Fiscal framework outturn report: 2018

1 Introduction

1.1 This is the first Fiscal Framework Outturn Report published by the Scottish Government. It forms part of a revised budget process – as recommended by the final report of the Budget Process Review Group ^[1] - and follows on from May’s publication of Scotland’s Fiscal Outlook: The Scottish Government’s Five Year Financial Strategy. Whereas that document set out a medium-term view of Scotland’s public finances and the Scottish Government’s broad approach to using the new financial powers provided through the Scotland Acts 2012 and 2016, this report focuses on operation of the Fiscal Framework. It is designed, in particular, to support Scottish Parliamentary scrutiny.

Recommendations of the Budget Process Review Group

1.2 Chapter 4 of the Budget Process Review Group Final Report recommended that scrutiny of the Fiscal Framework should be informed by two Scottish Government publications: a Fiscal Framework Outturn Report, to be published annually in September; and the Budget Document, to be published after the UK Budget.

1.3 It made two specific recommendations on the Fiscal Framework Outturn Report as outlined below. In line with recommendation 6, this report is designed to provide information useful for Committees’ pre-Budget reports for the 2019-20 Scottish Budget.

Budget Process Review Group Recommendation 6
The Group recommends that the annual Fiscal Framework Outturn Report is based on audited information as far as possible and is published in sufficient time to allow the committees to consider it prior to the publication of their pre-Budget reports. On this basis the Group recommends that the report is published in September.

Budget Process Review Group Recommendation 7
The Fiscal Framework Outturn Report should detail outturn expenditure on each of the social security benefits, with a comparison with the relevant forecasts. Similarly, the outturn [Block Grant Adjustment] for each of the social security powers should be reported along with the relevant [Block Grant Adjustment] forecast, with the aim of identifying a net Budgetary position, and implications for Budget management.

1.4 The Budget Process Review Group Final Report (p.28) also included the suggested content of the Fiscal Framework Outturn Report.

Outline contents of the Fiscal Framework Outturn Report

Reconciliation Process

• Outturn data for Scottish tax revenues (including comparison of outturn with forecast)
• Calculation of outturn BGAs (and comparison with forecast)
• Net budgetary position (revenue minus BGA) for each tax relative to forecast
• Implications of reconciliation for subsequent financial year
• Commentary on latest available interim outturn data on income tax.

Scotland Reserve

• Payments into the Reserve and withdrawals from the Reserve (with explanations for reasons for withdrawal or source of surplus)
• Balance of Scottish Reserve at the start and end of the previous financial year

Borrowing

• Borrowing undertaken during the past financial year, and assessment of how far Government remains below its various different borrowing limits (there are separate limits in respect of capital borrowing, and revenue borrowing for cash-management, forecast error and a ‘Scotland-specific shock’ respectively)
• Implications of borrowing in terms of estimated profile of future repayments

1.5 The remainder of this document follows the structure suggested by the Budget Process Review Group Final Report:

Chapter 2 – Operation of the Fiscal Framework covers the evolution of the fiscal powers of the Scottish Parliament and, in particular, the operation of the Fiscal Framework.
Chapter 3 – Reconciliation Process sets out the timelines for reconciliations of 2017-18 budget forecasts, how they work in practice, and what the impact of reconciliations will be on the Scottish Government’s 2019-20 Budget.
Chapter 4 – Scotland Reserve covers payments and withdrawals from the Reserve and the balance of the Reserve.
Chapter 5 – Borrowing sets out borrowing undertaken, how this compares with various borrowing limits, and the estimated profile of future repayments.
Chapter 6 – Conclusion summarises the main results.
Annexes – Annex A provides a summary of the fiscal impact of 2015-16 and 2016‑17 Devolved Revenues.
A separate data annex published alongside this Report contains all revenue and Block Grant Adjustment forecasts and outturn data to date.

1.6 The following points are particularly relevant for budget considerations:

• A downward reconciliation of £2 million will be made to the 2019-20 Budget in relation to the fully devolved taxes. The Scottish Government could invoke its resource borrowing powers for a net Budget shortfall to the extent that the outturn net Budget position falls below the forecast for each tax. This is set out in Chapter 3.
• Only a baseline value has been established for income tax and the 2020-21 Budget will be the first Scottish Budget in which an income tax reconciliation will have to be made, relating to income tax for 2017-18.
• The potential scale of the reconciliation required in the 2020-21 Budget is uncertain, but is indicated in the latest forecasts. Since the 2017-18 Budget, the forecast updates have shown a deterioration in the net budget position, which - if proved correct in the outturn - would lead to a reconciliation requirement in 2020-21 of -£267 million. This forecast is based on an estimated baseline, and subject to forecast error. The SFC’s Forecast Evaluation Report highlights that an under-estimate of 2017-18 GDP growth had – considered in isolation – taken £188 million off its income tax forecast for 2017-18, which would reduce the estimated reconciliation requirement from -£267 million to ‑£79 million. The forecasts that will be available at the time of the Budget will provide a more up-to-date estimate of the reconciliation that is to be expected.
• The residual balance of the Scotland Reserve is £192 million, on the basis of planned drawdowns and additions to the Reserve outlined at provisional outturn 2018. This is set out in Chapter 4.
• The Scottish Government will have accumulated £1,459 million of capital debt by the end of 2018-19, well within its overall £3 billion limit. This means that the Scottish Government could make full use of the £450 million annual drawdown limit in 2019-20 should it decide to do so. No resource borrowing has been undertaken. This is set out in Chapter 5.