Fiscal Framework Review: Independent Report

1. Introduction

The devolution of taxes and social security spending to the Scottish Government over the last six years has required adjustments to the block grant funding that it receives from the UK government. The devolution of the revenue associated with a tax, such as income tax, has been accompanied by reductions to the block grant to account for the tax revenue now flowing to the Scottish rather than the UK government. The devolution of social security spending has been accompanied by increases to the block grant to reflect the transfer of spending responsibilities from the UK to the Scottish Government.

The calculation of these block grant adjustments (BGA) has been guided by a set of principles agreed by the Smith Commission in 2014. An initial agreement on the precise methods of calculation to use for the first five years of devolution was agreed in early 2016, following intense negotiations between the Scottish and UK governments on how best to operationalise the Smith Commission's principles. The agreement reached in 2016 committed the governments to reviewing the operation of the BGAs and the wider fiscal framework, informed by an independent report analysing both the current and alternative approaches to calculating the BGAs. This is that independent report.

Our report has been informed by desk-based research, simple scenario modelling and a call for evidence to which 14 people and organisations responded. The remit for the report and consultation questions included in our call for evidence were agreed with the Scottish and UK governments. However, our analysis and conclusions are our own.

This report discusses the characteristics and potential impacts of different methods for calculating the BGAs, and in particular assesses their concordance with the Smith Commission's principles. In doing so we reach a relatively strong conclusion about the feasibility of fully satisfying these principles. However, in line with our remit, we do not make any recommendations for or against any particular option.

The rest of the report proceeds as follows. Section 2 provides an overview of why block grant adjustments are required, and the Smith Commission principles that guided the design of the block grant adjustment calculations in Scotland. Section 3 describes and analyses the current approach to calculating the block grant adjustments. Section 4 analyses alternative approaches to calculating the block grant adjustments. Section 5 concludes. There are three appendices: Appendix A replicates our consultation document and questions; and Appendix B lists the people and organisations that responded to our call for evidence; and Appendix C provides formulaic proofs of some of our findings in relation to cyclicality of revenues and spending.