Finance and Public Administration Committee: finance update and Spring Budget Revision 2022 to 2023 guide

B. Budget Documents, Process and Classifications, and Accounts

66. Despite devolution and the subsequent introduction of the Fiscal Framework, the Scottish Government remains part of the wider UK Government Fiscal Framework. This means that the Scottish Government must operate within UK Budget limits based on the specific HM Treasury budget classifications and follow the UK budgeting rules as set out in Consolidated Budgeting Guidance.

67. Alongside these rules, the Public Finance and Accountability (Scotland) Act 2000 requires:

• that the use of resources by Scottish Ministers is set out in a Budget Act;
• that Ministers must prepare accounts that set out how the resources set out in the Budget Act have been applied; and
• that those accounts are subject to audit by the Auditor General.

68. There are differences in the way that budgets have to be presented to meet these separate requirements. Effectively there are two budgets: the Scottish Budget (which provides the budget against which performance is measured in the Consolidated Accounts) and the Scottish Budget in HM Treasury terms. The initial Scottish Budget document provides the detail of portfolio budgets in HM Treasury terms, but then discloses the adjustments to reflect each portfolio in Scottish Budget terms for the purpose of Scottish Parliamentary approval. Whilst the number of changes moving from one to the other is relatively small, these do give rise to important distinctions in considering and understanding what is included in individual publications.

69. For example, following the adjustments set out in the initial Budget document, Budget Revisions present information in Scottish Budgetary terms – that is the statutory basis which will form the final budgets for comparison in the Accounts. They do not disclose portfolio budgets in HM Treasury terms - to do so would require “adding back” the necessary adjustments before deducting them again for parliamentary approval.

70. Much of the focus is on the three major HM Treasury Budget classifications - Fiscal Resource, Capital and Financial Transactions. These classifications account for all of the discretionary spending power the Scottish Government actually has and also govern the Scotland Reserve limits. However, budget revisions also require some additional budget classifications that includes the range of technical adjustments (as noted in section A.4 above), and that support the requirements for the Accounts preparation.

71. The purpose of this section, is to explain all of the budget classifications that the Scottish Government is subject to, how they apply to various Scottish Budget documents and how the differences manifest themselves.

B.1 Budget Classifications – HM Treasury Basis

72. The initial Scottish Budget document provides detailed analysis of the primary funding aggregates in HM Treasury terms alongside the key fiscal framework aggregates such as devolved taxes and borrowing. There are also a small number of other elements to the funding envelope which are outlined in Annex A. The Annex also shows how the total funding envelope set out reconciles to the total of portfolio expenditure plans.

73. This presentation draws a distinction between the discretionary budget, where the Scottish Government may deploy cash funding according to its own priorities within devolved competence, and the non-discretionary budget.

74. The discretionary Fiscal budget comprises four sub-categories of spending subject to their own control limits. These sub-limits are imposed by HM Treasury as part of UK fiscal rules. These limits apply to:

Fiscal Resource budgets, the largest element of government expenditure comprise expenditure on the day-to-day costs of delivering public services, used for example to pay public sector staff wages and purchase goods and services.

Capital budgets are used mainly to support the delivery of public infrastructure in Scotland. This is split between fiscal capital and a separate control for budgets that can only be used to support loan or equity investment in bodies outside the public sector, labelled as Financial Transactions. It is not possible within HM Treasury fiscal rules to use capital budgets to fund additional day-to-day expenditure; they must be used to support long-term investment.

Non-Domestic Rates (NDR) income are fully devolved and outside the scope of the block grant and Fiscal Framework arrangements controlled by HM Treasury. These are forecast by the Scottish Fiscal Commission (SFC) based on Scottish Government policies, and collected by Local authorities. The total distributable amount used in Scottish Budgets reflects the forecasts by the SFC taking into account outturn and other adjustments managed through the NDR pool. The arrangements for operation of the Non-Domestic Rates, and the management of the pool in Scotland are available on the Scottish Government website.

The non-discretionary budget reflects the items where use of funding is restricted and/or has no impact on cash deployment.

The non-cash resource limit is largely for the depreciation of assets. It is not possible to use the notional non-cash budgets to support any fiscal spending.

UK Funded AME, a small number of programmes that, whilst falling within the devolved responsibilities of the Scottish Government, continue to be funded annually by the UK Government on the basis of demand (shown here as UK funded Annually Managed Expenditure or UK-funded AME). These budgets are ring-fenced for specific purposes, principally NHS and teachers’ pension payments and Student Loans. HM Treasury fiscal rules prohibit the use of funding provided for these areas to support other expenditure. However this is not the case for all demand led programmes, for example Social Security expenditure in Scotland is managed within the Fiscal Resource Limit rather than AME.

B.2 Budget Classifications – Scottish Government Basis

75. A full list of budget classifications and details are included in the table below with further details provided underneath:

76. Fiscal Resource – Resource budget is provided to the core Scottish Government to support day to day spending. This classification is directly comparable to the HM Treasury Resource control aggregate and comprise expenditure on the day-to-day costs of delivering public services, used for example to pay public sector staff wages and purchase goods and services. Amounts score as operating expenditure for the Scottish Government budget scoring purposes.

77. Ringfenced – ringfenced funding provided to the core Scottish Government relates to non-cash accounting adjustments. This classification is directly comparable to the HM Treasury non-cash resource control aggregate. This budget is predominantly for depreciation but will include other accounting adjustments (e.g. impairments). Amounts will score as operating costs for the Scottish Government budget scoring basis.

78. Direct Capital – Direct capital budget is provided to the core Scottish Government and is used for the purchase, improvement, or maintenance of long-term assets. Expenditure here is capitalised within the Scottish Government’s accounts and is included within the capital categorisation in the budget revisions.

79. Indirect Capital – Indirect capital funding is provided for onward distribution. This generally takes the form of capital grants provided to local authorities and the private sector. Unlike direct capital (as this funding is provided to non-Scottish Government bodies) it does not result in assets being capitalised on the Scottish Governments balance sheet. As a consequence these amounts are categorised as operating for the Scottish Government budget scoring basis.

80. AME Resource/Non-cash/Direct capital – As detailed in section B.2 a small number of programmes that, whilst falling within the devolved responsibilities of the Scottish Government, continue to be funded annually by the UK Government on the basis of demand. While this funding will not impact discretionary spend it is included within the Scottish Budget and the budget classifications are consistent with the equivalent discretionary budget outlined above.

81. HMT Resource/Ring-fenced/Direct Capital/Indirect Capital/Financial Transactions for NDPBs - These classifications have the same descriptions as their respective categories outlined above but they only score for HM Treasury purposes. This relates to budget being provided to support the activity of non-departmental public bodies (‘NDPBs’). The full HM Treasury budgetary impact for all arms-length bodies scores in HM Treasury aggregates. The Scottish Government provides funding to NDPBs via cash grant in aid which is considered separately in Scottish budgetary terms.

82. Grant in Aid - Grant in aid refers to all funding provided to Scottish Government sponsored bodies to finance their ongoing operating expenditure in accordance with their respective Framework agreements set by Scottish Ministers. These amounts are categorised as operating expenses.

83. As grant in aid takes the form of a cash transfer any amounts which are non-cash are not included in this figure(such as depreciation, but also movements in working capital). This will lead to a mismatch between the figures included for the HM Treasury and Scottish Government basis’. While this will largely impact depreciation and similar UK non-cash resource balances there are some elements which score as fiscal resource which will not have a cash impact. Details of some of the exceptions, which are included in the SBR, are included in section B.3.

84. HMT AME Resource/ Non-cash/Direct capital – the NDPB equivalent of the core Scottish Government AME classification that has been detailed above.

85. IFRS16 adjustment – from 2022-23 there is a change to the way leases are treated in accounts – related to the introduction of International Financial Reporting Standard 16. These are technical adjustments that impact across the fiscal resource, ring-fenced and capital budgets and budget cover has been provided by HM Treasury to ensure these changes are budget neutral.

B.3 Differences between treatment within the Budget Revision

86. When it comes to Budget Revisions the Scottish Government has (for simplicity) grouped the transfers into four broad categories as disclosed in section A above. “Funding Changes” can include discretionary spend categories or Grant in Aid.

87. Whitehall Transfers impact cash expenditure but are (almost exclusively) transfers for a specific purpose and are therefore non-discretionary, so are excluded from the funding changes that at Ministerial discretion.

88. Technical transfers tend to include all other classifications which have no cash or discretionary impact.

89. Internal transfers can be any classification as they have no impact on the overall Scottish Budget aggregate.

90. As set out in the previous section there are instances where certain items score differently in Scottish and HM Treasury Budgetary terms. In many instances these differences only relate to the non-cash and accounting presentation, and have no impact on discretionary funding.

91. However, there are some instances where other budget categories are impacted. As the entire budget revision document must be prepared on a Scottish Budget basis these particular areas make it problematic when reconciling to discretionary funding deployed to an HM Treasury basis. Table 1.7 in the budget revision document therefore tends to include a number of (usually small) adjustments, which act as a reconciliation, to try and provide an accurate picture of discretionary funding which remains unallocated. Table 1.7 of the Spring Budget Revision notes £9.8 million of funding required to reconcile to the HM Treasury discretionary spending totals. This is made up of four components.

92. Firstly, £200k is required by South of Scotland Enterprise, an NDPB, for expected credit losses. Under the consolidated budgeting guidance the expected credit losses are deemed to score as fiscal resource under the HM Treasury basis and will therefore impact discretionary spend. However, as expected credit losses do not require cash to be transferred these are not included on a Scottish Government basis. These amounts are therefore not included within the Spring Budget Revision document but have been added to the SOSE HM Treasury budget limit.

93. Secondly, as part of the savings against HM Treasury budgets detailed in section A, it was highlighted that there has been a £25.7 million reduction in budget provided for Scottish Water in respect of their Aberdeen PFI project. As this relates to external borrowing by a public corporation it scores only against HM Treasury budgets and has not been included in the SBR. It has therefore been adjusted to show the impact on HM Treasury control totals only.

94. The amounts required for Judicial Salaries has decreased by £1.1 million. These sit outside the Scottish Budget as Scottish Ministers have no discretion over setting the levels but are funded from within HM Treasury aggregates.

95. Finally, we have a resource budget allocation of £16.8 million being provided to the Crown Office and Procurator Fiscal Service that is not included within the SBR but does score for HM Treasury purposes. A provision was previously included in the COPFS accounts for this so there is no net impact from a Scottish Budget perspective.