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

C. Scotland Reserve and Funding Position Details

96. Table 1.7 of the Budget Revision document sets out the Funding Position that supports the revised Scottish Budget. The table below breaks this down by the HM Treasury budget classifications of Fiscal Resource, Capital and Financial Transactions.

97. This presentation begins with the position following the Autumn Budget Revision process. The available funding position has moved as a result of the conclusion of the Final Outturn exercise for 2021-22 and revisions to in-year funding.

98. The Spring Budget Revision was laid in parliament on the 2 February 2023. At that point in time, the revision was laid the 2022-23 Supplementary Estimates process was ongoing. As such for the purposes of the Budget Revision, estimated figures were used by necessity. These have subsequently been revised and the full movements are analysed in Annex A.

99. The table above also includes details of the small number of adjustments within the budget revision which score from a HM Treasury basis. Differences are as set out in paras 92-95.

C.1 Funding Envelope Breakdown

100. Annexes A and B detail the funding envelopes for each of the three key budget classifications at the Budget Bill, along with the changes allocated within both the Autumn Budget Revision and the Spring Budget Revision. The latest updates since the budget revision was laid are also included although some of the lines such as devolved taxes remain subject to further changes through the remainder of the financial year and through the outturn processes.

101. The totals reconcile to the breakdown set out above, which in turn reconciles to table 1.7 in the supporting document. It should be noted that these totals detail discretionary funding only and not the technical or AME related changes.

C1.1 Fiscal Resource

102. The Fiscal Resource funding position has increased by £610.8 million since the Autumn Budget Revision. These changes arise from:

103. Following the conclusion of the final outturn exercise the amounts carried forward within the Scotland Reserve for fiscal resource increased by £184 million. £100 million of this relates to a reclassification of health research and development expenditure as capital, while the balance largely relates to a late adjustment to accrued social security benefit expenditure. The Final Outturn is the final reported position to HM Treasury and reflects all late adjustments as well as any accounting changes which have come to light following the end of the financial year.

104. Revised Block Grant Adjustments were published on the 17th November alongside the OBR forecast. The changes to the block grant adjustment were:

• A £116 million increase to the Social Security block grant adjustment.
• A £74 million decrease to the Taxes and Non-Tax income block grant adjustment.

105. The Scottish Government receives a positive social security block grant adjustment to fund those social security benefits which are devolved to the Scottish Government. These amounts are updated at UK Fiscal events including any inflationary uplifts.

106. As outlined in section A the net increase in social security benefit expenditure as part of the budget revision is £123.2 million. The increased costs exceed the extra BGA funding provided by around £7 million.

107. The Scottish Government receives an in-year change to the negative block grant adjustment for taxes and non-tax income. This reduction in funding reflects the fully devolved tax raising powers that are available to the Scottish Government, most notably through the Land and Building Transaction Tax (‘LBTT’) and Scottish Landfill Tax (SLfT).

108. The SFC provided updated economic and fiscal forecasts on 15 December 2022. As part of this, revised LBTT and SLfT forecasts were provided and this Budget Revision reflects these forecasts.

109. LBTT receipts for 2022-23 were forecast to rise to £849 million. This would be a £100 million increase in total receipts. SLfT receipts were forecast to increase by a nominal £0.1 million. The net position has improved by circa £26 million as a result of the combined movement.

110. There will be no further revisions to the block grant adjustments for tax and social security between now and the end of the financial year. Outturn reconciliation adjustments for these will be applied to the 2024-25 Scottish Budget. However changes to the gross tax receipts and demand led benefit expenditure between now and 31 March must be managed by the Scottish Government as part of its year-end processes and ultimately reflected in 2022-23 outturn.

111. Following discussions with HM Treasury officials on improving the UK Supplementary Estimates process some initial estimates of Barnett consequentials were provided to the Scottish Government on the understanding that these remained subject to change. The SBR included a that estimate of £125 million of resource. This figure was subsequently revised down by £19.5 million.

112. The following additional changes were included within the Spring Budget Revision position:

• £75.4 million of Machinery of Government (Whitehall) transfers from HM Treasury were included pending final confirmation at UK Supplementary Estimates. This included receipt of transfer for Project Unicorn.
• £71 million of additional Immigration Health Surcharge income was included pending final confirmation at Supplementary Estimates. This is in addition to the £92 million that was initially included as part of the 2022-23 Scottish Budget.
• The £15 million resource borrowing assumption has been removed reflecting the improvement to the net tax and social security positions in the Scottish Budget. However the Resource borrowing capacity remains available for 2022-23. Annex D sets out detail on how Resource borrowing limits are calculated.
• £17.3 million additional funding included from HM Treasury to correct an historic comparability factor error in their calculations.
• £11.5 million of Crown Estate income has been recognised. This amount has been passed directly to Marine for onward distribution to Local Government to reflect the Coastal Communities commitments.

113. Amounts detailed above are in addition to the £57.6 million of funding that remained unallocated at the Autumn Budget Revision, leaving £668.4 million available to be allocated.

114. £610.8 million of resource funding has been allocated as part of the Spring Budget Revision. An amount of circa £7 million was retained as unallocated funding to allow some degree of cover for any changes to the final UK Supplementary Estimate figures.

115. Following the publication of the Spring Budget Revision the UK Supplementary Estimates were concluded on 21 February 2023. The final resource consequentials figure was £105.5 million. This was a £19.5 million reduction from the estimated resource figure.

116. In addition to the changes to the consequentials figure there were movements in the final Immigration Health Surcharge and machinery of government amounts. Combined these totalled a £2 million increase in funding.

117. These movements following the Spring Budget Revision leave the overall resource position as slightly over-allocated by an amount of £10.2 million. This small funding shortfall will be managed through the remainder of the financial year.

C1.2 Capital and Financial Transactions

118. Changes to the Capital and Financial Transactions position since the Autumn Budget Revision have also been reflected in the budget revision.

119. Following the conclusion of the 2021-22 Final Outturn exercise the capital carry forward was reduced from £183 million as indicated in the Autumn Budget Revision to £81 million, a £102 million reduction.

120. An initial estimate from HM Treasury on the UK Supplementary Estimates position indicated that there would be a Barnett reduction in our capital block grant of £45 million. This funding reduction was reflected in the Spring Budget Revision.

121. Further changes to Capital include an additional £75 million of ring-fenced Rail funding and £15 million of Whitehall transfers received at the UK Supplementary Estimates.

122. At the point the Spring Budget Revision was published almost all the anticipated capital funding was allocated, including the impact of the estimated reductions at the UK Supplementary Estimates.

123. The final UK Supplementary Estimates position showed a total decrease to the capital block grant of £73 million. This is £28 million higher than the initial estimate.

124. This funding reduction exceeded the amounts retained and is the reason that the capital funding position is over-allocated by approximately £27 million. Based on expenditure forecasts following the budget revision, any shortfall is expected to be offset by emerging capital underspends to ensure that the capital budget in 2022-23 will balance.

125. Any further reductions in forecast capital expenditure will be considered as part of year-end financial management. It is likely that any further late underspends will be used in the first instance to reduce the current £450 million borrowing assumption in line with the Scottish Government’s Capital Borrowing policy (as set out in the medium term financial strategy).

126. Reductions to capital borrowing will reduce the total HM Treasury budget aggregate. This will give rise to a difference in HM Treasury budget as reflected in the Spring Budget Revision (and therefore in consolidated accounts). Underspends shown in the accounts will be against a higher capital budget limit (and therefore larger) than the final HM Treasury capital underspend should borrowing be reduced.

127. There was one change to the Financial Transactions position included in the Spring Budget Revision. Following the conclusion of the 2021-22 Final Outturn exercise, the financial transaction carry forward was reduced from the £46 million indicated in the Autumn Budget Revision to £14 million.

128. As noted in the sections above, at the time the Spring Budget Revision was published discussions around the UK Supplementary Estimates figures were ongoing. It was indicated that a significant consequential reduction in the Scottish Government’s FT budget was likely to follow.

129. HM Treasury provided an estimated figure of £120 million for the potential reduction. This figure was not included in the Spring Budget Revision forecast as there remains some discretion as to whether funds currently earmarked for future years can be deployed to offset this shortfall.

130. Following the conclusion of the UK Supplementary Estimates the final reduction was confirmed to be £117 million which has led to the current over-allocated position of £82.3 million. Following a review of latest forecasts it is expected that at least some of this reduction can be managed through savings between now and the end of the financial year.

C.2 Scotland Reserve

131. The full Scotland Reserve position from prior years, updated with final outturn detail in respect of 2021-22, is detailed below.

132. As is illustrated above, all Reserve availability is being utilised to support the 2022-23 financial position. Some of this was anticipated and therefore embedded in the original budget with the remaining funding set against the range of pressures which the Scottish Government continues to manage over the remainder of the financial year.

133. The challenges of the 2022-23 position also have a knock-on impact on the 2023-24 Scottish Budget. Given the pressures on both the capital and resource position, no anticipated Scotland Reserve carry forward was included for either budget classification. However as the year has progressed, and notwithstanding the residual challenges, it is now expected that the Scottish Government will be able to balance the 2022-23 Budget and therefore a modest underspend is likely to emerge that will be redeployed to support the 2023-24 Position.

134. The 2023-24 FT funding position had assumed £50 million of carry forward. This may be challenging to achieve given the latest Supplementary Estimate position. Any shortfall on reserve availability will therefore be managed as part of 2023-24 budget management.

C.3 2023-24 Position

135. Following the Stage 3 debate on the 2023-24 Scottish Budget, the Deputy First Minister announced new commitments, including £100 million for Local Government, to be added to the 2023-24 Scottish Budget. Due to the late confirmation of the Supplementary Estimates figures these were not tabled as stage 3 amendments and will therefore be formally added to the Scottish Budget as part of the Autumn Budget Revision later this calendar year.

136. The funding for these additions comes from a range of sources. Firstly the comparability factor correction to the Scottish Government Barnett settlement is baselined and the value of this in 2023-24 is £21 million. This is the 2023-24 effect of the same correction which added £17.3 million in 2022-23 as discussed in paragraph 112.

137. Secondly the overall improvement in the forecasts for 2022-23 have a number of direct and indirect implications for 2023-24. At the time of setting the 2023-24 Scottish Budget assumptions on borrowing costs were made on the basis that 2022-23 Resource borrowing may need to be maximised to help balance the position. As Resource Borrowing for 2022-23 is now unlikely to be required (let alone maximised) this automatically frees up some funding.

138. Similarly, interest income on the proceeds of Scotwind is now expected to be higher in 2023-24. For the majority of the financial year the Scotwind funds allocated to future years in the resource spending review were also considered a contingency option for balancing the 2022-23 budget. As the likelihood of this has receded, it automatically frees up this funding to be placed on annual deposit for use at the end of 2023-24. This in turns generates some interest which will also be available in 2023-24 and beyond.

139. It is also now highly probable that the full Capital borrowing annual allowance will not be utilised in 2022-23 as discussed in paragraph 125. Any reductions to this requirement will automatically reduce the capital borrowing costs in 2023-24.

140. Taken together it is now expected that the improvement in interest earnt on Scotwind proceeds and reductions to borrowing costs could free up £40-£60 million in 2023-24. However this remains subject to further change when borrowing drawdown decisions are finalised in mid March 2023.

141. The overall improvement in the 2022-23 position also increases the likelihood of some modest underspends being available in the Scotland Reserve to be available for spending in 2023-24. It is therefore expected that in combination, the Scotland Reserve, borrowing costs, Scotwind interest and the correction to the comparability factor will provide sufficient funding to cover these additional commitments in 2023-24.