Scottish Budget 2022 to 2023

Annex A Scottish Government Fiscal Control Framework and Reconciliation of Available Funding to Spending Plans

Introduction

The Scottish Government is required to set a balanced budget each year.

As the UK Budget and Spending Review has returned to an autumn timetable, in advance of the Scottish Budget being drafted, this provides some additional certainty to the resources at the Scottish Government’s disposal, particularly with regard to Barnett settlements, Block Grant Adjustments and Ring-fenced funding.

However there are a significant number of challenges with the totality of funding at the Scottish Government’s disposal and there remains a high level of uncertainty as to final level of resources available. These are discussed below.

Specific Funding Issues for 2022-23

Despite the ongoing impact of the Covid-19 pandemic on public services and the need to support economic recovery, the UK Government has discontinued funding for Covid-19 in 2022-23, stripping out £3.7 billion from the funding that supported the 2021-22 Budget position. After allowing for further COVID-19 2020-21 funding allocations at UK Main Estimates in May and the UK Budget in October, £5.2 billion of COVID-19 funding has been removed from Scottish Government budgets in 2022-23, despite ongoing demands on Scotland’s NHS, transport networks and education system.

Whilst the core Barnett settlement from the UK Government has increased, this is not sufficient to cover the impacts of the loss of this COVID-19 funding. The real terms reduction to total Barnett Funding (excluding Financial Transactions) is £1.747 billion by comparison to the 2021-22 Budget Bill position shown in this document. This represents a real terms reduction of 4.4%.

The effects of the UK Spending Review settlement on the longer-term funding outlook for the Scottish Government are discussed in the Medium-Term Financial Strategy.

Other Funding

An element of judgement is required to assess the totality of funding that will become available to the Scottish Government in addition to what is already included in the formal aggregates set out in Table A.01.

Whilst the return to a December publication for the 2022-23 Scottish Budget provides earlier clarity to local government, public bodies and many third sector organisations funded from within the portfolio allocations set out in this document, it also increases the scope for volatility in the funding position before the start of the financial year. In particular in 2022-23 there are a number of specific sources of funding which the Scottish Government believes will be available during the financial year but for which the precise timing and scale are not yet confirmed. These include:

• The UK Spending Review included an updated assessment of 2021-22 funding but excluded some previously anticipated Barnett consequentials (linked to previous UK Government announcements of additional funding). Whilst there remains some uncertainty as to the ultimate quantum of further consequentials for 2021-22 it is reasonable to assume that some additional funding will arise as the UK Supplementary Estimate process is concluded. Based on past experience, any further funding will not be confirmed in a sufficient timescale to be effectively deployed in 2021-22 and the Scottish Government will seek agreement with HM Treasury to defer any such additional funding into 2022-23.
• The UK Main Estimate process formally approves the UK Budget allocations for that financial year. This process is usually concluded in the early part of the financial year and historically has generated additional Barnett consequentials over and above the Block Grant allocations set out at the preceding UK fiscal event. Whilst the Scottish Government has received no specific notice of such consequentials for 2022-23, past history has been factored into the overall assessment of anticipated, but unconfirmed funding.
• The Scottish Government has been in discussion with HM Treasury over the budgeting treatment of the impact of increases to the personal allowance on adjustments to the Scottish Block Grant, dating back to 2017-18. This is a technical issue but a significant one. Whilst the scale of the financial impact is disputed, both parties accept the Scottish Government will be due to receive cumulative compensation. The Scottish Government will seek to conclude this process at the earliest possible opportunity to ensure that the compensatory funding is available to support the funding position for 2022-23.
• The next round of offshore wind leasing, being managed by the Crown Estate, will generate additional funding for Scottish Government for 2022-23 and beyond. At the time of publication there remains some uncertainty to the scale and phasing of this potential income.

Table A.05 sets out all additional funding included in the 2022-23 Budget position set out here. This includes £620m from the potential sources discussed above (and also the potential for any further additions to the fiscal resource position in the Scotland Reserve) on a risk-assessed basis. The other items included in the table as additional funding for 2022-23 include £179 million of additional Capital and Financial Transactions funding, to be drawn from the expected balance on the Scotland Reserve, along with an expected transfer from the UK Government allocating a proportional share of Immigration Health Surcharge Income of £92m.

The prior year assumptions on anticipated additional funding have been exceeded in aggregate.

Further Devolution of Powers

The Scotland Act 2016 provided the Scottish Government with new powers over Social Security including responsibility for certain benefits, including Attendance Allowance, Carer’s Allowance, Disability Living Allowance, Industrial Injuries Disablement Allowance, Personal Independence, Severe Disablement Allowance and, from 2022-23, Cold Weather Payment. Social security powers transferred to Scotland need to be managed within HM Treasury budget control limits (a difference to how they are managed in the rest of the UK where any additional spend in-year over the budgeted amount is funded by HM Treasury as annually managed expenditure). This has introduced additional volatility into the Scottish Budget. Any increase in demand against what has been forecast by the SFC will need to be managed through a combination of drawing down funding from the Scotland Reserve, drawing on resource borrowing powers or in-year adjustment to other budgets.

The transfer of greater tax and social security powers requires the Scottish Government to manage much larger levels of fiscal volatility. The Fiscal Framework^[1] provides for borrowing powers and the Scotland Reserve to give some assistance to stabilising spending across years.

Scotland Specific Economic Shock

The Scottish Fiscal Commission forecasts produced alongside the 2021-22 Budget indicated that the technical requirements for a Scotland-specific economic shock were met. The Scottish Fiscal Commission were clear that this does not mean that they expected economic performance to be significantly weaker in Scotland, but rather it is caused primarily by the timing of the SFC’s forecasts, which took place in very different circumstances from the OBR’s November 2020 forecasts. Triggering of a shock provides the Scottish Government with access to increased reserve and borrowing flexibilities until 2023-24. This has allowed an increased drawdown of an extra £79 million (over the usual limit of £100 million) of Capital and Financial Transactions funding from the Scotland Reserve in 2022-23.

Notwithstanding the increased flexibility provided by the triggering of a shock, experience to date has demonstrated that limits on borrowing and the Scotland Reserve imposed by the Fiscal Framework are too restrictive to ensure stability in the Scottish Government’s budget management. Scottish Ministers will seek to renegotiate those limits as part of the upcoming review of the Fiscal Framework.

Final borrowing drawdown will be confirmed over the course of the financial year linked to ongoing analysis of the budget management and monitoring process.

Scottish Government Funding

The devolved administrations’ budgets are set within a framework of public expenditure control and budgeting guidance determined by HM Treasury. Once overall public expenditure budgets have been determined, the Scottish Government has freedom to make its own spending and tax decisions on devolved programmes, but those decisions must take place within the budgetary controls set by HM Treasury and in compliance with HM Treasury’s Consolidated Budgeting Guidance.

Scottish Government total budgets are determined through the combination of Block Grant funding from HM Treasury, adjusted to reflect the transfer of social security powers, devolution of taxes and other income devolved to Scotland (through the Scotland Act 2012 and Scotland Act 2016), and any planned use of available devolved borrowing powers.

Changes in the Scottish Government’s block grant continue to be determined via the operation of the Barnett formula. Under the Barnett formula, the Scottish Government’s block grant in any given financial year is equal to the block grant baseline plus a population share of changes in UK Government spending on areas that are devolved to the Scottish Parliament. Detail of how the Barnett formula works is set out in the UK Government’s Statement of Funding Policy.^[2]

The block grant is adjusted upwards to reflect the devolution of social security powers, and downwards to reflect the retention in Scotland of revenues from devolved and assigned taxes and other devolved income, leaving a residual block grant. The Scottish Government then retains all devolved and assigned Scottish tax and other revenues (forecasts of tax revenues for inclusion in the budget are calculated by the Scottish Fiscal Commission). The Block Grant Adjustments - BGAs - are calculated by HM Treasury with reference to forecasts prepared by the Office for Budget Responsibility.

In simple terms the available funding for the Scottish Budget is the Block Grant, plus the BGAs for social security, less the BGAs for devolved and assigned taxes and other revenues, plus devolved revenue estimates plus borrowing.

The latest forecasts of tax revenues and social security expenditure and the comparison against the corresponding BGAs are set out in Annex B of the MTFS.

The total funding available to the Scottish Government is also dependent on decisions Scottish Ministers take on tax policy. Variation of Scottish tax policy relative to that of the UK will adjust the level of tax income received by the Scottish Government and the overall level of funding available to support spending plans. For the purpose of this budget, these relativities are drawn between existing UK tax policy and the devolved tax policy proposals advanced by the Scottish Government in this budget. No assumptions are made about possible future changes to UK tax policy (including Non-Domestic Rates).

The overall budget position for any given year is dependent on the interaction between the BGAs as provided by HM Treasury and the forecast of social security costs and tax revenues provided by the SFC. The forecasts underpinning both the BGAs, the costs of devolved social security powers and the revenues for devolved and assigned taxes will change over time until an agreed, reconciled, final outturn position is reached. The Fiscal Framework sets out the limited powers available to the Scottish Government to manage the impact of forecast errors between initial budget and the reconciled outturn position. This includes the power to undertake resource borrowing to smooth the budgetary impact of forecast errors.

The Scottish Government intends to use its resource borrowing powers under the Fiscal Framework to manage the forecast errors impacting on the 2022-23 budget limit. A decision to borrow to support capital spending will also impact on the funding available relative to the spending limits set by HM Treasury. The aggregate of the residual block grant plus devolved tax revenues plus agreed borrowing is a key control limit in defining the funding envelope within which Scottish Ministers must manage expenditure for a given year.

Table A.01 below sets out the Scottish Government Budget Control Limits:

Table A.01 Scottish Government Budget Control Limits 2020-21 to 2022-23

Cash Terms	2020-21 £m	2021-22 £m	2022-23 £m
UK Government - SR 20 settlement	–	36,073	–
UK Government - SR 21 settlement	–	–	39,257
Total Budget Limit from HM Treasury (A)	35,051	36,073	39,257
of which:
Fiscal Resource Budget Limit	29,711	30,892	34,322
Capital Budget Limit	4,734	4,973	4,469
Financial Transactions	606	208	466
Block Grant Adjustment for Social Security (B)	3,203	3,310	3,587
Ring-fenced and Non-Barnett Funding - Resource (C)	472	756	704
Ring-fenced and Non-Barnett Funding - Capital (C)	–	–	643
Total Covid-19 Funding (D)	–	3,686	–
Block Grant Adjustment for Taxes and Non-Tax Income	(12,991)	(12,430)	(14,639)
Scottish revenues:
Scottish Income Tax	12,365	12,263	13,671
Land and Buildings Transaction Tax	641	586	749
Scottish Landfill Tax	116	88	101
Non-Tax Income	25	25	25
Net Resource Budget Adjustment for Taxes and Non-Tax Income (E)	156	532	(93)
Reconciliation to Outturn (F)	(207)	(319)	(15)
Resource Borrowing (G)	207	319	15
Capital Borrowing (H)	450	450	450
Total Scottish Government Funding (A+B+C+D+E+F+G+H)	39,332	44,807	44,548

Figures may not add due to rounding

(A) The prior year comparators throughout this document reflect the position as set out in the Scottish Budget as approved by Parliament for that year. The funding position shown is consistent with that original budget allocation. The budget position changes throughout the year and subsequent budget revisions are available from the Scottish Government website. The Block Grant figures shown here represent core funding allocation calculated in accordance with the Barnett formula as detailed in the UK Spending Review of 27 October. This analysis is of Fiscal aggregates only and excludes ring-fenced non-cash budgets.

(B) Under the Fiscal Framework, there are additions to the block grant to reflect social security expenditure devolved to Scotland under the Scotland Act 2016. Further details on the devolved social security benefits with a corresponding Block Grant Adjustment are set out in Annex B of the Medium-Term Financial Strategy, published in December 2021.

(C) From 2020-21 Farm Subsidy direct payments are funded by HM Treasury (previously funding came from the EU). From 2021-22 HM Treasury are also funding Fisheries support that previously came from the EU. EU replacement funding is ring-fenced for that purpose. There are additional non-Barnett resource and capital allocations in respect of a specific Network Rail funding agreement.

(D) The UK Spending Review 2021 provided no Covid-19 funding for 2022-23 or beyond. The 2021-22 comparative figure here of £3,686m is £3,408m of Resource funding from a combination of 2020 UK Spending Review, UK March 2021 Budget and carry forward from 2020-21, £237m of Capital carry forward from 2020-21 and £40m of Financial Transactions carried forward from 2020-21.

(E) Under the Fiscal Framework, the block grant is reduced to reflect revenues devolved to Scotland under the Scotland Acts 2012 and 2016. The Block Grant Adjustment figures do not include Air Passenger Duty, devolution of which has been deferred. Revenues for Scottish Income Tax, Land and Building Transaction Tax and Scottish Landfill Tax are as forecast by the Scottish Fiscal Commission.

Non-tax income is from Fines, Forfeitures and Fixed Penalties and Proceeds of Crime.

(F) Reconciliation to Outturn is the net impact to the Scottish Budget of the reconciliation for Income Tax, LBTT and SLfT, Non-Tax income, and devolved Social Security payments. Further details on the reconciliation to the 2022-23 Budget are set out in Annex B of the Medium-Term Financial Strategy, published in December 2021.

(G) Resource borrowing undertaken to smooth the impact of forecast errors on the budget - actual borrowing drawdown will be determined based on in-year financial position.

(H) Initial planned capital borrowing - actual borrowing drawdown will be determined based on in-year financial position.

Table A.02 Real-Terms changes to HM Treasury Spending Limits

HMT Spending Limits - Real Terms (2021-22 prices)	2020-21 £m	2021-22 £m	2022-23 £m
Fiscal Resource Budget	29,711	34,531	33,649
Capital Budget	4,734	5,245	4,381
Total	34,445	39,777	38,030
Real-Terms Change against prior year	-	15.5%	-4.4%

Excludes Financial Transactions and non-Barnett funding.

Table A.03 Real-Terms changes to Scottish Government Funding

SG adjusted spending limits – Real Terms (2020-21 prices)	2020-21 £m	2021-22 £m	2022-23 £m
Fiscal Resource Budget	29,867	35,067	33,558
Capital Budget + Capital Borrowing	5,184	5,698	4,822
Total	35,051	40,765	38,380
Real-Terms Change against prior year	-	16.3%	-5.9%

Excludes Financial Transactions and non-Barnett funding.

Real-Terms calculations use the GDP deflator as published by the UK Government at the Spending Review on 26 November as the measure of inflation within the economy. The GDP deflator as published reflects some volatility as a result of the impact of the Covid-19 pandemic - the figure for 2020-21 is significantly higher than the historic trend and the figure for 2021-22 is negative.

Within these overall budget limits there are important 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:

• Resource budgets expenditure on the day-to-day costs of delivering public services, the total resource expenditure limit is sub-divided into a fiscal (or cash) limit – the largest element of government expenditure, used for example to pay public sector staff wages and purchase goods and services; and a non-cash limit – largely for depreciation of assets (and analysed separately below at Table A.06. It is not possible to use the notional non-cash budgets to support any fiscal spending.
• 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. The overall capital funding available to the Scottish Government can be augmented by capital borrowing, the limits for which are imposed by the UK Government through the Fiscal Framework.

The Scotland Reserve allows the Scottish Government limited ability to manage spending across financial years. The Fiscal Framework sets out the limits of Scotland Reserve – up to £700 million in aggregate may be deposited in the Reserve. Maximum drawdown in any one year from the Reserve is £250 million of Resource budget and £100 million of capital budget (including Financial Transactions). Under the Fiscal Framework the drawdown limits are temporarily waived where a Scotland-specific economic shock occurs.

In summary, HM Treasury fiscal rules impose an annual limit on the Scottish Government’s spending on public services that is equal to the aggregate of the residual block grant (after adjusting for devolved taxes), plus the devolved tax receipts themselves, plus borrowing within prescribed limits.

Annually Managed Expenditure (AME)

Further to the defined budget limits set out above there are two other funding elements that support the total expenditure managed by the Scottish Government; firstly Non-Domestic Rates which have been devolved since devolution in 1999, and secondly, funding for a number of demand-led programmes in Scotland. Specifically:

• Non-Domestic Rates income, responsibility for which is fully devolved and falls outside the scope of the block grant and Fiscal Framework arrangements controlled by HM Treasury. Details on the operation of Non-Domestic Rates in Scotland are available on the Scottish Government website.^[3]
• A small number of programmes that, whilst they fall 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. As previously noted Social Security expenditure in Scotland is managed within the Departmental Expenditure Limit rather than AME.

Spending Plans

The full spending plans for the year are set out in Table A.04. Portfolio chapters show the allocation of these totals across individual programmes.

Table A.04 Total Proposed Budget for 2022-23

2022-23 Scottish Budget	Resource £m	Capital £m	Financial Transactions £m	Total £m	UK Funded AME £m	Total £m
Health and Social Care	17,378.7	554.0	10.0	17,942.7	100.4	18,043.1
Social Justice, Housing and Local Government	12,467.2	1,341.2	150.0	13,958.4	2,766.0	16,724.4
Finance and the Economy	783.9	681.0	284.6	1,749.5	6,470.4	8,219.9
Education and Skills	3,279.1	484.0	22.1	3,785.2	361.3	4,146.5
Justice and Veterans	2,977.3	166.0	–	3,143.3	–	3,143.3
Net Zero, Energy and Transport	1,867.3	2,485.0	60.3	4,412.6	–	4,412.6
Rural Affairs and Islands	890.9	75.9	–	966.8	–	966.8
Constitution, External Affairs and Culture	340.0	30.5	–	370.5	–	370.5
Deputy First Minister and Covid Recovery	42.9	–	–	42.9	–	42.9
Crown Office and Procurator Fiscal Service	175.6	5.3	–	180.9	–	180.9
Scottish Government	40,202.9	5,822.9	527.0	46,552.8	9,698.1	56,250.9
Scottish Parliament and Audit Scotland	136.6	1.1	–	137.7	2.0	139.7
Total Scotland	40,339.5	5,824.0	527.0	46,690.5	9,700.1	56,390.6

Reconciliation of Funding to Spending Plans

There are a number of differences between the aggregate funding control limits as set out in Table A.01 and the total cost of the portfolio spending plans. Published spending plans anticipate additional funding of £1,040 million not yet reflected in those control limits (which reconcile to published HM Treasury figures). Table A.05 reconciles the aggregate funding limits to spending plans for 2020-21, 2021-22 and 2022-23 (the current budget year and the comparator years shown across the document).

Table A.05 Reconciliation of Funding to Spending Plans

SG Spending Limits - Cash Terms	2020-21 £m	2021-22 £m	2022-23 £m
Scottish Government Funding	39,332	44,807	44,548
Reserve	168	392	179
Machinery of Government Changes	8	3	–
Anticipated Budget Transfers	246	28	92
Other Income	98	185	620
Queen’s and Lord Treasurer’s Remembrancer	5	5	5
City Deal Funding	–	–	100
Fossil Fuel Levy	–	–	44
Total Reconciling Items	525	614	1,040
Non Cash Budget	884	1377	1,103
Scottish Government Spending Plans	40,741	46,797	46,691

Considering each of the reconciling items in turn

Reserve Drawdown – Spending plans are underpinned by anticipated underspend carried forward from the prior year through the Reserve. The balance of £179 million here relates to Capital and Financial Transactions.

Machinery of Government Changes relate to anticipated funding transfers from the UK Government for specific transfers of responsibility. These amounts are not reflected in the HM Treasury control total but are showing in portfolio spending plans.

Anticipated budget transfers reflect UK funding for specific areas of work - this includes a share of expected income from the Immigration Health Surcharge.

The Queen’s and Lord Treasurer’s Remembrancer (QLTR) is the Crown’s representative in Scotland who deals with ownerless property. In the Scotland Act 1998, the Crown’s property rights in ownerless goods and the revenues raised from them were transferred to Scottish Ministers and the revenues paid into the Scottish Consolidated Fund.

Other Income for 2021-22 comprised £185 million of expected receipts from recipients of rate relief measures in 2020-21. Other income of £620 million for 2022-23 is discussed in depth at the start of this Annex.

City Deals Funding – City deals are jointly funded through agreement with the UK Government. UK Government contributions to these agreements are not yet included in the Block Grant figures shown in Table 1.01. The £100 million shown here is consistent with the profile of UK Government contributions to these agreements.

Fossil Fuel Levy - The Fossil Fuel Levy was used to compensate power companies for the higher costs involved in meeting the terms of contracts to purchase renewable electricity, awarded to certain projects during the 1990s under a former renewables support mechanism. Changes introduced in 2005, which allowed the proceeds from the sale of Renewables Obligation Certificates (ROCs) attributable to the renewable projects in question to be used to meet the FFL costs, created a surplus. The Energy Act 2004 contains a provision, which enables Scottish Ministers to direct Ofgem (the Energy Regulator) to transfer surplus money from this fund to Scottish Consolidated Fund. The provision directs that the funds must be used to promote renewable energy in Scotland. The funding shown here represents a final transfer to the Scottish Government following the winding up of the scheme.

Non-Cash Budget

HM Treasury non-cash budget forms the balancing figure between Fiscal Resource (real spending power) and total Resource funding. Table A.06 shows the associated non-cash budgets by year. It is not possible to use the notional non-cash budgets to support any fiscal spending.

SG Spending Limits - Non-Cash Budget	2020-21 £m	2021-22 £m	2022-23 £m
Non-cash Budget Limit	1,145	1,145	2,470.0
Anticipated additional Non-cash	–	232	–
Unallocated Non-cash budget	(261)	–	(1,364)
Scottish Government Allocation	884	1,377	1,106

Footnotes

1 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503481/fiscal_framework_agreement_25_feb_16_2.pdf

2 Statement of Funding Policy 2021 (publishing.service.gov.uk)

3 Local government: Non-domestic rates (business rates) - gov.scot (www.gov.scot)