Scottish Budget: 2023 to 2024

Annex A Scottish Government Fiscal Control Framework

(1) Introduction

The Scottish Government is required to set a balanced budget each year. This must also remain within the key control totals as illustrated below:

Table A.01 – Scottish Government Total Funding

Scottish Government Discretionary Fiscal Budget	2021-22	2022-23	2023-24
	£m	£m	£m
Fiscal Resource	39,215	39,188	41,944
Non-Domestic Rates	2,090	2,766	3,047
Capital	5,660	5,824	5,939
Financial Transactions	449	527	424
Total Discretionary Fiscal Budget	47,414	48,305	51,353

Scottish Government Non-Discretionary Budget	2021-22	2022-23	2023-24
	£m	£m	£m
Non-Cash Resource Budget	1,378	1,103	1,015
UK Funded Annually Managed Expenditure (UKAME)	6,373	6,934	7,444
Total Non-Discretionary Budget	7,750	8,037	8,459
Total Scottish Budget	55,164	56,343	59,813

Notes: 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. Some figures may not sum due to roundings (all Scottish Budget figures are rounded at Level 4. Level 4 tables are published alongside the Scottish Budget document on the Scottish Government website).

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.

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, which 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. Full analysis of the Fiscal Resource funding envelope is detailed in Table A.02 below.

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. Full analysis of the Capital and Financial Transactions funding envelope is detailed in Tables A.03 and A.04 below.

Non-Domestic Rates income – is fully devolved and outside 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.

Note: This is disclosed as AME within the Local Government portfolio allocation.

The non-discretionary budget reflects the items where use of funding is restricted and/or has no impact on cash deployment and has two subcategories.^[11]

The non-cash resource limit – largely for depreciation of assets (and analysed separately below). 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 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 UKAME). These budgets are ringfenced 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: notably Social Security expenditure in Scotland is managed within the Fiscal Resource Departmental Expenditure Limit (DEL) rather than AME.

The Scottish Government operates within the requirements of the Fiscal Framework, agreed as part of the further devolution of fiscal powers contained in Scotland Act 2016.

(2) Fiscal Resource Funding Envelope

A full breakdown of the Fiscal Resource envelope by source of funding is detailed below.

Table A.02 Fiscal Resource Funding

Fiscal Resource Funding (£m)	2021-22	2022-23	2023-24
	£m	£m	£m
Core Barnett Settlement	30,892	34,322	36,023
COVID-19 Barnett Consequentials	3,408	–	–
Ringfenced Funding	756	704	715
Total UK Settlement (A)	35,056	35,026	36,737
Social Security Block Grant Adjustment (B)	3,310	3,587	4,360
Block Grant Adjustment for Taxes and Non-Tax Income	(12,430)	(14,639)	(16,131)
Scottish Income Tax	12,263	13,671	15,810
Land and Buildings Transaction Tax	586	749	773
Scottish Landfill Tax	88	101	79
Non-Tax Income	25	25	25
Net Budget Adjustment for Taxes and Non-Tax Income (C)	532	(94)	557
Reconciliations	(319)	(15)	46
Resource Borrowing	319	15	41
Resource Borrowing Costs	(21)	(76)	(120)
Capital Borrowing Costs	(76)	(92)	(112)
ScotWind	–	40	310
Scotland Reserve	192	120	–
Migrant Surcharge	28	92	120
KLTR	5	5	5
Other	185	180	–
Spillover	–	400	–
Machinery of Government	3	–	–
Other Income and Funding Adjustments (D)	317	669	289
Total Scottish Government Fiscal Resource Funding (A+B+C+D)	39,215	39,188	41,944
Non-Domestic Rates – Distributable Amount	2,090	2,766	3,047
Total Scottish and Local Government Fiscal Resource Funding	41,305	41,954	44,991

Scottish Government 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), any planned use of available devolved borrowing powers and Non-Domestic Rates Income. Specifically:

Total UK Settlement (A) – This contains the core Block Grant settlement as outlined in the UK Autumn Budget. Ringfenced funding here relates to the replacement EU funding for Agriculture and Fisheries.

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.^[12]

Social Security Block Grant Adjustment (B) – The block grant is adjusted upwards to reflect the devolution of social security powers and is calculated by HM Treasury with reference to forecasts prepared by the Office for Budget Responsibility.

Net Budget adjustment for Taxes and Non-Tax Income (C) – 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.

Other Income and Funding Adjustments (D) – A number of other adjustments are made to Fiscal Resource Funding these are detailed below. Note that previously the majority of these items were presented separately as reconciling differences between primary fiscal aggregates and Scottish Government spending plans. These form part of the overall fiscal envelope.

Reconciliations – This comprises positive and negative outturn movements versus previous forecasts on income tax (net of BGAs) along with final outturn reconciliations in respect of Social Security and Devolved taxes. Block Grant Adjustments (BGAs) and these reconciliations are part of the Fiscal Framework agreement between the Scottish Government and HM Treasury.

Resource Borrowing – The Scottish Government can use resource borrowing to offset any negative reconciliations arising from forecast errors, within the overall annual and cumulative resource borrowing limits as defined in the Fiscal Framework agreement. In 2023-24 this power is being deployed to offset the adverse BGA reconciliations in relation to devolved taxes and benefit expenditure and included within the net reconciliation total above.

Borrowing Costs – All costs of capital and resource borrowing (including repayments of principal and interest) are deducted directly from Fiscal Resource Funding. In previous budget documents this was included within the Finance and Economy Budget for presentational purposes but deducted from the total requiring parliamentary approval. In this budget and going forward these forecast costs will be included as a funding deduction reflecting how they are applied to budget aggregates and managed in line with borrowing policies.

ScotWind – In 2022-23 the Crown Estate Scotland concluded the first round of offshore wind leasing which has generated in excess of £756 million of income. The amounts detailed for 2022-23 and 2023-24 are in line with the Resource Spending Review profiles agreed in May. Note that £40 million was included within the combined 'Other Income' £620 million assumption in the 2022-23 budget, but this has been disaggregated in the table above.

Scotland Reserve – The Scotland Reserve allows the Scottish Government limited ability to manage spending across financial years. The Fiscal Framework sets out the limits of the 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. No assumption is made for fiscal resource carry over in the 2023-24 Budget.

Migrant Surcharge – This is income derived from charges on migrants for using NHS Services and is collected by the Department for the Home Office and redistributed to devolved governments on a Barnett basis. Despite the Barnett formula applying, this is not a Barnett Consequential included within the block grant as it has no relationship to UK departmental spending. Amounts are allocated to Scottish Government's settlements incrementally and the 2023-24 figure is a forecast of the total annual transfers for the year.

King's and Lord Treasurer's Remembrancer (KLTR formerly 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.

Spillover – As part of the 2022-23 Scottish Budget £620 million 'Other Income' assumption, £400 million was assumed to be forthcoming through the conclusion of a previous dispute on the application of increases to the personal allowance on adjustments to the Scottish Block Grant, dating back to 2017-18. An agreement was reached in 2022-23 reflecting all prior year adjustments up to and including financial year 2021-22 resulting in a transfer of £375 million. Any future funding transfers in respect of fiscal years 2022-23 onwards are to be subject to discussion as part of the forthcoming Fiscal Framework Review. No adjustment is made for 2023-24 onwards at this stage.

Machinery of Government – These 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. No such transfers are currently anticipated for 2023-24.

Other – There is no assumption on other income sources included for 2023-24 Fiscal Resource funding. In 2021-22 this comprised £185 million of expected voluntary donations from recipients of rate relief measures in 2020-21. In 2022-23 this was included in the total £620 million Other Income assumption (alongside anticipated Spillover and ScotWind funding) and related to expected, but unconfirmed Barnett consequentials.

Non-Domestic Rates Income – This is determined by policies set by the Scottish Government. In 2023-24, £3,047 million will form part of the settlement to Local Government in Scotland. The detailed polices for 2023-24 are set out in Chapter 2.

(3) Capital and Financial Transactions Funding Envelope

Table A.03 Capital Funding Envelope

Capital Funding (£m)	2021-22	2022-23	2023-24
	£m	£m	£m
Barnett Settlement	5,210	4,469	4,757
Ringfenced Funding	–	643	632
Borrowing (per Capital Borrowing Policy)	450	450	450
Scotland Reserve	–	118	–
Fossil Fuel Levy	–	44	–
City Deals	–	100	100
Total Capital Funding	5,660	5,824	5,939

Table A.04 Financial Transactions Funding Envelope

Financial Transactions Funding (£m)	2021-22	2022-23	2023-24
	£m	£m	£m
Barnett Settlement	249	466	186
Scotland Reserve	200	61	50
Corrections to historic settlement be reflected	–	–	188
Total Financial Transactions Funding	449	527	424

Barnett Settlement – As with Fiscal Resource these amounts are as per the recent UK Autumn Budget Statement on 17 November 2022.

Ringfenced Funding – This funding relates to the separate and specific agreement to transfer capital funding to support Network Rail outside the usual Barnett arrangements.

Capital Borrowing – The Scottish Government can borrow up to £450 million per annum for capital borrowing, subject to a cumulative limit of £3 billion. The Medium Term Financial Strategy details the Scottish Government's policy on capital borrowing which seeks to utilise borrowing capacity in a fiscally sustainable manner.

Scotland Reserve – As detailed above the Scottish Government has ability to carry forward some funds or net underspends via the Scotland Reserve. No such assumption is made for capital in 2023-24; however, £50 million of Financial Transactions is assumed to be available.

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. The funding shown for 2022-23 represents a final transfer to the Scottish Government following the winding up of the scheme. No such funding is available from 2023-24 onwards.

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. The £100 million anticipated here is consistent with the profile of UK Government contributions to these agreements.

Corrections to historic FT settlement – The methodology underpinning the Barnett calculation (and subsequent repayment requirements) of Financial Transactions (FT) was amended as part of the 2020 UK Spending Review. This drew a distinction between FTs to be allocated on a gross basis and those allocated on a net basis (where repayments can be retained for redeployment). The change revealed some previous miscalculation of the Scottish Government FT settlement since 2015. In aggregate the total change amounted to around £400 million. £190 million reflects an adjustment to the FT settlement agreed with HMT for 2023-24. The balancing amount remains subject to dispute.

(4) Specific Funding Issues for 2023-24 and beyond

Whilst Barnett funding from the UK Government has increased in real terms on the basis of the standard GDP deflator calculation this does not compensate the Scottish Budget for increases in prices over 2022-23 and 2023-24 combined. As the table below demonstrates the funding received for 2023-24 is 4.8% lower in real terms than in 2021-22, despite increases in the most recent financial year.

Table A.05 Real Terms change in Barnett Funding

Barnett Funding (2022-23 prices)	2021-22	2022-23	2023-24
	£m	£m	£m
Fiscal Resource Budget	35,967	34,322	34,895
Capital Budget	5,463	4,469	4,608
Financial Transactions Budget	261	466	180
Total	41,691	39,257	39,683
Real Terms Change against prior year	–	(5.8%)	1.1%
Cumulative Real Terms changes since 2021-22	–	(5.8%)	(4.8%)
GDP Deflators for 2022-23 prices	0.954	1.000	1.032
GDP Deflators for 2021-22 prices	1.000	1.049	1.082

Table A.06 Real Terms change in Discretionary Funding

Discretionary Funding (2022-23 prices)	2021-22	2022-23	2023-24
	£m	£m	£m
Fiscal Resource Budget	41,120	39,188	40,630
Capital Budget	5,935	5,824	5,754
Financial Transactions Budget	471	527	410
Total	47,526	45,539	46,794
Real Terms Change against prior year	–	(4.2%)	2.8%
Cumulative Real Terms changes since 2021-22	–	(4.2%)	(1.5%)

According to the latest data inflation now stands at 11.1%, the highest UK rate since 1981. Since 2021 the Scottish Block Grant has reduced by 4.8% in real terms when applying the GDP deflator. While the GDP deflator is the usual comparator for analysing real-terms changes in public spending, as highlighted by the OBR and SFC, it may not fully capture the inflationary pressures faced by the public sector in the current environment. Using CPI as an alternative measure of inflation, the core Barnett funding from the UK Government would be 10.8% lower than in 2021-22.

Looking at discretionary funding (incorporating the effect of Scottish Government policies on tax and borrowing) presents a similar picture, with a real-terms reduction in 2022-23 not fully compensated for by increases in 2023-24. However, the effect of Scottish Government tax and borrowing decisions has helped to mitigate this real-terms loss of funding. Whilst Barnett funding is down 4.8% since 2021-22, Scottish Government funding in total has only fallen by 1.5% after factoring in devolved funding policies.

Based on the most recent OBR analysis, the long-term fiscal outlook for Barnett Settlements presents a significant downturn to expected funding from 2025-26. This is as a result of the UK Government deferring the majority of departmental cuts to after the current UK Spending Review period, which expires in 2024-25. Therefore the full impact on the Scottish Government's funding outlook over the spending review period remains subject to considerable downside risk.

Funding Outlook

The Scottish Government published its Medium Term Financial Strategy in May 2022, alongside its Resource Spending Review and refreshed Capital Spending Review. The Medium Term Financial Strategy set out the funding outlook for the next five years; and this funding outlook was used to set the projected spending envelopes for resource and capital for the period 2023-24 to 2026-27.

There are a number of differences between the funding position set out at this 2023-24 Scottish Budget and the outlook set out in May 2022. In cash terms, there is £1.8 billion more resource funding available. This is a combination of;

• £831 million improvement to the forecast net tax position (including the effect of changes to tax policy detailed in this budget),
• £830 million more Barnett consequentials,
• £279 million from the inflationary uplift in the Social Security Block Grant Adjustment, less an offset of;
• (£127 million) across the range of items included within Other Income (D) above.

The CDEL funding position for 2023-24 remains unchanged from the outlook set out in May 2022. There is £38 million more Financial Transaction funding available. This is a result of:

• £12 million less than expected from corrections to historic settlement detailed above. The remaining £200 million was allocated to 2024-25.
• £50 million more from use of the Scotland Reserve.

An updated funding outlook for 2024-25 and subsequent years will be published as part of the Medium Term Financial Strategy in May 2023.

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^[13] 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 was 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.

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.

Fiscal Framework Review

The Fiscal Framework is due to be reviewed in 2022-23, after the completion of an independent report, jointly commissioned by the UK and Scottish Governments. The review must comprehensively consider the operation of the current framework and ensure the Scottish Government has the necessary powers to manage the risks we face within our devolved responsibilities, and to support economic recovery.

(5) Non-Cash Budget

The HM Treasury non-cash budget forms the balancing figure between Fiscal Resource (real spending power) and total resource funding. Table A:07 shows the associated non-cash budgets by year. It is not possible to use the notional non-cash budgets to support any fiscal spending.

Table A.07 Non Cash Budget Reconciliation

Non-Cash Budget (£m)	2021-22	2022-23	2023-24
	£m	£m	£m
Non-Cash Budget Aggregate	1,145	2,470	2,518
Anticipated Additional Non-Cash	233	–	–
Unallocated Non-Cash	–	(1,367)	(1,503)
Scottish Government Allocation	1,378	1,103	1,015

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