Scottish Budget 2025 to 2026

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 set out below:

Notes: (i) The prior year comparators throughout this document reflect outturn for 2023-24 and (ii) the latest Budget for 2024-25 as agreed by Parliament through the Autumn Budget Revision (ABR). The funding position shown above is consistent with the disaggregated position shown throughout the document. This revised presentation is a requested by the Scottish Parliament Finance and Public Administration Committee. There have been significant movements in the funding position since the Autumn Budget Revision was published, principally as a result of the UK Autumn Budget on 30 October. See tables A02 and A03 below. A further budget revision will be laid in Parliament in early 2025.

Some figures may not sum due to rounding (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 are the largest element of government expenditure 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. 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 (NDR) are 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 Non-Domestic Rates, and the management of the pool in Scotland are available on the Scottish Government website.

To note, NDR 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.

The non-cash resource limit is 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 relates to 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. However, this is not the case for all demand led programmes notably Social Security expenditure in Scotland, which 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 and subsequently revised in August 2023.

(2) Fiscal Resource Funding Envelope

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

There have been significant movements in the funding position since the Autumn Budget Revision was published, principally as a result of the UK Budget on 30 October. Allocation of the additional funding available in 2024-25 will be set out at the Spring Budget Revision (SBR) in the usual manner.

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.

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.

Ring-fenced funding for 2023-24 and 2024-25 relates to the replacement EU funding for Agriculture and Fisheries. From 2025-26, the UK Government has removed the ring-fence, with funding now part of the core settlement, with changes driven by the Barnett formula.

Social Security Block Grant Adjustment (B) – The block grant is adjusted upwards to reflect the devolution of social security powers and this figure 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. 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 fully 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. The 2025-26 reconciliations currently show a £500 million positive position and no resource borrowing is currently forecast for use. These assumptions and the overall position are subject to change over the course of the financial year.

Borrowing Costs – All costs of Capital and Resource Borrowing (including repayments of principal and interest) are deducted directly from Fiscal Resource funding.

Crown Estate Revenues – £660 million of Scotwind income remained available for use in 2024-25. In addition, a further £54 million of INTOG (Innovation and Targeted Oil and Gas) revenues have now also been generated. The amount of these revenues originally included in the 2024-25 Budget was £200 million and this was subsequently increased in the Autumn Budget Revision (by £224 million to £424 million). Following progress in reducing pressures in the in-year financial position as a result of the measures set out by the Cabinet Secretary for Finance and Local Government on 3 September 2024, and confirmation of consequentials as part of the UK Autumn Budget on 30 October, the forecast requirement for Scotwind in 2024-25 has now been reduced to £160 million. The position for 2024-25 will continue to be monitored, with an aim to further reduce usage in 2024-25 as far as possible. For 2025-26, £336 million of Scotwind funding is deployed, of which £10 million is deployed within resource position and £326 million is deployed as capital. The remainder of funding available, totalling £218 million at this stage, is expected to be utilised in future financial years.

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, which increases in real terms from 2024-25. For 2024-25 up to £712 million can be deposited in the Reserve, with this rising to a projected £734 million in 2025-26. There are no limits on drawdowns. No assumption is made for carry forward in the 2025-26 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. The total for 2025-26 is a forecast of the total annual transfers for the year, with the 2024-25 forecast moderately higher due to 2023-24 overpayments.

Kings Lord Treasurer 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.

Other/Budget Cover Transfers – 2024-25 figures for other fiscal resource includes £21 million related to an anticipated correction to the Block Grant for an error in the Home Office comparability factor applied at the last UK Spending Review, offset by an adjustment to the Block Grant baseline for the devolution of Crown Estates to Scotland (-£3 million in 2024-25, agreed as part of the Fiscal Framework renegotiation). The balance of funding is across a number of specific allocations including for thank-you payments for hosting Ukrainian refugees, debt advice and Union connectivity.

Non Domestic Rates Income – This is determined by policies set by the Scottish Government. In 2024-25, £3,114 million will form part of the settlement to Local Government in Scotland. The detailed polices for 2025-26 are set out in Chapter 2.

Public Sector Adoption of International Financial Reporting Standard 16 (IFRS 16) – The public sector adoption of IFRS 16 results in a change to the budgeting and accounting treatment for leases. This is a technical change, with budgets now adjusted to align with the requirement to capitalise the value of leased assets. 2024-25 was the final year of a three-year transition period, with budgets for 2024-25 and prior year comparators adjusted to reflect the necessary changes. These changes provided additional ring-fenced capital and non-cash budget cover to be applied for existing and new assets acquired under lease arrangements, to allow for their reclassification and subsequent depreciation. The changes to the resource budget position adjust for the elements of the rental costs that are now capitalised and therefore no longer score as resource. From 2025-26, this funding forms part of the core block grant.

(3) Capital and Financial Transactions Funding Envelope

Core Barnett Funding – As with Fiscal Resource these amounts are as per the recent UK Autumn Budget Statement on 30 October 2024.

Ringfenced Funding – This funding relates to the separate and specific agreement to transfer Capital funding to support Network Rail outside the usual Barnett arrangements. From 2025-26 this is now included in the core Barnett settlement.

Capital Borrowing – For Capital expenditure the Scottish Government can borrow up to £450 million annually, and £3 billion cumulatively, in 2023-24 prices. From 2024‑25, these limits increase in line with inflation. This means that for the purposes of the 2025-26 Scottish Budget the limits are calculated as £472 million and £3,144.5 million respectively. The Scottish Government is committed to ensuring that borrowing is deployed in a fiscally sustainable way that supports value-for-money expenditure. An additional memorandum is published alongside the budget document which sets out further details of the approach to borrowing as well as progress towards a future Scottish Government Bond issuance.

Scotland Reserve – As detailed above the Scottish Government has ability to carry-forward some funds or net underspends via the Scotland Reserve. No assumption is made for carry forward in the 2025-26 Budget.

Crown Estate Revenues – As detailed above, £326 million of leasing revenues is profiled within capital for 2025-26.

City Deals Funding – City deals are jointly funded through agreement with the UK Government.

Corrections to historic FT settlement – The methodology underpinning the Barnett calculation (and subsequent repayment requirements) of Financial Transactions 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. £188 million reflects an adjustment to the FT settlement agreed with HMT in 2023-24.

(4) Real Terms Analysis

The latest Barnett Block Grant figures show a net real terms increase across both 2024‑25 and 2025-26 using the latest settlement as at UK Budget on 30 October 2024. Within the total movement, real terms growth in resource Barnett Block Grant from 2024-25 to 2025-26 is £546 million or 1.4%. Capital real terms growth between 2024‑25 and 2025-26 is £401 million or 7%.

The real terms change in total discretionary funding reflects the net impact of tax and borrowing policy decisions, boosting real terms growth in the funding available to support public services.

(5) Additional disclosure on comparative information.

This years’ budget document includes outturn for the financial year 2023-24 and for 2024-25 the latest budget (which is the position at Autumn Budget Revision as approved by the Scottish Parliament) as the comparator information. There are significant movements in portfolio budgets across the financial year that reflect transfers of resource funding between portfolios – these transfers can reflect in-year decisions on reprioritisation, but also allow for recurring movement of significant sums between areas where policy responsibility (and initial budget) sit in one portfolio and ultimate delivery takes place in another. This is most marked in Heath and Local Government where there are large transfers for policy delivery. The Budget for 2025-26 therefore contains amounts that will be transferred at subsequent budget revisions during 2025-26, making a direct comparison with the 2024-25 ABR position (where those inter-portfolio transfers have already taken place) difficult unless these transfers are presented on a like for like basis.

Table A.07 below shows an adjusted 2024-25 resource position removing the impact at portfolio level of the recurring transfers actioned at ABR, to allow a like-for-like comparison against the 2025-26 initial allocations. The table shows the year-on-year movement at portfolio level in cash and real terms on a comparable basis.

This analysis makes no assumption on the distribution of the additional funding movement since the ABR. This will be presented to parliament as part of the Spring Budget Revision process in early 2025, in line with normal procedures. The allocation of this additional funding at the 2024-25 SBR will impact on the comparison with the position set out in the 2025-26 Budget.

No additional disclosure is provided for Capital and Financial Transactions as the different nature of the programmes supported by this funding mean that the same recurring transfers do not occur.

(6) Medium Term Funding Outlook

The following table sets out the Scottish Government’s multi-year funding forecast. It is based on a combination of (i) forecasts from the Scottish Fiscal Commission and the Office for Budget responsibility, and (ii) Scottish Government assumptions on growth in the block grant, based on OBR projections. The Scottish Government will set out more detail on the medium-term position in the next Medium Term Financial Strategy.