Scottish Budget: draft budget 2018-2019

Annex A : Scottish Government Fiscal Control Framework And Reconciliation Of Available Funding To Spending Plans

Introduction

The implementation of the Scotland Act 2016 ^[1] and the associated Fiscal Framework ^[2] have made significant changes to the structure of the Scottish Government’s Budget and the sources of funding that support government expenditure. In addition, the report of the Scottish Parliament Budget Process Review Group ^[3] includes recommendations that the Scottish Government budget process establishes as a core objective to – ‘improve transparency and raise public understanding and awareness of the Budget’.

This annex provides a short summary of the controls and the key financial limits within which Scottish Ministers must manage income and expenditure and shows how these control limits link to the published spending plans.

Scottish Government Funding

The Scottish Government’s funding is a product of the grant settlement as it applies to all Devolved Administrations, the fiscal framework adjustments and its own policies on devolved and assigned taxes. 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 in accordance with the Statement of Funding Policy, ^[4] the Scottish Government has freedom to make its own spending and tax decisions on devolved programmes, but that must take place within the overall budgetary control totals set by HM Treasury and in compliance with HM Treasury’s Consolidated Budgeting Guidance. ^[5]

The Scottish Government’s total budget is determined through the combination of block grant funding from HM Treasury, adjusted to reflect forecasts of receipts generated through taxes devolved to Scotland (through the Scotland Act 2012 and Scotland Act 2016), and planned use of available devolved borrowing powers.

As set out in the Fiscal Framework, changes in the Scottish Government’s block grant will 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 adjusted for 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.

The block grant is then adjusted by HM Treasury to reflect the retention in Scotland of forecast revenues from devolved and assigned taxes (leaving a residual adjusted block grant). The Scottish Government retains all devolved and assigned Scottish tax revenues. The operation of the Block Grant Adjustment ( BGA) is complex and explained further in Chapter 2 of this document and in more detail in the Fiscal Framework.

HM Treasury imposed spending limits and the total funding available to the Scottish Government subsequently reflect the combined aggregate of the adjusted block grant, the receipts from devolved and assigned tax revenues as forecast by the Scottish Fiscal Commission and decisions taken by Scottish Ministers on tax policy and capital borrowing.

Variation of Scottish tax policy relative to that of the UK will adjust the level of tax income eventually received by the Scottish Government and the overall level of funding available to support spending plans. Similarly a decision to borrow to support capital spending will increase the level of funding available.

Table 1.02 sets out the funding available.

Table 1.02: Scottish Government Budget Control Limits 2016-17 to 2018-19

SG Spending Limits – Cash Terms	2016-17 £m	2017-18 £m	2018-19 £m
UK Government Spending Review settlement – November 2015	30,286	30,520	30,620
Subsequent Barnett consequentials and other additions	(12)	828	1,247
Total Budget Limit from HM Treasury (A),	30,274	31,348	31,867
of which:
Fiscal Resource Budget Limit	26,088	26,679	26,860
Non-cash Budget Limit	967	1,057	1,105
Capital Budget Limit	2,891	3,166	3,413
Financial Transactions	329	446	489
Block Grant Adjustment	(5,500)	(12,450)	(12,472)
Scottish Income Tax	4,900	11,829	12,115
Land and Buildings Transaction Tax	538	507	588
Scottish Landfill Tax	133	149	106
Non-Tax Income	43.2	36	25
Net Resource Budget Adjustment (B)	71	71	362
Capital Borrowing (C)	316	450	450
Total Scottish Government Funding (A+B+C)	30,661	31,869	32,679

Within these overall budget limits there are also important sub-categories of
spending which are subject to their own control limits. These sub-limits are imposed
by HM Treasury as part of UK rent 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 limit (or cash limit) and a non-cash limit. The Fiscal limit is the largest element of government expenditure, used for example to pay public sector salaries and purchase goods and services. The non-cash limit is primarily for depreciation of assets (a technical measure of the wearing out, consumption or other reduction in useful life of public sector infrastructure used in delivering public services). It is not possible to use the non-cash budgets to support any Fiscal/cash expenditure.
• Capital budgets are used to support the delivery of public infrastructure in Scotland. This is again 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 here as Financial Transactions. It is not possible within UK fiscal rules to use Capital Budgets or Financial Transactions 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. Financial Transactions cannot be used to fund public services and must be repaid to HM Treasury.

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 taxes), plus the devolved and assigned tax receipts themselves, plus capital borrowing.

Spending Plans

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:

• 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 provided at http://www.gov.scot/Topics/Government/local-government/17999/11199.
• 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. This funding is described as UK-funded Annually Managed Expenditure ( 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 forms of expenditure.

The full spending plans for the year are set out in Table 1.04 in Chapter 1 of the document (reproduced below). Portfolio chapters show the allocation of these totals across individual programmes.

Table 1.05: Total Proposed Spending Plans for 2018-19

2018-19 Draft Budget	Resource £m	Capital £m	Total £m	UK Funded AME £m	Total £m
Health and Sport	13,147.8	351.2	13,499.0	100.0	13,599.0
Finance and the Constitution	164.9	6.7	171.6	4,624.0	4,795.6
Education and Skills	2,813.6	171.0	2,984.6	428.0	3,412.6
Justice	2,540.1	112.8	2,652.9	-	2,652.9
Economy, Jobs and Fair Work	266.0	423.8	689.8	-	689.8
Communities, Social Security and Equalities	7,146.3	1,733.4	8,879.7	2,636.0	11,515.7
Environment, Climate Change and Land Reform	165.0	239.9	404.9	-	404.9
Rural Economy and Connectivity	1,447.0	1,359.4	2,806.4	-	2,806.4
Culture, Tourism and External Affairs	314.6	29.7	344.3	-	344.3
Administration	179.5	13.1	192.6	-	192.6
Crown Office and Procurator Fiscal Service	112.4	3.6	116.0	-	116.0
Scottish Government	28,297.2	4,444.6	32,741.8	7,788.0	40,529.8
Scottish Parliament and Audit Scotland	106.1	1.5	107.6	2.0	109.6
Total Scotland	28,403.3	4,446.1	32,849.4	7,790.0	40,639.4

Reconciliation of Funding to Spending Plans

There are a number of differences between the aggregate funding control limits as set out in Table 1.02 of the Draft Budget and the total cost of the portfolio spending plans. Published spending plans often incorporate additional funding sources not yet reflected in the HM Treasury control limits but anticipated to be formally confirmed at a future fiscal event. Table 1 below reconciles the aggregate funding limits to spending plans for 2016-17, 2017-18 and 2018-19 (the current budget year and the comparator figures shown across the document).

Table 1

SG Spending Limits — Cash Terms	2016-17 £m	2017-18 £m	2018-19 £m
Scottish Government Funding (from Table 1.02)	30,661	31,869	32,679
Barnett Consequentials	12	(412)
Budget Exchange/Reserve	(11)	203	158
Machinery of Government Changes		31	(1)
Anticipated budget transfers	15	156	159
Unallocated Non-cash budget	(209)	(229)	(196)
Changes to LBTT	(24)
Changes to Income Tax		29
Queen’s and Lord Treasurer’s Remembrancer			50
Total Reconciling Items	(217)	(222)	172
Scottish Government Spending Plans (from Table 1.05)	30,444	31,647	32,849

Considering each of the reconciling items in turn:

Barnett Consequentials – The comparator figures across this document reflect the spending plans as at Budget Bill for those years, to show a like-for-like comparison against 2018-19 plans. The budget figures in Table 1.01 reflect the impact of any additional Barnett consequential on the budget limits for 2016-17 and 2017-18 flowing from UK Government Fiscal events since the relevant Budget Bill. To get to the funding position that underpinned the spending plans shown throughout this document, the budget impact of these subsequent fiscal events needs to be removed.

Budget Exchange/Reserve – in 2016-17, £11 million of funding was not utilised at Budget Bill. That funding was later allocated as part of the annual budget revision process. 2017-18 and 2018-19 spending plans are underpinned by anticipated underspend carried forward from the prior year. Until 2017-18 that budget carry forward was through HM Treasury Budget Exchange. From 2017-18 it is through the operation of the Scotland Reserve (rules for which are set out in the Fiscal Framework).

Machinery of Government Changes relate to anticipated funding for transfers of responsibility from the UK Government not reflected in the HMT control total at the point of the relevant Draft Budget publication but included in portfolio spending plans.

Anticipated budget transfers reflect UK Government funding for specific areas of work, including funding for Scotland Act 2016 Implementation and Administration, that are not yet reflected in HM Treasury budget limits but anticipated to be formally confirmed at a future fiscal event.

The HM Treasury non-cash budget allocation is often more than is required to meet the current needs of the Scottish Government. Accordingly, not all of this is allocated out to portfolios and is subsequently returned to HM Treasury. As noted above this budget cannot be used to support Fiscal/cash spending.

The 2016-17 Draft Budget included announcement of plans to introduce a residential transactions supplement to the Land and Buildings Transaction Tax. Whilst anticipated revenues of £23 million from this measure were included in the funding position published in the Draft Budget, legislation still needed to be enacted. Portfolio spending plans therefore did not reflect that revenue, which was applied as part of the budget revision process in-year.

During the passage of the 2017-18 Budget Bill, a change to income tax policy was made to freeze the Higher Rate tax threshold. Under the operation of the Fiscal Framework this released an additional £29 million of funding to support spending plans during the Budget Bill process.

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 consolidated fund. The £50 million shown here is the funding impact of the accumulated revenues, which sit outside of HM Treasury control aggregates.