Implementation of the Scotland Act 2016: second report

Chapter 4 - Block Grant Adjustments, Reconciliation and Indexation

46. Following the Fiscal Framework agreement, changes in the Scottish Government's block grant continue to be determined via the operation of the Barnett Formula. The block grant is then adjusted to reflect the retention in Scotland of devolved revenues. The block grant adjustments ( BGAs) involve two elements: (i) an initial baseline adjustment; and (ii) an indexation mechanism.

47. The general position set out in the Fiscal Framework and associated technical annex ^[12] is that the initial baseline adjustments for each tax will be equal to the UK Government's receipts from the relevant tax generated in Scotland in the year immediately prior to devolution (year 0). Indexation will then be applied to the year 0 baseline to determine the block grant adjustment for each tax in the first year of devolution (year 1), and annually thereafter. The full indexation formulae and methodologies for BGAs can be found in part two of the technical annex.

48. Over the period to 2021-22, the BGAs for tax will be indexed using the Comparable Model ( CM) and the results will then be adjusted to achieve the outcome delivered by Indexed Per Capita ( IPC). The figures in this chapter refer to figures achieved by the IPC method. The BGAs based on both the CM and IPC mechanisms can be found on page 31 of the Scottish Government's Draft Budget for 2018-19. ^[13]

Scotland Act 2012

49. Implementing the financial provisions for the Scotland Act 2012 powers has required BGAs in 2017-18 for SLfT and LBTT.

Scottish Landfill Tax ( SLfT) and Land and Buildings Transaction Tax ( LBTT)

Autumn Budget 2017 Block Grant Adjustments

	2016-17	2017-18	2018-19	2019-20	2020-21	2021-22
LBTT	£534m	£591m	£600m	£622m	£650m	£682m
SLfT	£131m	£104m	£94m	£86m	£79m	£75m
Total	£665m	£695m	£694m	£708m	£729m	£757m

2016-17

50. For 2016-17, the Scottish and UK Governments agreed a provisional one-year BGA of £600m for LBTT and SLfT. This figure was also agreed prior to the Fiscal Framework agreement in March 2016. As part of this agreement, it was agreed that the £600m figure would be revisited after the Fiscal Framework was agreed to ensure budgetary certainty.

51. Outturn data for 2016-17 for corresponding UK Government Receipts has now been published by HMRC. Consequently, the combined BGA for LBTT and SLfT for 2016-17 has increased from £600 million to £665 million.

52. This update will apply to the Scottish Government's 2017-18 budget. This £65 million increase in the block grant adjustment was anticipated at an early stage in financial year 2017-18 planning and has been proactively managed within our established in-year budget management processes.

2017-18

53. The initial BGAs for LBTT and SLfT for 2017-18 were £545m and £119m respectively. These figures were used for the purpose of calculating the Scottish Government's block grant at the Autumn Statement 2016 and for the Scottish Government's Draft Budget for 2017-18.

54. The block grant adjustments for the fully devolved taxes are updated once a year at every UK Government Autumn fiscal event. The reason for this is that Scottish Government uses receipts from fully devolved taxes as they are collected during the year to fund spending. The corresponding block grant adjustments are therefore also updated during the year to reflect latest forecasts of corresponding tax receipts in the rest of the UK.

55. At the Autumn Budget 2018, these BGAs were updated to £591m and £104m to reflect the latest forecasts for 17-18 receipts made by the OBR. This £31m increase in the block grant adjustment is being carefully and proactively managed through the Scottish Government's in-year financial management process.

56. Outturn data for 2017-18 receipts is likely to be available in Summer 2018. The final reconciliation to outturn data of these block grant adjustments will be applied at the UK Government's Autumn Budget 2018.

2018-19

57. The initial BGAs for LBTT and SLfT for 2018-19 are £600m and £94m respectively. These figures were used for the purpose of calculating the Scottish Government's block grant at the Autumn Budget 2017 and for the Scottish Government's Draft Budget for 2018-19.

58. These figures should be updated based on the latest available data at UK Government's Autumn Budget 2018. The final reconciliation of these block grant adjustments will be applied at the UKG Autumn Budget 2019.

59. Block grant adjustments for future years are included for completeness. These block grant adjustment values have had no impact on the Scottish Government's block grant, although are used for financial planning purposes.

Scotland Act 2016

Income Tax

Autumn Budget 2017 Block Grant Adjustments

	2017-18	2018-19	2019-20	2020-21	2021-22
SIT	£11,523m*	£11,749m	£12,056m	£12,477m	£12,936m

*Under the Fiscal Framework, the figure agreed at Autumn Statement 2016 (£11,750m) is not updated until reconciliation to outturn data.

60. Since 6 April 2017, the Scottish income tax ( SIT) powers under the Scotland Act 2016 have been in force.

2017-18

61. A block grant adjustment of £11,750m for 2017-18 was made at Autumn Statement 2016 based on the OBR's forecast of corresponding UK Government receipts of NSND Income Tax.

62. In contrast to the block grant adjustments for the fully devolved taxes, the block grant adjustments for Scottish income tax remain fixed until outturn data is available. For 2017-18, it is anticipated that outturn figures will be available in Summer 2018. A reconciliation of the block grant adjustment will then be made as part of the Scottish Government's Draft Budget for 2020-21.

2018-19

63. A block grant adjustment of £11,749m was made at Autumn Budget 2018 based on the OBR's forecast of corresponding UK Government receipts of NSND Income Tax. This block grant adjustment will remain fixed until outturn data is available in Summer 2020. A reconciliation of the block grant adjustment will then be made as part of the Scottish Government's Draft Budget for 2021-22.

64. Block grant adjustments for future years are included for completeness. These block grant adjustment values have had no impact on the Scottish Government's budget, although are used for financial planning purposes.

Baseline Adjustment Value

65. 2016-17 is the year used as the baseline adjustment for the Scottish income tax BGA, as this is the year immediately prior to the devolution of the current powers.

66. At the time of Autumn Statement 2016 and Scottish Government's Draft Budget 2017-18, a baseline adjustment value of £11,520m was used to inform the block grant adjustment for 2017-18. This figure reflected the most current forecast that the Office for Budget Responsibility had produced at the time for non-savings, non-dividend ( NSND) income tax receipts raised in Scotland in 2016-17.

67. For the Scottish Government's Draft Budget for 2018-19, the Scottish Government and HM Treasury agreed to use the SFC's 2016-17 forecast – rather than that provided by the OBR – for the baseline adjustment that informs the 2018-19 block grant adjustment. This is as a consequence of different methodological approaches taken by the SFC and the OBR which, without this change in approach, would have meant that the 2016-17 baseline adjustment was not fiscally neutral as anticipated in the Fiscal Framework. As such, to inform the 2018-19 block grant adjustment for income tax, a value of £11,214m was used as the baseline.

68. The 2016-17 NSND IT data for Scotland from HMRC's April 2018 Trust Statement will be used as an outturn figure to finalise this baseline. However, there will be no fiscal effect on the Scottish Government as the baseline year receipts must be the same as the block grant adjustment, so any reconciliation nets to zero.

Fines, Forfeitures and Fixed Penalties ( FFFP)

Autumn Budget 2017 Block Grant Adjustments

	2017-18	2018-19	2019-20	2020-21	2021-22
FFFP	£26m	£24m	£25m	£25m	£25m

69. The Scotland Act 2016 includes provision for fines, forfeitures and fixed penalties imposed by courts and tribunals in Scotland to be retained in Scotland. To bring this provision into effect, the UK Government laid a designation of receipts order on 15 December 2017 so that income from fines, forfeitures and fixed penalties imposed from 1 April 2017 are retained in the Scottish Consolidated Fund.

70. Under the Fiscal Framework, an adjustment has also been made to the Scottish Government's block grant to reflect the retention of this income in Scotland from April 2017 onwards.

2017-18

71. A figure of £33m was initially used at the Autumn Statement 16 and Scottish Government's Draft Budget for 2017-18 as the BGA for FFFP. This figure was updated in-year to £26m at Autumn Budget 2018 based on the latest forecast provided by the Ministry of Justice of corresponding UK Government receipts.

72. Outturn data for 2017-18 receipts is likely to be available in Summer 2018. The final reconciliation to outturn data of this block grant adjustment will be applied at the UK Government's Autumn Budget 2018.

2018-19

73. Scottish Government's Draft Budget for 2018-19 used £24m as the BGA for FFFP. Outturn data for 2018-19 receipts is likely to be available in Summer 2019. The final reconciliation to outturn data of this block grant adjustment will be applied at the UK Government's Autumn Budget 2019.

74. Block grant adjustments for future years are included for completeness. These block grant adjustment values have had no impact on the Scottish Government's budget, although are used for financial planning purposes.

Baseline Adjustment Value

75. 2016-17 is the baseline adjustment year for Fines, Forfeitures and Fixed Penalties ( FFFP), as it is the year prior to the devolution of these powers. The Fiscal Framework agreed that revenues from courts and tribunals in Scotland would be used as the baseline deduction. A figure of £33m was initially used at the Autumn Statement 2016; the final reconciled figure of £25m was derived using outturn from the Scottish Consolidated Fund accounts for 2016-17. ^[14]

Proceeds of Crime

76. The Scotland Act 2016 also includes provision for sums raised under Proceeds of Crime legislation in Scotland to be retained by the Scottish Government. The block grant adjustment to be made for Proceeds of Crime is still under discussion between the UK Government and Scottish Governments.

Crown Estate and Coastal Communities Fund

77. The UK and Scottish Governments agreed in the Scotland Act 2016 that the Scottish Government will take on responsibility for managing the Crown Estate assets in Scotland and responsibility for the Coastal Communities Fund would be devolved to the Scottish Government. These functions commenced on 1 April 2017.

78. In accordance with the arrangements in the Fiscal Framework, £6.1m was deducted from the block grant to reflect the retention of Crown Estate revenues in Scotland and £5.1m was added to reflect responsibility for managing the Coastal Communities Fund. Neither of these values will be indexed.

Next Steps

79. The Budget Process Review Group recommended that a Fiscal Framework Outturn Report be produced to support scrutiny of the operation of the Fiscal Framework including the reconciliation process, the Scotland Reserve and borrowing powers. The Scottish Government welcomed this recommendation and intends to produce the first outturn report in Autumn 2018.