Implementation of the Scotland Act 2016: third report

5. Chapter Five – Block Grant Adjustments, Reconciliation & Indexation

The Fiscal Framework agreed that the Scottish Government's Block Grant would be adjusted to reflect the impact of the transfer of greater fiscal powers to the Scottish Government. Deductions are made to reflect the retention of devolved tax revenues and additions are made to provide funding for devolved social security benefits.

Key Developments

• The First Fiscal Framework Outturn Report was published on 20 September 2018 to report, amongst other things, on the operation of the Block Grant Adjustments (BGAs).
• A change has been agreed to the Income Tax Block Grant Adjustment to account for income tax devolution to Wales.
• The first Block Grant Adjustment for Social Security was operationalised following the transfer of Carer's Allowance to the Scottish Parliament.

5.1 Fiscal Framework Outturn Report

5.1.1 As recommended by the Budget Process Review Group, the Scottish Government published a Fiscal Framework Outturn Report on 20 September 2018 to report on the operation of the Fiscal Framework. The Report made the following key points regarding the operation of the Block Grant Adjustments in 2018-19:

• A downward reconciliation of £2 million was made to the 2019-20 Budget in relation to the fully devolved taxes.
• Only the baseline value was established for income tax and the 2020-21 Budget will be the first Scottish Budget in which an income tax reconciliation will have to be made, in regards to income tax for 2017-18.

5.2 Income Tax

BGA Baseline Reconciliation

5.2.1 Income tax outturn data for Scotland for 2016-17 was published on 12 July 2018 as part of HMRC's annual accounts and report process. The outturn figure of £10,719m will be used from now on as the baseline value for the income tax BGA.

5.2.2 This figure was £548m lower than the 2016-17 forecast used at Scotland's Fiscal Outlook (£11,267m) in May 2018. While this causes the income tax BGA and forecast Scottish Income Tax revenues for the 2019-20 Scottish Budget to be significantly lower, the 2016-17 outturn data has no direct impact on the Scottish Government's Budget. This is because the BGA deducted from the Budget and the forecast tax revenues added to the Budget have been revised down by the same amount to account for the new baseline value.

Change in the Income Tax BGA Indexation

5.2.3 From 2019-20, a proportion of income tax paid by taxpayers living in Wales will be transferred to the Welsh Government. This has required the Scottish Government's income tax BGA to be updated in line with paragraph C.16 of the Fiscal Framework:

"For revenues, "corresponding UK government receipts" are the revenues from the equivalent taxes or other revenue-raising powers collected by the UK government in the rest of the UK… The scope of the UK government receipts will be updated with any devolution of tax powers to other parts of the UK".

5.2.4 For 2019-20, the BGA will still be indexed using growth in receipts and population data for England, Wales and Northern Ireland. This is necessary because there will be no 2018-19 outturn figure for England and Northern Ireland (ENI) income tax receipts only. Without this figure, it is not possible to measure the growth between 2018-19 and 2019-20 ENI income tax receipts, which would be needed to operate the 2019-20 BGA based on ENI only.

5.2.5 From 2020-21 and onwards, the income tax BGA will be indexed using growth in receipts from England and Northern Ireland only.

5.3 VAT Assignment

5.3.1 Once VAT Assignment is fully implemented, a Block Grant Adjustment will be made to reflect the fact that more of the Scottish Government's spending power will be determined through assigned VAT.

5.3.2 As set out in paragraph A.5 of 'Scottish VAT Assignment: Summary of Assignment Model'^[8], the two Governments have agreed that the Office for Budget Responsibility (OBR) will forecast comparable receipts in the rest of the UK to be used in calculations for the Block Grant Adjustment.

5.3.3 The Block Grant Adjustment for VAT Assignment will work in broadly the same way as the adjustments applied for Scottish Income Tax. Forecast assigned revenues and the Block Grant Adjustment will be added to and deducted from the Scottish Government's Block Grant. The revenues and BGA are then fixed until the Budget after outturn data is available.

5.4 Social Security

5.4.1 Block Grant Adjustments for Social Security work in a similar way to Fully Devolved Taxes, albeit they are additions to the Block Grant rather than deductions.

5.4.2 The first benefit to require a Block Grant Adjustment, Carers' Allowance, was devolved to the Scottish Government on 3 September 2018.^[9] As the benefit was transferred halfway through the financial year, the BGA was apportioned on a pro rata basis. As set out in table 5.1, Carer's Allowance expenditure from September 2017 to March 2018 accounted for around 59% of DWP's expenditure in 2017-18 therefore the BGA for 2018-19 is 59% of the total year BGA. This proportion will also be used to make the reconciliation after 2018-19 outturn data becomes available in Autumn 2019.

Table 5.1 Carer's Allowance 2018-19 BGA Calculation

DWP's expenditure on Carer's Allowance in Scotland (April 2017 - March 2018)	£249m
DWP's expenditure on Carer's Allowance in Scotland (Sept 2017 - March 2018)	£146m
% of expenditure (Sept 2017 - March 2018 )	59%
Block Grant Adjustment (April 2018 - March 2019)	£267m
Block Grant Adjustment (Sept 2018 - March 2019)	£157m

5.5 Proceeds of Crime

5.5.1 The Scotland Act 2016 includes provision for sums raised under Proceeds of Crime legislation in Scotland to be devolved to the Scottish Government. This provision came into force at the beginning of 2017-18 financial year.

5.5.2 Prior to devolution, the Scottish Government had an agreement with the UK Government whereby it retained all sums from Proceeds of Crime under an administrative cap of £30m. This cap was never breached whilst it was in force, so the UK Government never benefitted from any sums from Proceeds of Crime raised in Scotland before 2017-18.

5.5.3 The no detriment principle is clear that neither government's budget should be larger or smaller simply as a result of the devolution of powers. Despite this, the UK Government has made a Block Grant Adjustment of £4m per year for Proceeds of Crime since 2017-18. This means that the Scottish Government's budget is now £4m worse off a year and the UK Government's budget is £4m larger as a result of devolution. This contravenes the no detriment principle.

5.5.4 This Block Grant Adjustment remains under active discussion through the Joint Exchequer Committee.