Scotland Act 2016 implementation: seventh annual report

5. Block Grant Adjustments, Reconciliations and Indexation

As part of the Fiscal Framework Agreement, it was decided that the Scottish Government’s Block Grant would be adjusted to represent the impact of the transfer of greater fiscal powers to the Scottish Government. Deductions to the Budget reflect that the Scottish Government now retains revenues from some devolved taxes, with the devolved social security benefits that the Scottish Government is responsible for reflected through additions to the Budget. These adjustments are called Block Grant Adjustments (BGAs).

Forecast BGAs

38. Under the Fiscal Framework, two indexation mechanisms are used to calculate BGAs – the Indexed per Capita (IPC) mechanism and the Comparable Model (CM). The latest forecast IPC and CM BGAs, are set out in the Scottish Government’s Fiscal Framework Data Annex^[9].

39. BGAs which underpin the Scottish Budget use the IPC model. For the 2022-23 Scottish Budget, IPC-calculated BGAs were based on forecasts published by the Office for Budget Responsibility (OBR) alongside the 2021 UK Autumn Statement that preceded the Scottish Budget.

40. These forecast BGAs were subsequently used to calculate the in-year reconciliations, on the basis of the comparison between the BGAs which underpinned the 2022-23 Scottish Budget and the BGAs agreed at the 2022 UK Autumn Statement. The in-year reconciliations compared BGAs on LBTT, SLfT and social security, resulting in a positive £42 million reconciliation.

Data update: Fiscal Framework Outturn Report 2022 and Scottish Government's Medium Term Financial Strategy

41. As established in the Written Agreement between the Scottish Government and the Finance and Constitution Committee^[10], the Scottish Government published its annual Fiscal Framework Outturn Report on 27^th September 2022. The report outlines tax and expenditure outturn data and the implications of this data on the following Scottish Budget.

42. Due to the Office for National Statistics (ONS) mid-year population estimates being delayed until December 2022, all outturn BGAs detailed in the Outturn Report are provisional, with the exception of the 2020-21 income tax BGA which is final.

43. Table 18 of the Outturn Report shows the total provisional reconciliations for the 2023-24 for the Scottish Budget of £22.5 million. This is the net impact of the revenue and BGA reconciliations for Income Tax for 2020-21, and for the BGA reconciliations for fully devolved taxes, Fines, Forfeitures and Fixed Penalties, and Social Security Benefits Expenditure for 2021-22.

44. The Scottish Government’s Medium-Term Financial Strategy (MTFS)^[11] was published in May 2022. Annex B (Fiscal Framework) outlines the forecasts for tax revenues and BGAs, social security benefits expenditure and BGAs, and forecast reconciliations for tax, social security and non-tax revenue.

Impact of ONS population delay on Scottish Budget 2022-23

45. Due to the delay of the ONS population estimates for 2021, it was agreed that the provisional final reconciliation of £22.5 million would be applied to the Scottish Budget, with potential for a further reconciliation once ONS figures were published in December 2022.

46. On 21^st December 2021 ONS published their mid-year estimates for 2021 and HM Treasury provided a corresponding set of updated BGAs for devolved taxes and social security expenditure.

47. However, Scottish Government and HM Treasury officials identified potential for the inclusion of census data within the latest ONS statistics to distort BGA calculations. Specifically the impact of census data on relative population growth rates and the fact that census data is available for the rest of the UK (rUK) but not Scotland because of Scotland’s delayed census publication.

48. Latest ONS data suggests that Scotland enjoyed higher population growth than rUK, a reversal of a long-term trend which is more likely to be down to inconsistent data. Officials from SG and HMT are considering how best to manage the impact of census data in ONS forecasts, and mitigate any distortion of BGA calculations or unnecessary volatility in the Scottish Budget.

49. In the interim, the provisional reconciliation applied at the 2023-24 Scottish Budget will continue to be used. HMT took the same approach to calculating its 2023 Budget.

Income Tax Reconciliation

50. Outturn data for Income Tax for 2020-21 was published by HMRC on 7 July 2022 and a reconciliation of positive £50.4 million was applied to the Scottish Budget 2022-23. This was the fourth income tax reconciliation since the implementation of the Fiscal Framework. Further information on the reconciliation can be found in the Fiscal Framework Outturn Report^[12].