Sixth Annual Report on the Implementation of the Scotland Act 2016: Tenth Annual Report on the Implementation and Operation of Part 3 (Financial Provisions) of the Scotland Act 2012

5. Block Grant Adjustments, Reconciliations and 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 that the Scottish Government now retains devolved tax revenues and additions are made to reflect that the Scottish Government is now responsible for certain devolved social security benefits. These adjustments are referred to as Block Grant Adjustments (BGAs).

Provisional BGAs

44. The Fiscal Framework sets out that, where the Scottish Budget takes place before the UK Budget, provisional BGAs will be provided to the Scottish Government for budgeting purposes. The framework also notes that these provisional BGAs will be applied to the Scottish Block Grant if the UK Budget has not occurred at least three months before the start of the financial year. Since the UK Budget 2021, published 3 March 2021, took place after the Scottish Budget, provisional BGAs were used to inform the Scottish Budget 2021-22. The provisional BGAs were based on forecasts published by the Office for Budget Responsibility (OBR) alongside the UK Government Spending Review on 25 November 2020.

45. The UK and Scottish Governments agreed that the Scottish Government could choose to use the BGAs provided alongside the later UK Budget if it preferred to do so. However, the Cabinet Secretary for Finance and the Economy decided to use the provisional BGAs to inform the Scottish Budget.

46. In-year reconciliations to the 2021-22 Scottish Budget have been made in the normal way, by comparing the provisional BGAs, which underpinned the Scottish Budget 2021-22, to the BGAs agreed alongside the UK Autumn Budget and Spending Review 2021.^[14]

Data update: Fiscal Framework Outturn Report 2021 and Scottish Government's Medium Term Financial Strategy

47. In compliance with the Written Agreement between the Scottish Government and the Finance and Constitution Committee^[15], the Scottish Government published a Fiscal Framework Outturn Report on 30 September 2021^[16], which set out the impact of tax and expenditure outturn data for the following Scottish budget.

48. As a result of changes to previous publication schedules, the report largely drew upon provisional outturn revenue, expenditure and BGA data. A data update, which includes final outturn data, was published in the Scottish Government's Medium Term Financial Strategy (MTFS)^[17], alongside the Scottish Budget 2022-23.

49. Table B.19 in Annex B of the MTFS sets out that a final reconciliation of negative £15 million would be made to the Scottish Budget 2022-23, which is the net impact of the revenue and BGA reconciliations for Income Tax for 2019-20, and for the BGA reconciliations for fully devolved taxes, Fines, Forfeitures and Fixed Penalties, and Social Security Expenditure for 2020-21.

Income Tax reconciliation

50. Outturn data for Income Tax for 2019-20 was published by HMRC on 22 July 2021 and a reconciliation of negative £34 million was applied to the Scottish Budget 2022-23. This was the third income tax reconciliation since the implementation of the Fiscal Framework. Further information on the reconciliation can be found in the Fiscal Framework Outturn Report 2021^[18].

BGA for Low Income Winter Heating Assistance / Cold Weather Payment

51. It was announced in December 2021 that the Scottish Government would introduce a new Scottish benefit, Low Income Winter Heating Assistance, to replace the current Cold Weather Payment scheme in Scotland from winter 2022.

52. A BGA for Low Income Winter Heating Assistance was agreed for the first time alongside the UK Autumn Budget on 27 October 2021 and a BGA of £14 million was applied to the Scottish Budget 2022-23.

53. Due to the substantial volatility of the Cold Weather Payment, paragraph 13 of the Fiscal Framework agreed that the initial baseline addition to the Scottish Budget would be "an average of the UK government's spending in Scotland on this benefit from 2008-09 to the year prior to devolution." As Scottish expenditure outturn data for 2008-09 is unavailable, the Scottish and UK Governments agreed that the initial baseline addition would be calculated on the basis of the expenditure outturn from 2009-10 to 2019-20 and forecast data for 2020-21 to 2021-22^[19].

54. Furthermore, the UK and Scottish Governments agreed that, for the initial BGA calculation, an average of the expenditure in England and Wales over the same period would be used for the purposes of calculating the percentage growth for UK government Cold Weather Payment expenditure in England and Wales.

Latest Forecast BGAs

55. Under the Fiscal Framework, two indexation mechanisms are used to calculate BGAs – the Indexed per Capita (IPC) mechanism and the Comparable Model (CM). In practice, the IPC-calculated BGAs are applied to the Scottish Budget.

The latest forecast IPC and CM BGAs, agreed alongside the UK Government Spring Statement on 23 March 2022 are set out in the Scottish Government's Fiscal Framework Data Annex.^[20]