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

9. Fiscal Framework Implementation

The Fiscal Framework agreement between Scottish and UK Governments determines how the Scottish Government is funded, and underpins the powers set out in the Scotland Act 2016.

This chapter covers further areas of Fiscal Framework implementation relevant to this report: progress on policy spillovers and the review of the Fiscal Framework.

Progress on policy spillovers

111. The Fiscal Framework makes provision for policy spillovers – instances when one government makes a policy decision that affects the tax receipts or expenditure of the other. In these circumstances, the decision-making government should reimburse the other in cases of additional costs, or receive a transfer if there is a saving. Any decision or transfer relating to a spillover effect must be jointly agreed by both Governments.

Personal Allowance spillover

112. The Scottish and UK Governments continue to seek a resolution to the outstanding dispute concerning a spillover claim in relation to UK Government increases to the income tax Personal Allowance. These increases have a disproportionate impact on Scottish tax receipts, through the operation of the Fiscal Framework. The Cabinet Secretary for Finance and the Economy and the Chief Secretary to the Treasury (CST) discussed the next steps on the matter at a meeting of the Joint Exchequer Committee (JEC) on 3 February 2022. Ministers agreed that officials will work together with a view to publishing a paper on the jointly agreed analytical framework that sets out how the dispute is assessed under both the Scottish Government and HM Treasury positions. Officials will also undertake further work on options to resolve the dispute for consideration at the next JEC meeting.

113. While the scale of the financial impact is disputed, both parties accept that a direct spillover effect arises from the UK Government's changes to the Personal Allowance and that the Scottish Government is due a transfer of funding. The Scottish Government has included a funding assumption within Scottish Budget 2022-23 relating to the dispute, on a risk-assessed basis, and will seek to conclude the dispute process at the earliest possible opportunity to ensure that the funding is available to support the funding position for 2022-23. Issues relating to the spillovers provisions should be considered in more detail as part of the forthcoming review of the Fiscal Framework.

Fiscal Framework Review

114. The Fiscal Framework agreement states that a review of the Fiscal Framework should be undertaken by the Scottish and UK Governments after the Scottish Parliament elections in 2021, preceded by an independent report.

115. To support a wide-ranging review, the Scottish Government pursued a broad scope to the independent report, highlighting its role in establishing a wide, objective evidence base to inform the review. However, given the position of the CST and the need to make progress, at a meeting of the JEC in October 2021, the Cabinet Secretary for Finance and the Economy agreed with the CST that the subject of the independent report will be the Block Grant Adjustments arrangements only. Both ministers agreed that the review will be broader in scope than the report and that preparations for the review can be conducted in parallel to the work on the independent report. As part of the process, input is being sought from a wide range of stakeholders to help develop a robust evidence base for both the report and the review.

116. The arrangements for the independent report are subject to joint agreement between the Scottish and UK Governments. At the time of writing this Scotland Act Implementation Report, the arrangements are being finalised and the report will be commissioned as soon as possible.

Scope of the Review

117. The Medium Term Financial Strategy, published alongside the Scottish Budget 2022-23^[35], sets out the Scottish Government's position on the scope of the review. The Scottish Government reasons that the scope of the review should include both an assessment of how the framework has operated to date, as well as a wider consideration of the levers that the Scottish Government has to manage the risks to which the Scottish Budget is exposed, particularly in light of the COVID-19 pandemic.

118. The Scottish Government's objectives on the review are to ensure that funding arrangements are fair; that budget volatility is minimised; and that the Scottish Government has the powers and flexibility to manage risks and to support economic recovery in the years ahead.

119. The scope and arrangements for the review will be discussed at a JEC meeting in due course with a view to commence the review as early in 2022 as possible. The arrangements for the review depend on joint agreement with the UK Government, so progress on scope and timing for the review relies on their equal commitment to achieve this ambition. At a JEC meeting on 3 February 2022, the Cabinet Secretary for Finance and the Economy and the CST expressed a desire to avoid unnecessary delays to starting the Fiscal Framework review, and agreed to continue a dialogue and joint preparations for the review while the independent report is underway.

120. Beyond the input of the two governments, the Scottish Government welcomes the agreement with the UK Government that stakeholders' views will also be an integral part of the process, involving input from parliamentary committees and wider stakeholders.