The latest report shows that the Scottish Government’s resource budget in the past three years has evolved more healthily than was anticipated at the start of the parliamentary term in 2016, due to both UK government spending increases and Scottish government tax decisions.
Following announcements of further spending increases this year – and via the Barnett Formula – the outlook for Scotland’s resource block grant from Westminster has improved even further this year and next. Real terms increases of around 2% per annum are anticipated for the next two years, the first time period of consistent real terms increases since the start of the ‘austerity’ period.
But two issues, both relating to devolved income tax, will offset some of this increase:
1. The block grant in each of the next two years will be reduced to take account of the fact that outturn Scottish income tax revenues in 2017/18 and 2018/19 turned out to be lower than forecast. The Scottish Government will be required to repay £200m in 2020/21 and potentially as much as £600m in 2021/22.
2. On the basis of the latest official forecasts, Scottish income tax revenues are on track to disappoint relative to the rest of the UK.
As a result, despite the block grant from Westminster growing by 2.1% in 2020/21, the resources available to the Scottish Government may still only grow by less than 1% in real terms.
All this comes at a time of heightened political and economic uncertainty. Financial responsibility for £3.5bn of social security spending will transfer to the Scottish budget in April 2020, bringing new pressures and risks.