What’s happening to the Scottish block grant in 2020/21?

Last month’s UK Spending Round announced increases in UK Government resource spending of 4.1% in real terms next year. Will the Scottish block grant increase by more or less than this, and why? And what will this mean for the Scottish budget?

Departmental spending plans of the UK Government affect the Scottish block grant via the Barnett formula. The block grant increases by a population share of increases in comparable spending by the UK Government in England (or England and Wales in some cases).

And whilst revenues from devolved taxes have an increasingly material impact on the resources available to the Scottish Government, the block grant remains the most critical factor in determining the overall size of the Scottish budget.Continue reading

October 2, 2019

The Fiscal Framework Outturn Report 2019

Yesterday afternoon the Scottish Government published its annual ‘Fiscal Framework Outturn Report’. It reports outturn tax and social security spend data for 2018/19 (2017/18 for income tax) and discusses the budget implications.

By necessity it is a dry report. But if you don’t want to battle your way through it, this blog summarises the key bits.

For each of Scotland’s new devolved/shared taxes, the FFOR tells us two things.

  • First, whether SG raised more from a given Scottish tax than was deducted from its block grant (block grant adjustment, BGA), for the latest year for which outturn data is available. In other words, is the Scottish budget better off or worse off as a result of tax devolution?
  • Second, how different the outturn data is from the forecasts that were made when the budget was set.

For income tax in 2017/18, £97m less was raised in Scotland than was deducted from the block grant. So the Scottish budget was a bit worse off than it would have been without IT devolution – despite an attempt to raise more revenues by freezing the higher rate threshold.

But the forecasts for budget 17/18 projected that IT revenues would be £107m more than the BGA. So, in effect, SG budgeted to spend £204m more than it had available to it (the difference between £107m and -£97m). That £204m will be deducted from the 2020/21 budget as part of the ‘reconciliation’ process.

Of course we’ve known all of that since July! What’s new is what the report says about LBTT and Landfill Tax.

  • In 2018/19, revenues from LBTT (£557m) were £7m higher than the BGA – partly as a result of higher LBTT rates than down south. This is slightly better than the forecast position when the 18/19 budget was set.
  • Revenues from LfT (£143m) were £37m higher than the BGA. Again, this is a bit better than the forecast position when the 18/19 budget was set – partly because Scotland sent more waste to landfill than anticipated.

For LBTT and Landfill Tax, most of any reconciliation required happens within the 2018/19 financial year, and thus has already been absorbed. Tiny reconciliations will apply to the 2020/21 budget, but this is so small as to be of no budgetary significance.

There is a similar story in relation to income from various other (very small) income streams – there are no significant budgetary effects from the reported figures.

The FFOR also considers spending on social security. In 2018/19, the Scottish Government spent £5m less on Carer’s Allowance than what had been added to its block grant to cover the new responsibility. (This of course excludes the effect of the Carer’s Allowance supplement that the SG began paying in 2018, which came with a price tag of £35m and that the government has to fund from its total budget).

Perhaps the most interesting bit of the FFOR is the revelation of a brewing stooshy between the Scottish and UK govs about how sums recovered under ‘proceeds of crime’ legislation (confiscation of money and assets that have been gained through criminal conduct) are budgeted for post-devolution.

Before sums raised from proceeds of crime legislation were officially devolved through Scotland Act 2016, the two governments had an agreement that the Scottish Government could retain sums raised through proceeds of crime in Scotland if these raised less than £30m in any year – which they always did. So HM Treasury never actually received any sums from proceeds of crime legislation in Scotland prior to their devolution.

But the devolution of PoC resulted in a formalised process by which the Scottish budget can be adjusted downwards to reflect the funding that the UKG has ostensibly foregone as a result of devolving these funds.

So in 2018/19, rather than being able to retain in full the £5m revenue from proceeds of crime in Scotland – as would have happened pre-devolution – the SG finds that most of this is being clawed back by HMT in the form of a reduced block grant.

The Scottish Government is miffed about this, and claims it breaches ‘no detriment’ principles. HMT’s response seems to have been to shrug and say ‘its what you signed up to’. (The Smith Commission report argued that Scotland’s block grant would need to be adjusted to accommodate the retention of PoC sums).

That the governments can have a stooshy about £4 or £5m – which is small beer for the Scottish Government and miniscule beer for the UK – perhaps gives an indication of the current state of inter-governmental relations.

Unfortunately we now have a full 12 months to wait until we have the thrill of reading the third annual FFOR.

September 27, 2019

Spending Round 2019: what does it mean for the Scottish budget?

As had been widely expected, UK Chancellor Sajid Javid used today’s Spending Round to announce significant increases in UK Government resource spending – to fund day-to-day public services – in 2020/21.

The announcements amount to an additional £12bn of resource spending next year relative to the plans that his predecessor Phillip Hammond had already pencilled in. This including a substantial uplift to schools spending (£2.6bn), extra resources for social care (£1bn), and for the police (£750m).

Of course these figures relate to spending in England. But the increases in spending in England will generate an uplift to the Scottish block grant, via the Barnett Formula.Continue reading

September 4, 2019

Spending Review 2019: how might it affect the Scottish Budget?

Wednesday’s Spending Review will influence the size of the Scottish budget in 2020/21. But it is just one piece of the jigsaw – with the other pieces not becoming available until later in the year.

In normal times, the publication of a UK Government Spending Review would be a major moment in the political and public finance annual calendar. This week’s Spending Review however will be overshadowed by the ongoing mess that is the UK’s withdrawal from the EU.

But the Spending Review is important, and it will set out departmental spending limits for 2020/21 in key areas of the NHS, education, defence and other public services. However, the government’s previous aspirations to deliver a multi-year spending review have been jettisoned given ongoing uncertainty over Brexit.

The Spending Review will of course also have important implications for next year’s Scottish budget which Derek Mackay will present to parliament later on this autumn – most likely in December. The setting of departmental spending limits for UK departments will determine the size of the Scottish block grant.Continue reading

September 3, 2019