Scottish Government's Medium Term Financial Strategy: May 2019

Annex C: Fiscal Framework Update

This Annex shows changes in the net position of the Scottish Budget following the latest Scottish Fiscal Commission (SFC) forecasts and Block Grant Adjustment (BGA) estimates informed by Office for Budget Responsibility (OBR) forecasts, as well as the latest capital borrowing and Scotland Reserve balances. 

Tax

Table C.1 shows the latest forecasts for tax revenues from the SFC and BGA estimates from the UK Government’s Spring Statement in March 2019.

Table C.1: Latest Forecasts Of Tax Revenues And Block Grant Adjustments

£ million		2017-18	2018-19	2019-20	2020-21	2021-22	2022-23	2023-24	2024-25
Income Tax	Revenue	11,005	11,486	11,703	12,332	12,831	13,374	13,985	14,613
	BGA1	11,127	11,665	11,709	12,380	12,825	13,300	13,805	N/A
	Difference	-122	-179	-5	-48	6	74	180	N/A
LBTT2	Revenue	557	553	616	655	691	724	759	794
	BGA1	584	547	535	568	611	651	705	N/A
	Difference	-27	6	81	88	80	73	54	N/A
SLfT2	Revenue	148	143	109	87	12	14	15	15
	BGA1	113	105	92	86	92	84	72	N/A
	Difference	35	38	17	1	-80	-71	-57	N/A
Total	Revenue	11,710	12,182	12,429	13,075	13,534	14,112	14,758	15,421
	BGA1	11,824	12,318	12,336	13,034	13,528	14,035	14,582	N/A
	Difference	-114	-136	93	41	7	77	176	N/A

Note 1: The BGAs shown are calculated using the Indexed Per Capita (IPC) indexation method. This method in practice determines the BGAs applied to the budget. Figures may not sum due to rounding.

Note 2: The 2017-18 LBTT and SLfT revenue and Block Grant Adjustment are outturn figures. 

Figures may not sum due to rounding.

These revised estimates for income tax revenues and Block Grant Adjustments for 2017-18, 2018-19 and 2019-20 do not have any immediate impact on the Scottish Budget. Under the Fiscal Framework, BGAs for income tax are fixed for a financial year based on the forecast at the previous fiscal event.

The updated forecasts for future years provide an indication of the level of revenues that the SFC anticipates, but these figures will not be used to set the 2020-21 Budget in December 2019, as that will make use of the next set of forecasts that the SFC produces.

Future Reconciliations

The forecasts for both Scottish tax revenues and corresponding BGAs are based on the latest available information at the time of the Budget. Once the outturn data is available for the Scottish tax revenues and the BGAs, reconciliations will be carried out.

Income Tax

For Scottish income tax, outturn data is available around 16 months after the end of the financial year. For example, 2017-18 income tax outturn data will be available in summer 2019 and a reconciliation will be applied to the 2020-21 Budget to both forecast revenues and the BGA.

The potential scale of the reconciliations required are shown below for the 2020-21, 2021-22 and 2022-23 Budgets using the latest forecasts.

Table C.2: Income Tax Reconciliation To 2020-21 Budget (£ Million)

2017-18  Income Tax	Revenues	BGA	Net Position	Forecast Reconciliation
Budget 2017-18	11,857	11,750	+107
Latest forecast	11,005	11,127	-122
Change	-852	-623		-229

Table C.3: Income Tax Reconciliation To 2021-22 Budget (£ Million)

2018-19 Income Tax	Revenues	BGA	Net Position	Forecast Reconciliation
Budget 2018-19	12,177	11,749	+428
Latest forecast	11,486	11,665	-179
Change	-692	-84		-608

Table C.4: Income Tax Reconciliation To 2022-23 Budget (£ Million)

2019-20 Income Tax	Revenues	BGA	Net Position	Forecast Reconciliation
Budget 2019-20	11,684	11,501	+182
Latest forecast	11,703	11,709	-5
Change	20	208		-188

Figures may not sum due to rounding.

Since the 2017-18 Budget, the forecast updates have shown a deterioration in the net budget position, which - if proved correct in the outturn - would lead to negative reconciliation requirements in future Budgets.

However, these forecast positions are not certain and will not be known for sure until outturn receipts are available for 2017-18 in summer 2019, for 2018-19 in summer 2020 and for 2019-20 in summer 2021.

It is also worth noting that 2017-18 and 2018-19 revenue and BGA forecasts for income tax were based on a forecast 2016-17 baseline. Income tax outturn data for 2016-17 has now been published, and will be used from now on as the baseline value for the income tax revenue forecasts and BGA. This figure is £806 million lower than the 2016-17 forecast used at the 2017-18 Scottish Budget and £495 million lower than the one used at the 2018-19 Scottish Budget.

While the use of this outturn figure causes forecast revenue and BGA figures to be lower, the 2016-17 outturn data has no direct impact on the Scottish Budget. This is because the BGA deducted from the Budget and the forecast tax revenues added to the Budget have been revised down by the same amount to account for the new baseline value.

Fully Devolved Taxes

Revenue Scotland manages and collects LBTT and SLfT and these revenue streams feed in to the Scottish Budget as they are collected. There is no reconciliation required for these revenues; the Scottish Government manages any variance between what was forecast and actual revenues as part of its in-year budget management process. The latest 2019-20 forecasts for LBTT and SLfT are shown in Tables C.5 and C.6.

Table C.5: LBTT 2019-20 Revenue Forecast (£ Million)

SFC Revenue Forecast – Budget 2019-20	643
SFC Revenue Forecast – MTFS 2019	616
Change	-27

Table c.6: SLfT 2019-20 revenue forecast (£ Million)

SFC Revenue Forecast – Budget 2019-20	104
SFC Revenue Forecast – MTFS 2019	109
Change	+6

The BGAs for these taxes are reconciled twice. The first ‘interim reconciliation’ is made within the financial year at the Autumn Budget, on the basis of the most recent OBR forecasts. The latest forecast interim reconciliation to the 2019-20 LBTT and SLfT BGAs is shown in Tables C.7 and C.8.

Table C.7: LBTT 2019-20 Forecast Bga Interim Reconciliation (£ Million)

Forecast BGA – UK Autumn Budget 2018	567
Forecast BGA – UK Spring Statement 2019	535
Forecast Reconciliation to 2019-20 Budget	+32

Table C.8: SLfT 2019-20 Forecast Bga Interim Reconciliation (£ Million)

Forecast BGA – UK Autumn Budget 2018	91
Forecast BGA – UK Spring Statement 2019	92
Forecast Reconciliation to 2019-20 Budget	-1

Once outturn data is available in the following financial year, a final reconciliation is applied to the block grant for the financial year thereafter (i.e. two years after the year to which the revenues relate). Tables C.9 and C.10 show the forecast final reconciliation for 2018-19 LBTT and SLfT BGAs.

Table C.9: LBTT 2018-19 Forecast Bga Reconciliation (£ Million)

Forecast BGA - UK Autumn Budget 2018	546
Forecast BGA - UK Spring Statement 2019	547
Forecast Reconciliation to 2020-21 Budget	-1

Table c.10: SLfT 2018-19 forecast BGA Reconciliation (£ Million)

Forecast BGA - UK Autumn Budget 2018	104
Forecast BGA - UK Spring Statement 2019	105
Forecast Reconciliation to 2020-21 Budget	-1

Social Security 

Carer’s Allowance 

For social security benefits, the Block Grant Adjustments are additions rather than deductions. Carer’s Allowance is the only social security benefit in current operation that requires a Block Grant Adjustment. Table C.11 shows the SFC’s latest expenditure for Carer’s Allowance (not including the supplement) and the Block Grant Adjustment estimate provided at the Spring Statement 2019.

Table C.11: Forecasts Of Carer’s Allowance Expenditure And Block Grant Adjustments (£ Million)

		2018-19	2019-20	2020-21	2021-22	2022-23	2023-24	2024-25
Carer's Allowance	SFC Expenditure Forecast – MTFS 2019	152	286	304	325	351	371	393
	BGA Estimate - UK Spring Statement 2019	157	287	304	325	355	385	N/A
	Difference	5	1	0	0	4	14	N/A

There is no reconciliation required for Carer’s Allowance expenditure, as the Scottish Government manages any variance between forecast and actual revenues in-year. 

As with the fully devolved taxes, the BGAs for benefits are reconciled twice. The first ‘interim reconciliation’ is made within the financial year at the Autumn Budget, on the basis of the most recent OBR forecasts. The latest interim reconciliation to the 2019-20 Carer’s Allowance BGA is shown in Table C.12.

Table C.12: Carer’s Allowance 2019-20 Forecast Bga Interim Reconciliation (£ Million)

Forecast BGA - UK Autumn Budget 2018	290
Forecast BGA - UK Spring Statement 2019	287
Forecast Reconciliation to 2019-20 Budget	-3

Once outturn data is available in the following financial year, a final reconciliation is applied to the block grant for the financial year thereafter. There will be a reconciliation to the 2018-19 Carer’s Allowance BGA as part of the 2020-21 Budget. Table C.13 shows the forecast final reconciliation.

Table C.13: Carer’s Allowance 2018-19 Forecast bga Reconciliation (£ Million)

Forecast BGA - UK Autumn Budget 2018	157
Forecast BGA - UK Spring Statement 2019	157
Forecast Reconciliation to 2020-21 Budget	0

Discretionary Housing Payments and Best Start Grant 

The Scottish Fiscal Commission forecasts expenditure on Best Start Grant and Discretionary Housing Payments (DHPs) and Scottish Government spending plans on DHPs, as shown in Table C.14 below.

Table C.14: Forecasts And Spending Plans For Best Start Grant And Discretionary Housing Payment Expenditure (£ Million)

		2018-19	2019-20	2020-21	2021-22	2022-23	2023-24	2024-25
Best Start Grant	SFC Expenditure Forecast	4	21	16	16	17	17	18
DHPs – Bedroom Tax Mitigation	SFC Expenditure Forecast	51	53	55	57	58	60	62
DHPs – Other Spend	SG spending plans	11	11	11	11	11	11	11

Best Start Grants and DHPs are not funded through Block Grant Adjustments. They are instead initially funded by ‘Machinery of Government’ transfer payments directly from the Department of Work and Pensions until the end of the Spending Review period. After that, funding for these benefits becomes part of the core resource block grant, or ‘baselined’ into the block grant, and subject to the Barnett formula. This means that there are no BGAs calculated for these benefits and no reconciliation process. Funeral Support Payment, commencing in summer 2019, will also commence through this process. Table C.15 shows the funding transfers that the Scottish Government has agreed before funding becomes part of the core resource block grant.

Table C.15: Best Start Grant And Discretionary Housing Payment Funding Transfers (£ Million)

		2018-19	2019-20
Best Start Grant	Funding Transfer	1	2
DHPs	Funding Transfer	20	20

Benefits Yet to Commence 

Executive competence for the remaining benefits will commence in April 2020 and, where relevant, Block Grant Adjustments will be agreed at the UK Government’s Autumn Budget 2019. 

Capital Borrowing

Table C.16 shows the Scottish Government’s current capital borrowing plans. 

The Scottish Government has borrowed £250 million in 2018-19 to support capital expenditure. This is less than the £450 million originally planned, largely as a result of additional consequential capital funding received from the UK Government. 

In 2019-20, the Scottish Government has announced plans to borrow the annual maximum of £450 million capital intended over a 25-year period. Final decisions on the specific borrowing arrangements for 2019-20 will be taken over the course of the year.

The Scottish Government currently plans to borrow a further £350 million in 2020-21 to support the National Infrastructure Mission. Final decisions on future borrowing levels will be taken as part of the 2020-21 Budget and subsequent budget processes.

Chapter 3 sets out the Scottish Government’s policy of borrowing between £250 million and £450 million over the remaining period of the National Infrastructure Mission, but this is not included in table C.16 at this stage. Final decisions are always taken within the relevant budget year, depending on circumstances.

On the basis of existing and planned borrowing included in the table, the Scottish Government will have accumulated £1.66 billion in capital debt by the end of 2019-20, 55 per cent of its overall limit. Details on previous borrowing can be found in the Fiscal Framework Outturn Report published on 20 September 2018.

The capital outlook assumes that the maximum amount of capital borrowing (£450 million) will be undertaken in 2019-20 and £350 million in 2020-21. As set out in chapter 3, our policy is then to borrow between £250 million and £450 million over the remaining period of the National Infrastructure Mission, but this is not included in modelling of the capital outlook. Final decisions are always taken within the relevant budget year, depending on circumstances.

Table C.16: Capital Borrowing And Repayment Schedule

£ million		2017-18	2018-19	2019-20	2020-21	2021-22	2022-23	2023-24	2024-25
Borrowing		450	250	450	350
Repayment on 2015-16 borrowing	Capital	9.43	9.43	9.43	9.43	9.43	9.43	9.43	9.43
	Interest	0	0	0	0	0	0	0	0
Repayment on 2016-17 borrowing	Capital	11.1	11.1	11.1	11.1	11.1	11.1	11.1	11.1
	Interest	0	0	0	0	0	0	0	0
Repayment on 2017-18 borrowing	Capital		7.07	14.35	14.62	14.90	15.19	15.48	15.77
	Interest		7.72	8.35	8.07	7.80	7.51	7.22	6.93
Repayment on 2018-19 borrowing	Capital			11.95	24.06	24.29	24.52	24.76	24.99
	Interest			2.06	2.21	1.98	1.74	1.51	1.27
Repayment on 2019-20 borrowing	Capital				6.5	13.3	13.6	14	14.3
	Interest				9.8	11	10.7	10.3	10
Repayment on 2020-21 borrowing	Capital					5.1	10.4	10.6	10.9
	Interest					7.7	8.6	8.3	8
Repayment on 2021-22 borrowing	Capital
	Interest
Repayment on 2022-23 borrowing	Capital
	Interest
Total Repayments of Principal		20.53	20.53	32.48	51.10	63.22	69.06	69.89	70.73
Repayment period for borrowing (years)		25	10	25	25
Interest rate		1.9	0.95	2.5	2.5
Is interest rate fixed or variable?		Fixed	Fixed	Fixed	Fixed

Scotland Reserve 

Table C.17 shows the 2018-19 Reserve position as reported at Spring Budget Revision and provided to the Scottish Fiscal Commission for its May 2019 forecasts.

Table C.17: 2018-19 Scotland Reserve Forecast At 31 January 2019

£ million
2018-19 Opening Balance		(538.0)
2018-19 Forecast Movements		38.3
In-year Reserve Drawdown	250.0
Forecast Underspends	(211.7)
2018-19 Forecast Closing Balance		(499.7)
2019-20 Expenditure Commitments		407.5
Budget Bill (anticipated drawdown)	313.5
Budget Bill - Stage 2	94.0
Less:  Additional 2019-20 Funding		(208.0)
Late budget consequentials carried forward through HMT Reserve	(148.0)
QLTR Receipts deferred from 2018-19	(60.0)
2019-20 Planned Reserve Drawdown		199.5
2019-20 Forecast Residual Balance		(300.2)
Of Which
Resource	(145.7)
Capital	(154.5)

Additional funding commitments for 2019-20 totalling £313.5m were made when the budget was initially published in December 2018, with the full amount of this funding to be met through anticipated drawdown from the reserve. A further £94m of spending was committed at Stage 2 of the Budget Bill giving a total commitment to be funded of £407.5m as shown above. However, the overall funding position had changed by the time the additional spending was committed at Stage 2. Additional Budget consequentials of £148m were provided by the UK government and income from the Queen and Lord Treasurer’s Remembrancer account of £60m originally intended for deployment in 2018-19 could now be deferred. These two elements of additional funding have been applied against the total spending commitment of £407.5m reducing the planned drawdown from the reserve in 2019-20 to the £199.5m shown in the table.