Fiscal Framework between Scottish Government and Local Government

Annex A: Scottish Government and Local Government Funding

Sources of Funding for the Scottish Government

1. The money that Scottish Government has to allocate, collectively called the Scottish Consolidated Fund, comes from the following sources:

a. block grant from the UK Government

b. other funding from the UK Government

c. Scottish income tax (collected by HMRC)

d. non-domestic rates (collected by local authorities and redistributed by the Scottish Government)

e. devolved taxes (collected by Revenue Scotland)

f. borrowing

2. The block grant includes resource, capital, annually managed expenditure (which can only be spent for the purposes for which it is allocated) and Financial Transactions allocated by the UK Government at UK fiscal events and is currently determined with reference to the overarching requirement to meet the objectives set out in the Charter for Budget Responsibility^[2]

3. Changes in the block grant are calculated as a population share of changes in spending on public services devolved to Scotland. These arrangements are set out in the Statement of Funding Policy^[3] and the allocation process is often referred to as the Barnett Formula.

4. For devolved social security benefits and all taxes set, raised or assigned in Scotland, the block grant is subsequently adjusted to reflect the benefit costs and tax revenues foregone by the UK Government. These ‘block grant adjustments’^[4] reflect the hypothetical value that would have been raised or spent in Scotland by UK Government if the taxes and payments had not been devolved.

Sources of Funding for Local Government

5. Local Government receive its funding mainly from the following sources:

a. Scottish Government General Revenue Grant (GRG)

b. Non-domestic rates (collected by local authorities and redistributed by the Scottish Government)

c. Council Tax (collected by local authorities)

d. Government Grants (other than GRG) from either the Scottish or UK Government

e. Other Grants including from NHS Boards and income from Integrated Joint Boards

f. Customer and Client Receipts, from fees and charges for services

6. The Scottish Government guarantees each local authority receives the total level of funding set out in the Local Government finance settlement (detailed in the Local Government Finance Order and circulars) through a combination of General Revenue Grant plus Non-Domestic Rates Income, and each councils’ share is calculated using the jointly agreed needs-based formula.

7. An adjustment to each councils’ funding is made which assumes a baseline level of Council Tax receipts. This takes into account local authorities’ differing tax bases but also enables councils to raise additional funding to spend on local services.