The Scottish block grant continues to be calculated by the Barnett formula, but an adjustment needs to be made to reflect that some of the budget is now funded by Scottish tax revenues that were previously retained by the UK Government. There are two steps to the adjustment:
- An initial block grant deduction is made for each tax. This is to compensate the UK Government for the tax revenue which is now being retained by the Scottish Government. These adjustments ensure that the UK and Scottish Governments are no better or worse off as a direct result of devolution.
- For each subsequent year the block grant adjustments (BGAs) for each tax are grown or "indexed" to take account of changing tax revenue over time.