4 Scotland Reserve
4.1 The Scotland Act 2016 replaced a previous power under the Scotland Act 2012 (to operate a limited cash reserve) and the HMT rules on the Budget Exchange Mechanism with a new Scotland Reserve. This allows the Scottish Government to build up funds when devolved revenues are higher than forecast, smooth all types of spending (including carrying-forward underspends), assist the management of tax volatility and determine the timing of expenditure. The Scotland Reserve applied from 2017-18 onwards and is split between resource and capital.
4.2 The Reserve is capped at £700 million, or only 2.2 per cent of the total Scottish Budget in 2018-19. Annual drawdowns from the Reserve are limited to £250 million for resource and £100 million for capital.
Operation of the Scotland Reserve
4.3 The opening balance in the Scotland Reserve at the start of 2017-18 was £74 million. The closing balance on the Reserve for 2017-18 is £527 million, as reported in the provisional outturn statement to the Scottish Parliament in June 2018.
4.4 The Cabinet Secretary for Finance’s Ministerial Statement on the provisional Budget outturn for the 2017-18 financial year noted that the currently expected drawdown from the Scotland Reserve in 2018-19 is £335 million (resource and capital). £235 million of this is accounted for by underspend from the previous financial year. The remaining £100 million comprises Scotland Act 2016 Implementation funding provided by HMT in 2017-18 which was previously expected to be provided in 2018-19.
4.5 On the basis of planned drawdowns outlined at provisional outturn 2018, the residual balance of the Scotland Reserve is £192 million. An update on the reserve position, including the changes from the confirmation of final outturn against the 2017-18 budget will be provided as part of the 2018-19 Spring Budget Revision.
4.6 As noted above, the Scotland Reserve is the mechanism by which any underspend in the Scottish Budget can be carried forward to be used in a subsequent financial year. In recent years, with very tight financial management, underspend has been low, less than 1 per cent of the total discretionary Budget. Even so, managing money across financial years is likely to use up a substantial proportion of the £250 million resource and £100 million capital limits. This restricts the Scottish Government’s ability to draw down from any reserve that is built up.
4.7 The Scottish Government intends to build up the balance in the Scotland Reserve over time as resources allow, in order to have a financial cushion available while ensuring that there remains sufficient capacity in the Reserve to prudently manage any underspend across financial years. A carefully managed reserve is a key element of managing the financial volatility that can arise through the operation of the Fiscal Framework.
Table 4.1 – Scotland Reserve Balance(£Million)
|2017-18 Opening Balance||74||-||74|
|2017-18 Additions to reserve||358||95||453|
|2017-18 Closing Balance (Provisional)||432||95||527|
|2018-19 Planned Drawdowns|
|To support 2018-19 spending plans||(238)||(97)||(335)|
|Resource to capital switch||(2)||2||-|
|Residual Balance Available (Provisional)||192||-||192|
|Additions to reserve were made up of:|
|Scotland Act 2016 Implementation Funding||100||-||100|
|2017-18 LBTT outturn||50||-||50|
|2017-18 SLfT outturn||(2)||-||(2)|
|2017-18 Penalties and Interest on devolved taxes||2||-||2|
|2017-18 Liberty House Guarantee Fee Income||2||-||2|
|2017-18 Planned Underspend to support 2018-19 spending plans||140||95||235|
|2017-18 Additional Uncommitted Underspend||66||-||66|
|Additions to reserve||358||95||453|
Notes on Table 4.1:
1. The figures for additions to the reserve are the provisional outturn figures as reported to Parliament in June 2018. Table 3.3 shows that outturn revenues for SLfT were £1m less than the forecast at the Budget Act 2017. This was an improvement of £1m against the position reported to Parliament in June and outlined in the table above.
2. The Scottish Fiscal Commission ( SFC) in their May Forecast published a figure for the anticipated additions to the reserve of £377 million. The additional £76 million reported here represents additional emerging underspend as the provisional outturn position was finalised.
3. The planned drawdown reflects the aggregate of additional spending commitments set out in the 2018-19 budget intended to be funded from the Reserve. The planned drawdown has increased by £29 million from the equivalent figure quoted in the SFC in the May Forecast. There was not sufficient Capital carry forward to fully fund these spending commitments at that time.
4. Liberty House Group paid a fee of £2 million in 2017-18 to secure a Scottish Government guarantee with respect to a power purchase agreement between the hydro plant and aluminium smelter at Lochaber. The total discounted value of all premiums due to the Scottish Government in respect of this guarantee is £18.7 million. Fee income is placed in the reserve to support funding of any future calls under the guarantee.