"Other Income" expected by the Scottish Government in relation to personal allowance calculations: FOI release

Information requested

1. At the time of publication, how much money did the Scottish Government expect to receive in ‘Other Income’ (as set out in Table A.05 of the Scottish Budget 2022-23) in relation to the dispute with the UK Government regarding personal allowance calculations.

2. How much this expected amount differed from the actual amount received, which was £375 million according to the Fraser of Allander Institute.

Response

I have included the information you have requested below as well as some background information. The Fiscal Framework Agreement was jointly agreed by the Scottish and UK Governments in 2016, with new tax and social security powers devolved to Scotland. Through the implementation and operation of the framework, there were discussions for some time between both Governments about the Personal Allowance spillover effect. Both governments agreed that a spillover effect arose from changes made by the UK government to the Personal Allowance threshold. However, there was disagreement on the counterfactual against which the spillover effect should be measured, and the amount owed.

Further details on the final settlement were set out in a letter from the Cabinet Secretary for Finance and Economy to the Finance and Public Administration Committee on 15th July, available here: SG Gaelic Cabinet Secretary for Finance and Economy (parliament.scot), as well as commentary from the Fraser of Allander Institute: Weekly update: inflation, earnings, and budget windfall | FAI (fraserofallander.org)

I will respond to your questions in turn.

Firstly, at the point at which the Scottish Budget was published, assumptions were made on ‘Other Income’ which were set out in the Table A.05. For 2022-23, the total other income assumed was £620m on a risk-assessed basis from a number of funding sources, which included the assumption that the spillover element would cover a settlement up to and including 2022-23. The expected income from personal allowance spillovers was based on a prudent expectation of a most likely negotiated outcome.

At the time of the Budget, the working assumption was the inclusion of £400m from the spillover dispute (calculated up to 2022-23 and based on our estimate of the HMT counterfactual and data
available at the time).

However, during the course of the negotiations, the final settlement agreed with HM Treasury (HMT) was up to 2021-22 only.

To answer your second question, our most recent estimate of the HMT counterfactual for up to 2021-22 is a transfer from the UK Government to the Scottish Government of £329m. As correctly stated above, the final agreement was £375m, meaning that, making a reasonable comparison over an equivalent time period, the settlement secured by SG was £46m higher than the amount anticipated as part of the dispute.

The balance of the total “Other Income” £620 million assumption in the Scottish Budget has been met, and exceeded, through use of the Scotland Reserve.

This negotiation settled the historic liabilities for the Personal Allowance spillover dispute, up to 2021-22, with liabilities for 2022-23 and future years to be discussed as part of the forthcoming Fiscal Framework review, which will commence later this year”.

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