Finance and Public Administration Committee: finance update and Spring Budget Revision 2022 to 2023 guide

Background information provided to the Finance and Public Administration Committee (FPAC) to help with members' scrutiny of the Spring Budget Revision 2022 to 2023.

Annex D – Resource Borrowing Limits

A. Technical Agreement on Resource Borrowing Limits

A.1 – Resource Borrowing Agreement

1. Following discussions with HM Treasury colleagues, a formal agreement was reached between both parties on 11th July 2022 on what scores as ‘forecast error’ for resource borrowing.

2. Under the Fiscal Framework agreement, the Scottish Government can borrow up to £300 million annually to manage “forecast error in relation to devolved and assigned taxes and demand-led welfare expenditure arising from forecasts of Scottish receipts/expenditure and correspondingUKforecasts for the Block Grant Adjustments”. Both the Scottish and UK Government expect that this arrangement will be reviewed in the upcoming Fiscal Framework Review.

3. The Fiscal Framework does not specify what counts as a ‘forecast error’. Talks between the Scottish Government and HM Treasury last year highlighted a different interpretation of what counts as forecast error for borrowing. This led to an agreement to set out a shared approach for forecast error.

4. Following discussions, the Scottish Government and HM Treasury agreed that “borrowing should only be permitted for the net impact across individual tax/BGA comparisons, social security expenditure/BGA comparisons and forecast error in relation to social security expenditure without a BGA”. This means that borrowing would not be permitted where there is a net neutral impact on each tax/BGA or social security/BGA comparison, even where a negative forecast error occurs against an element of a tax or social security BGA, or corresponding revenue or expenditure.

5. It was agreed that the Scottish Government will be able to borrow against the net impact of individual tax/BGA (or social security/BGA) reconciliations, even where a net negative impact of one reconciliation is potentially offset by the net positive impact of another. This acknowledges the fact that the timing of reconciliations differs across the tax and welfare areas.

6. It was also agreed that during the process of calculating the net impact of a tax or social security benefit, the Scottish Government have the option to use internal forecasts for tax revenue and social security expenditure to compare against the SFC forecasts which informed the Scottish Government’s spending plans. In short, it isn’t mandatory to use the most recent SFC forecasts, which may be outdated at the time of a borrowing drawdown request.

7. Consequently, the resource borrowing limit can fluctuate until the day a borrowing drawdown request is submitted to HM Treasury by the Scottish Government. After the request is submitted at the limit is locked in for the budget year.

8. An example of the calculation of borrowing limits is displayed in the table below. It illustrates what the Resource Borrowing limit would be (and how its changed) between setting the 2022-23 Scottish Budget in December 2021 and the 2022 MTFS in May 2022:

Final Reconciliations applied to 2022-23 Budget
2019-20 Income Tax Revenue Reconciliation 149.0
2019-20 Income Tax BGA Reconciliation -183.5
Net Income Tax Reconciliation Applied to 2022-23 Scottish Budget -34.5
LBTT Final 2020-21 BGA Reconciliation -6.1
SLFT Final 2020-21 BGA Reconciliation 0.1
FFFP Final 2020-21 BGA Reconciliation 4.1
POC Final 2020-21 BGA Reconciliation N/A
Carer's Allowance Final 2020-21 BGA Reconciliation 1.4
Attendance Allowance Final 2020-21 BGA Reconcilation -9.2
Personal Independence Payment Final 2020-21 BGA Reconciliation 29.9
Disability Living Allowance Final 2020-21 BGA Reconciliation 2.2
Industrial Injuries Disablement Scheme Final 2020-21 Reconciliation -2.3
Severe Disablement Allowance Final 2020-21 BGA Reconciliation 0.1
Net Reconciliation applied to 2022-23 Scottish Budget -14.7
Borrowing Limit when 2022-23 Scottish Budget set (A) -52.3
Borrowing in the 2022-23 Scottish Budget
Taxes/Benefits with a BGA Net Position at Budget Net Position at Latest Forecast Movement Movement scoring as limit increase
LBTT 85.8 139.6 53.8 0.0
SLfT 18.3 -2.5 -20.8 -20.8
Attendance Allowance -0.1 5.5 5.6 0.0
Personal Independent Payment -15.3 -23.6 -8.3 -8.3
Disability Living Allowance -22.6 23.8 46.4 0.0
Carer's Allowance 8.1 2.9 -5.2 -5.2
Industrial Injuries Disablement Scheme -1.3 -1.3 0.1 0.0
Severe Disablement Allowance -0.2 0.1 0.4 0.0
Cold Weather Payment -6.9 -18.6 -11.7 -11.7
Sum of in-year Net Position movements (B) 60.1 -46
Taxes/Benefits without a BGA Net Position at Budget Net Position at Latest Forecast Movement Movement scoring as limit increase
Scottish Child Payment 197.4 226.3 -28.9 -28.9
Best Start Foods 13.1 13.0 0.1 0.0
Best Start Grant 17.8 20.5 -2.7 -2.7
Caarer's Allowance Supplement 41.8 44.0 -2.2 -2.2
Child Winter Heating Assistance 4.0 4.9 -0.9 -0.9
Funeral Support Payment 11.9 11.2 0.7 0.0
Self-Isolation Payment 15.0 8.6 6.4 0.0
Fair Start Scotland 23.6 23.6 0.0 0.0
Sum of in-year Benefits without a BGA movements (C) -27.5 -34.7
Latest Forecast Borrowing Limit (A+B+C) -133.0

A.2 – Income tax correction and borrowing impact

9. Previous discussions between Scottish Government officials and HM Treasury found that income Tax outturn data from HMRC from the years 2017-2018 to 2019-20 was inaccurate. This resulted in approximately a £7 million a year larger negative reconciliation from 2020-21 to 2022-23, totalling £20.6 million.

10. HM Treasury proposed to correct this by increasing the 2022-23 Scottish Budget by £20.6 million, but with a one-off reduction to Scottish Government’s available borrowing for income tax forecast error in 2022-23 by the same amount, reducing that limit from £34 million to £14 million.

11. The Scottish Government accepted HM Treasury’s proposal of a £20.6 million transfer and arrangements were made for this figure to be transferred during the supplementary estimates process, while also agreeing to reduce the available borrowing limit for income tax error by the same amount in 2022-23.

12. Both parties agreed that this agreement would be reached on the condition that the borrowing capacity adjustment was a one-off, and that the £20.6 million transfer does not set a precedent for future recalculations on available income tax forecast error borrowing.

A.3 – Additional reduction to the 2023-24 borrowing limit

13. The agreement on borrowing between the Scottish Government and HM Treasury specifies that any changes in tax or social security forecasts which are as result of policy changes after a Budget is set should not score against the borrowing limit in that financial year.

14. The Scottish Government has therefore applied a £15 million reduction to its borrowing limit for 2022-23. This is in relation to the Scottish Child Payment increasing to £25 and extended to include eligible children up to the age of 16.

15. The combined effect of both the £15 million haircut in respect of Scottish Child Payment policy changes and the £20.6 million one-off haircut therefore reduces the 2022-23 Resource Borrowing Limit from the £133 million illustrated above to circa £98 million on the basis of the most recent Scottish Fiscal Commission forecasts.



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