Guide to the ABR 2024-25 – Finance Update for FPAC

B. Scotland Reserve and Funding Position Details

36. Tables 1.7a to 1.7e of the Budget Revision document sets out the Funding Position that supports the revised Scottish Budget. The table below breaks this down by the HM Treasury budget classifications of Fiscal Resource, Capital and Financial Transactions.

37. Annexes A and B detail the funding envelopes for each of the three key budget classifications at the Budget Bill along with the changes allocated within the Autumn Budget Revision.

38. The totals reconcile to the breakdown set out above, which in turn reconciles to table 1.7 in the supporting document.

B.1 Fiscal Resource

39. The Fiscal Resource funding position has increased by £1,076.5 million since the Scottish Budget was set in December 2023. The key changes are outlined in detail below.

40. There have been two UK Government fiscal events since the 2024-25 Scottish Budget was set. These have both resulted in £730.6 million of additional Barnett consequentials which have been allocated as part of the Autumn Budget Revision.

41. Following the Spring Budget 2024, £293.5 million of consequentials were generated. These were largely Health consequentials with £237.5 million received as a consequence of additional funding being provided to the NHS in England. This funding has been passed to the Health and Social Care portfolio in full in line with our commitment to pass on all Health consequentials.

42. £48.5 million of consequentials were received following the UK Governments decision to allocate an additional £500 million to the English Local Government settlement.

43. A further £437.2 million of resource consequentials were generated following the conclusion of the UK Government’s 2024-25 Main Estimates process. These amounts were primarily in relation to increased employer pension contributions (EPC) requirements in the Department for Health and Social Care, the Home Office, the Ministry of Justice and the Department for Education which total £354.6 million.

44. An additional £66.3 million related to Department for Transport consequentials for an uplift for Network Rail for Control Period 7. This was already funded within the Scottish Budget and this funding has been to support the wider financial position alongside the other smaller balances which made up the total consequentials received.

45. The Social Security Block Grant adjustment has been amended as part of the Autumn Budget Revision. Ordinarily the BGA would only be adjusted following revised OBR projections at a UK fiscal event. However, the decision by the UK Government to reduce the eligibility to Winter Fuel Payments is a fundamental change of policy, rather than reflecting refinements to forecast uptake of benefits, and will have a material impact on the funding received by the Scottish Government. The exact impact on the BGA will not be confirmed until after the UK Budget on 30 October however our internal estimates indicate this will be in the region of £146 million and we’ve chosen to reflect this movement in the budget revision.

46. As noted above the Scottish Government has replicated this policy and has reduced its forecast benefit expenditure by £148 million meaning the net position is forecast to improve by approximately £2 million. We will revert to using the relevant OBR forecasts for all Social Security Block Grant adjustments at the Spring Budget Revision which may be impacted by increased registrations for pension credit.

47. As was outlined in the Minister for Public Finance’s statement to parliament on provisional outturn on 20 June 2024, there was an underspend of £162 million against the resource budget for 2023-24. This amount has been carried forward within the Scotland Reserve and applied in full at the Autumn Budget Revision. Any revisions to the final outturn for 2023-24, and the associated Reserve carry forward will be reflected in the Spring Budget Revision.

48. At the time the Scottish Budget was set an £89 million resource to capital switch was included within the funding position to support the capital budget. Following the 2023-24 provisional outturn exercise it has become clear there is sufficient capital underspend carried forward in the Scotland Reserve to support the position without the requirement of the switch and this has been reversed. This improves the resource position by £89 million with a corresponding reduction in the overall capital position.

49. An additional £224 million of ScotWind revenues has been included with the funding position in the Autumn Budget Revision. This takes the current forecast utilisation in 2024-25 to £424 million with a further £236 million held as backstop to cover additional pressures.

50. The intention is to reduce the utilisation of ScotWind down as far as possible depending on the final financial position, as was the case in 2023-24 where ScotWind revenues were reduced to nil. Final decisions on the draw down and utilisation of ScotWind revenues from Crown Estate Scotland will be made at the end of the financial year.

51. To date only £96 million of the £756 million of ScotWind revenues received have been utilised, all in 2022-23. No INTOG revenues have been utilised to date with £54 million available in 2024-25 if required.

52. At the time the budget was set in December 2023 assumptions were made on the level of capital and resource borrowing that would be undertaken for 2023-24. These impacted the assumed cost of borrowing in 2024-25. Final decisions on the quantum borrowed in 2023-24 as well as the interest rates applied have resulted in a reduction in borrowing costs of £7.7 for resource and an increase of £6.3 million for capital borrowing costs.

53. £18.1 million of budget cover transfer have been received as part of the Main Estimates process. These amounts reconcile to the amounts outlined in the Whitehall transfers section above.

B.2 Capital

54. Changes to the capital position since the Budget was set in December 2023 have also been reflected in the Autumn Budget Revision. These increase capital funding by £59.9 million.

55. The provisional outturn statement in June noted there were capital underspends of £130.4 million in 2023-24. These amounts are utilised in full within this budget revision. Any further changes to the 2023-24 figures will be reported as part of the final outturn and will be reflected in the Spring Budget Revision if the process has concluded by this point.

56. As discussed in the resource section, the level of underspends carried forward in the Scotland Reserve has allowed for the £89 million resource to capital switch included in the Budget to be reversed. This reduces the capital funding position by £89 million, leaving a net improvement of £41.4 million as a consequence of the Scotland Reserve.

57. The capital block grant position deteriorated by £1.3 million at the UK Main Estimates as a result of net negative consequentials.

58. These are offset by the increases in ‘Other’ capital funding for the £14.8 million deferral of late notified consequentials from the 2023-24 Supplementary Estimates process and the £5 million Reserve claim in respect of City Regional Deals Forthside Land Transfer.

59. For the purposes of the Autumn Budget Revision we have not fully allocated all capital funding. An amount of £25.2 million has been retained to offset the over-allocation of financial transactions budget.

B.3 Financial Transactions

60. There has been a significant deterioration in the financial transactions budget since it was set in December 2023.

61. Negative financial transaction consequentials totalling £63.8 million were confirmed as part of the 2023-24 Supplementary Estimates process. These were significantly higher than previously indicated and given the late confirmation of this movement in 2023-24 it was agreed with HM Treasury that the Scottish Government could defer £52.8 million of these into 2024-25.

62. While this deferral was required to ensure the budget wasn’t breached in 2023-24 the negative consequentials being applied in 2024-25 is putting extreme pressure on the budget position.

63. A modest underspend of £0.7 million is included within the Scotland Reserve following the conclusion of the provisional outturn process.

64. Currently the financial transaction budget is overallocated by £25.5 million. The expectation is that this will be reduced to nil at the Spring Budget Revision through a combination of slippage in FT programmes and additional FT income which has not yet been received. Given the uncertainty an equivalent amount of capital budget is being held to offset this overallocation.

B.4 Scotland Reserve

65. The current forecast Scotland Reserve following the provisional outturn is detailed below.

66. In general terms the Scottish Government will always plan to drawdown any Scotland Reserve availability in full each financial year, with at least £100 million being required to be held annually to cover audit adjustments post year-end As previous iterations of the Medium-Term Financial Strategy have set out this ensures that maximum fiscal flexibility is maintained without compromising the Scotland Reserve’s capacity to absorb any volatility in spending late in the financial year.

67. Following the conclusion of the Fiscal Framework Review the Scotland Reserve cap will now grow in line with the inflation (as measured by the GDP deflator) from its previous £700 million threshold. The limit for 2024-25 is £712 million. In addition the drawdown limits of £250 million on Resource and £100 million on Capital have ceased to apply.