Implementation of the Scotland Act 2016: ninth annual report

5. Block Grant Adjustments, Reconciliations and Indexation

As part of the 2016 Fiscal Framework Agreement, it was agreed that the Scottish Government’s Block Grant would be adjusted to represent the impact of the transfer of greater fiscal powers to the Scottish Government. Deductions to the Budget reflect that the Scottish Government now retains revenues from some devolved taxes, with the devolved social security benefits that the Scottish Government is responsible for reflected through additions to the Budget. These adjustments are called Block Grant Adjustments (BGAs).

2024-25 Developments

Forecast BGAs

37. The latest forecast BGAs are set out in the Scottish Government’s Fiscal Framework Data Annex^[13].

38. For the Scottish Budget 2024-25, BGAs were based on forecasts published by the Office for Budget Responsibility (OBR) alongside the 2023 UK Autumn Statement that preceded the Scottish Budget.

39. These forecast BGAs were subsequently used to calculate in-year reconciliations, on the basis of the comparison between the BGAs which underpinned the Scottish Budget 2024-25 and the BGAs agreed at the UK Autumn Statement 2024. The in-year reconciliations compared BGAs on LBTT, SLfT and social security, resulting in a negative £54 million reconciliation.

Data update: Fiscal Framework Outturn Report 2024 and Scottish Government's Medium Term Financial Strategy

40. The Scottish Government published its annual Fiscal Framework Outturn Report (FFOR) on 26th September 2024^[14]. The report outlines tax and expenditure outturn data and the implications of this data on the following Scottish Budget.

41. In previous years the Scottish Fiscal Commission (SFC) have published tax revenue and social security expenditure forecasts alongside the Scottish Government’s Medium-Term Financial Strategy publication (MTFS), which have also been used to inform the FFOR. Due to the postponement of the 2024 MTFS, the SFC forecasts published alongside the Scottish Budget 2024-25 were followed by forecasts alongside the 2025-26 Scottish Budget on 04 December 2024.

42. Table 16 of the FFOR showed the total provisional reconciliations to be applied to the Scottish Budget 2025-26 amounted to positive £490.1 million. This is the net impact of the revenue and BGA reconciliations for Income Tax for 2022-23, and for the provisional BGA reconciliations for fully devolved taxes and social security benefits expenditure for 2023-24.

43. At the Autumn Budget 2024, the reconciliation was updated for available outturn data, resulting in a reconciliation of positive £499.9 million to be applied to the Scottish Budget 2025-26 being agreed with HM Treasury. Following the Department for Work and Pensions (DWP) publication of UK Government welfare expenditure outturn in November 2024, the reconciliation was updated further, reducing it by £7.2 million to £492.7 million. However, under the terms of the Fiscal Framework, the Scottish Government has the option to defer the impact of outturn which is not published at least two months in advance of the publication of the Scottish Budget by one budget year.

44. Due to this change to the outturn BGAs being less than two weeks from publication of the Scottish Budget 2025-26, the Scottish Government chose to defer the £7.2 million negative impact of the updated outturn to the Scottish Budget 2026-27. Therefore, a reconciliation of positive £499.9 million was applied to the 2025-26 Scottish Budget.

Impact of population back-revisions and outturn changes on Scottish Budget 2024-25

45. Calculations of BGAs rely on updated mid-year population estimates from the Office of National Statistics (ONS) for the rest of the UK (rUK) and the National Records of Scotland (NRS) for Scotland. However, all BGAs from the 2023-24 and 2024-25 Scottish Budgets were calculated using the ONS mid-year 2020 population estimates. This was primarily due to timing differences between the Scottish and rUK censuses and their subsequent inclusion into the ONS and NRS mid-year estimates.

46. Until the Scottish census results were factored into Scottish population estimates, it was not possible to calculate the relative growth rates between Scotland and the rUK on a consistent basis. Consequently, it was agreed with HM Treasury that in the interim the mid-year population estimates for 2020 would be used, with the relative growth rate in that year projected ahead uniformly until the issue was resolved.

47. Up to date population estimates for Scotland and rUK are now available, with the ONS and NRS having published their back-revised population estimates for 2011 to 2021 (in November 2023 and July 2024, respectively). From July 2024, BGAs have been calculated using up-to-date, comparable Scotland and rUK growth rates.

48. While the Scottish Government and HM Treasury have agreed that a reconciliation will take place for the interim period in which mid-2020 population estimates were used, an agreement has yet to be made on whether historical BGAs should be reconciled to account for the population back-revision. The Scottish Government and HM Treasury will reach agreement on this in the round with a series of other outturn changes that have occurred. They are as follows:

• A correction to historical HMRC Income Tax outturn in Scotland and rUK from 2017-18 to 2020-21. Further information on this correction can be found in the joint statement with HM Treasury on the 2022-23 income tax reconciliation^[15].
• Changes to DWP outturn data for England and Wales, used for social security BGA calculations
• The use of provisional DWP outturn in Scottish Budget 2024-25 BGA calculations, with outturn published after the budget.

Income Tax Reconciliation

49. Outturn data for Income Tax for 2022-23 was published by HMRC on 3rd October 2024^[16] and a reconciliation of positive £451 million was applied to the Scottish Budget 2025-26. This was part of the overall reconciliation for tax and social security outlined in paragraph 42. This was the sixth Income Tax reconciliation since the implementation of the Fiscal Framework. Further information on the reconciliation can be found in the Fiscal Framework Outturn Report^[17].

Pension Age Winter Heating Payment

50. The social security benefit Pension Age Winter Heating Payment (PAWHP) was launched in winter 2024, for which there is a corresponding BGA for the UK equivalent benefit Winter Fuel Payment (WFP). The baseline BGA forecast corresponds to UKG’s WFP expenditure in Scotland in the year prior to its devolution (2023-24).

51. Under Section A.46 of the Fiscal Framework^[18], the Scottish Government has the option to defer in-year reconciliations when the impact is due to a UK Government policy change introduced after the Scottish Government’s Budget. The means-testing of the equivalent Winter Fuel Payment resulted in an in-year reduction to the 2024-25 BGA of £146 million. Therefore, the Scottish Government had the option to defer the impact of the reduction until the final reconciliation applied to the Scottish Budget 2026-27. The Scottish Government elected to not defer.

Future plans

52. The Scottish Government will work with HM Treasury to find a principle-based resolution to the outstanding issues relating to outturn to avoid agreeing issues on a case-by-case basis.

53. The UK and Scottish Governments are working closely together to agree BGA arrangements for when the Scottish Aggregates Tax is devolved, taking account of the provisions of the Fiscal Framework agreement^[19]