Scotland's fiscal outlook: medium-term financial strategy

Annex B: Alternative Funding Scenarios – Further Details

Resource funding

The scenarios aim to provide an indication of the magnitude of the impact if the main upside and downside risks materialise for the two main drivers of resource funding – the Block Grant and the net Income Tax position. The Block Grant represents the largest element of funding, which means that even small changes can significantly impact total funding. In addition, as discussed earlier in Chapter 2, the net Income Tax position is currently forecast to increase sharply over the forecast horizon, and there are significant risks as to whether this will be fully realised.

• The upside resource scenario reflects higher growth in the resource Block Grant and the net Income Tax position. For the Block Grant, the upside risk reflects UK Government day-to-day spending growing at a higher rate than forecast and the potential for future positive consequentials. For the net Income Tax position, the upside risk provides an illustration of the impact of a small but sustained improvement in earnings growth (0.1 percentage points higher) relative to the rest of the UK in each year of the forecast. Resource funding grows at 1.5 per cent a year in real terms compared to 1.0 per cent in the central scenario.
• The downside resource scenario reflects lower growth in the Block Grant and a deterioration in the net Income Tax position. The Block Grant is assumed to be lower as a result of tightening of UK Government spending, for example in response to weaker economic growth or challenges related to fiscal headroom. The downside scenario for the net Income Tax position lowers the SFC’s earnings growth forecasts to align them with the OBR, reducing the net position. The impact of this goes beyond simple alignment in earnings growth, as bringing down the forecast for earnings also reduces the improvement in the net tax position associated with Scotland’s more progressive tax system. However, in general the larger downside risk for the net position reflects that the SFC earnings growth forecasts are already above the OBR in the central funding position. Resource funding grows at 0.4 per cent a year in real terms compared to 1.0 per cent in the central scenario.

Overall, total resource funding is 2.4 per cent (£1.4 billion) lower by 2029-30 in the downside scenario and 2.2 per cent (£1.3 billion) higher by 2029-30 in the upside scenario, compared to the central funding position. The larger downside risk reflects the balance of risks across the two main funding components, in particular the net Income Tax position.

Capital funding

The scenarios for capital funding consider uncertainty in the main element of funding, the capital Block Grant. Analysis focuses on the core capital Block Grant, and does not include Financial Transactions.

• The upside scenario captures a potential increase in the capital Block Grant relative to the allocation confirmed at the 2025 UKSR. Overall capital funding (excluding FTs) is assumed to fall by 1.3 per cent a year in real terms compared to a 2.4 per cent fall in the central scenario.
• The downside scenario assumes 1.0 percentage point lower growth in the capital Block Grant in each forecast year, reflecting the possibility of negative CDEL consequentials. Overall capital funding (excluding FTs) falls by 3.3 per cent a year in real terms compared to a 2.4 per cent fall in the central scenario.

Overall, total capital funding is 3.7 per cent (£0.3 billion) lower by 2029-30 in the downside scenario and 4.4 per cent (£0.3 billion) higher by 2029-30 in the upside scenario, compared to the central outlook. Upside risks are slightly larger than downside risks, although in general the capital outlook is more uncertain than the resource outlook.