OECD Network on Fiscal Relations across Levels of Government, 16th Annual Meeting, 3-4 December 2020 – Virtual Meeting

1. Funding Devolved Government in
the UK: Scotland
OECD NETWORK ON FISCAL RELATIONS ACROSS LEVELS OF GOVERNMENT
4 December 2020
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2. Flows of Public Funding in the UK
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3. Key element of funding from UKG to Scotland:
The Block Grant
• Every year a new baseline is established, adding an increment to previous
year’s baseline.
• Increment from year to year depends on UK spending growth and where
the money is spent (whether it is ‘comparable’).
• Scotland receives a population share of ‘comparable’ expenditure
(defence is 0% comparable; education is 100% comparable).
• This approach pre-dates devolution and was an administratively expedient
way to minimise negotiations within the UK Government when it came to
allocating money to the Scottish Office – a UK Department (1885-1999)
that was in charge of public services like health, education and prisons in
Scotland.
• The procedure is known as the ‘Barnett formula’.
• Due to a relatively high baseline Scotland receives higher per-capita
funding than the rest of the UK. Over time, per-capita funding levels
should converge (so-called ‘Barnett squeeze’). The Barnett squeeze has
been counteracted by relatively slower population growth in Scotland.
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4. Evolving Shape of the Scottish Budget – Devolution of
Tax Powers
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Air Passenger duty is not devolved yet; devolution of VAT assignment has been delayed
Non-domestic rates are a local real estate tax that are re-distributed to local authorities

5. Block Grant Adjustment
• The Scottish block grant continues to be the key determinant of the overall funding
envelope for the Scottish Government due to the way tax powers have been
introduced
• The block grant is adjusted to reflect extra revenue from devolved and assigned taxes
(and welfare powers).
Barnett- based
block grant
Ca. 30bn
SG budget
Net block grant
paid to SG
Block Grant
Adjustment
= how much
would have been
raised in
Scotland if
revenues
behaved as in
the rest of the UK
(also depends on
UK tax
decisions!)
SG Tax Revenue
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Net addition
+/- 200m

6. The Scottish budget needs to balance
• Scotland’s finances are closely tied into the UK system.
• For public finance purposes, the Scottish Government is
treated like a UK Department and it needs to deliver a
balanced budget by year end.
• Limited ability (max. £700m) to keep money back and move
it between years (‘Scotland Reserve’).
• Limited ability to draw down from the Reserve (£250m
resource, £100m capital per annum).
• Limited reserve borrowing powers (max. £300m per
annum, max. 5-year term – for forecast error only).
• Limited capital borrowing powers (max. £450m per annum,
up to a total of £3bn).
• The Scottish Government’s ability to deal with budget
volatility is therefore extremely limited.
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