1. Fiscal Framework Agreement CIPFA Scottish Conference
17 March 2016
James McLellan, Fiscal Responsibility Division, Scottish Government

2. Overview 1. What is a Fiscal Framework?
2. Key aspects of the Fiscal Framework Agreement
Block grant adjustment
Capital and resource borrowing
Administration and implementation costs
Scotland Reserve
3. Financial issues for the Scottish Government flowing from the Fiscal Framework
4. Questions

3. Smith Principles
Barnett Formula: the block grant from the UK Government to Scotland will continue to be determined via the operation of the Barnett Formula.
Economic Responsibility: The Scottish budget should benefit from policy decisions by the Scottish Government which increase revenues or reduce expenditure.
No detriment: as a result of the decision to devolve further powers and as a result of UK Government or Scottish Government policy decisions post-devolution.
Borrowing Powers: Scotland’s fiscal framework should provide sufficient, additional borrowing powers to ensure budgetary stability and provide safeguards to smooth Scottish public spending and to support capital investment.
Implementable and Sustainable: the revised funding framework should not require frequent ongoing negotiation.
Independent Fiscal Scrutiny: the Scottish Parliament should expand and strengthen the independent scrutiny of Scotland’s public finances
UK Economic Shocks: the UK Government should continue to manage risks and economic shocks that affect the whole of the UK.

4. What is a Fiscal Framework?
Elements of a Scottish fiscal framework
Sustainable funding model
Tools for managing risks
Credible fiscal rules
Independent fiscal institutions
Consistency with UK fiscal policy
A well designed fiscal framework will ensure that further devolution provides the right incentives & increases accountability - linking Scottish Government budget to Scottish economic performance
Fiscal framework must be robust, cohesive and provide the flexibility to develop and deliver distinct Scottish policies – within the UK fiscal framework

5. Fiscal Framework – Block Grant Adjustment
The Scottish block grant will continue to be determined by Barnett
The block grant will then be adjusted to reflect the introduction of devolved and assigned taxes and welfare powers and then indexed in future years.
The indexation mechanism agreed covers the period of the next Scottish Parliament and will ensure no detriment to the Scottish budget as a result of devolution.
For all other areas of spending UKG to transfer Barnett share of their spending over the SR period. This will be baselined and Barnett applied thereafter.
Welfare additions
SG Tax Revenue
SG budget
Barnett- based block grant
Tax deductions
Equal to UKG tax in Scotland in devolved / reserved areas
Net block grant paid to SG

6. Fiscal Framework – Capital and Resource Borrowing
SA12 powers
New Smith powers
Capital borrowing
Under the 2012 Act the statutory limit was £2.2bn
The statutory limit on borrowing for capital expenditure will be increased to £3bn
Annual limit was 10% of the Scottish Government's capital budget – approximately £300 million
annual limit on the amount of borrowing for capital expenditure will be set at 15% of the overall borrowing cap, which is equivalent to £450 million a year
Resource Borrowing
Statutory overall borrowing limit of £500m
Statutory overall borrowing limit of £1.75bn
Limit for in-year cash management of £500m
Annual limit for borrowing for forecast errors of £200m
Annual limit for borrowing for forecast errors of £300m
Where there is, or is forecast to be, a Scotland specific economic shock, the annual limit for borrowing increases to £600m
Repayment period of 4 years
Flexible repayment period of between 3-5 years, decided by Scottish Ministers

7. Fiscal Framework – Admin, Implementation Costs and Scotland Reserve
Area
What was agreed
What does this mean
One off implementation costs
£200 million for one off implementation costs, supplementing the block grant, to support the functions being transferred.
This will be used to cover the implementation costs of all new powers being devolved.
The profile of this transfer is yet to be agreed.
Ongoing admin costs
£66 million for the ongoing administration costs – this figure includes the marginal savings baseline transfer.
This baseline transfer will be indexed through the normal application of the Barnett formula.
This will be used to cover the admin costs of all new powers being devolved.
Scotland Reserve
The Scotland Reserve replaces the cash reserve and the Budget Exchange Mechanism .
It will enable the Scottish Government to smooth all types of spending and manage tax volatility and determine the timing of expenditure.
The Scotland Reserve will be capped in aggregate at £700m.
Annual drawdowns are limited to £250m for RDEL and £100m for CDEL. No annual limits for payments into the Scotland Reserve.

8. Timing of Devolution of Powers
Income Tax - SRIT comes into effect Aril Full devolution of income tax rates and thresholds for non-savings and non-dividend income commence in April 2017.
Capital Borrowing - The Scotland Bill will be amended to increase the aggregate borrowing limit form April 2017.
Resource Borrowing - Enhanced resource borrowing powers will apply from onwards.
Scotland Reserve - The Scotland Reserve will apply from
VAT Assignment - VAT assignment will be implemented in
Air Passenger Duty - APD will be devolved in April 2018.
Aggregates Levy - Commencement for devolution of Aggregates Levy will be agreed by JEC once current state aid and other outstanding legal issues have been resolved.
Courts and Tribunals - Revenues for courts and tribunal will be retained by the Scottish Government from April 2017.
Welfare Powers - Implementation dates for welfare will be agreed by the Joint Ministerial group on Welfare. JEC will oversee the transfers of funding.

9. Financial Issues – Scale of the Change

10. Financial Issues
Significantly change the composition of the SG budget with c50% being funded from tax receipts.
Policy making will need to take into account impacts on devolved tax receipts in Scotland as that will directly affect our spending power.
Need to set up the Scottish Fiscal Commission on a firm footing as the key producer of fiscal and economic forecasts.
Transfers for implementation and admin costs may not cover all costs of devolution.
New responsibilities for borrowing.
Potential need to review the draft Budget and Budget Bill process to recognise the increased proportion of budget being funded from tax receipts.