Scottish Government can borrow more under new deal on devolution finance

The updated fiscal framework doubles the Scottish Government’s resource borrowing annual limit to £600 million, which Deputy First Minister Shona Robison said enables it to mitigate against errors in forecasting.

The Treasury claims the change boosts spending through borrowing by £90 million in the next financial year, as the Scottish Government faced a reconciliation of £390 million that financial year due to forecast errors but until the new agreement was reached could only borrow £300 million.

The deal also removes limits on how much can be withdrawn from the Scotland reserve to spend on future years.

The previous framework meant the Scottish Government could borrow £450 million a year within a £3 billion cap, in addition to having a share of UK Government borrowing according to the Barnett formula.

Under the new deal, these amounts will instead rise with inflation, as will the resource borrowing annual limit.

The deal maintains the Barnett formula, which governs how cash is distributed to the devolved regions from the Treasury through the block grant.

The two governments agreed to permanently adopt the existing indexed per capita method to calculate block grant adjustments, which the Scottish Government said protects the Scottish budget “from the risk of Scotland’s population growing at a slower rate from the rest of the UK” and is understood to have been a key part of securing the deal.

The previous funding arrangements for tax have also not been changed.

The Scottish Government will return an increasingly larger amount of the money they receive from the Crown Estate outside Scotland, from £10 million in 2024/25 to £40 million in 2028/29 and from then on, which is understood to reflect an increasing level of revenue.

Chief Secretary to the Treasury John Glen said: “This is a fair and responsible deal that has been arrived at following a serious and proactive offer from the UK Government.

“We have kept what works and listened to the Scottish Government’s calls for greater certainty and flexibility to deliver for Scotland.

“The Scottish Government can now use this for greater investment in public services to help the people of Scotland prosper. These are the clear benefits of a United Kingdom that is stronger as a union.”

Ms Robison, who is also the Scottish Finance Secretary, said: “This is a finely balanced agreement that gives us some extra flexibility to deal with unexpected shocks, against a background of continuing widespread concern about the sustainability of UK public finances, and while it is a narrower review than we would have liked, I am grateful to the Chief Secretary to the Treasury for reaching this deal.

“As I set out in the medium-term financial strategy, we are committed to tackling poverty, building a fair, green and growing economy, and improving our public services to make them fit for the needs of future generations.

“We still face a profoundly challenging situation and will need to make tough choices in the context of a poorly performing UK economy and the constraints of devolution, to ensure finances remain sustainable.”

The reviewed fiscal framework has long been anticipated and was delayed by the pandemic.

David Phillips, an associate director at the Institute for Fiscal Studies, said: “The long-delayed fiscal framework review has finally been concluded with a decision that the ‘no detriment’ principle will continue to be prioritised over the ‘taxpayer fairness’ principle.

“This helps reduce the risk of the Scottish Government losing out as a result of tax devolution but means that it’s likely that a growing amount of income tax and stamp duty revenue will go on being redistributed from the rest of the UK to Scotland over time.

“The boost to the Scottish Government’s existing borrowing limits is sensible – the existing borrowing limits were set to be insufficient to address forecast errors in the coming financial years, 2024–25. But the circumstances in which it is able to borrow are still fairly limited, which is an issue that may need to be revisited in future.”