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Scotland’s new financial powers

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The two Scotland Acts of 2012 and 2016 were fundamental in changing the Scottish Budget landscape – transforming it from a spending budget to a mixed revenue raising and spending budget.  Audit Scotland has produced a briefing paper for the Scottish parliament, which is a timely guide, prior to the Scottish Budget on 12 December, to the different elements of the ‘fiscal framework’. As well as Scottish taxes, there is the block grant, block grant adjustments (which have more significance than many realise), and borrowing powers. Most, but not all, of the powers in the Scotland Acts have been implemented; some such as assigned VAT and social security spending have still to come on stream.
 
The paper consists of three parts:
 
  • An overview of the Scottish Budget in 2017/18, the first full year of operation of Scottish income tax, borrowing and reserve powers (contained in the Scotland Act 2016); what funding was available and how it was spent
  • The main components of the fiscal framework, how they operate and affect the budget and also the powers that have yet to be implemented.
  • Managing the risks and potential for increased volatility now affecting the Scottish budget, as a result of moving away from being fully funded by the block grant (in 2017/18, the block grant represented 59% of all spending).  
There are clear explanations of how the forecast taxes and outturn reports are reconciled, and charts illustrating the timeframe for the devolved taxes from forecasts, to outturn, to final adjustment. This process takes some considerable time for Scottish income tax and the final budget adjustment is three years after the original budget year (so, for example, the 2017/18 reconciliation will be adjusted through the 2020/21 budget). There are also clear explanations of how the Barnett formula, Barnett consequentials and block grant adjustments (BGAs) impact on the overall Scottish budget, and the way in which they too bring volatility to the budget. 
 
This paper provides a useful insight for anyone interested in the first steps of devolved finances, and sheds light on some of the thinking and lessons which can be learned from the Scottish experience when rolling out devolution across other regions of the UK. Devolution cannot be considered in isolation: it impacts personal and business taxation in every area of the UK.  
 
The introduction of devolved, partially devolved and, from April 2019, assigned VAT, has brought elements of complexity and volatility, leading to a certain amount of uncertainty for individuals and business. The paper from Audit Scotland clearly explains where the devolved taxes sit in the fiscal framework and that there are many moving parts to  manage in Scotland’s budget. 
 
ICAS and the CIOT, working jointly as the Scottish Taxes Policy Forum, recently produced a discussion paper, Devolving taxes across the UK: learning from the Scottish experience, that considers the implementation of the devolved tax powers and how well they work for Scotland and for the rest of the UK. In a poll commissioned alongside this, it was revealed that over 80% of Scots felt they needed a greater understanding of devolved taxation. It is more important than ever that Scotland creates stability and communicates its policy roadmap to business and the public to enable greater understanding and effective strategic planning.
 
Issue: 1421
Categories: In brief
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