Explainers

Reconciliations

The Scottish Budget is set in advance of each financial year, based in part on Scottish Fiscal Commission (SFC) and Office for Budget Responsibility (OBR) forecasts.

Because of so much of the Scottish Budget is now based on forecasts, there is a recurrent process of adjustments that is called reconciliations.

Fully devolved taxes and social security

Ahead of a Scottish Budget, we forecast the amount of fully devolved taxes we think Revenue Scotland will collect for that year, as well as how much Social Security Scotland and the DWP will pay in devolved social security in Scotland. 

The OBR forecast the equivalent UK Government tax revenues and social security spending where they are not devolved (England and Northern Ireland for fully devolved taxes, England and Wales for social security). These are used to calculate the corresponding BGAs. Fully devolved tax BGAs deduct money from the Block Grant and social security BGAs add to it.

Fully devolved tax revenues, social security spending, and their corresponding BGAs are all revised at different times.

• The Scottish Government manages any forecast error on fully devolved tax revenues and social security spending in real time as part of the budget management process.

• The BGAs are adjusted once during the financial year, using the more recent OBR forecasts in the autumn.

Once UK Government tax receipts and social security payments for a financial year are known – normally a year after the financial year ends – the final BGAs are calculated and there is then another reconciliation.

Income Tax

For each Scottish Budget, the SFC’s forecasts set the amount of Scottish Income Tax (SIT) revenues we think HM Revenue and Customs will collect. Accordingly, the amount the UK Government transfers to the Scottish Government is based on our forecast.

The OBR forecasts the equivalent Income Tax revenues collected by the UK Government in England and Northern Ireland. These are the basis for the Income Tax Block Grant Adjustments (BGAs), which deduct funding from the Block Grant.

Because Income Tax is so large and there is a long delay until outturn data is published, its net position – that is, the difference between forecast revenues and the Income Tax BGA – is locked using the budget-setting forecasts. Even if later forecasts from us or the OBR point to some forecast error, it is only revisited once outturn data is available.

Outturn data for Income Tax takes two years to be available. Once published, SIT revenues in a given year are known and the corresponding BGA can be calculated. The difference between the forecasts used to set the budget and the outturn data are then applied as a reconciliation. This takes place the financial year after the outturn data is available.

The long time it takes for outturn data to be released means there is a lag of up to three years when applying reconciliations. For example, the Income Tax reconciliation worth -£309 million applied to the 2021-22 Budget related to Income Tax collected in 2018-19. The following diagram shows how this reconciliation came about.

Watch the How is the Scottish Budget funded? video to know find out more about income tax reconciliations.

In conclusion, the reconciliations process ensures that at each Scottish Budget, adjustments are made to ensure the Income Tax net position and the BGAs for everything else are as they should have been, with the complexity that they relate to different years (three years prior for Income Tax, two years prior for the BGAs of everything else).

Watch the ‘How is the Scottish Budget funded?’ video to find out more about the other sources of funding here: