Explainers

Annual Budget Gap

The annual budget gap shows the difference between funding and spending in each year as a share of Scottish devolved public spending and can be thought of as the Scottish specific fiscal sustainability challenge. In our Fiscal Sustainability Reports we use the annual budget gap to show the level of reductions in spending or increases in tax revenue that would be required by the Scottish Government each year over a 50 year period in order to balance the budget. We use the annual budget gap because the Scottish Government must keep a broadly balanced budget and is limited in how much it can borrow.

The fiscal framework means that the annual budget gap is affected by any action the UK Government takes to address fiscal sustainability at the UK level.

The effect of UK Government action to address fiscal sustainability at the UK level on the annual budget gap depends on what balance future UK Governments strike between reducing spending and raising tax revenue, and to what extent these are in devolved or reserved areas.

Since the share of public spending currently devolved is larger than the share of tax revenues which are devolved, the Scottish Government funding is more sensitive to UK Government reductions in spending. Scottish Government funding would be relatively protected from fiscal pressure if UK Government policy decisions are focused on reserved areas.

However, changes to reserved spending and taxation will still have an impact on the people of Scotland. For example, changes to Universal Credit, a reserved benefit paid by the UK Government to people in Scotland, could have important consequences for people living in Scotland.