THE UK and Scottish governments have announced a major change to the funding model for the devolved administration.
Among the changes, the amount that the Scottish Government can borrow to mitigate against errors in forecasting will be doubled from £300 million to £600m.
There will also be no limits to the amount that can be drawn from the Scotland Reserve, which the Government said will provide “some greater flexibility to handle funding volatility”.
Also, the governments agreed that borrowing and reserve limits will grow in line with inflation and so will be maintained in real terms.
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The announcement on Wednesday also saw the existing Indexed Per Capita (IPC) method used to calculate the funding received from the UK Government adopted permanently. It had been in use as a stop-gap measure since the previous review in 2016.
The IPC method has been chosen ahead of the Comparable Model (CM). The decision follows a joint review and is aimed at protecting the Scottish Budget from the risk of Scotland’s population growing at a slower rate from the rest of the UK.
The primary difference between IPC and CM relates to way differences in relative population growth between Scotland and the rest of the UK are treated, according to a Scottish Government factsheet.
It notes: "The long-run experience is that Scotland's population grows slower on average each year than the rest of the UK ...
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"Slower population growth means that, for Scotland to grow total revenues at the same rate as in the rest of the UK, revenues per head would have to grow faster. That would make it more difficult for Scotland to generate the tax revenues it would need to ensure the budget was no better or worse off than before devolution.
"To mitigate this population risk, IPC provides full protection against slower population growth in Scotland, by indexing the block grant adjustment to growth in revenues per head in the rest of the UK."
Scottish Government resource borrowing is limited to an overall total of £1.75 billion, with an annual limit of £600m.
Previously, the Scottish Government could only borrow up to £600m annually in cases of forecast error if there was a Scotland-specific “economic shock”.
The Scottish Government can also borrow up to £500m annually for “in-year cash management”, but this falls under the same limits.
Capital borrowing, which is separate, is capped at £450m annually and £3bn in total.
The Scotland Reserve is a pot of funding which the Scottish Government uses to transfer funds between fiscal years. If there is any excess money at the end of one year, it can be added to the reserve.
The limit on how much could be used each year has been lifted.
Deputy First Minister and Finance Secretary Shona Robison (above) 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 news comes after Robison met with the chief secretary to the Treasury, John Glen, on July 20 to discuss the Fiscal Framework review.
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.”
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