Budget reconciliation will see Scottish Government funding reduce by £390m

The Scottish Government’s funding for the next financial year will be reduced by £390 million as a result of budget reconciliation changes, it has been announced.

Under the fiscal framework between the Scottish and UK governments, Scottish income tax revenues and revenues from the rest of the UK are compared to calculate the block grant adjustment (BGA).

The BGA was £1,851 million higher than forecast, reducing the amount the Scottish Government receives from the Treasury for the 2024/25 financial year.

However the Scottish income tax out-turn was higher than forecast, meaning Scottish Government self-funding will rise by £1,461 million.

The budget for the current financial year is £59.7 billion.

Ministers in Edinburgh will set out their 2024/25 budget later this year.

Scottish public finance minister Tom Arthur said high inflation is “profoundly challenging” and “tough choices” will be required to balance the books.

He said: “I welcome the fact that Scotland has seen a record growth in income tax receipts, exceeding the original budget forecasts for 2021-22 by almost £1.5 billion.

“However, under the fiscal framework this does not translate directly to additional funding for the Scottish Government because of the reconciliation process.

“Income tax reconciliation is part of the devolved budgeting process. It involves adjusting the Scottish budget to reflect differences between new income tax data for Scotland and the UK for 2021-22, and forecasts that were made at that time.

“As a result, the Scottish Government will see its funding reduced next year by £390 million.

“This is smaller than had been forecast in May 2023, but still exceeds the £300 million annual borrowing limit set by the UK Government to manage this reconciliation process.

“We continue to press the UK Government for greater borrowing powers to ease this process.”

The Treasury said last year’s budget reconciliation led to an increase for the Scottish Government, arguing ministers in Edinburgh will have known about the coming decrease for some time.

A UK Government spokesman said: “The UK Government is operating the fiscal framework as agreed with the Scottish Government, with funding based on actual income tax revenues rather than forecasts.

“The Scottish Government has significant borrowing powers and flexibilities – including a £700 million reserve – to help manage their budget.”