Letter from Minister for Public Finance, Planning and Community Wealth, 22 July 2021
HMRC has today published provisional statistics on 2019-20 outturn for Scottish Income Tax, as well the equivalent UK Government receipts.
The publication indicates that £11,833 million of Scottish Income Tax was collected in 2019-20, an increase of by £277 million (2.4%) from 2018-19. The data also indicates that Scottish receipts grew marginally faster than receipts in the rest of the UK (2.4% vs 2.3%), for the second consecutive year. As a result, Scotland raised an additional £148 million over and above the corresponding Block Grant Adjustment (BGA) in 2019-20.
This year’s statistics have been published on a provisional basis until the National Audit Office (NAO) has completed their annual audit of the entire HMRC Trust Statement. This is expected to be completed by October 2021.
Based on the figures in the 22 July 2021 outturn publication and as required under the Fiscal Framework, an indicative ‘reconciliation’ for 2019-20 Income Tax has been calculated of -£34 million. The relevant calculations are set out in the annex to this letter. Once the NAO’s audit is complete, the ‘reconciliation’ for 2019-20 Income Tax can be finalised and will be applied to the 2022-23 Scottish Budget.
Reconciliations are a regular feature of the operation of the Fiscal Framework, required to address forecast error in relation to revenues and BGA. However reconciliations – whether positive or negative - should not be confused with how Income Tax receipts are performing.
As set out in our Medium Term Financial Strategy (MTFS) in January 2021, the Scottish Government will assume full borrowing against this reconciliation, in order to promote budget stability and maintain flexibility in the Scotland Reserve. While this reconciliation is much smaller than the reconciliations seen in previous budgets, it is inevitable that the Scottish Budget will be subject to significant negative reconciliations once again in the future. It has been clear for some time that the existing borrowing and reserve powers in the Fiscal Framework to manage these reconciliations are insufficient.
Analysis by the Scottish Fiscal Commission indicates that Income Tax reconciliations could exceed Scottish Government borrowing powers up to four times every ten years. Our own analysis, set out in the MTFS 2021, shows that there is up to a 1 in 6 chance that funding volatility, as a result of income tax forecasting error, would breach the current limits of our resource borrowing powers. This is without taking into account forecast error in relation to other devolved taxes and social security benefits. The limits on these powers need to be increased and I continue to call on the UK Government to consider this in the upcoming Review of the Fiscal Framework.
A statement, jointly agreed with HM Treasury (HMT), outlining the Scottish Income Tax reconciliation process has been made available, and can be found at the link below and will also be available on the HM Treasury website. This follows the approach taken for last year’s outturn publication, after heeding the advice taken from the Finance and Constitution’s Pre-Budget Scrutiny report for 2020-21. This joint statement delivers on the Committee’s recommendation that HMT and the Scottish Government should jointly set out the Income Tax reconciliation process and shows our continued commitment to ensuring full transparency around the Fiscal Framework and specifically the reconciliation process.
I look forward to speaking to the Committee about these matters as part of its pre-budget scrutiny.
| 2019-20 Income Tax | |||
|---|---|---|---|
| Revenues (£m) | BGA (£m) | Net Budget Position (£m) | |
| Forecast at Budget 2019-20 | 11,684 | 11,501 | +182 |
| Outturn | 11,833 | 11,685 | +148 |
| Final Reconciliation (Change) | +149 | -184 | -34 |