Scotland’s economy, which includes oil and gas development in Scottish waters, had a nominal gross domestic product (GDP) of $205 billion in 2020. Scotland’s economy has been tightly tied with the economy of the rest of the United Kingdom (UK) since the Acts of Union in 1707, and England has historically been its principal trading partner. Scotland still does the majority of its business within the United Kingdom: in 2017, Scotland’s exports totaled 81.4 billion, with 48.9 billion (60 percent) going to UK component nations, 14.9 billion to the rest of the EU, and 17.6 billion to the rest of the globe.
Scotland was a world leader in manufacturing from the period of the Industrial Revolution onwards, and it was one of Europe’s industrial powerhouses. This is reflected in the wide range of goods and services produced in Scotland, including textiles, whisky, and shortbread, as well as jet engines, buses, computer software, ships, avionics, and microelectronics, as well as banking, insurance, investment management, and other financial services. Manufacturing and primary-based extractive sectors have both declined in prominence in Scotland, as they have in most other mature industrialised nations. However, this has been accompanied with an increase in the service sector of the economy, which has risen to become Scotland’s largest.
The central UK Government (responsible for reserved subjects) and the Scottish Government (responsible for devolved matters) are primarily involved in Scotland’s economy via HM Treasury. The Chancellor of the Exchequer and the Cabinet Secretary for Finance, Constitution, and Economy are in charge of their respective financial tasks. Since 1979, the UK economy (including Scotland) has been managed in a mostly laissez-faire manner. Scotland’s central bank is the Bank of England, and its Monetary Policy Committee is in charge of setting interest rates. The Pound Sterling is the currency of Scotland, which is also the world’s fourth-largest reserve currency after the US dollar, the euro, and the Japanese yen.
Scotland is a member of the Commonwealth of Nations, the G7, the G8, the G20, the IMF, the OECD, the World Bank, the World Trade Organization, the Asian Infrastructure Investment Bank, and the United Nations.
What is Scotland’s economic contribution to the UK?
The economy of Scotland. Scotland’s population was predicted to be 5.47 million in mid-2020, accounting for 8.1 percent of the overall UK population, according to the ONS. According to the Office for National Statistics (ONS), the Scottish economy accounted for about 8% of total UK GDP in 2019.
What is the largest contributor to the UK’s GDP?
Services, manufacturing, construction, and tourism are the industries that contribute the most to the UK’s GDP. 4 It has its own set of rules, such as the free asset ratio.
What is the UK government’s contribution to Scotland?
The Autumn Budget 2021 will provide Scotland with the greatest yearly funding settlement since devolution, helping to level the playing field across the UK. The UK government will provide the Scottish government a record 41 billion per year.
What accounts for Scotland’s higher GDP than England?
When a geographical proportion of North Sea oil and gas extraction is taken into account, Scottish GDP per head is usually higher than UK GDP per head in most years. As a result, some may feel compelled to publicize this figure, even implying that the average Scot is better off than the average person in the United Kingdom. That’s a big claim to make, and it comes with certain qualifiers, which we’ll go through later.
International comparison
Another thing to consider is how these Scottish data compare not only to those of other UK states, but also to those of other countries. This involves the use of a somewhat different metric, which is widely used to compare GDP per capita across different regions.
Of course, different countries have different currencies. In a cross-country comparison, it makes sense to utilize a single currency. The UK’s GDP per capita in 2019 was
Introduction
Because the UK Budget and Spending Review has returned to an autumn timeline ahead of the Scottish Budget, the resources available to the Scottish Government have been given more clarity, particularly in relation to Barnett settlements, Block Grant Adjustments, and ring-fenced funds.
However, there are numerous issues with the total amount of cash available to the Scottish Government, and there is considerable ambiguity about the final level of resources available. These will be explored further down.
Specific Funding Issues for 2022-23
Despite the persistent impact of the Covid-19 pandemic on public services and the need to assist economic recovery, the UK Government has cut funding for Covid-19 in 2022-23, taking 3.7 billion from the money that supported the budget position in 2021-22. Despite increasing constraints on Scotland’s NHS, transportation networks, and education system, 5.2 billion of COVID-19 funding has been taken from Scottish Government budgets in 2022-23, after further COVID-19 2020-21 cash allocations at UK Main Estimates in May and the UK Budget in October.
While the UK Government’s main Barnett settlement has grown, it is insufficient to compensate for the loss of COVID-19 funds. In comparison to the 2021-22 Budget Bill position stated in this document, the real terms drop in overall Barnett Funding (excluding Financial Transactions) is 1.747 billion. This equates to a 4.4 percent reduction in actual terms.
In the Medium-Term Financial Strategy, the impacts of the UK Spending Review settlement on the Scottish Government’s longer-term funding picture are explored.
Other Funding
To determine the totality of funding that will become available to the Scottish Government in addition to what is currently contained in the official aggregates given out in Table A.01, an element of judgment is required.
While the return to a December publication for the 2022-23 Scottish Budget gives local government, public bodies, and many third-sector organizations funded from the portfolio allocations outlined in this document more certainty, it also increases the risk of funding volatility before the start of the financial year. There are a number of specific sources of funding, particularly in 2022-23, that the Scottish Government expects will be available during the financial year but for which the precise timing and scale have not yet been confirmed. These are some of them:
- The UK Spending Review includes an updated evaluation of funding for the years 2021-22, although it left out several previously predicted Barnett consequences (linked to previous UK Government announcements of additional funding). While the final amount of additional consequentials for 2021-22 is unknown, it is realistic to expect that some more funds will emerge once the UK Supplementary Estimate process concludes. Based on previous experience, any additional funds will not be confirmed in time to be deployed effectively in 2021-22, thus the Scottish Government will seek approval from HM Treasury to defer any such additional funding to 2022-23.
- The UK Budget allocations for that fiscal year are formally approved through the UK Main Estimate procedure. This process is normally completed in the early part of the financial year, and it has historically resulted in additional Barnett consequentials over and above the Block Grant allocations established at the previous UK fiscal event. While no particular warning of such consequences has been received by the Scottish Government for 2022-23, historical experience has been taken into account in the general assessment of anticipated but unconfirmed funding.
- Since 2017-18, the Scottish Government has been in discussions with HM Treasury about how to budget for the impact of increases in the personal allowance on changes to the Scottish Block Grant. This is a technical problem, but it’s a big one. While the magnitude of the financial impact is debatable, both parties agree that the Scottish Government will be entitled to compensate in the long run. The Scottish Government will work to complete this process as quickly as practicable so that compensating money is available to support the funding position for 2022-23.
- The Crown Estate is managing the next cycle of offshore wind leasing, which will provide additional revenue to the Scottish Government for 2022-23 and beyond. The scale and phasing of this prospective income are still unknown at the time of writing.
All additional funds included in the 2022-23 Budget Position is listed in Table A.05. On a risk-adjusted basis, this includes 620 million from the prospective sources outlined above (as well as the potential for any further contributions to the fiscal resource position in the Scotland Reserve). Other items in the table that provide additional funding for 2022-23 include 179 million in additional Capital and Financial Transactions funding, which will be drawn from the Scotland Reserve’s expected balance, as well as a 92 million transfer from the UK Government allocating a proportional share of Immigration Health Surcharge Income.
In total, the previous year’s projections on projected increased money have been exceeded.
Further Devolution of Powers
The Scotland Act 2016 gave the Scottish Government new powers over social security, including responsibility for benefits such as Attendance Allowance, Carer’s Allowance, Disability Living Allowance, Industrial Injuries Disablement Allowance, Personal Independence, Severe Disablement Allowance, and, beginning in 2022-23, Cold Weather Payment. The devolution of social security functions to Scotland must be managed within the constraints of HM Treasury budget management (a difference to how they are managed in the rest of the UK where any additional spend in-year over the budgeted amount is funded by HM Treasury as annually managed expenditure). The Scottish Budget has become more volatile as a result of this. Any demand growth that exceeds the SFC’s prediction will need a mix of drawing down funds from the Scotland Reserve, using resource borrowing capabilities, or making in-year adjustments to other budgets.
The Scottish Government will have to handle substantially higher levels of fiscal volatility as a result of the transfer of more tax and social security powers. The Fiscal Framework includes borrowing powers and the Scotland Reserve, which will help to keep spending in check over time.
Scotland Specific Economic Shock
The technical prerequisites for a Scotland-specific economic shock were met, according to the Scottish Fiscal Commission predictions released accompanying the 2021-22 Budget. The Scottish Fiscal Commission made it clear that this does not imply that they expected Scotland’s economy to do considerably worse; rather, the timing of the SFC’s estimates, which occurred in very different conditions than the OBR’s November 2020 forecasts, is to blame. The Scottish Government will have recourse to additional reserve and borrowing flexibility until 2023-24 if a shock is triggered. This has permitted an extra 79 million of Capital and Financial Transactions financing from the Scotland Reserve to be drawn down in 2022-23 (above the customary maximum of 100 million).
Despite the greater flexibility given by the triggering of a shock, experience to date has shown that the Fiscal Framework’s borrowing restrictions and the Scotland Reserve are too restrictive to provide fiscal stability for the Scottish Government. As part of the next review of the Fiscal Framework, Scottish Ministers will seek to renegotiate such boundaries.
Over the course of the fiscal year, the final borrowing drawdown will be confirmed based on continuous budget management and monitoring process analysis.
Scottish Government Funding
HM Treasury sets the budgets for the devolved administrations under a framework of public expenditure management and budgeting guidelines. The Scottish Government has the freedom to make its own spending and tax decisions on devolved programs once the overall public expenditure budgets have been determined, but those decisions must be made within the budgetary controls set by HM Treasury and in accordance with HM Treasury’s Consolidated Budgeting Guidance.
Total budgets for the Scottish Government are calculated using a combination of HM Treasury Block Grant funding, adjusted to reflect the transfer of social security powers, devolution of taxes and other income devolved to Scotland (through the Scotland Acts 2012 and 2016), and any planned use of available devolved borrowing powers.
The Barnett formula continues to be used to determine changes in the Scottish Government’s block grant. The Scottish Government’s block grant is equal to the block grant baseline plus a population share of changes in UK Government spending on areas delegated to the Scottish Parliament under the Barnett formula in any given financial year. The UK Government’s Statement of Funding Policy explains how the Barnett formula works in detail.
The block grant is increased to reflect the devolution of social security functions and decreased to reflect the retention of revenues from devolved and assigned taxes and other devolved income in Scotland, leaving a residual block grant. All devolved and assigned Scottish tax and other income are thereafter retained by the Scottish Government (forecasts of tax revenues for inclusion in the budget are calculated by the Scottish Fiscal Commission). HM Treasury calculates Block Grant Adjustments, or BGAs, based on predictions made by the Office for Budget Responsibility.
In simple terms, the Block Grant plus BGAs for social security, less BGAs for devolved and assigned taxes and other revenues, plus devolved revenue predictions plus borrowing, is the available money for the Scottish Budget.
The most recent tax income and social security expenditure predictions, as well as a comparison to the equivalent BGAs, are included in Annex B of the MTFS.
The total budget available to the Scottish Government is also determined by tax policy decisions made by Scottish Ministers. The level of tax revenue received by the Scottish Government and the total level of cash available to support spending plans will be adjusted if Scottish tax policy differs from that of the UK. These comparisons are made between existing UK tax policy and the devolved tax policy ideas advanced by the Scottish Government in this budget for the purposes of this budget. There are no assumptions made concerning future changes in UK tax policy (including Non-Domestic Rates).
The relationship between the BGAs provided by HM Treasury and the SFC’s prediction of social security costs and tax income determines the overall budget position for any given year. The estimates that support both the BGAs and the expenses of devolved social security functions, as well as the revenues from devolved and assigned taxes, will evolve over time until a final outturn position is agreed upon and reconciled. The Scottish Government’s limited powers to address the impact of forecast inaccuracies between the initial budget and the reconciled outturn position are spelled out in the Fiscal Framework. This includes the ability to borrow resources to mitigate the fiscal impact of forecasting inaccuracies.
The Scottish Government wants to use the Fiscal Framework’s resource borrowing capabilities to handle forecast inaccuracies that will affect the 2022-23 budget limit. A choice to borrow to finance capital spending will have an influence on the amount of money available in relation to the HM Treasury’s spending limits. A primary control limit in determining the funding envelope within which Scottish Ministers must manage expenditure for a given year is the sum of the residual block grant + devolved tax revenues plus authorized borrowing.
(A) Throughout this publication, the preceding year comparators reflect the position as set forth in the Scottish Budget as approved by Parliament for that year. The current financial situation corresponds to the original budget allotment. Throughout the year, the financial situation changes, and following budget revisions are posted on the Scottish Government website. The Block Grant statistics displayed below are core cash allocations computed using the Barnett formula, as specified in the UK Spending Review of October 27. This study solely looks at fiscal aggregates and does not include ring-fenced non-cash budgets.
(B) There are changes to the block grant in the Fiscal Framework to reflect social security expenditure delegated to Scotland under the Scotland Act 2016. Annex B of the Medium-Term Financial Strategy, issued in December 2021, has more information on the devolved social security benefits and the related Block Grant Adjustment.
(C) From 2020-21, HM Treasury will support Farm Subsidy direct payments (previously funding came from the EU). From 2021 to 2022, HM Treasury will fund Fisheries Support that was previously provided by the EU. Replacement financing from the EU is set aside specifically for that purpose. In relation to a specific Network Rail financing arrangement, there are extra non-Barnett resource and capital allocations.
(D) Covid-19 funding for 2022-23 and beyond was not included in the UK Spending Review 2021. The comparative figure of 3,686 million for 2021-22 comes from a combination of 3,408 million in Resource funding from the 2020 UK Spending Review, the UK March 2021 Budget and carry forward from 2020-21, 237 million in Capital carry forward from 2020-21, and 40 million in Financial Transactions carry forward from 2020-21.
(E) The block grant is reduced under the Fiscal Framework to reflect funds ceded to Scotland under the Scotland Acts of 2012 and 2016. Air Passenger Duty, whose devolution has been postponed, is not included in the Block Grant Adjustment statistics. The Scottish Fiscal Commission forecasts that revenues from Scottish Income Tax, Land and Building Transaction Tax, and Scottish Landfill Tax will be as expected.
Fines, forfeitures, and fixed penalties, as well as proceeds of crime, provide non-tax revenue.
(F) The net impact of the reconciliation for Income Tax, LBTT and SLfT, Non-Tax income, and devolved Social Security contributions on the Scottish Budget is known as Reconciliation to Outturn. Annex B of the Medium-Term Financial Strategy, issued in December 2021, has more information on the reconciliation to the 2022-23 Budget.
(G) Resource borrowing is used to mitigate the budgetary impact of forecast inaccuracies; the actual borrowing drawdown will be selected based on the current financial situation.
(H) Initial projected capital borrowing actual borrowing drawdown will be determined based on the current financial situation.
The GDP deflator, as announced by the UK government at the Spending Review on November 26th, is used as the measure of inflation inside the economy in Real-Terms calculations. The stated GDP deflator includes some volatility as a result of the Covid-19 pandemic’s impact; the figure for 2020-21 is much higher than the normal trend, while the figure for 2021-22 is negative.
There are major sub-categories of spending that are subject to their own control constraints within these overall budget limits. HM Treasury imposes certain sub-limits as part of UK budgetary laws. These restrictions apply to:
- The total resource expenditure limit is subdivided into a fiscal (or cash) limit the largest element of government expenditure, used for example to pay public sector staff wages and purchase goods and services; and a non-cash limit primarily for depreciation of assets (and analysed separately below at Table A.06). The notional non-cash budgets cannot be used to support any fiscal spending.
- In Scotland, capital budgets are primarily used to fund the delivery of public infrastructure. This is divided into fiscal capital and a separate control for budgets that can only be used to fund loan or equity investment in non-government organisations dubbed Financial Transactions. Capital budgets cannot be used to cover more day-to-day spending under HM Treasury fiscal rules; they must be used to promote long-term investment. Capital borrowing, which is limited by the UK Government’s Fiscal Framework, can be used to supplement the overall capital financing available to the Scottish Government.
The Scotland Reserve gives the Scottish Government a limited amount of flexibility in terms of budgeting across fiscal years. The Fiscal Framework establishes the limitations of the Scotland Reserve, which can hold up to 700 million in total. The Reserve can only be depleted by 250 million in resource budget and 100 million in capital budget in any given year (including Financial Transactions). When a Scotland-specific economic shock occurs, the drawdown limitations are temporarily relaxed under the Fiscal Framework.
In brief, HM Treasury fiscal guidelines set an annual cap on Scottish Government spending on public services equal to the sum of the residual block grant (adjusted for devolved taxes), devolved tax receipts, and borrowing within permitted limitations.
Annually Managed Expenditure (AME)
There are two other funding elements that support the total expenditure managed by the Scottish Government, in addition to the defined budget limits set out above: first, Non-Domestic Rates, which have been devolved since devolution in 1999, and second, funding for a number of demand-led programs in Scotland. Specifically:
- Non-Domestic Rates income, for which complete responsibility has been delegated and which is outside the ambit of HM Treasury’s block grant and Fiscal Framework provisions. The Scottish Government website has information about how Non-Domestic Rates work in Scotland.
- A limited number of programs that, while falling under the Scottish Government’s devolved powers, are still funded annually by the UK Government on the basis of demand (shown here as UK funded Annually Managed Expenditure or UK funded AME). These funds are set aside for specified purposes, namely payments to the NHS and teachers’ pensions, as well as student loans. The use of funding allocated for these areas to support other spending is prohibited by HM Treasury fiscal regulations. As previously stated, in Scotland, social security spending is controlled by the Departmental Expenditure Limit rather than the AME.
Reconciliation of Funding to Spending Plans
The aggregate funding control limits shown in Table A.01 deviate from the overall cost of the portfolio expenditure plans in a number of ways. Additional funding of 1,040 million is anticipated in published spending plans but is not yet reflected in those control limits (which reconcile to published HM Treasury figures). The aggregate financial limits for 2020-21, 2021-22, and 2022-23 are reconciled in Table A.05 (the current budget year and the comparator years shown across the document).
Considering each of the reconciling items in turn
Reserve Drawdown – Spending plans are based on expected underspend carried forward from the previous year via the Reserve. Capital and Financial Transactions account for the remaining 179 million.
Governmental machinery The modifications are related to anticipated funding transfers from the UK government for specific transfers of responsibilities. These figures do not appear in the HM Treasury control total, but they do appear in portfolio spending plans.
Budget transfers expected incorporate UK support for specific areas of activity, including a portion of expected revenue from the Immigration Health Surcharge.
The Queen’s and Lord Treasurer’s Remembrancer (QLTR) is the Crown’s representative in Scotland who deals with property that is not owned by the owner. The Crown’s property rights in ownerless assets, as well as the earnings generated from them, were passed to Scottish Ministers and the revenues paid into the Scottish Consolidated Fund under the Scotland Act 1998.
Other Income for 2021-22 included 185 million in anticipated receipts from rate relief recipients in 2020-21. The 620 million in other income for 2022-23 is covered in detail at the beginning of this Annex.
City Deals Funding – Through an agreement with the UK government, city deals are jointly supported. The Block Grant estimates in Table 1.01 do not yet reflect UK government contributions to these agreements. The figure of 100 million is in line with the pattern of UK government contributions to these accords.
The Fossil Fuel Levy was created to reimburse power companies for the greater expenses of meeting the terms of contracts to purchase renewable electricity that were given to certain projects in the 1990s under a previous renewables assistance mechanism. A surplus was produced by changes made in 2005 that permitted proceeds from the sale of Renewables Obligation Certificates (ROCs) attributable to the renewable projects in issue to be used to cover FFL costs. Scottish Ministers can ask Ofgem (the Energy Regulator) to transfer surplus money from this fund to the Scottish Consolidated Fund under the Energy Act 2004. The monies must be used to promote renewable energy in Scotland, according to the law. Following the scheme’s closure, the amount listed here represents a final transfer to the Scottish Government.
Non-Cash Budget
The non-cash budget of HM Treasury serves as a counterbalance to the Fiscal Resource (actual spending power) and overall Resource financing. The accompanying non-cash budgets are shown in Table A.06 by year. The notional non-cash budgets cannot be used to support any fiscal spending.
What is the cause of Scotland’s poverty?
“New analysis in the JRF Poverty in Scotland 2019 study demonstrates that the difference in rates between Scotland and the rest of the UK is mostly due to lower rents in the social housing sector, as well as Scotland having a higher proportion of social rented dwellings,” according to the report.
Is the UK wealthier than the US?
According to a research by wealth specialists New World Wealth, the United States led the ranks for the world’s richest countries, followed by China with $48.73 trillion and $17.25 trillion in wealth, respectively (NWW).
Individuals’ property, cash, investments, and business interests are included in the numbers, which show that the UK is the fourth richest country in terms of average wealth per person ($147,600), behind Switzerland, Australia, and the United States. Germany, which was fourth in total wealth, fell to 11th place, with people owning assets worth an average of $114,400.
The report’s author, Andrew Amoils, attributed Britain’s high average wealth to the high value of real estate: “Property makes up such a large amount of UK wealth.” Many people in Germany do not own their homes and instead rent them, which has a detrimental influence on their overall wealth,” he told City A.M.
Is the UK’s economy doing well?
The UK economy grew at the fastest rate of the G7 major economies in 2021, at 7.5 percent, indicating a healthy recovery. As the ONS points out, this should be viewed in the context of the UK’s sharpest drop of 9.4% in 2020 when compared to those similar economies.
What percentage of the UK economy does farming contribute?
- Farming is the foundation of the UK’s largest manufacturing industry, food and drink, which generates more than 120 billion in revenue.
- 65 percent of all farm businesses in England also operate other businesses, such as farm shops, wedding venues, and B&Bs, bringing in 740 million to the UK economy in 2018/19.