Recommendations & Conclusions
19 items
1
Conclusion
1st report – The financing of the Scott…
Accepted
We note the Scottish Government’s call for full fiscal autonomy, but do not consider that this currently appears to be a realistic prospect. Fundamental questions remain about how full fiscal autonomy would work in practice, and whether it would be operable within the constraints of the UK’s current devolution settlement. …
Government response. The government agreed with the committee's conclusion that full fiscal autonomy is not a serious proposition, contrasting it with the financial stability provided by the UK and highlighting a potential £14 billion funding gap for Scotland.
Scotland Office
2
Conclusion
1st report – The financing of the Scott…
Accepted
Whilst the Barnett formula is an imperfect method of calculating Scotland’s funding, we have heard no convincing evidence of a workable alternative. We therefore consider the formula to be fit for purpose and are not convinced there is clear need to reform it significantly. (Conclusion, Paragraph 33)
Government response. The government accepts the conclusion, citing the significant real-terms settlement for the Scottish Government delivered through the Barnett formula via Phase 2 of the Spending Review, affirming the formula's role in providing financial certainty.
Scotland Office
3
Conclusion
1st report – The financing of the Scott…
Accepted
In particular, we are not convinced there is a need to introduce a needs- based factor into the Barnett formula at this time. Scotland currently may be receiving more than it would if a needs-based factor, like the floors introduced in Northern Ireland and Wales, were to be introduced. However, …
Government response. The government accepts the conclusion, reiterating the substantial funding increases for the Scottish Government through the existing Barnett formula, which provides financial certainty and stability without the need for a needs-based factor at this time.
Scotland Office
4
Conclusion
1st report – The financing of the Scott…
Accepted
The operation of the Barnett formula is not as transparent as it could or should be. In particular, there is a lack of transparency around how comparability percentages are calculated. Comparability percentages are a fundamental feature of the Barnett formula and the only multiplier which cannot be effectively scrutinised by …
Government response. The government stated that details on how comparability percentages are calculated, including a programme-by-programme breakdown, are already included in Annex B of the Statement of Funding Policy document published in June 2025.
Scotland Office
5
Conclusion
1st report – The financing of the Scott…
Deferred
In all future Statements of Funding Policy, the UK Government should include details of how the comparability percentage of each department has been calculated, including a programme-by-programme breakdown of what has and has not been included in the calculation. (Recommendation, Paragraph 42)
Government response. The government states that officials have agreed to begin preliminary work on the scope for the next review of the Fiscal Framework, deferring the discussion rather than committing to include detailed comparability percentage calculations in future Statements of Funding Policy.
Scotland Office
6
Conclusion
1st report – The financing of the Scott…
Deferred
We recognise the importance of the Block Grant Transparency document, as well as the value in it being published in a timely manner. We welcome the Secretary of State’s commitment to publishing an updated document after the 2025 Spending Review and hope the Government will continue this practice in future …
Government response. The government discusses Scottish Government borrowing limits and the Fiscal Framework review, rather than addressing the recommendation to publish the Block Grant Transparency document alongside each major fiscal event.
Scotland Office
7
Recommendation
1st report – The financing of the Scott…
Deferred
The UK Government should publish an updated Block Grant Transparency document alongside each fiscal event which will result in changes to Scotland’s funding. (Recommendation, Paragraph 47) Dispute resolution and formalisation
Government response. The government states it shares the position, but then pivots to discussing VAT assignment, the Building Safety Levy, and Aggregates Levy, failing to address the specific recommendation to publish an updated Block Grant Transparency document alongside each fiscal event.
Scotland Office
8
Conclusion
1st report – The financing of the Scott…
Accepted
HM Treasury, and therefore the UK Government, is the “ultimate arbiter” of the Barnett formula. As the formula is non-statutory, there is no legal recourse for the Scottish Government to challenge the UK Government’s application of it. There is also currently no formal, objective dispute resolution process relating to the …
Government response. HM Treasury sets out the impact on Scotland of policy changes at fiscal events in the publicly available fiscal event documents.
Scotland Office
9
Recommendation
1st report – The financing of the Scott…
Acknowledged
We are not convinced that putting the Barnett formula on a statutory footing, or otherwise formalising it, would significantly improve its effectiveness. The use of the Barnett formula is already a well-established practice, not unlike other features of the UK’s uncodified constitution. Although new routes to legal challenge may be …
Government response. The government repeats the committee's conclusion verbatim.
Scotland Office
10
Conclusion
1st report – The financing of the Scott…
Acknowledged
The Committee notes that the Block Grant is the single largest source of Scottish Government funding, and that tight rules on borrowing and fiscal reserves mean that significant changes to the block grant will almost always require significant, urgent changes to the Scottish Government’s spending plans. (Conclusion, Paragraph 80)
Government response. The government provided an update on the Scottish Government's block grant, stating it has received the largest real terms settlement since devolution and additional funding, contrasting this with the Scottish Government's stance on the Barnett Formula.
Scotland Office
11
Conclusion
1st report – The financing of the Scott…
Accepted
The timing of supplementary estimates and UK Government fiscal events can cause clear challenges for the Scottish Government in terms of financial planning, with the Scottish Government’s final funding position not confirmed until close to the end of the financial year. This uncertainty is compounded by in-year changes to UK …
Government response. The government explained that the Block Grant Transparency is published annually, and the Scottish Government is informed of changes at the earliest possible opportunity, justifying its current practices as appropriate for managing market sensitive information.
Scotland Office
12
Recommendation
1st report – The financing of the Scott…
Accepted in Part
The importance of regular communication between the UK and Scottish Governments, in respect of UK spending decisions which could impact Scotland’s budget, cannot be overstated. The UK Government must ensure that the impact of UK budgetary changes on the block grant is assessed and considered while decisions are being made. …
Government response. The government stated that regular engagement and early notification on funding changes already occur, but rejected the need for formal impact assessments due to the mechanical nature of the Barnett formula, though impacts are routinely considered.
Scotland Office
13
Conclusion
1st report – The financing of the Scott…
Acknowledged
Given the challenges the Scottish Government faces, we recognise its need for fiscal flexibility. The Scotland Reserve is a key tool that enables the Scottish Government to carry funds from one year to another, and there seems little benefit in capping the amount of money that can be stored in …
Government response. The government explained the Scotland Reserve limit was mutually agreed and is uprated annually, with consideration of any changes deferred to the next Fiscal Framework review expected in 2028.
Scotland Office
14
Recommendation
1st report – The financing of the Scott…
Deferred
We note also that the jeopardy for returning funds to the UK Treasury at the end of the financial year incentivises poor behaviour in departmental spending, relative to value for money to the taxpayer. The removal of the Reserve, which is simply a treasury rule, would allow the Scottish Government …
Government response. The government explained the current Scotland Reserve limits were agreed with the Scottish Government and deferred any changes, including potential removal, to the next Fiscal Framework review in 2028.
Scotland Office
15
Recommendation
1st report – The financing of the Scott…
Deferred
At the next Fiscal Framework review, the UK Government should consider removing the cap on the Scotland Reserve, to ensure the Scottish Government’s fiscal flexibility is not unduly limited and to avoid the undesirable possibility of it having to return funds. (Recommendation, Paragraph 101)
Government response. The government deferred considering removing the cap on the Scotland Reserve to the next Fiscal Framework review, expected in 2028, with preliminary scoping work beginning soon. They noted the current limit was agreed with the Scottish Government and is uprated …
Scotland Office
16
Conclusion
1st report – The financing of the Scott…
Acknowledged
At present, the Scottish Government’s limited borrowing powers constrain its ability to manage fiscal shocks, as it is only able to borrow for resource purposes to cover forecast errors. Capital borrowing limits are currently linked to and grow in line with inflation, which may not necessarily be the highest metric …
Government response. The government acknowledges the conclusion by explaining that borrowing powers and limits were jointly agreed in the 2023 Fiscal Framework and are uprated annually by the GDP deflator to maintain real value, committing to consider these arrangements at the next …
Scotland Office
17
Recommendation
1st report – The financing of the Scott…
Deferred
We recognise the arguments presented calling for reform to the Scottish Government’s current borrowing arrangements. We maintain that such borrowing should continue to be subject to interest payments, the same as it is for any other government when it borrows to cover for its own forecast errors. However, we agree …
Government response. The government explained current borrowing limits are mutually agreed and uprated annually, stating they will consider further reforms to Scottish Government borrowing arrangements at the next Fiscal Framework review. They did not commit to publishing an analysis of different metrics …
Scotland Office
18
Conclusion
1st report – The financing of the Scott…
Not Addressed
It seems highly unlikely to us that the assignment of VAT revenues will ever come into force. It is clear that implementing the assignment poses a significant challenge, and given the amount of time that has passed since the change was due to come into force, it is far from …
Government response. The government acknowledged continuing work on Smith Commission recommendations, including VAT Assignment, but did not directly address the committee's conclusion that its implementation seems highly unlikely and unrealistic.
Scotland Office
19
Recommendation
1st report – The financing of the Scott…
Not Addressed
We call on the UK Government, in its response to this report, to explain why it thinks the assignment of VAT revenues is still possible, despite robust views to the contrary, and whether the Scottish Government shares this position. We also call on the UK Government, by the summer of …
Government response. The government stated that HM Treasury will continue to work with the Scottish Government to deliver Smith Commission recommendations, including VAT Assignment, but did not explain why it thinks assignment is possible or commit to a 2026 update as requested.
Scotland Office