Source · Select Committees · Scottish Affairs Committee
1st report – The financing of the Scottish Government
Scottish Affairs Committee
HC 456
Published 16 July 2025
Recommendations
7
Deferred
Publish updated Block Grant Transparency documents with each fiscal event impacting Scotland's funding
Recommendation
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 Summary
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
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9
Acknowledged
Formalising Barnett formula or dedicated dispute process would not improve effectiveness
Recommendation
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 …
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Government Response Summary
The government repeats the committee's conclusion verbatim.
Scotland Office
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12
Accepted in Part
Ensure early communication of UK budgetary changes and block grant impact assessments to Scotland
Recommendation
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 …
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Government Response Summary
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
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14
Deferred
Removing Scotland Reserve cap would enable more strategic Scottish Government financial planning
Recommendation
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 …
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Government Response Summary
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
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15
Deferred
Consider removing the cap on the Scotland Reserve at next Fiscal Framework review
Recommendation
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 …
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Government Response Summary
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 annually.
Scotland Office
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17
Deferred
Publish transparent analysis of Scottish Government borrowing limits based on various metrics
Recommendation
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 …
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Government Response Summary
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 as recommended.
Scotland Office
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19
Not Addressed
Explain feasibility of VAT revenue assignment and update on implementation progress by 2026
Recommendation
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 …
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Government Response Summary
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
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Conclusions (12)
1
Conclusion
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 Summary
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.
2
Conclusion
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 Summary
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.
3
Conclusion
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 Summary
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.
4
Conclusion
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 Summary
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.
5
Conclusion
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 Summary
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.
6
Conclusion
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 Summary
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.
8
Conclusion
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 Summary
HM Treasury sets out the impact on Scotland of policy changes at fiscal events in the publicly available fiscal event documents.
10
Conclusion
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 Summary
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.
11
Conclusion
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 Summary
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.
13
Conclusion
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 Summary
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.
16
Conclusion
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 Summary
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 Fiscal Framework review.
18
Conclusion
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 Summary
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.