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Scotland's Finances Weekend 4 Scotland’s Finances: Explanation of Terms and useful background materials Introduction In Weekend 4, the Assembly is invited to consider Scotland’s finances, including where funding comes from and how decisions about tax and spending are taken. For further information, please see Weekend 4 Introductory note. The Secretariat have prepared this introductory factsheet which includes: - Section 1: Explanation of some of the key terms that will come up in evidence (split into ‘Part 1: Budgets and Finance’ and ‘Part 2: Tax’) - Section 2: A list of links to useful background material - It is not essential to read all of this material in advance since the presentations at the weekend will cover the relevant issues. However, we know that Members can find it helpful to familiarise themselves with what will be discussed and we hope you find this material a useful resource in the lead up to Weekend 4. As the list of background material is quite extensive, we have highlighted a few online resources, that you may find interesting: - Scottish Government: Scotland's finances 2019-2020: key facts and figures, a guide setting out key information about how the system of public finances in Scotland stands in 2019 to 2020 and how this system is changing https://www.gov.scot/publications/scotlands-finances-2019-2020-key-facts-figures/ - Scottish Parliament: Where does Scotland get its money from?, a video prepared by the Scottish Parliament’s Financial Scrutiny Unit in 2016, which explains how the Scottish budget is funded. It looks at the block grant, how the Barnett formula is calculated and the impact of new tax powers. https://www.youtube.com/watch?v=oNw-1516a08 - Audit Scotland: Overview of the journey of financial devolution in Scotland. https://www.audit-scotland.gov.uk/reports/e-hubs/financial-devolution-in-scotland-the-journey- so-far - - Citizens Assembly factsheet, prepared by Professor Nicola McEwen: What Powers does the Scottish Parliament have?, which covers how tax powers have changed https://www.citizensassembly.scot/sites/default/files/inline-files/SCA_Factsheet_1-1_0.pdf - Scottish Government: Draft Budget 2020-2021 (Published by the Government and presented to Parliament on 6 February) https://www.gov.scot/budget/ SECTION 1 - EXPLANATION OF KEY TERMS PART ONE: BUDGETS AND FINANCES Barnett formula (or Barnett-determined Block Grant) The devolved administrations in Scotland, Wales and Northern Ireland all receive a transfer, the so called ‘block grant’ from the UK Government that funds a substantial proportion of their spending. A system known as the Barnett funding formula calculates the annual increase or decrease in the block grant given to each country. Budget consequentials is where the UK Government increase spending in a policy area which is devolved (e.g. health) and a share of this increased spending is passed on to the Scottish Government. Base Rate (or bank rate) The bank rate is sometimes referred to in the news as the ‘Bank of England base rate’ or ‘BOEBR’ or ‘the interest rate’. The bank rate determines the interest rate the Bank pays to commercial banks that hold money with them which then influences the rates those banks charge people to borrow money, or pay on their savings. The bank rate in the UK is currently 0.75%. Block Grant Adjustment The Scottish Government’s Block Grant is now adjusted to reflect that some of the Scottish budget is now funded by Scottish tax revenues that were previously retained by the UK Government. There are also additions for social security benefits that have been devolved to Scotland. The Fiscal Framework sets out how this Block Grant Adjustment (BGA) mechanism works but put simply, if tax revenues per head grow faster in Scotland than the rest of the UK then the Scottish Budget has extra resources available and vice versa. Business Rates (see Non-Domestic Rates) Borrowing Government borrowing is the money any government borrows to make up the difference between what they earn (revenue, mostly from tax) and what they spend (expenditure). 2 Capital spending Government spending or expenditure includes all government consumption, investment, and transfer payments. Capital spending involves spending on assets that have a durable life of over a year and the spending does not have to be renewed each year. Examples of capital spending include investing in schools, roads or hospitals. Current Budget Balance This is the difference between government’s current revenue (the money it makes) and current expenditure (what it spends on day to day public services). It excludes capital investment in infrastructure, for example. It measures the degree to which taxpayers meet the costs of paying for day to day public services, excluding capital investment. Current Expenditure Current expenditure refers to the short term spending on goods and services within a financial period. Current Revenue All revenue raised by the public sector from tax and non-tax revenues except the sale of assets or interest received. Disposable income Total personal or household income once direct personal taxes have been taken off. Economy An economy is the system according to which the money, industry, and trade of a country or region are organised. A country's economy is the wealth that it gets from business, industry and other services. Expenditure Government expenditure, or spending, is a term used to describe money that a government spends on goods and services such as education, health care and defence. Financial year basis In financial forecasts and documents this is commonly the 12 month period running from April in one year to March in the next year. Some companies, institutions, individuals and governments may use a different definition of a financial year. Fiscal This relates to government revenue especially taxes. Fiscal position (also see GERS) A government’s net fiscal balance, or fiscal position, measures the difference between total public sector expenditure, including capital investment, and total public sector revenue. If 3 expenditure exceeds revenue, the Government runs a net fiscal deficit, and vice versa. Scotland’s fiscal position can be considered through a National Statistics publication: Government Expenditure and Revenue (GERS). Fiscal forecasts A fiscal forecast is a fiscal management tool that presents estimated information based on past, current, and projected financial conditions. Fiscal Framework The 2016 Agreement between the Scottish and UK governments that sets the fiscal rules, funding and borrowing powers available to the Scottish Government. This followed on from the Scotland Act 2016 new powers GERS (Government Expenditure and Revenue in Scotland) GERS is a National Statistics publication which outlines Scotland’s fiscal position within the UK. It estimates the contribution of revenue raised in Scotland toward goods and services that benefit the residents of Scotland. GERS addresses three questions about Scotland's public sector finances under the current constitutional arrangements: What revenues were raised in Scotland? How much did the country pay for the public services that were consumed? To what extent did the revenues raised cover the costs of these public services? GERS provides an account of Scotland’s: Total Public Sector Revenue (so what was money was generated, including a share of North Sea revenue) Total Public Sector Expenditure (so what was spent) Net fiscal balance (difference between total revenue and total public sector expenditure including capital investment) – which can be a deficit or surplus Current Budget Balance (difference between total revenue and current expenditure excluding capital investment) GDP (Gross domestic product) GDP is the total value of all the finished goods and services which have been produced by a country in a specific time period. It includes what consumers and the government spends as well as what is exported, but it does not include what we import. GDP is the most popular way of measuring the output of an economy (what it has produced) and it is therefore seen as a way of showing how big an economy is and how much it is growing by. Growth (economic) Economic growth is the rate at which Gross Domestic Product (GDP – see GDP) - the size of the economy- is increasing. 4 Inflation Inflation is the rate of increase in prices for goods and services in a particular country. The higher inflation is, the more you have to pay for goods and services. There are a number of different ways of measuring inflation such as through the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The UK inflation rate was 1.8% in January 2019, following an average of 2.55% from 1989 to 2019. Interest rates Interest is what you pay for borrowing money, and what banks pay you for saving money with them. Interest rates are shown as a percentage of the amount you borrow or save over a year. Macroeconomic forecast This is a general term which refers to what may happen to a range of economic variables such as GDP, inflation or employment. National Accounts National accounts are a statistical system that represents the economic activity and transactions between sectors in a national economy. Onshore GDP Onshore Gross Domestic Product describes Scotland’s GDP not including the value of oil, gas and other hydrocarbons produced in the Scottish sector of the UK continental shelf. Outturn data From a forecasting perspective, the outturn data is the amount of taxes which have been collected, or the amount of expenditure which has been undertaken in a given period rather than what was expected or forecast. Potential Output Potential output is the maximum amount of goods and services an economy can sustainably produce without creating excessive price pressures. Projection A projection is a simple estimate of the future value of a particular element of say tax. By developing a projection it can be possible to then create a more elaborate forecast of what might happen to an area of spending or tax.
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