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The Scottish Government's overall budget depends both on funding from the UK government, which is determined largely via the Barnett formula, and on its own devolved revenues, borrowing and reserves, which are governed by the Fiscal Framework. This chapter of the report looks at the funding outlook in the short term (2022-23 and 2023-24), medium term (2024-25 to 2027-28) and beyond, drawing on Scottish Government and Scottish Fiscal Commission (SFC) figures. Key findings1. The funding available to the Scottish Government in 2023-24 for day-to-day nonbenefits spending is around £1.5 billion higher than forecast in May 2022 at the time of the Resource Spending Review. Of this, just over £0.8 billion reflects higher funding from the UK government via the Barnett formula, and another £0.8 billion reflects a forecast improvement in net revenues from devolved taxes, only a small part of which is due to new tax raising measures. This cash-terms increase is partially, but not fully, offset by higher forecast inflation.2. The Scottish Budget for 2023-24 shows day-to-day non-benefits spending increasing by 1.6% in real terms, on average, compared to what was originally budgeted to be spent this year, which is more generous than the 1% fall expected at the time of the Resource Spending Review. However, these comparisons exclude in-year top-ups to the funding available to the Scottish Government this year, which SFC forecasts suggest amount to around £1.1 billion.

Strictly speaking, the comparator has switched to England and Northern Ireland, following the devolution of tax powers to Wales in 2018-19 (Stamp Duty Land Tax and landfill tax) and 2020-21 (income tax). We use the term rUK throughout for ease of reference. Key findings1. Scottish Government policy measures -which include reducing the higher rate threshold, moving to a five-band system of income tax, and increasing the higher and top rates of tax -have raised significant amounts of revenue relative to if it had followed UK government tax policy that applies in rUK. The SFC estimates that, before accounting for any behavioural responses, these changes boosted revenues by £385 million in 2018-19 and will boost revenues by £852 million in the current financial year, 2022-23.2. However, slow growth in Scotland's underlying tax base compared with rUK has exerted downwards pressure on Scottish income tax revenues, despite these reforms to Scottish income tax policy. In 2018-19, revenues from income tax were only £127 million higher than the BGA subtracted from Scotland's block grant funding to account for tax devolution (which is updated each year in line with growth in revenues in rUK), and in the current financial year, 2022-23, revenues are forecast to be £107 million lower than the BGA. In other words, slow growth in the underlying tax base is forecast to more than offset the additional revenues from Scotland's higher tax rates this year.3. Relatively slow employment growth in Scotland, compared with rUK, has been one factor behind this poor net tax position. Scotland's population is ageing more rapidly than the population of rUK, and there have been falls in economic participation rates within age groups. For adults aged 35-49, the labour force participation rate in 2014-15 was comparable in Scotland to that in the UK as a whole (86.8% versus 86.9%), but