Order!

Our first item of business today is a ministerial statement from the First Minister.

Statement on new funding agreement with the UK Government

Presiding Officer,

I rise to deliver a statement on the new funding agreement which the Scottish Government reached with the UK Government and which was announced in the UK Government’s budget.

In 2020, at the Fair Funding Formula Forum (F4), the UK, Scottish, Welsh and Northern Irish governments agreed on a new funding settlement. In 2022, however, this formula was changed due to concerns that it was underfunding the devolved governments. Last year, the UK, Scottish, Welsh and Northern Irish governments agreed to reform devolved finances again. It was agreed that the Treasury would return to using the Barnett formula to calculate block grants, and that the devolution of the power to set land value taxes should accordingly reduce the block grant. It was additionally agreed that further talks would be held later to adjust the formula to take account of the relative wealths of the nations of the UK, as the Barnett formula alone does not provide sufficient funding to the devolved governments. These talks were started under the Groko II government, but never concluded; and it was decided to plug the gap in the Scottish Government’s budget with temporary, stop-gap funding. The Violet government has since agreed with the Scottish, Welsh and Northern Irish governments on a permanent solution.

The new system still uses the Barnett formula. This formula calculates funding for a devolved government by considering each UK government department: the expenditure of that department is multiplied by what percentage of that department’s powers are devolved and by what proportion of the UK lives in the devolved nation. This is calculated for all UK government departments, and is then summed to give the full block grant. The block grant is then multiplied by a deprivation factor, which is currently 110%, to give the final block grant.

It was also agreed to change how much VAT revenue the Scottish Government receives. It was agreed that the VAT rebate for Scotland was around twice as high as it should have been. This was because 4 years ago, it was found that the UK Government’s budget allocated less VAT revenue to Scotland than it should have, and so the UK Government agreed then to make a temporary, one-off payment to the Scottish Government to refund this error. However, this payment was not discontinued in successive UK Government budgets, and had the effect of distorting the VAT rebate Scotland receives. It has now been agreed to end this temporary payment, and the VAT rebate has accordingly decreased such that is now only the VAT revenue which the Scottish Government is entitled to.

Due to the large effect the halving of the VAT rebate would have, it was agreed that the UK Government would provide a “Transition Parachute Payment” to the Scottish Government until the financial year 2028-29 to allow the Scottish Government to adjust its budget to account for the decrease in the VAT rebate, and for the other changes made to the funding settlement.

Reforms to devolved finances have been in motion for close to a year now, and I am happy to be able to announce now that the reforms have been finally finalised. The new funding settlement I believe is sustainable, fair on taxpayers across the UK, and will ensure that the current and future Scottish Governments receive sufficient funding to spend on implementing their priorities. It has the full support of this government.

I would like to thank my right honourable friends the Chancellor of the Exchequer and my predecessor as First Minister for their work on coming to this new funding agreement.

This statement is delivered by First Minister Rt. Hon. Sir LightningMinion KT CT CT CBE OM OM MSP MP

Members may now debate the statement. Debate will end with the close of business at 10pm GMT on the 26th of February 2024.