Explanation of the block-grant adjustment in Scotland and Wales

he block grant adjustment is the deduction (or “addition” in the case of Scottish social security) made to the block grant to reflect the devolution of taxes or social security. They were initially set at the relevant amount of UK government revenue or spending in the respective devolved government in the year prior to devolution,^a and are then updated using one of two methods – the ‘indexed per capita’ method for Scotland and the ‘comparable’ method for Wales:

• Scotland (the indexed per capita method): takes the initial deduction and adjusts each year such that if Scotland’s tax revenues and welfare expenditure grow at the same rate per person as those in England and Northern Ireland, then Scotland’s budget would be no better or worse off than if there had been no devolution. It is calculated as follows:

BGA in year 2 = BGA in year 1 x ENI Government receipts in year 2/ENI Government receipts in year 1 x relative Scottish population growth

• Wales (the comparable method): takes the initial deduction and adds the population share of the change in equivalent cash revenues for the rest of the UK adjusted by a comparability factor (which reflects tax revenue per person in Wales as a proportion of revenue per person in the rest of the UK at the time of devolution). The underlying
  principle is that if Wales’s population and tax revenues grow at the same rate as in England and Northern Ireland, then Wales’s budget would be no better or worse off than if there had been no devolution. For income tax, this is calculated for each tax band. The calculation is as follows:

BGA in year 2 = BGA in year 1 + £ change in ENI Government revenue between year 1 and year 2 x Wales’s population share x comparability factor

As a result of these different methods, for a given change in UK government revenue on a devolved tax there is a different impact on the block grant adjustment and net tax position for Scotland and for Wales. In both cases, holding all else equal, if tax revenues per person are higher (lower) in Wales or Scotland, than the rest of the UK, relative to the previous year, this will
improve (worsen) the net tax position. However, there are differences in the impact of relative changes in population:

• In Scotland, the block grant adjustment depends on that year’s population growth relative to England and Northern Ireland. This adjustment is applied directly to the block grant adjustment from the previous year. The effect of this is that the block grant adjustment
  fully accounts for differences in relative population growth. This method was the preference of the Scottish government to protect their budget against population decline relative to the rest of the UK.^b
• For Wales, the block grant adjustment depends on the relative size of the population in Wales compared to England and Northern Ireland in each year. This adjustment is not applied directly to the ‘baseline’ block grant adjustment from the previous year. This means that if there is relative population decline in Wales, all else equal, the block grant adjustment would be higher than it would be if the calculation was based on the indexed per capita method, which would reduce the net tax position.

In addition, relative differences between Scotland and Wales are explained by the extent to which income tax is devolved:

• For Scotland, with the exception of the personal allowance, all rates and bands are devolved, so there is a single BGA for all NSND income tax.
  • In Wales, only the first 10p of each NSND income tax band is devolved and the BGA (including the comparability factor) is calculated separately for each band. For example, the comparability factor for the basic rate is 81.9 per cent compared to 11.4 per cent for the additional rate. This reflects the per person revenue raised of Welsh rates relative to the equivalent England and Northern Ireland “10p” bands in the year of devolution. As a result, changes in ENI receipts from the additional rate influence the BGA less than the basic rate and so the BGA is less affected by tax base growth at the top of the income distribution.

Devolved governments set their initial budget plans based on the forecast for the net position. With the exception of income tax, differences in devolved revenues and spending are managed in-year. For income tax, when outturn data is released the difference between outturn and forecast is settled with the devolved administration in a process known as reconciliation.