A £772.4 million downward adjustment is now built into the provisional arithmetic for Scotland’s 2027–28 Budget. Most of it arises from Scottish Income Tax — not because tax receipts collapsed, but because the forecasts used when the 2024–25 Budget was set proved too optimistic about Scotland’s position relative to the corresponding UK tax adjustment.
Scotland’s 2027–28 Budget is heading towards a negative fiscal reconciliation of £772.4 million, according to the Scottish Government’s latest Fiscal Framework Outturn Report.
The figure is unusually large, but its meaning is easily obscured by the language used to describe Scotland’s finances. It is not a £772 million bill suddenly presented to the Scottish Government, nor does it mean £772 million of tax has disappeared. It is principally the delayed correction of forecasts used several years earlier to calculate how much money Scotland’s devolved tax system was expected to contribute to the Budget.
The largest component is now settled. The final reconciliation associated with Scottish Income Tax for 2024–25 is negative £720.5 million.
A further £41.5 million comes from reconciliations associated with Land and Buildings Transaction Tax, Scottish Landfill Tax and devolved social-security expenditure. Added to that is £10.5 million carried forward from an earlier social-security reconciliation.
Together, they currently produce a negative £772.4 million adjustment for 2027–28.
The £720.5 Million Income Tax Calculation
When the Scottish Budget for 2024–25 was constructed in December 2023, Scottish Income Tax receipts were forecast at £18.844 billion.
At the same time, the corresponding Income Tax Block Grant Adjustment was forecast at £17.432 billion.
The difference between those two figures gave Scotland an expected positive Income Tax net position of £1.412 billion.
The eventual outturn was different.
Scottish Income Tax receipts for 2024–25 reached £18.635 billion — £208.9 million below the forecast used when the Budget was set.
The final Block Grant Adjustment was £17.944 billion — £511.6 million larger than forecast.
The two forecast errors moved in the same direction from Scotland’s Budget perspective. Scottish receipts were lower than expected while the deduction from the Block Grant was larger than expected.
The anticipated £1.412 billion positive net position therefore became £691.7 million in the final figures.
The difference is £720.5 million.
That is the Income Tax reconciliation which will be applied to the 2027–28 Scottish Budget.
Scottish Income Tax Receipts Actually Rose
The scale of the negative adjustment can create the impression that Scottish Income Tax performed badly in absolute terms. The outturn figures show something more complicated.
Scottish Income Tax raised approximately £18.635 billion in 2024–25, an increase of about £1.54 billion, or 9 per cent, compared with the previous year.
The number of Scottish taxpayers also increased by more than 113,000, or 3.9 per cent.
Modern Scot reported in August that Scotland’s wider devolved revenues had risen strongly during 2025–26. That article recorded £27.8 billion from devolved revenues including Scottish Income Tax, Council Tax, non-domestic rates, Land and Buildings Transaction Tax and Scottish Landfill Tax — an increase of £2.1 billion over the year.
The present reconciliation does not contradict that growth.
It arises because the Fiscal Framework measures Scottish Income Tax not simply by asking how much Scotland collected, but by comparing what Scotland collected with the deduction made from the UK Block Grant to account for the tax power having been devolved.
Why Scotland Has a Block Grant Adjustment
The mechanism reaches back to the financial settlement created after the Smith Commission and the Scotland Act 2016.
Modern Scot examined that history in May when looking again at the Smith Commission. Among its recommendations was substantially greater Scottish control over Income Tax. Holyrood gained the power to set rates and bands for non-savings, non-dividend income, while important parts of the tax system — including the Personal Allowance, definition of the tax base, savings and dividend taxation — remained reserved.
Devolving a tax does not mean Scotland simply receives the tax on top of the Block Grant it previously received from Westminster.
The Block Grant is reduced to reflect the revenue the UK Government no longer receives from the tax power transferred to Scotland. That reduction is the Block Grant Adjustment, normally shortened to BGA.
The system therefore has two moving parts.
Scotland gains the revenue raised by Scottish Income Tax. At the same time, an amount calculated by reference to equivalent tax revenues in England and Northern Ireland is removed from Scotland’s Block Grant.
The financial gain or loss to Scotland is determined by the relationship between those two numbers.
Two Forecasts Have to Work Together
There is another complication. Budgets have to be set before the final tax receipts are known.
The Scottish Fiscal Commission forecasts Scottish Income Tax. The Office for Budget Responsibility produces forecasts which feed into the calculation of the corresponding Block Grant Adjustment.
Those forecasts are used to build the Scottish Budget.
Years later, once HM Revenue and Customs has sufficient information about actual Income Tax liabilities, the forecast numbers can be replaced by outturn. The Budget then has to be corrected for the difference.
That correction is the reconciliation.
The Scottish Government explicitly describes reconciliations as a normal feature of the Fiscal Framework and cautions against treating them by themselves as measures of Scottish tax performance.
The Scottish Fiscal Commission makes the same point. A reconciliation depends on forecast errors on both sides of the calculation.
If Scottish tax receipts exceed forecast, that works positively for the later reconciliation. If the Block Grant Adjustment turns out larger than forecast, that works negatively. In many years those errors partly offset each other.
For 2024–25 they reinforced each other.
England and Northern Ireland Grew Faster Than Expected
Scottish Income Tax revenue grew by 9 per cent in 2024–25.
Equivalent non-savings, non-dividend Income Tax revenues in England and Northern Ireland grew faster, at 10.2 per cent.
That difference feeds directly into the Fiscal Framework because the Block Grant Adjustment follows the equivalent tax base outside Scotland.
The Scottish Fiscal Commission has identified earnings growth as one factor behind the forecast divergence. It says the Office for Budget Responsibility’s November 2023 forecast for average UK earnings growth in 2024–25 was subsequently revised upwards by 0.5 percentage points more than the Scottish Fiscal Commission’s December 2023 forecast for Scotland.
The final calculation shows the consequences.
Scottish tax revenue came in £208.9 million below the figure used in the 2024–25 Budget. The Block Grant Adjustment came in £511.6 million above its forecast.
Neither forecast error individually approached £720 million. Combined, they produced the £720.5 million reconciliation.
The Adjustment Arrives Three Budgets Later
The timing is one of the more difficult features of the system to follow.
The tax year involved is 2024–25.
The Budget receiving the correction is 2027–28.
That delay arises because final Scottish Income Tax liabilities are established after the end of the tax year and after HMRC has completed the processes needed to allocate taxpayers and liabilities accurately. The reconciliation is then applied to a later Scottish Budget.
A Scottish Government making spending decisions in 2027–28 therefore has to absorb a correction generated partly by forecasts made in late 2023 about income earned and taxed during 2024–25.
The system can work in Scotland’s favour as well as against it.
For 2023–24, the final reconciliation was positive. The Scottish Fiscal Commission calculated that Scotland’s Budget had initially received less Income Tax funding than the subsequent outturn justified, producing a positive correction of about £406 million for the 2026–27 Budget.
The following tax year has produced the opposite result on a considerably larger scale.
The Remaining £51.9 Million
Income Tax accounts for almost all of the forthcoming adjustment, but not all of it.
The 2026 Fiscal Framework Outturn Report records a negative £11.7 million reconciliation associated with the 2025–26 Block Grant Adjustment for Land and Buildings Transaction Tax.
Scottish Landfill Tax contributes another negative £15.7 million.
The provisional social-security Block Grant Adjustment reconciliation is negative £14.1 million.
Those components bring the current reconciliation calculated in the report to negative £761.9 million.
A further £10.5 million has to be added from the previous year.
The 2025 Fiscal Framework Outturn Report had contained a £361.5 million reconciliation subsequently applied to the 2026–27 Budget. Part of that calculation used provisional social-security data. Once final figures became available, the reconciliation was reduced to £351.1 million.
The resulting £10.5 million negative difference was deferred rather than applied immediately and is now due to be incorporated into the 2027–28 Budget.
That produces the present £772.4 million total.
Part of the £772 Million Is Still Provisional
The £720.5 million Income Tax element is based on final outturn data.
The entire £772.4 million figure is not yet final.
The 2026 report still uses provisional information for part of the social-security calculation. The Scottish Government says the complete reconciliation for 2027–28 will be confirmed when the Scottish Budget is published.
Previous differences between provisional and final reconciliations have generally been comparatively small, although that has not always been the case.
The Government’s historical table shows that the reconciliation identified in the 2025 report changed by £10.5 million before it was finally applied. The 2024 report changed by £2.6 million and the 2023 report by £6.2 million. A larger £23.1 million difference occurred following the 2022 report.
There is therefore good reason to describe £772.4 million as the current requirement rather than an immutable final figure.
The Reconciliation Is Larger Than the Previously Estimated Borrowing Limit
The size of the Income Tax correction creates a further budget problem.
The Fiscal Framework allows the Scottish Government to use resource borrowing to manage negative forecast-error reconciliations. That mechanism exists precisely because large tax corrections can otherwise hit expenditure in a single year.
But the power is capped.
When the Scottish Income Tax outturn was published in July, the Scottish Fiscal Commission said the estimated resource-borrowing limit for 2027–28 was £668 million.
The final Income Tax reconciliation alone is £720.5 million.
The Commission therefore concluded that the Income Tax adjustment exceeded the forecast borrowing limit. Even if the Scottish Government were to use the maximum available borrowing, the Commission said the reconciliation would reduce funding available in 2027–28, while borrowing would also create repayments in later years.
The precise borrowing ceiling applicable when the 2027–28 Budget is set may change because Fiscal Framework limits are uprated, so £668 million should not be treated as the final statutory limit for that Budget. The underlying problem remains: the present reconciliation is unusually large relative to the mechanism intended to smooth such corrections.
There Is £360.6 Million in the Scotland Reserve — but It Is Not a Spare £360 Million Pot
The Outturn Report also records a provisional residual Scotland Reserve balance of £360.6 million at the end of 2025–26.
That figure provides another source of fiscal flexibility, but it cannot simply be subtracted from £772.4 million and described as money available to cancel the reconciliation.
The Scotland Reserve is used to manage funding across financial years and contains resource and capital elements subject to Fiscal Framework rules. Decisions about withdrawals have to be made alongside the rest of the Government’s budget position, existing commitments and any other pressures falling in the same year.
The significance of the £360.6 million balance is therefore that the Government enters the next stage of Budget planning with some reserve capacity. How much of that capacity can or will be directed towards the 2027–28 reconciliation has not yet been settled in the material published with the Outturn Report.
The Size of the Error Was a Known Fiscal Risk
A reconciliation of this size is exceptional in the history of Scottish Income Tax, but the Scottish Fiscal Commission had previously modelled the possibility of large corrections.
Its analysis found that where Scottish and rest-of-UK forecasting errors are highly correlated, they frequently offset each other. That has happened repeatedly since Income Tax devolution because economic shocks affecting wages and employment often affect Scotland and the rest of the UK in similar directions.
The Commission says forecast errors on Scottish Income Tax and the corresponding Block Grant Adjustment moved in offsetting directions in five of the six preceding years.
For 2024–25 they did not.
The Commission had previously estimated that, under an assumption of 80 per cent correlation between the relevant forecasts, there was a 24 per cent probability of a negative reconciliation exceeding £600 million.
The present £720.5 million Income Tax reconciliation is therefore large, but it is not outside the type of fiscal risk already identified within the design of the system.
A Different Figure From Scotland’s Fiscal Deficit
The reconciliation should also be kept separate from Scotland’s wider fiscal balance.
Modern Scot reported in August that Government Expenditure and Revenue Scotland estimated £98.3 billion of public revenue attributable to Scotland in 2025–26 against £123.6 billion of public expenditure, producing a notional net fiscal deficit of £25.3 billion.
Those GERS figures and the £772.4 million reconciliation measure different things.
GERS estimates total public revenues and expenditure attributable to Scotland across devolved and reserved government activity. The Fiscal Framework reconciliation concerns the mechanics of financing the devolved Scottish Budget under the existing constitutional settlement.
One cannot therefore be used to offset, explain or replace the other.
The Budget Problem Is Now Visible Before the Budget Is Written
The 2027–28 Scottish Budget has not yet been set, and several parts of its eventual funding position will change before it is.
The Office for Budget Responsibility is due to publish new forecasts alongside the UK Autumn Budget on 28 October 2026. The Scottish Fiscal Commission will publish updated Scottish forecasts alongside the 2027–28 Scottish Budget. Those forecasts will alter the forward-looking tax and Block Grant calculations used to determine Scotland’s available funding.
They will not remove the final £720.5 million Income Tax reconciliation arising from 2024–25.
The outstanding social-security element can still change before the overall reconciliation is finalised, while decisions on borrowing, the Scotland Reserve and the wider spending settlement will determine how the adjustment is accommodated.
The present position is therefore narrower, but firmer, than describing Scotland as having a £772 million “black hole”. A £720.5 million Income Tax correction is already established from final outturn. Smaller tax and social-security reconciliations currently take the adjustment to £761.9 million, and a previously deferred £10.5 million brings the provisional 2027–28 total to £772.4 million.
The question for the 2027–28 Budget is no longer whether a substantial reconciliation is coming. It is how much of it can be absorbed through the Fiscal Framework’s borrowing and reserve mechanisms, how much remains to be met from the year’s available funding, and what other pressures are competing for the same money when the final Budget arithmetic is assembled.
Sources
Fiscal Framework Outturn Report: 2026
Scottish Government, 29 September 2026
https://www.gov.scot/publications/fiscal-framework-outturn-report-2026/
Fiscal Framework Outturn Report: 2026 — Income Tax
Scottish Government, 29 September 2026
https://www.gov.scot/publications/fiscal-framework-outturn-report-2026/pages/3/
Fiscal Framework Outturn Report: 2026 — Reconciliation Requirement for the Scottish Budget 2027–28
Scottish Government, 29 September 2026
https://www.gov.scot/publications/fiscal-framework-outturn-report-2026/pages/8/
Scottish Income Tax Outturn Reconciliation for 2024 to 2025: Letter to Finance and Public Administration Committee
Scottish Government, 9 July 2026
https://www.gov.scot/publications/scottish-income-tax-outturn-reconciliation-for-2024-to-2025-letter-to-finance-and-public-administration-committee/
Forecasts for Scottish Income Tax, Block Grant Adjustments and Reconciliations
Scottish Fiscal Commission, 17 September 2026
https://fiscalcommission.scot/17-september-2026-forecasts-for-scottish-income-tax-block-grant-adjustments-and-reconciliations/
Income Tax Publication Day
Scottish Fiscal Commission, 9 July 2026
https://fiscalcommission.scot/9-july-2026-income-tax-publication-day/
Understanding Scottish Income Tax Reconciliations
Scottish Fiscal Commission, 23 June 2026
https://fiscalcommission.scot/understanding-scottish-income-tax-reconciliations/
Scotland Revenues Reach £98.3bn as Fiscal Deficit Narrows
Modern Scot, 13 August 2026
https://modernscot.ch/scotland-revenues-reach-98-3bn-as-fiscal-deficit-narrows/
What Was the Smith Commission, and Why Does It Matter Again?
Modern Scot, 27 May 2026
https://modernscot.ch/what-was-the-smith-commission-and-why-does-it-matter-again/
