How are the Scottish and Welsh Governments funded?

The Scottish and Welsh Governments are funded through several main mechanisms:

• funding from the UK government;
• devolved taxes and other revenue sources;
• devolved borrowing and reserves.

Funding is split between components for day-to-day spending on public services and benefits (‘resource spending’) and investment in buildings, equipment, infrastructure and research (‘capital spending’). The devolved governments can transfer resource funding to use on capital spending instead, but not vice versa, without special permission from the UK government. Funding arrangements are formally set out in the UK government’s Statement of Funding Policy and the Fiscal Framework Agreements for Scotland and Wales.

Funding from the UK government

Funding from the UK government is the largest source of funding for both the Scottish and Welsh Governments. It is made up of several different components. 

The biggest are the so-called ‘block grants’: general purpose funding provided by the UK government which the devolved governments can spend as they wish across their devolved responsibilities. There are separate block grants for resource and capital spending. The size of the grants is determined largely by the Barnett formula, which in turn is based on the size of the block grants in the prior year and the change in planned spending in England (see our separate explainer on the Barnett formula for further details). The UK government also provides the Scottish Government with a top-up to the block grant, via so-called block grant adjustments, in recognition of the benefits devolved to Scotland in recent years. However, the Scottish Government is free to spend more or less than this top-up on benefits if it wishes to. 

Alongside the block grant, the UK government also provides funding for specific types of spending, which in some cases is ring-fenced for those purposes. This includes funding to be transferred to councils to pay for ‘City Deals’, funding to cover the cost of student loans, and funding for certain public sector pension schemes in Scotland. 

Devolved taxes and revenues

The next-largest source of funding is devolved taxes and revenues. 

Both the Scottish and Welsh Governments decide policy and retain the revenues from some taxes, including on the purchase of property, on landfill disposals and parts of income tax. They also set policy for local taxes collected by councils in their countries. Further information can be found in our separate explainer on the devolved governments’ powers. 

The Scottish Government also retains income from the Crown Estates in Scotland, including the leasing of the seabed for offshore windfarms (‘ScotWind’), and from various fines, forfeitures and fixed penalties associated with crime.

To reflect the fact that the devolved governments retain these revenue sources, a series of ‘block grant adjustments’ are made – deducting an amount off the block that they would otherwise receive from the UK government. This means the net impact of devolved taxes and revenues on the funding of the Scottish and Welsh Government depends on the difference between devolved revenues and the associated block grant adjustments. Further information on how these block grant adjustments work – and why they work in this way – can be found in our separate explainer. 

Devolved borrowing and reserves powers

Unlike the UK government, whose borrowing powers are constrained only by how much and at what rate the financial markets are willing to lend, the devolved governments are subject to rules on how much and when they can borrow. 

Both the Scottish and Welsh Governments can borrow modest amounts of money to supplement their capital funding, and in turn invest more. They cannot generally borrow to boost their resource funding, unless it is to cover the negative impact from forecast errors for devolved taxes and benefits and the associated block grant adjustments (e.g. if revenues are lower or the block grant adjustment higher than forecast). 

Both the Scottish and Welsh Governments also have the ability to pay modest amounts of money into reserves to draw down at a later date.

Further information on these borrowing and reserves powers can be found in our separate explainer.