diff --git a/internal/backend/local/backend_local.go b/internal/backend/local/backend_local.go
index eb598f4c3258..dfc3bf771d9e 100644
--- a/internal/backend/local/backend_local.go
+++ b/internal/backend/local/backend_local.go
@@ -16,6 +16,7 @@ import (
 	"github.com/hashicorp/terraform/internal/backend"
 	"github.com/hashicorp/terraform/internal/configs"
 	"github.com/hashicorp/terraform/internal/configs/configload"
+	"github.com/hashicorp/terraform/internal/lang"
 	"github.com/hashicorp/terraform/internal/plans/planfile"
 	"github.com/hashicorp/terraform/internal/states/statemgr"
 	"github.com/hashicorp/terraform/internal/terraform"
@@ -516,7 +517,9 @@ var _ backend.UnparsedVariableValue = unparsedTestVariableValue{}
 func (v unparsedTestVariableValue) ParseVariableValue(mode configs.VariableParsingMode) (*terraform.InputValue, tfdiags.Diagnostics) {
 	var diags tfdiags.Diagnostics
 
-	value, valueDiags := v.Expr.Value(nil)
+	value, valueDiags := v.Expr.Value(&hcl.EvalContext{
+		Functions: lang.TestingFunctions(),
+	})
 	diags = diags.Append(valueDiags)
 	if valueDiags.HasErrors() {
 		return nil, diags
diff --git a/internal/backend/local/test.go b/internal/backend/local/test.go
index e56dab91098c..2739ff1d9ae2 100644
--- a/internal/backend/local/test.go
+++ b/internal/backend/local/test.go
@@ -1023,7 +1023,7 @@ func (runner *TestFileRunner) GetVariables(config *configs.Config, run *modulete
 	values := make(terraform.InputValues)
 
 	// First, let's look at the global variables.
-	for name, value := range runner.globalVariables {
+	for name, variable := range runner.globalVariables {
 		if !relevantVariables[name] {
 			// Then this run block doesn't need this value.
 			continue
@@ -1039,9 +1039,22 @@ func (runner *TestFileRunner) GetVariables(config *configs.Config, run *modulete
 			parsingMode = cfg.ParsingMode
 		}
 
-		var valueDiags tfdiags.Diagnostics
-		values[name], valueDiags = value.ParseVariableValue(parsingMode)
+		value, valueDiags := variable.ParseVariableValue(parsingMode)
 		diags = diags.Append(valueDiags)
+		if diags.HasErrors() {
+			// We still add a value for this variable even though we couldn't
+			// parse it as we don't want to compound errors later. For example,
+			// the system would report this variable didn't have a value which
+			// would confuse the user because it does have a value, it's just
+			// not a valid value. We have added the diagnostics so the user
+			// will be informed about the error, and the test won't run. We'll
+			// just report only the relevant errors.
+			values[name] = &terraform.InputValue{
+				Value: cty.NilVal,
+			}
+			continue
+		}
+		values[name] = value
 	}
 
 	// Second, we'll check the run level variables.
diff --git a/internal/command/test_test.go b/internal/command/test_test.go
index 4cb8192ba916..554964142a23 100644
--- a/internal/command/test_test.go
+++ b/internal/command/test_test.go
@@ -208,7 +208,7 @@ func TestTest_Runs(t *testing.T) {
 			code:        0,
 		},
 		"functions_available": {
-			expectedOut: "1 passed, 0 failed.",
+			expectedOut: "2 passed, 0 failed.",
 			code:        0,
 		},
 		"mocking": {
@@ -227,6 +227,11 @@ func TestTest_Runs(t *testing.T) {
 			expectedOut: "1 passed, 0 failed.",
 			code:        0,
 		},
+		"global_var_refs": {
+			expectedOut: "2 failed, 1 skipped.",
+			expectedErr: "Variables may not be used here.",
+			code:        1,
+		},
 	}
 	for name, tc := range tcs {
 		t.Run(name, func(t *testing.T) {
@@ -281,7 +286,7 @@ func TestTest_Runs(t *testing.T) {
 			}
 
 			if !strings.Contains(output.Stdout(), tc.expectedOut) {
-				t.Errorf("output didn't contain expected string:\n\n%s", output.All())
+				t.Errorf("output didn't contain expected string:\n\n%s", output.Stdout())
 			}
 
 			if !strings.Contains(output.Stderr(), tc.expectedErr) {
diff --git a/internal/command/testdata/test/functions_available/alternate.tftest.hcl b/internal/command/testdata/test/functions_available/alternate.tftest.hcl
new file mode 100644
index 000000000000..29a2f8398639
--- /dev/null
+++ b/internal/command/testdata/test/functions_available/alternate.tftest.hcl
@@ -0,0 +1,10 @@
+variables {
+  input = jsonencode({key:"value"})
+}
+
+run "test" {
+  assert {
+    condition = jsondecode(test_resource.resource.value).key == "value"
+    error_message = "wrong value"
+  }
+}
diff --git a/internal/command/testdata/test/global_var_refs/environment_variable.tftest.hcl b/internal/command/testdata/test/global_var_refs/environment_variable.tftest.hcl
new file mode 100644
index 000000000000..de4195c7eb2f
--- /dev/null
+++ b/internal/command/testdata/test/global_var_refs/environment_variable.tftest.hcl
@@ -0,0 +1,6 @@
+
+variables {
+  input = var.env_var_input
+}
+
+run "execute" {}
diff --git a/internal/command/testdata/test/global_var_refs/main.tf b/internal/command/testdata/test/global_var_refs/main.tf
new file mode 100644
index 000000000000..af996592408f
--- /dev/null
+++ b/internal/command/testdata/test/global_var_refs/main.tf
@@ -0,0 +1,7 @@
+variable "input" {
+  type = string
+}
+
+output "value" {
+  value = var.input
+}
diff --git a/internal/command/testdata/test/global_var_refs/run_block_output.tftest.hcl b/internal/command/testdata/test/global_var_refs/run_block_output.tftest.hcl
new file mode 100644
index 000000000000..d3b71602af62
--- /dev/null
+++ b/internal/command/testdata/test/global_var_refs/run_block_output.tftest.hcl
@@ -0,0 +1,17 @@
+
+variables {
+  input = var.setup.value
+}
+
+run "setup" {
+  variables {
+    input = "hello"
+  }
+}
+
+run "execute" {
+  assert {
+    condition     = output.value == "hello"
+    error_message = "bad output value"
+  }
+}