The Barnett formula and the financing of devolution

How the system works

The UK’s devolved administrations are, for the most part, financed by what is known as a ‘block grant and formula’ system’.   As a block grant, the funding allocated to them can be spent freely by the devolved administrations as they see fit.  They are not tied to spending it on any particular functions.  The ‘formula’ part relates to how it is calculated – for which the Barnett formula is used.

The formula does not relate to all public spending in Scotland, Wales or Northern Ireland. The UK Government continues to spend on a range of non-devolved functions as well. Only about 60 per cent of ‘territorially identifiable’ public spending in Scotland is from the Scottish Government, and about 50 per cent of that in Wales. The rest is by the UK Government, and social security payments – welfare benefits and pensions – makes up the bulk of that. (The figures for Northern Ireland are rather confusing, as social security is devolved but subject to requirements to ensure there is parity with the system in Great Britain.)

The formula gives the devolved administrations a proportionate share of spending on ‘comparable’ functions in England, given their populations compared to England’s.   The population proportions for 2011-14 (expressed as a percentage of the population of England) are:

Scotland                                 10.03

Wales                                  5.79

Northern Ireland                    3.45

Whether a function is ‘comparable’ or not, and the extent to which it is comparable, varies from case to case.  Like the population figures, comparability percentages are calculated at each spending review.  They are set out in the Statement of Funding Policy issued by HM Treasury, which is available from the link below.  They depend on whether individual programmes are devolved or not – whether they are for the benefit of the UK as a whole, or for the particular parts of it. ‘Territorially identifiable’ spending is that which benefits a particular part of the UK, and does not include spending which is considered to benefit the UK as a whole, such as that on defence, foreign affairs and international development.

The formula only relates to changes to the block grant, not to the underlying baseline.  The allocation in Year 1 will be varied by changes calculated as above, which are added in Year 2 (and so become the baseline for Year 3). That baseline has, however, never been reviewed.  It has simply accrued since the formula was first adopted in 1976.

The status of the formula

All key decisions regarding the working of the formula and the block grant and formula system are taken by HM Treasury.  The Treasury has extensive discretion about its operation – most notably, whether an event should trigger a consequential payment or not.  For example, the Treasury decided in the 2007 Comprehensive Spending Review to exclude all spending on the 2012 London Olympics from triggering consequentials, on the ground that it was for the benefit of the UK as a whole.  This was despite the fact that much of the spending was on regeneration of the area around Stratford in east London, which would have triggered consequentials in any other context.  The result has been an enduring dispute between the UK and devolved governments.

The formula’s basis is that it is simply Treasury ‘policy’.  It is not enshrined in statute, or given any legal or constitutional form.  It is simply set out in an internal document of the UK Government.  (A complaint sometimes made by devolved finance ministers is that they have no right to sign or otherwise approve the Statement when it is revised.  It is signed on behalf of the devolved administrations by the Secretaries of State for Scotland, Wales and Northern Ireland.)  Authority to pay the grant is given each year in the Appropriation Act passed by Parliament, and the grant is paid to the territorial Secretary of State, who passes it on to the devolved administration after deducting the cost of running his or her Office.

What the formula doesn’t do

The baseline, and the financial allocations provided by the system more generally, pay no regard to ‘need’ (whatever one might understand that to mean).  They simply are.  This has given rise to much political debate about whether need should be a factor, and how that should be applied.

The Barnett formula only applies to spending which is territorially identifiable, and which forms part of a ‘Departmental Expenditure Limit’ (DEL).  DEL spending is planned at least three years ahead, through the spending review process.  The other sort of public spending is called Annually Managed Expenditure (AME), which varies much more from year to year and cannot be planned in the same way.  The main category of domestic AME spending is that on social security benefits, though much Ministry of Defence spending is AME too.

The formula does not apply to spending within England, or the allocation of territorially identifiable public spending across the UK as a whole.  This varies widely (see the IPPR paper linked below for some slightly dated details).  The formula is only responsible for allocations to the devolved administrations in Scotland, Wales and Northern Ireland.

Reviewing devolution finance

Since 2007, there has been quite a debate about devolution finance.  These are discussed in detail in many posts on this blog.  In Scotland, there are two key proposals on the table.  One, proposed by the Calman Commission set up by the three unionist parties, has been for devolution of 10 percentage ‘points’ of personal income tax and some smaller land-related taxes to the Scottish Parliament, to create a measure of ‘fiscal accountability’. This is set out in the Scotland bill introduced into the UK Parliament in November 2010.  The alternative, proposed by the SNP, has been for ‘fiscal autonomy’; the Scottish Parliament would set, and Scottish Government collect, all taxes in Scotland, remitting to London an amount to cover the cost of common UK public services.

In Wales, the Holtham Commission reported in the summer of 2010 and recommended a ‘fair’ (needs-based) grant for Wales, along with a measure of fiscal autonomy along lines very similar to those of the Calman Commission for Scotland.

In Northern Ireland, the key issue has been the devolution of corporation tax so that a lower rate, closer to that in the Republic of Ireland, could be set.

Information and resources

HM Treasury’s Statement of Funding Policy is here.

The Lords Select Committee on the Barnett Formula’s report is here.

The report of the Holtham Commission set up by the Welsh Assembly Government (which assessed the case for a needs based formula for Wales, and how that might be done)  is here.

The report of the Calman Commission is here.

The Scottish Government’s February 2009 paper on fiscal autonomy (part of the ‘National Conversation) is here, and its February 2011 one on ‘full fiscal responsiblity’ is here.

The 2010 edition of the Scottish Government’s publication Government Expenditures and Revenues Scotland is here.

HM Treasury’s paper Rebalancing the Northern Ireland Economy (discussing corporation tax devolution) is here.

A useful paper by Iain McLean, Guy Lodge and Katie Schmuecker for IPPR on the present allocations across the UK is here.

The chief source of data about public spending across the UK, the Public Expenditure Statistical Analyses prepared by HM Treasury, is here.