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. More than 60 per cent of ‘territorially identifiable’ public spending in Scotland comes from the Scottish Government, and the balance from the UK Government. In Wales, the proportion is about 55 per cent of all territorially identifiable spending. 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 – something that has became a major source of controversy in 2014, with the UK Government’s welfare reform agenda.)
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 2016-21 (expressed as a percentage of the population of England) are (with those published in 2010 for 2011-15 in brackets):
Scotland 9.85 (10.03)
Wales 5.69 (5.79)
Northern Ireland 3.39 (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 (see the table on page 43), and relate to spending by each UK Government department. The departmental figures in turn depend on whether individual programmes are devolved or not – meaning whether the programme is for the benefit of the UK as a whole, or for the particular parts of it. ‘Territorially identifiable’ spending does not include spending which is considered to benefit the UK as a whole rather than individuals or areas within it, 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. (See posts HERE and HERE for more detail.) 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 was 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 Supply and 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 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. Needs-related formulae are used to allocate spending for local government, health and (to varying extent) schools in all parts of the UK, including within England – though the efficacy with which they do so in England was shown by the Commons Public Accounts Committee in November 2011 to be rather limited. There have been recurrent calls for such a formula to be introduced as well as debates about how a ‘needs-based’ grant would be calculated, most notably from the Holtham Commission (for Wales) in 2010 and the Lords Select Committee on the Barnett Formula in 2009.
Reviewing and changing devolution finance
Since 2007, there has been a very active debate about devolution finance. This is addressed in detail in many posts on this blog. In Scotland, the Scotland Act 2012 provides for implementation of two key proposals from the Calman Commission set up by the three unionist parties: the devolution of 10 percentage ‘points’ of personal income tax and some smaller land-related taxes to the Scottish Parliament, to create a measure of ‘financial accountability’. Devolution of land taxes started in April 2015, with stamp duty land tax replaced by the ‘land and buildings transaction tax‘. Partial devolution of income tax is planned to start in April 2016.
The Scottish Government has called for ‘full fiscal autonomy’, though the referendum campaign has put that on the back boiler since 2011.
Following the Scottish independence referendum in 2014, the cross-party Smith Commission was established to formulate proposals for further devolution to Scotland. These include retaining the Barnett formula as the basis of devolved funding, devolving all revenues from income tax with control of the rates and bands of the tax, and assigning half of VAT receipts from Scotland to the Scottish Government. These proposals are set out in the Scotland bill introduced into the UK Parliament in May 2015.
Similar proposals to Calman’s were made for Wales by the Silk Commission in its Part 1 report in November 2012, building on the earlier work of the Holtham Commission. These were enacted in the Wales Act 2014 and provide for devolution of landfill tax and stamp duty land tax from April 2018, and potentially a Welsh rate of income tax of 10 points. (The Act requires a referendum before the Welsh rate of income tax can be introduced; in the 2015 Spending Review, the Chancellor announced that requirement will be dropped, and a ‘Barnett floor’ of 115 per cent of spending on comparable functions in England implemented.)
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. Devolution of corporation tax was legislated for in the Corporation Tax (Northern Ireland) Act 2015, and figures in both the December 2014 and November 2015 ‘Fresh Start’ Stormont House Agreements (where it was agreed that the devolved rate would be 12.5 per cent, as in the Republic, and that devolution would start in April 2018). The Northern Ireland Executive has also secured the devolution of air passenger duty for long haul flights (and set the devolved rate at zero).
Information and resources
The Lords Select Committee on the Barnett Formula’s report is here.
The reports 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) are here.
The report of the Calman Commission is here.
Details of the Scottish Government’s publication Government Expenditures and Revenues Scotland are here. The most recent edition was published in March 2015 and covers 2013-14.
A useful 2008 paper by Iain McLean, Guy Lodge and Katie Schmuecker for IPPR on the present allocations across the UK is here.
A valuable report on financing devolved government in Northern Ireland, commissioned by the Northern Ireland Council for Voluntary Action, is available here.
The chief source of data about public spending across the UK, the Public Expenditure Statistical Analyses prepared by HM Treasury, is here.
(This page was updated on 26 November 2015.)