Annex
THE BARNETT FORMULA AND EUROPEAN STRUCTURAL
FUNDS—NOTE BY SCOTLAND OFFICE
1. This paper describes arrangements for administering
the European Structural Fund grants in Scotland within the Government's
public expenditure systems and against the background of the European
requirement for such grants to be additional to domestic expenditure
on relevant programmes.
UK PUBLIC EXPENDITURE
2. Prior to 1998, public expenditure within
the responsibility of the Secretary of State for Scotland was
managed largely within the "Scottish Block" of spending
programmes, to which the Barnett Formula (see below) applied.
Separate arrangements, however, applied to certain spending programmes
(mainly on agricultural support and finance for nationalised industries),
for which spending plans were negotiated annually with the Treasury
outwith the Block and Formula arrangements.
3. In the Comprehensive Spending Review
1998, a new distinction was introduced. Departmental Expenditure
Limits were set for each department over the three year planning
period to provide a firmer basis for planning; and, for Scotland,
the DEL included programmes previously included in the Scottish
Block. Other programmes, for which different control systems were
required, were included within Annually Managed Expenditure plans.
4. With devolution in 1999, the expenditure
programmes of the former Scottish Block were included within the
"Scottish Assigned Budget" (SAB), for which the Barnett
Formula arrangements continue to apply. Other elements of public
expenditure plans for devolved Scotland include.
— Expenditure programmes within DEL
but not subject to the formula arrangements (eg Hill Livestock
Compensatory Allowances).
— Annually Managed Expenditure programmes
(including agricultural market support).
A fuller summary of the components of the public
expenditure regime for devolved Scotland is at Section 12 of the
Statement of Funding Policy (published by the Treasury March 1999
and revised July 2000 after consultation with the devolved administrations).
BARNETT FORMULA
5. The arrangements for determining the
public expenditure plans for the Scottish Assigned Budget are
included within the Statement of Funding Policy. Since 1978, the
Barnett Formula has enabled the aggregate public expenditure provision
for the Scottish Block/Scottish Assigned Budget (and similarly
for Wales and Northern Ireland) to be determined without the need
for detailed negotiations with the Treasury for each individual
expenditure programme. It achieves this by providing an overall
increase in the total spending, calculated using a population-based
share of changes in spending on comparable English programmes,
including, of course, changes in English programmes funded by
European Structural Funds. Within the new total spending limit
so determined the Secretary of State (now the Scottish Executive)
was free to decide locally on priorities and needs for Scotland.
Thus the Barnett Formula offers a simple, transparent and fair
way of determining aggregate expenditure provision for the Scottish
Assigned Budget, while leaving detailed allocations in relation
to individual programmes for local discretion.
6. Within the SAB are included all the main
spending programmes; for health; education; industrial support
and training; transport; housing; law and order; domestic agriculture
and fisheries; and environmental services. Spending by local authorities,
by NDPBs and by nationalised industries in Scotland is also included
within these public expenditure controlled arrangements. Such
public expenditure plans are financed largely by Government grants,
which is subject to the annual Parliamentary control system of
Supply Estimates and Votes, but also by local taxes, by European
grants and by fees and charges for services.
EUROPEAN STRUCTURAL
FUNDS
7. Public expenditure financed by European
Structural fund (SF) grants is managed within these planning and
control arrangements, although the exact treatment has evolved
over time. In particular, in 1992 a separate programme was created
within the Scottish Block for spending financed by the European
Regional Development Fund (ERDF) and the European Social Fund
(ESF). Provision has been made, within the total extra resources
provided by the Barnett Formula for such spending in line with
the programmes agreed with the Commission and with forecast claims
for payment within the programmes. Sufficient provision has been
made to enable European SF grants to be fully taken up in Scotland,
though of course the actual up-take depends on the progress of
projects. In addition, therefore, the administration of the European
SF is intended to enable good projects to be submitted in good
time for such financial support; and for the eventual claims to
be paid in good order. The administration of the European SF in
Scotland has been warmly praised by the Commission, in part because
of the success in maximising the take-up of these European funds.
ADDITIONALITY
8. The regulations governing the European
SF have required that such European funding should not replace
domestic expenditure plans. This concept of "additionality"
has been redefined several times since 1975 but Article 11 of
Regulation 1260/99 sets out the latest definition:
"in order to achieve a genuine economic
impact, the appropriations of the Funds may not replace public
or other equivalent structural expenditure by the Member States."
In 1992, the Kerr-Millan agreement set out rules
on implementation of the additionality requirement, notably in
relation to the impact of European programmes at a local level.
More detailed guidance has also been issued by the Commission,
specifically for the European SF programmes covering 2000-06,
which requires broadly that expenditure plans for that period
should be compared with actual expenditures in 1994-99 by Member
States at the level of Objective one and for the active labour
market policy at the level of Objectives two and three taken together.
Such expenditure plans are compared at the beginning, middle and
end of the period 2000-06 to ensure that the Member State maintains
its expenditure. This legal requirement does not apply to regions/nations
within Member States.
9. As the commission itself recognises,
the basic concept of additionality is simple, but implementation
is more difficult. There are two main reasons. First, it is always
difficult to prove what a Member State (MS) would have spent in
areas covered by the European SF in the absence of grants from
the EU particularly as time passes on from a base year in which
no European grants were received. Second, most MSs' expenditure
is planned on an annual basis, but European SF programmes are
multi-annual, perhaps up to seven-years. But there are also other
considerations which complicate the demonstration of additionality
at the level of the Member State, for example when expenditure
profiles of relevant programmes are reasonably altered for external
reasons. Even so, the UK accepts the need to demonstrate such
additionality, and has satisfied the Commission that it is implementing
the European SF in a manner which meets the Commission's requirements
on additionality.
10. In demonstrating additionality to the
Commission, the UK has submitted information about spending in
a standard format, for inclusion in the Programme Document which
the Commission must approve. Examples of these are attached for:
— Objective 1 UK 2000-06, and 1994-99
— Transitional Objective 1 Highlands
and Islands 2000-06 (which contributes to the UK Objective 1 returns)
To illustrate the information which the UK provides
to the Commission to demonstrate additionality in the case of
the Objective 1 programme 2000-06.
11. In addition, the UK has regard to the
terms of an agreement of an agreement reached in 1992 with the
Commission (the Kerr/Millan agreement) which emphasised the need
for additional benefit from the European SF grants to be realised
at the local level. In Scotland, this has been achieved, as described
in paragraph 7, by establishing a separate spending programme
within the Scottish Block/Scottish Assigned Budget; by making
sufficient provision for that programme; and by administration
of the programme designed to maximise the benefit in Scotland.
CONCLUSION
12. In summary, the Secretary of State for
Scotland and now the Scottish Executive have made sufficient additional
spending provision available for programmes eligible for European
SF grants, within the aggregate spending provision available for
Scotland, to enable full participation in these European programmes
and to produce additional benefit at the local level.
Scotland Office
July 2000
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