Funding for Scotland, Wales and Northern Ireland Contents

1The complexity of the funding system for Scotland, Wales and Northern Ireland

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Treasury on funding for Scotland, Wales and Northern Ireland.1

2.HM Treasury is responsible for operating the funding framework for the devolved administrations of Scotland, Wales and Northern Ireland (the devolved administrations), and for calculating the funding attributable to each nation. At spending reviews, HM Treasury allocates a ‘block grant’ to the devolved administrations that they use to provide public services according to their spending priorities. It then uses the Barnett formula to calculate changes to this funding when there are changes in UK government spending plans that affect devolved services. In the 2015 Spending Review, Scotland was allocated indicative annual funding of around £30 billion, Wales was allocated £15 billion, and Northern Ireland was allocated £11 billion.2 Between spending reviews, HM Treasury allocates funding annually and authorises adjustments to re-allocate money as spending plans change. It may also announce funding for new priorities on an ad hoc basis. At the 2018 Autumn Budget, changes in UK government spending plans resulted in additional funding totalling £960 million for Scotland, £554 million for Wales and £325 million for Northern Ireland.3

3.Funding arrangements for the devolved administrations are required to take account of the devolution of tax and social security powers. This reduces block grant funding for all devolved administrations to reflect tax revenues foregone by the UK government, and increase Scotland’s block grant funding to reflect that the Scottish government, rather than the UK government, is now responsible for making welfare payments.4

Arrangements for calculating funding for devolved administrations

4.For more than 40 years the Barnett formula has been HM Treasury’s primary mechanism of calculating funding for Scotland, Wales and Northern Ireland. The formula aims to give the devolved administrations a population-based share of changes in UK government spending on public services in England. HM Treasury described the Barnett formula as mechanical, applying population and comparability factors to changes to UK government funding on public services in England, or England and Wales, to calculate the change in funding for Scotland, Wales and Northern Ireland.5

5.The Barnett formula only applies to those functions or services that have been devolved. It does not apply to spending on policy areas such as defence where the UK government retains responsibility for the whole of the UK.6 Policing, on the other hand, is devolved to Scotland and Northern Ireland so, when there are changes in UK government funding allocated to policing in England and Wales, there are Barnett consequentials for Scotland and Northern Ireland. Whether devolved administrations receive Barnett consequentials or not depends on who the recipient of the funding is.7

Ensuring funding reflects need

6.The Barnett formula is only applied to annual changes in the UK government’s planned spending, not to the total block grant. A large part of the grant funding for the devolved administrations is rolled forward year-on-year and is not adjusted for changes in populations within the devolved administrations.8 Funding baselines, established more than 40 years ago when the Barnett formula was introduced, were agreed at a time when population levels were different to today and have contributed to variations in spending per head.9 Populations in all countries of the UK have been increasing for a number of years, but the rate of increase in Scotland, Wales and Northern Ireland is consistently lower than the rate of increase in England and the UK as a whole.10

7.From the 2018–19 financial year, HM Treasury introduced a needs-based factor into the Barnett calculation for Wales which uplifted the funding for Wales. This was introduced in response to the Holtham Commission’s findings that Wales needed additional funding in recognition of its more dispersed population and greater prevalence of poverty.11 We asked HM Treasury about the likelihood of similar factors being introduced to meet the needs of Scotland and Northern Ireland. HM Treasury did not comment on Northern Ireland but referred to an independent review of the funding framework in Scotland, scheduled to take place in 2021, which could “take this sort of thing into account”.12

Tax and welfare adjustments

8.HM Treasury told us that the devolution of new areas of tax and some areas of welfare policy to Scotland meant that funding arrangements were becoming more complicated.13 Agreements between the UK government and the Scottish and Welsh governments set out how the block grant will be adjusted to reflect the devolved taxes and spending powers and other nation-specific adjustments.14 We asked HM Treasury specifically about the time lag in expected tax revenues, what is actually collected and how the Scottish government manages any adverse effects. HM Treasury explained that this was a normal part of budgeting and forecasting for all governments and that borrowing powers and the reserve, as included in the fiscal framework, were designed to help the Scottish government to cope with the ups and downs in tax receipts.15

9.HM Treasury told us that it was constantly trying to explain what is inevitably a complicated system given tax and welfare devolution so that the informed citizen can understand and make choices accordingly.16 We also received written evidence from Professor David Heald which highlighted that, while block grant adjustments are an inevitable consequence of political decisions to improve the fiscal accountability of the devolved administrations, more can be done to improve transparency and understandability.17

The ability of Ministers to allocate funding directly

10.HM Treasury told us that UK government ministers have the flexibility to decide how they allocate funding to the UK’s nations and regions outside of the Barnett formula process and that decisions are made by Ministers based on the perceived needs in different areas.18 The UK government allocated more than £375 million to city and growth deals in Scotland, Wales and Northern Ireland up until 2021. The government has committed funding beyond this period.19 In addition to direct funding for city deals, the devolved administrations also received Barnett consequentials because of funding already allocated to the Department for Communities & Local Government to spend on city deals in England.20 HM Treasury told us that it assessed bids for city deals funding on the basis of business cases, local support and local funding regardless of where in the country they came from.21

11.Only increases in the funding of public services in England that trigger Barnett consequentials for other nations. In the case of the £1 billion funding agreement between the Conservative party and the Democratic Unionist party, HM Treasury told us that, as this was a direct allocation to Northern Ireland, it did not form part of the calculations under the Barnett formula. HM Treasury also told us that it had allocated funding directly to nations to cover policing costs, for example those incurred by Scotland during President Trump’s visit in 2018.22

12.We asked HM Treasury about the purpose of having structures in place to secure fair and balanced funding allocations when ministers can choose to give indiscriminate amounts of money to Scotland, Wales and Northern Ireland. HM Treasury told us that the purpose of the system was to provide a system for decisions on the allocation of resources, but that HM Treasury policy had always been clear that ministers can make decisions about the allocation of resources. HM Treasury emphasised that funding decisions must also be voted on by Parliament. We were concerned that the inadequacies of the estimates process could make it very difficult to reject what is put before Parliament.23

Transparency over funding decisions

13.We questioned HM Treasury on the level of transparency around how the funding system for devolved administrations operates; specifically, how it is applied, whether the average citizen understands how it works, and what can be done to make decisions more transparent and less subjective. HM Treasury agreed that the system was complicated and not straightforward for the citizen to understand. It told us that it worked hard to provide more transparency around the 2015 spending review in how funding allocations were calculated and committed to building on this in the next spending review. It told us as part of this, it intended to publish further information about how it approaches funding decisions, and how it operates the funding system for devolved administrations. However, it stressed that the information would be quite technical given that it is a technical system.24 We received written evidence which stated that, while the average citizen may find it difficult to understand technical matters of public finance, prompt, accurate and well-designed publications can enhance transparency for elected members, the media and members of the public who wish to engage.25

14.In 2017–18, spending on public services per head was £9,080 in England, £10,881 in Scotland, £10,397 in Wales and £11,190 in Northern Ireland.26 HM Treasury explained that the main reason for the disparities in spending levels is historical and attributable to funding baselines agreed 40 years ago when population levels were different to today and there was higher spending per head in Scotland, Wales and Northern Ireland than in England. HM Treasury told us that these baselines were now “baked in” to current funding allocations and are not adjusted for changes in population or other factors. We questioned HM Treasury on the granularity of information available on what each UK government department was spending in each nation; for example, their operations and salaries across the country. HM Treasury was unaware of any regional analysis or breakdown of UK government spending on salaries by department but agreed to write to us with a response to confirm what is publicly available.27

1 C&AG’s Report, Investigation into devolved funding, Session 2017–19, HC 1990, 13 March 2019

2 C&AG’s Report, para 1.14

3 C&AG’s Report, para 2.9

4 C&AG’s Report, para 1.8, 1.10

5 Q 3

6 C&AG’s Report, para 2.1

8 C&AG’s Report, para 1.3; Q 7

10 C&AG’s Report, para 1.5

11 C&AG’s Report, para 1.11

13 Q 39

14 C&AG’s Report, para 1.7

15 Q 101

16 Q 5

17 Ev 0001, Professor David Heald, June 2019

18 Qq 76, 82

19 C&AG’s Report, Figure 10

20 C&AG’s Report, Figure 10

21 Q 76

22 Q 76–78

23 Q 81–83

24 Qq 1–2, 5, 102

25 Ev 0001, Professor David Heald, June 2019

26 C&AG’s Report, para 3.2, Figure 11

27 Qq 62, 64, 66–67

Published: 26 July 2019