CHAPTER 2: UK PUBLIC SPENDING AND THE
BARNETT FORMULA
The territorial distribution of
public spending in the United Kingdom
11. The Barnett Formula is the mechanism used
by the United Kingdom Government to allocate just over half of
total public expenditure in Scotland, Wales and Northern Ireland.
Public spending, considered on a per capita basis, is unevenly
distributed across the four parts of the United Kingdom. Some
forms of spending—on defence and foreign affairs in particular—cannot
be accounted for on a territorial basis and are treated in public
statistics as national. Several areas of public spending are territorially
identifiable but remain the responsibility of the United Kingdom
Government; the most important of these is social security, which
is paid according to the status of individual claimants irrespective
of their geographical location. The amounts involved, and the
relationship they bear to the total amounts of identifiable public
expenditure,[10] are
shown in Table 1.
TABLE 1
UK Public Spending and the Importance of the Barnett Formula,
2007-2008
| | £ million
| As percentage of
total identifiable
UK public spending
| As percentage of total
identifiable public spending in
appropriate territory
|
| Total Managed Expenditure UK Government spending
| 582,676 |
| |
| Total (territorially) UK identifiable public spending
| 467,981 |
| |
| Total territorially identifiable public spending in Scotland
| 46,409 | 9.92
| |
| Of which spending by the Scottish Executive and local authorities[11]
| 32,314 |
| 69.63 |
| Of which DEL[12] spending (subject to the Barnett formula) [13]
| 26,946 |
| 58.01 |
| |
| |
|
| Total territorially identifiable public spending in Wales
| 25,309 | 5.41
| |
| Of which spending by the Welsh Assembly Government and local authorities
| 16,147 |
| 63.80 |
| Of which DEL spending (subject to the Barnett formula)[14]
| 13,538 |
| 53.49 |
| |
| |
|
| Total territorially identifiable public spending in Northern Ireland
| 16,863 | 3.60
| |
| Of which spending by the Northern Ireland Executive and local authorities
| 14,495[15]
| | 85.96
|
| Of which DEL spending (subject to the Barnett formula)[16]
| 8,492 |
| 50.36 |
| |
| |
|
| Total spending by devolved administrations (sum of lines 4, 7 and 10)
| 62,956 | 13.45
| |
| Total spending subject to the Barnett formula (sum of lines 5, 8 and 11)
| 48,976 | 10.47
| |
All data for 2006-7, taken from Public Expenditure Statistical
Analyses 2009 Cm 7630 (London: HM Treasury, 2009), tables 1.1,
1.12, 9.1 and 9.21 and the Scotland Office Annual Report 2009
Cm 7401 and Wales Office Annual Report 2009 Cm 7603.
12. The Barnett Formula's importance (baseline
and increment) is shown by Table 1. In 2007-08 the
Formula accounted for almost £49 billion of public spending,
which was more than half of total public spending in Scotland,
Wales and Northern Ireland and ten per cent of total territorially
identifiable public spending in the United Kingdom.
13. The devolved administrations' budgets consist
of the Departmental Expenditure Limit (DEL) and Annually Managed
Expenditure (AME). Since the 1998 Comprehensive Spending Review,
the spending of all UK spending departments (Whitehall departments
and the devolved administrations) is divided between the DEL and
AME budgets. DEL public expenditure is that which can be planned
and controlled on a three year basis through spending reviews.
This applies to the cost of providing services which can be reasonably
predicted, for example, education, health or transport. AME expenditure
is public expenditure which varies according to external circumstances
and which cannot reasonably be subject to firm multi-year limits,
such as unemployment benefit.[17]
The Formula only applies to funding allocated under the DEL budget.
14. An important element of total identifiable
public expenditure not subject to the Barnett Formula is
social security spending. Table 2 shows the differences if social
security spending is removed from total identifiable public expenditure;
it indicates a closer estimation of the effect that the Barnett
Formula has on spending. Table 3 reduces these figures to indices
expressed as per capita expenditure across the regions of the
United Kingdom.
TABLE 2[18]
The importance of social security spending in
Scotland, Wales and Northern Ireland 2006-07
|
| | £ million
|
|
| Scottish Executive and local authorities |
30,077 |
| Social Security | 12,148
|
| Other non-devolved expenditure | 1,493
|
|
| Total identifiable expenditure in Scotland
| 43,718 |
|
| |
|
| Welsh Assembly Government and local authorities
| 15,229 |
| Social Security | 7,471
|
| Other non-devolved expenditure | 1,537
|
|
| Total identifiable expenditure on Wales
| 24,237 |
|
| |
|
| Northern Ireland Executive and local authorities
| 13,253 |
| Social Security | 5,072[19]
|
| Other non-devolved expenditure | 1,492
|
|
| Total identifiable expenditure on Northern Ireland
| 15,658 |
|
Figures, taken from PESA 2008 Table 9.17. Figures may not add
up due to rounding. This table includes both AME and DEL expenditure.
TABLE 3
Index of per capita public expenditure, including and excluding
social security
UK = 100
| 2006-07 | England
| Wales |
Scotland |
N. Ireland |
| Total identifiable public expenditure
| 97 |
112 | 117
| 123 |
| Total identifiable public expenditure less social security payments[20]
| 96 |
112 | 122
| 125 |
15. Table 4 shows the territorial distribution
of public spending between 2001 and 2008 on a per capita basis.
There are problems with the accuracy of the historical statistics;
the poor quality of data for earlier years means that we have
not been able to assess the change in public spending over a longer
period. But the table shows changes even since 2001. The change
in Scotland's per capita allocation in 2004-5 may have been due
to convergence but it is more likely to be the result of the revision
of population figures for the increment in the 2004 Spending Review,
which took effect from 2004-5.
TABLE 4
Index of changes in the territorial distribution of overall
per capita public spending, 2001-02 to 2008-09
(UK = 100)
|
| England
| Wales
| Scotland
| NI
|
| 2001-02 | 96
| 112 | 119
| 132 |
| 2002-03 | 96
| 113 | 118
| 133 |
| 2003-04 | 97
| 113 | 117
| 126 |
| 2004-05 | 97
| 111 | 114
| 126 |
| 2005-06 | 97
| 111 | 117
| 124 |
| 2006-07 | 97
| 112 | 118
| 123 |
| 2007-08 | 97
| 111 | 118
| 125 |
| 2008-09 (plans) | 97
| 111 | 116
| 122 |
Sources: for 2001-02 and 2002-03, PESA 2005, table 8.2; for 2003-04
and subsequent years, PESA 2009, table 9.2.
All data for 2006-7, taken from Public Expenditure Statistical
Analyses 2008 HC 289 (London: HM Treasury, 2008), tables 1.12
and 9.17 and the Scotland Office Annual Report 2008 Cm 7403 and
Wales Office Annual Report 2008 Cm 7404.
How the Barnett formula works
16. The annual allocation of funding made under
the Barnett Formula (the block grant) is comprised of the baseline
plus the annual incremental change. The baseline each year is
made up of the total block grant (baseline plus increment) from
the previous year. We use the term the "Barnett Formula"
to refer to the Formula used to determine the increment and the
mechanism for deciding the total allocation of block grant. Where
necessary we specify whether we are referring to the incremental
Formula (increment) only or the method of determining the total
block grant (baseline and increment).
17. The baseline in any particular year is made
up of the baseline in the previous year plus the previous year's
increment, thus everything in the past is taken as given. The
original baseline when the Formula was first applied now represents
barely one tenth of the total expenditure but there are a culminating
series of new baselines, which become increasingly out of date,
leading to further anomalies. Together, these account for the
vast bulk of the block grant.
18. Each year, once they receive the grant, the
devolved administrations allocate it in order to suit local priorities.
For example if a consequential payment[21]
is triggered by an increase in English health spending that does
not mean that it has to be spent on health elsewhere; it can be
allocated as the devolved administration sees fit. In practice,
however, most expenditure in the devolved administrations does
tend to follow the pattern established for England.
19. Since 1999, the details of how the Formula
works have been published by the Treasury, in its document Funding
the Scottish Parliament, National Assembly for Wales and Northern
Ireland Assembly: Statement of Funding Policy. This document
has been revised and reissued following each Spending Review and
Comprehensive Spending Review.
BOX 1
How the Barnett Formula works
Sources: HM Treasury, Funding the Scottish Parliament,
National Assembly for Wales and Northern Ireland Assembly: A Statement
of Funding Policy Fifth Edition (London: HM Treasury, October
2007), pp.10-11. House of Commons Library, The Barnett Formula
(Research Paper 01/108, 30 November 2001).
20. The increases in grant allocated to Scotland,
Wales and Northern Ireland are calculated on the basis of a population
share (a per capita share) of the changes made for England. We
discuss the details of this, and how it has changed over time,
in Chapters 3 and 4 below. If Scotland's population is 10 per
cent of that of England (which roughly it is), the Formula adds
to the Scottish block grant 10 per cent of the changes made in
spending for England. If health spending goes up by £2 billion
in England, Scotland gets a 10 per cent share, or £200 million.
The converse would apply if spending were to go down in England—it
would trigger proportionate reductions in spending allocated to
Scotland, Wales and Northern Ireland. These payments are known
as 'consequential' payments.
21. A 'consequential' payment is triggered by
a decision made by the United Kingdom Government about spending
in England. Therefore the overall structure of public spending
continues to reflect decisions about priorities in England. The
Formula takes the additional amounts allocated for spending on
'comparable functions' in England each year and multiplies it
by the relevant population proportion. This makes up the increment
for that year. That increment is added to the block grant from
the previous year to make up the new totally block grant. In turn,
that figure forms the baseline for the following year.
22. The list of 'comparable functions' is set
out in the Statement of Funding Policy (Schedule C) and
is based on the allocation of functions for England within United
Kingdom Government departments. Each department has a list of
sub-programmes; a percentage is set for any 'consequential' payment
for each of the devolved administrations depending on whether
the sub-programme is devolved or not. For example, at the Department
for Transport the Rail Network Grant is 100 per cent devolved
in Scotland and Northern Ireland but set at 0 per cent for Wales
because this is not devolved. Each individual percentage is used
to calculate an overall percentage for each department, according
to how much of its functions are devolved to each administration.
Those overall percentages vary: for Transport, they are 91.5 per
cent for Scotland, 68.3 per cent for Wales and 94.0 per cent for
Northern Ireland. Any change in the budget of the department triggers
'consequentials' in those ratios, multiplied by the appropriate
population percentage. So if the Department for Transport were
allocated an extra £100 million, Scotland would get 91.5
per cent of its per capita share of that money, Wales 68.3 per
cent and Northern Ireland 94.0 per cent.
10 "Identifiable Expenditure" is defined
within the Public Expenditure Statistical Analysis as "expenditure
that can be recognised as having been incurred for the benefit
of individuals, enterprises or communities within particular regions.
Examples are most health, education and transport services, and
spending on social security and on pensions." Back
11
Local authority spending, and that of local government public
corporations, is included with the devolved administrations' spending
as local government is under the control of the devolved administrations.
Back
12
See para 13. Back
13
Includes Capital and Resource DEL allocations. From Scotland Office
Annual Report 2009, Annex 1. Back
14
Includes Capital and Resource DEL allocations. From Wales Office
Annual Report 2009, Annex 7. Back
15
Includes social security spending, which is a responsibility of
the Northern Ireland Executive but subject to requirements to
ensure parity with Great Britain. This is AME spending and not
part of the Northern Ireland Executive's DEL. Back
16
Includes Capital and Resource DEL allocations. Back
17
For the devolved administrations AME has applied to three major
areas of spending: agricultural subsidies paid under the Common
Agricultural Policy, payments for certain pensions (teaching and
NHS pensions in particular) and for housing benefit and council
tax benefit. AME expenditure is reviewed twice a year, and is
not subject to the Barnett Formula. Back
18
Source: Public Expenditure Statistical Analysis 2008,
tables 10.1 to 10.4 and appendix table F1. ESA expenditure. What
has been excluded under the heading of 'social security payments'
is all spending in tables 10.1 to 10.4 under the category of 'social
protection' except for that described as 'personal social services.' Back
19
Includes social protection funding administered by the Northern
Ireland Executive, subject to requirements to ensure parity with
Great Britain. Back
20
Precisely: including only personal 'social services' from within
the category of 'social protection' Back
21
See paras 20-21. Back
|
