The Barnett Formula - Select Committee on the Barnett Formula Contents



36.  When planning for devolution after the 1997 general election, the United Kingdom Government decided at an early stage to continue to use the Barnett Formula to allocate funding for the devolved administrations.[30] It was incorporated into the devolution white papers published early that summer.[31] The Formula was slightly adapted to cater for the fact that different administrations, accountable to separate elected bodies, were to be responsible for wide but differing ranges of public service provision.[32]


37.  From 1997 the use of the Formula was increasingly formalised. In 1999 the methodology used was set out in the Treasury's document Funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly: A Statement of Funding Policy.[33] The basis on which it operated was explicitly stated and its application was therefore less flexible with little scope for negotiation within the published rules. But, by explicitly stating that the Treasury had unlimited discretion on any significant decision that remained to be taken, it reinforced the power of the Treasury.[34]

38.  Since 1997 the application of the Formula has been largely a technical, even arithmetical, exercise. This has been described as 'Pure' Barnett (QQ 246, 698). While there remain subjective decisions for the Government about whether particular matters attract 'consequential' payments for the devolved administrations (some of which are discussed in more detail below), the Formula is otherwise simple to apply. This was clearly set out in the Treasury's evidence to us (p 85).

39.  As well as being simple to operate, the Formula delivers stable funding to the devolved administrations. These virtues have been set out in evidence submitted to us, and are not to be underestimated (Q 415) (see paras 50-51). On the other hand, the present system of calculating the grant takes no account of the broader issues of spending need.


40.  In place of the previous arrangements the Statement of Funding Policy sets out procedures for dealing with disputes for bilateral negotiations between the devolved administration concerned and the Treasury. In theory the main forum for resolving disputes is now the Joint Ministerial Committee (JMC), the body responsible for co-ordination between the United Kingdom Government and the devolved administrations. In its plenary form the members of the JMC are the Prime Minister and the devolved First Ministers, along with the Deputy First Ministers and the territorial Secretaries of State. However, as in the past, ultimate responsibility for financial matters rests with Treasury Ministers and the United Kingdom Cabinet, not the JMC. As the Treasury told us, no disagreement relating to devolution finance has ever been referred to the JMC for resolution (QQ 476-478). In practice this leaves the Treasury with the last word when determining the financial allocations for the devolved administrations.[35]

41.  Although, as a result of devolution whilst the role of the territorial Secretary of States has been much reduced in favour of the First Ministers from the devolved administrations, financial issues of primary importance are still determined within the United Kingdom Government (mainly by the Treasury). The Scottish Cabinet Secretary for Finance and Sustainable Communities, John Swinney MSP, expressed his concern that he was not responsible for approving the Statement of Funding Policy on behalf of his government, but that assent was signified by the Secretary of State for Scotland (QQ 166-8). Richard Pengelly, Public Spending Director, Department of Finance and Personnel, Northern Ireland Civil Service, agreed: "I cannot think of anything where there is active discussion with the Treasury, it is all Barnett-based and formulaic. The negotiation, as such, happens around the statement of funding policy and that is where the difficulties are as opposed to the quantum of any specific item of funding that flows through Barnett"(Q 653).


42.  Notwithstanding the fact that the Formula has been applied more rigidly since 1999, there have been significant increases in funding for the devolved administrations outside the application of the Formula. For Northern Ireland, the Reform and Reinvestment Initiative was introduced in 2002, and provided for borrowing powers, a fund for capital investment in infrastructure, and a strategic investment board to manage infrastructure improvements. In addition, Northern Ireland benefited from additional funding from the Treasury to support European Union (EU) funding as well as under the 'PEACE 2' programme. Wales also secured additional funding to support use of EU Objective 1 monies (and subsequently Convergence Fund monies, as the successor to Objective 1). Such funds are transferred outside the scope of the Barnett Formula, so in that sense constitute 'Formula Bypass'.[36] Decisions about whether they should be granted or not have been taken by the United Kingdom Government to date, after representations by the devolved administrations but without, so far, involving the JMC formal machinery.[37] Another issue which may have to be similarly dealt with is the future funding of policing in Northern Ireland.


43.  In recent years the powers of the Treasury to make decisions about financial matters have been exercised in relation to a number of controversial matters. When considering funding any project or event in the devolved administrations the Treasury has two options: they can decide that it should be met from within the block grant provided by the Barnett Formula (baseline and increment) or the funding might be found from other United Kingdom Government sources.

44.  When making spending decisions for a project or event in England the Treasury has to decide whether that expenditure is "UK-wide" or "England only". The decision to categorise spending in England as "England only" requires an exercise of judgment by the Treasury triggering a 'consequential' payment through the Barnett Formula to the devolved administrations. By contrast categorising expenditure as "UK-wide" does not trigger a 'consequential' payment. The following examples highlight a subjective application of the Formula by the Treasury—mainly on the categorisation of spending:

  • The planned expenditure for the 2012 London Olympics, including spending on regeneration schemes in east London, has been classified as "UK-wide" rather than "England" only. This has the effect of preventing 'consequential' payments to the devolved administrations. If specific regeneration spending had been classed as such it would have triggered automatically 'consequential' payments for the devolved administrations. (QQ 165, 167, 653, 675, 679-82). There were extensive discussions about this between the devolved administrations and the United Kingdom Government and it was considered at Cabinet (QQ 924-5).
  • By contrast, the Treasury eventually agreed to the classification of spending on Crossrail (which will overwhelmingly benefit London and the South East) as an "England" expenditure therefore triggering 'consequential' payments for the devolved administrations. This amounted to some £500 million for Scotland (QQ 469, 925-7). This appears to have been a decision taken to resolve a difficult political disagreement rather than the application of a consistent principle.
  • The capital costs of a replacement Forth Road Bridge have been an issue of contention between the United Kingdom Government and Scottish Executive for some time. We were told by the Secretary of State for Scotland that part of the rationale for the decision about Crossrail was that this was of comparable importance to the Forth Bridge project (QQ 25-6). A resolution was said to be near in early April 2009, although to date no final decision has been announced (QQ 928-31).

45.  The Treasury also makes unilateral decisions when there is a claim on the UK Contingency Reserve. Cases involving claims on the Reserve since 1999 have included outbreaks of Foot and Mouth Disease (devolved claims were permitted in 2001), the cost of policing the G8 summit at Gleneagles in 2005 (again, the Scottish claim was allowed), and the costs of implementing the Carter Review[38] in Scottish prisons. In the latter example the Treasury rejected Scotland's claim for a proportion of the share of the funds used to improve the prison estate in England and Wales (paid for from the Reserve) and the cost of improvements in Scottish prisons were funded from within the block grant (QQ 143, 470). The Chief Secretary to the Treasury, Liam Byrne MP, set out the criteria on which a bypass is determined: "the devolved administrations can bid to the reserve on an exceptional basis, but there are three tests, if you like: the spending does indeed have to be exceptional, it has to be unforeseen, and third, it cannot reasonably be 'absorbed' (I think is the word) within existing budgets" (Q 1013).

46.  The Treasury determines the extent of any End-Year-Flexibility in relation to DEL budgets. During the 2007 Comprehensive Spending Review the Treasury agreed to release accumulated (and mainly Scottish) underspends; this accounted for the release in Scotland of approximately £900 million a month before the publication of the Spending Review.[39]

47.  The Treasury also enforces the distinction between the levels of capital and current spending within the block grant; such levels were set as part of the 2007 Comprehensive Spending Review. This amounted to a form of hypothecation of devolved spending as it restricted the devolved administrations' freedom to determine their own allocations of spending. It was reinforced as part of the 'reprofiling' of public spending in the 2008 Pre Budget Review with the amounts required to be spent by the devolved administrations adjusted in accordance with the changes in the capital investment programme of the United Kingdom Government (p 318). Similarly a retrospective review of the baseline for the NHS in England in 2006-07 led to a reduction of the baseline of some £3 billion (apparently due to underspending on its capital budget triggering 'consequential' reductions in the baseline for the devolved administrations) (QQ 155-63, 677-8).

48.  These examples illustrate the extent of the exercise of the Treasury's discretion within the current system. Some examples raise the question whether a particular item of United Kingdom spending entitles devolved administrations to 'consequential' funds (applying the rules); a number involve claims on the UK Contingency Reserve (exceptional cases outside the normal rules); while others involve decisions about the framing of the Statement of Funding Policy for the period of the next spending review (setting the rules). Leo O'Reilly, Permanent Secretary, Department of Finance and Personnel, Northern Ireland Civil Service, told us: "at times we have concerns as to the way the Treasury decide what is and is not falling within the scope of the Formula and what is and is not English expenditure as distinct from UK-wide expenditure. To some extent we are entirely dependent on the Treasury telling us what our comparable adjustments in expenditure are" (Q 649). These issues have been handled differently depending upon their treatment within the Statement of Funding Policy. Inevitably the effect of the Formula, as now applied, cannot be regarded as wholly predictable.[40]

30   A Trench (ed) Devolution and Power in the United Kingdom 2007 p 89. Back

31   Scotland's Parliament 1997 Cm 3658; A Voice for Wales 1997 Cm 3718.  Back

32   Statement of Funding Policy 1999. Back

33   Statement of Funding Policy has been subsequently reissued following each spending review or comprehensive spending review.  Back

34   Statement of Funding Policy para 3.199-3.202. Back

35   The role of the territorial finance ministers and the JMC are discussed the in Calman Commission report. Back

36   See para 35. Back

37   House of Lords Select Committee on the Constitution: Devolution: Inter-Institutional Relations in the United Kingdom HL 28, 2002-03, QQ 191-4, 1268-71. Back

38   Securing the future: Proposals for the efficient and sustainable use of custody in England and Wales; Ministry of Justice, December 2007. Back

39   Scotland Office Press Release, 9 October 2007, 'Response to announcement of CSR and Pre Budget Report'. Back

40   See Chapter 5. Back

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