CHAPTER 4: THE FORMULA SINCE 1997
Devolution
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]
THE APPLICATION OF THE FORMULA IN
PRACTICE SINCE 1997
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.
HANDLING DISAGREEMENTS ABOUT FINANCE
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).
'FORMULA BYPASS' SINCE 1997
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.
THE POWERS OF THE TREASURY
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 Treasurymainly
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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