The Barnett Formula - Select Committee on the Barnett Formula Contents

Memorandum by HM Treasury

  This paper provides evidence by the Treasury to the House of Lords Select Committee on the Barnett formula. The paper describes how the Barnett formula works within the framework of the Government's devolved funding arrangements.


United Kingdom Government funding for the devolved administrations' budgets is determined in spending reviews alongside United Kingdom Government departments and in accordance with the policies set out in the Statement of Funding Policy.

  Aggregate public spending across the UK is set by the Government in the Budget preceding the spending review, within the Government's wider fiscal framework. The Government's fiscal framework is described in the Pre Budget Report published in November 2008 This aggregate public spending is then allocated to UK departments in the spending review and the population based Barnett formula is applied to changes in the departments' planned spending to determine changes to the devolved administrations' budgets.

  The Barnett formula provides the devolved administrations with a population based share of changes in comparable spending of UK departments.

  A worked example of the Barnett formula is set out below.

  If, for example:

    — the Government decides to increase the DEL budget of the Department of Innovation, Universities and Skills by £100 million; and

    — the comparability percentage for that particular department for each devolved administration is 79 per cent ( because that United Kingdom Government department carries out some expenditure at an all United Kingdom level); and

    — the population proportions are 10.08 per cent for Scotland, 5.84 per cent for Wales and 3.43 per cent for Northern Ireland of England's population ;

then the following changes are added to each devolved administration's overall budget:

    — for Scotland, £100 million (change in United Kingdom Government department's budget) x 79 per cent (comparability percentage) x 10.08 per cent (population proportion as a percentage of England's) giving a net change of 7.96 million;

    — for Wales, £100 million (change in United Kingdom Government department's budget) x 79 per cent (comparability percentage) x 5.84 per cent (population proportion as a percentage of England's) giving a net change of £4.61 million; and

    — for Northern Ireland, £100 million (change in United Kingdom Government department's budget) x 79 per cent (comparability percentage) x 3.43 per cent (population proportion as a percentage of England's) giving a change of £2.71 million. This amount is then abated by 2.5 per cent to reflect the fact the Northern Ireland Executive do not require funding to meet Value Added Tax costs incurred as these are refunded by HM Customs and Excise. The net change for Northern Ireland is therefore £2.64 million.

  A similar calculation is applied to the changes in provision for all other UK Government departments in the spending review using the appropriate departmental comparability factors. The sum of the changes across all UK Government departments for the appropriate spending review year are added together to show the net aggregate (or total) change to the DEL budget of each devolved administration for that year.

  Once the budgets of the devolved administrations are set it is for the devolved administrations to allocate their Departmental Expenditure Limit block budgets to devolved spending programmes in line with their own assessment of their priorities and needs.

  As for UK Government Departments, the total budget of the Scottish Executive is composed of two separate categories of public expenditure. These are defined as Departmental Expenditure Limits (DEL), set over three years, and Annually Managed Expenditure (AME) updated in the Budget and PBR. DEL and AME together form Total Managed Expenditure (TME). In summary:

    (i) Departmental Expenditure Limits (DELs) set firm, three-year spending limits. Changes in provision for the DEL for devolved administrations are determined through the Barnett Formula, details of which are set out in the Statement of Funding Policy.

    (ii) Annually Managed Expenditure (AME) covers items which are not controlled through annual limits such as demand led spending and certain self-financed expenditure, whose provision is set by means of forecasts in the Budget and updated in the PBR. There are two main classifications of spend within AME: main departmental programmes in AME and other AME spending. Main Departmental programme spending covers policy-specific, ring-fenced items where provision is included within the Vote from the United Kingdom Parliament. Other AME spending includes locally financed expenditure, including any expenditure financed by the Scottish Variable Rate of Income Tax, not yet operated. The Treasury reviews the AME budget twice-annually, and forecasts are made for the three years ahead. The AME element of a devolved administration's budget is not determined by the Barnett formula and forecasts can therefore move up or down and the total budget moves up or down in line. AME expenditure cannot be recycled from one AME programme to another or recycled to increase the DEL.

  DEL and AME budgets together comprise Total Managed Expenditure (TME). Once DEL and AME budgets are set, the United Kingdom Parliament then votes the necessary provision to the Scottish, Welsh and Northern Ireland Secretaries of State, and they, in turn, makes the block grants to the Scottish Executive,Welsh Assembly Government and Northern Ireland Executive as detailed in the Scotland, Wales and Northern Ireland Acts. The devolved administrations' budgets are not funded exclusively by grant from the United Kingdom Parliament. The budget is also funded from sources such as: funding financed by non-domestic rates; in Scotland, the Scottish Variable Rate of Income Tax if a decision is taken to use the tax-varying power; the European Commission; non cash items; and borrowing by local authorities for capital spending.

  Any changes to the devolved administrations' DEL and AME budgets between spending reviews are determined according to the principles set out in the Statement of Funding Policy. For example the Treasury provides the devolved administrations' with the Barnett DEL consequentials of changes in provision announced for Government departments in the Budget and PBR.

  In addition the Treasury monitors outturn spending against planned spending with the devolved administrations during each year, and underspends may be carried forward under the End Year Flexibility scheme, the drawdown of which is agreed with the Treasury.

  The Statement of Funding Policy also sets out a dispute resolution procedure under which the devolved administrations may remit disputes to the Joint Ministerial Committee (JMC). In practice no disputes have been remitted to the JMC since devolution.

  The Statement of Funding Policy is updated in each spending review in consultation with the devolved administrations. It includes updated details of the Barnett formula.

  Estimates of identifiable public spending by country and region, including both devolved and reserved spending, are published annually in Public Expenditure Statistical Analyses. Details of the calculation of comparability factors are set out in Annex C of the Statement of Funding Policy.


  The formula is updated in each spending review. The Treasury looks forward to seeing the Committee's report in due course.

March 2009

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