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.
PUBLIC
SPENDING: SETTING
THE DEVOLVED
ADMINISTRATIONS' BUDGETS
IN EACH
SPENDING REVIEW
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.
CONCLUSION
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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