The Barnett Formula - Select Committee on the Barnett Formula Contents


Supplementary memorandum by HM Treasury

INTRODUCTION

Q1.  What, in HM Treasury's view, are the chief merits and disadvantages of the Barnett formula as the basis for funding the Devolved Administrations (DAs)?

  A.  The Barnett formula has pragmatic strengths such as being relatively simple, administratively efficient, involving little negotiation in spending reviews, transparent, providing stable and predictable funding, and allowing the devolved administrations to determine their own policies and priorities in allocating their block budgets. The devolved funding rules also embody important principles including:

    — equity of treatment in the way public spending rules apply to the devolved administrations and England;

    — pooling of taxes collected at UK level, and subsequent country public spending allocations being made on the basis of equal comparable spending per head increases through the Barnett formula; and

    — a high degree of devolution of spending decisions ,while ensuring relatively little macroeconomic risk at the UK level and country level.

While we recognise that no system for allocating funding is perfect, the Barnett formula has stood the test of time well.

APPLICATION OF THE FORMULA IN PRACTICE

Q2.  It remains unclear how, in practice, the Barnett formula actually works—how changes in spending for England translate into changes in the block grants for the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly. Please show us how changes in spending for England (at the sub-programme level used in the Statement of Funding Policy) translated into changes in the block grants for Scotland, Wales and Northern Ireland, for the period from 2003-4 to 2007-8.

Q3.  Please show how budgeted changes in spending at sub-programme level from 2007-8 over the period of the current spending review (ie to 2009-10) are expected to impact the block grants to the devolved administrations in Scotland, Wales and Northern Ireland. (The material submitted in response to this should also include planned changes arising from the 2007 and 2008 Budgets and the 2008 Pre Budget Review. We would appreciate a further update after the 2009 Budget.)

  A.  The information sought by the Committee is available as follows. The evidence which the Treasury has already provided to the Committee explains how the Barnett formula works and provides a worked example. The devolved administrations are provided with unhypothecated block (rather than disaggregated by programme/sub programme) increases in spending reviews and these are published in spending review White Papers. The subsequent calculation of the block grants is set out in the territorial offices' departmental/annual reports. In year changes to the block grants are made through Supplementary Estimates which the territorial offices present to Parliament. The Scotland and Wales Offices' annual reports also provide details of in year spending changes to Departmental Expenditure Limits.

Q4.  The 2008 edition of the Public Expenditure Survey Analyses, table 9.2, provides a break-down of overall public spending by nation and region—but does not distinguish between spending by the devolved administrations and that of the UK Government. Please provide a version of that table, identifying spending between the different governments involved.

  A.  Further information is provided in other tables of PESA. Table 9.11 of PESA shows spending by country, region and function. Table 9.17 of PESA identifies spending on services for Scotland, Wales and Northern Ireland, distinguishing devolved and reserved spending.

Q5.  What criteria does HM Treasury apply in determining whether spending is classed as "England" spending (so triggering consequential payments under the Formula) or as "UK" spending (so not leading to consequential payments)?

  A.  For the purposes of the application of the Barnett formula public spending is divided into comparable and non comparable spending. Comparability is defined in the Statement of Funding Policy as the extent to which services delivered by UK Government departments correspond to services within the budgets of the devolved administrations. The devolution settlements and associated legislation determine the extent of devolution in Scotland, Wales and Northern Ireland. Spending which is non comparable is that which is UK wide and for the benefit of the whole UK. The details of comparable and non comparable spending are published in Annex C of the Statement of Funding Policy.

Q6.  What criteria are used to determine whether it is appropriate to by-pass the Formula? Has the scope for "Formula by-pass" has changed since devolution? To what extent have measures such as EU Objective 1/Convergence Fund funding for Wales and Northern Ireland (PEACE II) cushioned the system from pressures caused by the failure of the Barnett Formula arrangements to provide funding on the basis of need? What will happen when these streams of additional funding come to an end?

  A.  We assume that the term Formula by pass means increases in spending outside the Barnett determined increases in spending reviews. The Committee will be aware that when the Barnett formula was first introduced there were some programmes of spending such as industry and agriculture spending which were outside the Barnett block. However the Barnett formula currently applies to all changes in comparable DEL spending of UK Government departments in spending reviews and therefore the scope for by-passing the Formula is in that sense negligible, although it is possible for the Treasury to agree additions if appropriate. In year there is no automatic access to the Reserve and Reserve claims are assessed on a case-by-case basis as set out in the Statement of Funding Policy. The Barnett formula can be used to determine Reserve claims where appropriate. In practice Reserve claims are rare. Since 2005 spending financed by EU receipts is determined both for UK departments and devolved administrations by the amount of receipts (not by the Barnett formula). This approach applies to EU receipts generally not just Objective 1 and PEACE funding. When the stream of EU receipts ends the spending financed by those receipts ends too.

Q7.  Does the working of the Formula allow the Devolved Administrations sufficient scope to shape their own policy agendas?

  A.  The Formula is used to calculate changes to the block DEL budgets. The devolved administrations have freedom to allocate the block budgets to reflect their own policies and priorities. Since devolution was introduced there has been considerable policy diversity across the UK.

Q8.  Recent Freedom of Information requests have confirmed that the Treasury or the Cabinet Office carried out a number of internal reviews of the relative needs of Scotland, Wales and Northern Ireland following the Needs Assessment exercise published in 1979. Please confirm exactly when each of these reviews was carried out, what the outcome of each exercise was, and what methodology was applied on each occasion.

  A.  A formal interdepartmental needs assessment was carried out by the Treasury in consultation with interested departments in the 1970s and was published in 1979. Although the study was extensive it did not come to an agreed conclusion and it was not implemented. The Barnett formula was introduced at around this time. We are aware that in the period between 1980 and 1997 consideration was given to carrying out a new formal interdepartmental needs assessment, but no new one was agreed. We are also aware that in this period reference was made from time to time to the 1979 needs assessment methodology in public spending negotiations, but as far as we are aware no agreement on needs was reached. Since 1997 the Barnett formula has been regularly updated and published in the Statement of Funding Policy and this remains the Government's policy.

DATA QUALITY AND AVAILABILITY

Q9.  Does HM Treasury consider the data available about the territorial distribution of public spending across the UK to be adequate?

  A.  Data on public spending is published annually in Public Expenditure Statistical Analyses. Over the years the Treasury has put considerable effort, with departments and devolved administrations, into ensuring extensive and good quality data in PESA. In addition the territorial offices publish a considerable amount of data in their annual reports and Estimates. Beyond that the devolved administrations produce extensive budget reports, accounts and Estimates for their own elected bodies.

NEED FOR REFORM/ALTERNATIVES TO THE EXISTING FORMULA

Q10.  If the Barnett Formula were to be replaced by a system more directly reflecting relative needs, costs of services or a combination of both, what factors should be considered as part of a needs assessment?

  A.  Government policy on the devolved funding arrangements is set out in the Statement of Funding Policy. While the Barnett formula is regularly updated there are no plans to review the formula so the question of what factors should be considered as part of a needs assessment has not been assessed.

Q11.  What would be the implications of carrying out such a needs assessment? What resources, in personnel and otherwise, would HM Treasury think would be needed to carry out such an assessment?

  A.  No assessment has been made of the resources which would be necessary to carry out a needs assessment for the reasons given above.

Q12.  Would it be appropriate for HM Treasury to do this, or should it be undertaken by an impartial body reporting to all four governments rather than a department of one of them?

  A.  The devolved funding arrangements are part of the UK wide public spending framework for which the Treasury is responsible. However no assessment has been made of who should carry out a needs assessment for the reasons given above.

Q13.  Similarly, should HM Treasury continue to determine matters relating to the Barnett Formula such as the classification of spending as UK wide or England only or whether the Formula should be by-passed?

  A.  As noted above the devolved funding arrangements are part of the UK wide public spending framework for which the Treasury is responsible. However the devolved administrations are consulted when the Statement of Funding Policy, which informs the Treasury's approach, is updated.

March 2009






 
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