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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