Memorandum by the Chartered Institute
of Public Finance & Accountancy (CIPFA)
1.1 The interim report of the Commission
on Scottish Devolution (Calman), sets out three main mechanisms
used in funding systems: tax assignment, grant based systems and
fiscal autonomy. At the moment, the system of devolved government
across the UK relies on a grant based funding system. This approach
has been consistent with the constitutional objective of the UK.
The Barnett Formula has been the foundation for the grant based
funding system. Given the choice of the grant based funding approach,
any proposed changes need to be considered in terms of their impact
on the constitutional objective.
1.2 As an accountancy Institute we believe
that it is our role to help governments design funding systems
but not to set out the constitutional objectives for which a funding
system would support. We have recently submitted written and oral
evidence to the Commission on Scottish Devolution (Calman) within
which we restricted ourselves to answering those questions which
relate to the funding mechanisms rather than considering the constitutional
objectives which a funding system would support.
1.3 We have adopted the same approach in
this response. As per the instructions accompanying the call for
evidence, we have also restricted the length of our response.
Question 1. Application of the formula in practice
(d) What measure of flexibility do the devolved
administrations presently enjoy in allocating funds, between various
policy areas, between capital and current spending and for accounting
purposes? Is there any need for reform in this area?
Allocating Funds between policy areas
The allocation of public expenditure between
the services under the control of the devolved administrations
is for the devolved administrations to determine. Consistent with
the arrangements for departments of the United Kingdom Government,
the devolved administrations will normally be expected to accommodate
additional pressures on their budgets, with access to the Reserve
being considered in exceptional circumstances only. Unforeseen
pressures should be catered for by offsetting savings and adjustments
Allocating funds between capital and current spending
As per the Statement of Funding Policy (October
2007) , the Scottish and Northern Ireland Executives and Welsh
Assembly are free to allocate their capital and resources budgets,
determined in spending reviews, to reflect their own priorities.
They may also switch provision from resource DEL to capital DEL
and in exceptional circumstances they may consider with the Treasury
in year a switch from capital DEL to resource DEL.
Financial reporting guidance in the UK public
services is expressed as an interpretation of private sector guidance.
This has the effect of facilitating comparability with the private
sector and between public service sectors. Two different implementation
approaches have been developed for different public services.
Some sector regulators follow the Accounting Standards Board (ASB)
process and develop Statements of Recommended Practice (SORPs).
A different approach is taken in the central government, devolved
administrations and health sectors: manuals are produced which
interpret international financial reporting standards for the
sectors, which are reviewed by a specially constituted group of
government and other financial reporting stakeholders, the Financial
Reporting Advisory Board (FRAB).
In the central government, health sector and
the devolved administrations the requirements for financial reporting
are set out directly in legislation, and responsibility for producing
financial reporting guidance rests with the "relevant authority"
under that legislation. The sectors have adopted a co-ordinated
review process in order to produce consistent guidance: each of
the "relevant authorities" is represented on the Financial
Reporting Advisory Board (FRAB), together with an accounting academic,
representatives from the national audit agencies, and ASB and
CIPFA nominees. Under this unified approach a single government
International Financial Reporting Manual (iFReM) provides guidance
for central government in England and across the UK, and for devolved
administrations in Scotland, Wales and Northern Ireland, while
aligned guidance for health bodies is provided in NHS manuals
and in an iFReM issued by Monitor, the regulator for NHS Foundation
These processes seem to operate satisfactorily
and we would not advocate significant changes.
Question 3. Data Quality and Availability
(j) What body should undertake the collection
and publication of such data
The content of the existing Statement of Funding
Policy, which stipulates the current financial arrangements between
UK Government and the devolved administrations, and how it is
applied, are matters for the UK Government. A case could be made
for putting the maintenance, development and review of the Barnett
Formula in the hands of an independent body like the Australian
Commonwealth Grants Commission. This would of course require carefully
prescribed terms of reference and statutory backing.
Although the Barnett Formula is in principle
simple, it has not avoided a degree of controversy about its application,
for example, in relation to Olympics spending or new spending
on prisons in England. The Government in Scotland have exercised
their right in terms of policies and spending priorities and these
choices have received much media attention north and south of
the border. The coverage of these choices has contributed to a
mounting belief, emanating from a number of areas across England,
that Scotland is getting a better deal under devolution than the
rest of the United Kingdom.
Other countries, like Australia for example,
have attempted to introduce an element of independent oversight
to the system of grants based on a needs assessment. The funding
allocated to states is based on an assessment undertaken by an
independent body, the Commonwealth Grants Commission. The UK equivalent
of this body would be a non departmental public body.
Question 4. Need for reform/alternatives to the
(k) Do the advantages of the formula as presently
constituted outweigh its disadvantages
Listed below are the advantages and disadvantages
we see in relation to the existing formula. These are considered
through the lens of different facets of financial management.
Financial Planning: The devolved government's
get a baseline budget which is essentially the budget from the
previous spending review. A revised budget is calculated by adding
or subtracting from the baseline an amount calculated using the
Barnett Formula. This amount is a population share of the change
in comparable English spending programmes. This forms the new
budget for future years. The inherited baseline is the largest
single determinant of the budget. The combination of the baseline,
Barnett and three year spending plans have the effect that the
budget of the devolved governments are stable and substantially
Financial Planning: The block grants
(or assigned budgets) are contained within the devolved administrations'
Departmental Expenditure Limits. Changes to these budgets are
generally determined by the Barnett Formula. This helps to minimise
the need for potentially protracted negotiations between Treasury
Ministers, Secretaries of State and Ministers of the devolved
Financial Planning: The block grant,
which in part is determined by the Barnett Formula, is a non ring
fenced grant and therefore offers greater overall autonomy to
the devolved governments in terms of determining their own spending
Financial Control: The current system
imposes a firm financial disciplinedevolved policy makers
can only spend what they get except where over-spends are permitted
by UK Government. End of year flexibility allows resources to
be carried over from one year to the next (and into future spending
review periods) but this is subject to HM Treasury restrictions.
Financial Planning: The Scottish block
is in part determined by changes in spending on equivalent programmes
in England set by the UK Government and is not directly linked
to the preferences of the devolved nations population nor their
willingness to pay for the provision of services;
Financial Planning : The formula is not
related to need;
Financial Planning: The formula does
not reallocate existing expenditure, only changes made for that
year (ie) an uplift or decline on expenditure on the previous
year. This is an incremental approach to budgeting which carries
the inherent weakness of encouraging focus on changes at the margins
rather than a challenging re-examination of the base budget;
Financial Management: The formula delivers
block grant to the devolved governments irrespective of the efficiency
of the government or the performance of public bodies. Trade-offs
between levels of spending and levels of taxation are obscure.
Financial Management: The formula gives
devolved policy makers no incentive or ability to retain a surplus
achieved in good times (it would be returned to London) although
it does prevent an emerging deficit in bad times (as devolved
governments cannot issue debt);
Application of the formula: There are
transparency issues around what spending is actually subject to
the formula. In most cases, it is easy to see what is and is not
Barnett expenditure. But there are exceptions where the position
is less than clear cut.
The scale of investment required to fund a new
Forth crossing is significant. If funded from within the current
Scottish block grant, it would result in a huge volume of other
priorities not being met. Where other parts of the Scottish public
sector have needed to make similar significant capital investment
and either do not have the power to borrow or have insufficient
capacity to borrow, the route of funding has been the Private
Finance Initiative (PFI). The PFI approach often meant that the
underlying assets did not appear on the public sector balance
sheet but instead were on the private sector balance sheet. This
has been important as it has meant the associated debt was not
viewed as government debt and therefore would not impact on the
government's Sustainable Investment Rule. This did not mean that
the capital investment was "free" to the public sectorinstead,
the public sector had a long term contractual commitment to repay
a "rental" for the use of the asset.
Developments within the worldwide accounting
profession, has seen a worldwide programme of convergence on internationally
developed accounting standards. The UK is participating in this
convergence programme. Significantly for PFI, the international
accounting standards apply a different test to determining whether
a privately funded "public" asset should sit on the
public/private sector balance sheet. As a result, we face the
prospect of many PFI assets coming onto the public sector asset.
In the context of the Forth Bridge, if the new
crossing were financed through PFI, the adoption of IFRS would
require the debt to be accounted for on the public sector balance
sheet and this would count against the UK Government controls
on borrowing and capital expenditure budgets and the (recently
suspended) Sustainable Investment Rule.
The Scottish block grant is determined, in part,
by the Barnett Formula which does not assess need and simply provides
for a Scottish population share of the incremental awards to English
spending departmentstherefore no uplift will be provided
within the Scottish block grant for the new crossing. It is useful
to examine the treatment of the Olympic gamesa significant
financial investment which is viewed as having economic benefit
for the whole country and therefore funding has been top sliced.
A similar methodology may be required for other major infrastructure
priorities and needs. In effect, there is a need for a state-wide
co-ordination of government activity across the UK on capital
(l) Should the Barnett Formula be (a) retained
in its current form, (b) amended or (c) replaced entirely
There are a number of arguments for amendment
and replacement of the formula:
Greater clarity on Barnett consequentialsFor
example, recent proposals for police pensions will result in amendment
to the calculations for pensions and for widows pension. There
is debate about whether this spending should or should not count
for Barnett purposes.
Greater clarity on conditions around
block grantFor example, the Scottish Governments recent
proposals for a local income tax exposed a difference of opinion
between the Scottish Government and UK Treasury on whether the
council tax benefit element of the block grant (about £400 million)
was ring fenced or not.
Greater independence and transparencyIn
answering question 3j) we have suggested that responsibility for
the maintenance, development and review of the Barnett Formula
could be given to an independent body in order to encourage confidence
in the formula. Such an approach would potentially bring greater
transparency to the formula calculations.
Provision for major infrastructure investmentlarge
scale infrastructure in devolved administrations are not fully
catered for in the current formula.
Reflecting Needsthe formula is
not needs based. A needs assessment exercise was carried out for
Scotland by the UK Treasury ahead of the planned devolution of
1979. If needs were to be re-addressed, then a new study would
be required which would have to cover all the devolved nations
and the English regions. However such a study would be a major
undertaking and would be fraught with difficulties. For example,
there would almost certainly be limitations to available data
in some areas. Replacing the current formula with a needs based
approach would likely involve significant transitional arrangements.
The Steele Commission
drew attention to the arrangements put in place when Australia
introduced a major package of reform to its fiscal system in 1999.
The changes came with a guarantee that each state would not be
worse off during the transitional period than it would have been
had the changes not been implemented. The transition period was
approximately eight years and during this time states whose income
fell below the guaranteed level were given non ring fenced grants
to maintain overall revenue levels.
(m) Should the Barnett formula be replaced
by a system more adequately reflecting relative needs, costs of
services or a combination of both.
Hume Occasional paper No 80
sets out an interesting possible amendment: "one way to make
the Barnett Formula work more effectively would be to recognise
that it is a case of using one instrument to reach two targets.
The targets are to provide the Scots with more money per head
according to their needs
while trying to preserve
equity with the rest of the UK. This suggests keeping the base
calculations as they are, but replacing the comparability percentage
by a percentage calculated to reflect needs. These new percentages
could be based on performance indicators as revealed needs and
put in the public domain". Such an amendment would have the
advantage of maintaining the stable platform but would start to
factor in an assessment of need. However, such an approach might
(over time) start to narrow policy choices as it would imply UK-wide
agreement as the approach to, and cost of, addressing particular
8 Moving to federalism-A New settlement for Scotland
March 2006. Back
The David Hume Institute Options for Scotland's Future-the Economic
Dimension November 2007. Back