The Barnett Formula - Select Committee on the Barnett Formula Contents

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 to plans.

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.

Accounting Purposes

  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 Trusts.

  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 existing formula

(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 predictable;

    — 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 administrations;

    — 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 priorities;

    — Financial Control: The current system imposes a firm financial discipline—devolved 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 sector—instead, 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 departments—therefore no uplift will be provided within the Scottish block grant for the new crossing. It is useful to examine the treatment of the Olympic games—a 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 investment.

(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 consequentials—For 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 grant—For 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 transparency—In 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 investment—large scale infrastructure in devolved administrations are not fully catered for in the current formula.


    — Reflecting Needs—the 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[8] 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[9] 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 needs.

8   Moving to federalism-A New settlement for Scotland March 2006. Back

9   The David Hume Institute Options for Scotland's Future-the Economic Dimension November 2007. Back

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