Last week we discussed the approach taken to devolution of tax and spending powers to Wales, Scotland and Northern Ireland. Here we consider how devolution, and other recent changes, has impacted on how the devolved nations are funded. The system has become more complex, with different approaches for different nations. How have the methods for calculating funding changed?
The UK Government provides funding in the form of block grants
Block grants are the element of the devolved nations’ funding which comes directly from the UK Government. Annual changes in the block grants have traditionally been derived from the Barnett Formula – the system whereby changes in Westminster’s spending on devolved services are allocated according to population size of each nation. When UK departments’ spending on devolved services change, the Barnett Formula aims to give each country the same pounds-per-person change in funding. Although the block grants are driven by changes in UK government departments, each devolved nation can spend the funds on what it likes.
Although the Barnett Formula is not without contention, it has generally been uniformly applied to the block grant. However, recently the block grant calculation has become less straightforward: devolution-related adjustments, and other adjustments made to satisfy the different needs of the devolved nations, have made it more complex.
Block grants are being adjusted to allow for devolution of tax and spending power….
Block grant adjustments should mean that neither the UK government nor the devolved nation is financially worse off simply from the initial transfer of power. In the case of a devolved tax, the adjustment results in the devolved nation receiving a smaller block grant as they, rather than the UK Treasury, will receive the revenue from the devolved tax.
Adjustments to the block grant are made in a way that allows tax changes made by the devolved nations to impact on their own budgets.
….but different adjustments are being used for Scotland and Wales
The block grant adjustment for income tax for Scotland is currently calculated using the “per capita indexed method”. This is the methodology preferred by the Scottish Government, and means that Scotland is protected from slower population growth relative to the UK. However the Welsh Fiscal Framework stipulates that HM Treasury will use the “comparable model” for its block grant adjustment for Wales, which the UK Government argues is consistent with the operation of the Barnett formula. The Treasury would have preferred use the “comparable model” for Scotland too and Scotland’s formula is up for review in 2020–21.
Wales’ block grant now receives some protection
Wales has greater spending needs relative to England, according to the Holtham Review and other studies. These reviews also showed that Wales’ funding was in danger of falling below an adequate needs-based level. To address this the UK introduced a block grant floor for Wales in Spending Review 2015, which prevents Wales’ block grant falling below 115% of comparative spending per head in England.
From 2018/19 the Barnett formula will be used to deliver Wales’ floor – a needs based-factor is being added to the calculation. No change has been made Scotland’s or Northern Ireland’s Barnett formula – there will be no needs-based factor used in the calculation for these nations.
Continuing ad hoc changes to block grants can be contentious
There have always been changes to the block grants that have not occurred as the result of changes in expenditure to UK Government departments, such as City Deals to Scottish, Welsh and Scottish Cities. These are normally referred to as non-Barnett additions – spending changes which do not arise as a result of changes in UK Government department spending, and are thus not affected by the Barnett formula.
The promise of additional funding to the Northern Ireland Executive, following the agreement reached between the DUP and UK Government on key votes after the 2017 General Election, brought up some Barnett-related controversy. The funding – around £1 billion – is being provided to Northern Ireland as non-Barnett additions. The Welsh and Scottish Governments, who will receive no additional consequential funding, have described this as unfair. (We discussed this issue in The Barnett formula: a quick guide)
Increased complexity to deliver devolution and meet individual nations’ needs
Devolution has increased the complexity of how block grants to Scotland, Wales and Northern Ireland are calculated. The UK Government has brought in different approaches for the different nations, some directly linked to devolution and some not. Although there may be sound pragmatic reasons for the differing approaches, it makes calculations of block grants a far more complex process.
While the process has become more complex, it has also become more transparent. In December 2017, HM Treasury published the data underpinning block grant calculations in response to a recommendation from the Procedure Committee, providing detail that was not previously publicly available.