This briefing paper sets out the background to the UK Internal Market Bill. This Bill has its Second Reading in the House of Commons on 14 September 2020.
The subject for this debate was selected by the Backbench Business Committee as part of the new process for choosing subjects of Estimates Day debates, following the publication of the 2018-19 Main Estimates on 19 April 2018. The application to the Committee was made by Stewart Malcolm McDonald MP.
This debate centres on how grants to devolved institutions are determined, in particular the means by which Treasury’s decisions relating to UK departments’ spending have an impact on grants to devolved institutions.
HM Treasury’s Statement of Funding Policy sets out how the Barnett formula operates. The Barnett formula determines annual changes in the block grants – the element of the devolved administrations’ funding that comes directly from the UK Government.
Changes in the block grant due to the Barnett formula are often referred to as Barnett consequentials. Barnett consequentials are changes to the devolved administrations’ block grants that have arisen from changes in UK government departments’ spending.
Section 5 of the Estimate Memoranda lists out the Barnett consequentials included in the Main Estimate of the block grant for 2018/19:
These consequentials have all occurred after the 2015 Spending Review, where the block grants for the devolved administrations were originally set out until 2019/20. The table below summarises the Barnett consequentials for 2018/19.
Sections 7 of the Main Estimates Memoranda shows how devolved administrations’ block grants in Main Estimates 2018-19 have changed since the 2015 Spending Review Settlements. This includes a summary of Barnett consequentials arising from fiscal events and also other adjustments such as transfers from UK government departments/ non-Barnett additions (City Deals) and also block grant adjustments (arising out of devolution of taxes).
HM Treasury’s Block grant transparency publication also provides data on devolved administrations’ Barnett consequentials from the 2015 Spending Review until Autumn Budget 2017, for the years 2016/17 to 2020/21. In addition, the publication provides more information about the Barnett formula and other elements impacting on the block grant.
Additional funding for health: Barnett consequentials
The Government recently announced additional funding for NHS England. An additional £20 billion per annum is expected by 2023/24 in real terms (adjusted for inflation). The Government has set out estimates of the Barnett consequentials arising to the devolved administrations from NHS England’s additional funding.
Overview and summary data
The House of Commons Scrutiny Unit has produced data visualisations of the 2018-19 spending plans contained in the Main Estimates for each major government department, including the grants to devolved institutions. These give an overview of how block grants have changed from the 2015 Spending Review:
- Grant to Scottish Government, and Scotland Office funding
- Grant to Welsh Government, and Wales Office funding
- Grant to Northern Ireland Government, and Northern Ireland Office funding
The Library briefing paper Main Estimates: Government spending plans for 2018-19 provides an overview of the Main Estimates and includes details of Main Estimates of Scotland Office, Wales Office and Northern Ireland Office.
Block grants are the element of the devolved administrations’ funding that comes directly from the UK Government. Once the block grant has been determined, the devolved administrations can spend it as they wish in areas of devolved responsibilities within the overall totals.
The total block grant allocated to the devolved administrations (their departmental expenditure limits, or DELs) are provided in section 8 of the 2018/19 Main Estimates Memorandum for:
The block grants aren’t the sole source of revenue for the spending of devolved administrations. They are also funded through local and devolved tax revenues, other revenue raising powers (including fees, charges and sales of goods, services and assets), grants from the European institutions, and borrowing.
Traditionally, annual changes in the block grants are largely determined by the Barnett formula. However, recent devolution of tax and spending powers have impacted on the block grants though ‘block grant adjustments’.
The Barnett formula calculation
The Barnett formula calculates the annual change in the block grants. The Barnett formula doesn’t calculate the total value of a devolved government’s block grant: it works out how much the grant should change each year, and adds the change to the previous year’s block grant to come up with the following year’s grant.
When budgets for comparable services in England change, the Barnett formula aims to give each devolved administration the same pounds-per-person change in funding. The formula does this by considering:
- the change in money given to UK government departments to run services in England (or England and Wales or Great Britain);
- the extent to which the UK departments’ services are provided by the devolved government – what is known as the comparability percentage; and,
- the relative population of the devolved nation.
Change to the UK government department’s budget
|x||Comparability percentage||x||Appropriate population proportion|
From 2018/19, as specified in Wales’ Fiscal Framework, the Barnett formula will be used to deliver a needs-based floor for Wales – a needs based-factor is being added to the calculation to ensure that Wales’ funding converges to a level in line with Wales’ needs. The Holtham Commission – which considered funding for devolved government in Wales – estimated that Wales’ additional needs mean that its block grant funding per head needs to be around 114% to 117% of equivalent funding per head in England. Currently, the needs-based factor has been set at 105%, but in the long term the UK and Welsh governments agreed that the factor will be set at 115%. In 2018-19 implementation of the needs based factor has added £16m (£8 million resource and £8 million capital) to the block grant.
The devolved administrations can spend the Barnett-formula-determined block grant as they wish. If block grants increase because education spending has increased in England, the devolved administrations do not have to spend the additional money on education.
There is more on the Barnett formula in the following Library briefing and Insight:
- Commons Library Insight, The Barnett formula: a quick guide, June 2017
- Commons Library Briefing, The Barnett formula, January 2018
Devolved taxes and spending: block grant adjustment
Recent devolution, and proposed devolution, of tax and spending powers to the devolved administrations have left the Barnett formula largely unchanged. However block grants are being adjusted to accommodate the new powers. Additional spending powers will see block grants increase, while additional tax powers will see block grants decrease. Such adjustments aim to ensure that neither the UK Government nor the devolved authorities are made worse off simply from the power being devolved.
Northern Ireland’s block grant is adjusted each year, according to an agreed mechanism. The block grant adjustment process for Scotland and Wales is set out in their respective fiscal frameworks.
- The agreement between the Welsh government and the UK government on the Welsh government’s fiscal framework
- The agreement between the Scottish government and the United Kingdom government on the Scottish government’s fiscal framework
Block grant adjustments for 2018/19 are provided in section 7 of the 2018/19 Main Estimates Memorandum for:
Stamp duty and landfill tax has been devolved to Wales in 2018-19, leading to block grant adjustment for Welsh Government grant for the first time in the 2018-19 Main Estimate.
HM Treasury’s Block grant transparency publication provides data on devolved administrations’ block grant adjustments, for the years 2016/17 to 2020/21. Paragraphs 2.12 – 2.22 of the publication discusses block grant adjustments in further detail.
There is more on devolution and block grant adjustment in the following publications:
- Commons Library Insight, Devolution (part 2): changes to devolved funding, January 2018
- Cardiff University’s Wales Governance Centre and the Institute for Fiscal Studies, Fair Funding for Taxing Times?, February 2017
- Scottish Parliament Information Centre, The Fiscal Framework, November 2016
Paragraphs 115-120 of the Procedure Committee’s Authorising Government expenditure: steps to more effective scrutiny report discusses English Votes for English Laws (EVEL) and the Estimate process.
This is a reading list of publications on the UK’s withdrawal from the EU and future UK-EU relations from library, research services and committees of the UK and devolved parliaments and assemblies.
This is a purely statistical note on public sector borrowing (the budget deficit), public sector debt and government debt interest payments.