Funding arrangements for the devolved administrations are complicated and are becoming more so as tax and social security powers are further devolved, requiring adjustments to the way their funding is calculated. The largest part of funding for Scotland, Wales and Northern Ireland is fixed at Spending Reviews, but there are often significant funding changes during the financial year, either at budgets or ad hoc announcements. Baseline levels of funding for the nations were agreed over 40 years ago when the Barnett formula was introduced, and most funding is simply rolled forward from one year to another without being revised for changes in relative population or need. HM Treasury therefore does not know to what extent the funding provided to nations is meeting the needs of their populations. It has recently agreed a needs-based up-lift to funding for Wales, but it has not committed to providing similar uplifts in future for other nations.
Funding arrangements and calculations are not explained in a way that is readily understandable to taxpayers. The information HM Treasury publishes at Spending Reviews does not allow taxpayers or Parliament to identify what proportion of funding has been rolled forward or to understand how funding for the nations has been affected by changes to budgets for major UK government projects in England, for example Crossrail.
“The complicated and often opaque method for calculating funding levels for devolved administrations is based on population levels and needs across the UK agreed 40 years ago.
“At future spending reviews, when the block grant to the devolved administrations is allocated, HM Treasury should publish more detailed and transparent information about its funding decisions.
“Ministers are able to allocate funding outside of the Barnett formula, which is HM Treasury’s primary mechanism of calculating funding for Scotland, Wales and Northern Ireland.
“A lack of detailed supporting information to Parliament on this money makes it difficult for such ministerial decisions to be properly scrutinised. At future spending reviews, HM Treasury should publish information about how these decisions are made.”
Conclusions and recommendations
Arrangements for funding the devolved administrations are increasingly complex and there is a lack of transparency about how funding decisions are made. Indicative allocations of funding for the devolved administrations are based on the amount of money they received in the previous financial year, with the Barnett formula only being used to calculate marginal changes to funding. Much of the funding allocated to Scotland, Wales and Northern Ireland is based on population levels and needs across the UK agreed 40 years ago, which may be significantly different today. The calculation of funding is made more complex by the increasing number of adjustments that are needed to reflect the devolution of tax and welfare. The UK government may also allocate additional funding to the devolved administrations outside of the Barnett formula in response to its priorities. For example, each of the devolved administrations have received UK government funding for city deals. A lack of information affects the ability of taxpayers and Parliament to understand the basis for the funding allocated to the devolved administrations. HM Treasury asserts that it provided more transparency around how funding allocations were made at the Spending Review in 2015, but recognises it needs to build on this in the next Spending Review.
Recommendation: At future Spending Reviews, HM Treasury should publish more detailed and transparent information about its funding decisions and the elements that make-up the funding allocated to the devolved administrations. This should include evidence of its assessment that the current block grant continues to be the optimum way of allocating funding to meet the needs of the UK as a whole.
Ministers' ability to allocate funding outside of the Barnett formula without consequential payments to other nations makes it impossible to determine whether funding decisions are based on need. A significant amount of funding is allocated outside of the Barnett process as Ministers ultimately have the flexibility to decide how they allocate resources to the nations and regions of the country on the basis of perceived need. Examples include direct funding provided to Scotland to meet the policing costs associated with President Trump’s visit, and additional funding allocated to Northern Ireland as part of the agreement between the Conservative Party and the Democratic Unionist Party. Funding for City Deals in Scotland, Wales and Northern Ireland was allocated directly to the devolved administrations and was additional to funding already received by each nation as a result of funding allocated for City Deals in England. This money is subject to the approval of Parliament via the estimates process, but a lack of detailed supporting information makes it difficult for Parliament to properly examine funding decisions. Unlike the Barnett formula which, when the UK government increases funding in England, triggers population-based funding for Scotland, Wales and Northern Ireland, direct allocations of funding by Ministers do not result in additional funding for England or other nations.
Recommendation: At future Spending Reviews, HM Treasury should publish information to explain how it has ensured that funding decisions are prioritised according to the needs of citizens across the UK.
HM Treasury does not know whether the block grant funding it allocates to the nations adequately reflects the needs of citizens across the UK. A large part of the funding for Scotland, Wales and Northern Ireland is simply rolled forward from one year to another, meaning relative changes in population between the nations are not reflected in funding settlements. Funding baselines were agreed 40 years ago when population levels were different to today and there was higher spending per head in Scotland, Wales and Northern Ireland than in England. These baselines are now “baked in” to current funding allocations and are not adjusted for changes in population or other factors. HM Treasury has applied a specific uplift to funding for Wales to reflect its greater need and the cost of providing services where populations are dispersed. But Treasury has not committed to providing subsequent uplifts for other nations or parts of England with similar needs.
Recommendation: Ahead of the upcoming Spending Review, HM Treasury should write to the Committee with details of its analysis of the impact of rolling forward a large part of block grant (historic) funding and the impact that slower relative population growth could have on funding per head across the UK.
HM Treasury's decisions about how to finance the UK government’s spending plans affect the funding allocated to the devolved administrations and their ability to plan and manage their finances. HM Treasury decides what funding mechanism to use to support new government projects and programmes. Additional funding is provided to the devolved administrations if spending plans increase the overall amount spent in England for services and activities devolved to Scotland, Wales and Northern Ireland. The devolved administrations do not receive additional funding from the UK government if HM Treasury chooses to fund new spending announcements through reprioritising existing budgets, as it did with the funding announced for NHS England in summer 2018. When government spending announcements are made, it is often not clear how plans will be funded, meaning that the devolved administrations may receive less funding than they expect from specific announcements. In addition to decisions about how programmes and projects are financed, the decisions HM Treasury makes about whether a programme is or devolved can have significant implications for the funding allocated to the devolved administrations. Yet the devolved administrations are not always given sufficient time to review and challenge these decisions which are reflected by the comparability factors assigned to UK government departments and their spending programmes. HM Treasury is aiming to get this information to the devolved administrations “in good time” ahead of the next Spending Review but has not specified how far in advance this will happen.
Recommendation: HM Treasury should:
- share timely information with the devolved administrations on how it will fund projects and programmes whether through new funding, loans, re-allocation of existing budgets or via the Central Reserve; and
- engage with the devolved administrations sooner on the comparability factors included in its Statement of Funding Policy to ensure that they have the opportunity to review the status of devolved and reserved functions before policy is finalised.
We are concerned by the uncertainty for devolved administrations caused by the UK government’s postponement of the Spending Review and the absence of a decision on how it will replace existing EU funding. The timing of UK government decisions about future funding will be critical for the devolved administrations because of the impact on their own budgeting cycle. The timing of the next Spending Review has not yet been confirmed, but the UK government has guaranteed to maintain all EU funds at their current levels until 2023, meaning that structural funds (intended to reduce disparities in the regions of the EU), payments to farmers, science and research funding will continue until this time. It has also guaranteed that, should the UK leave the EU without an agreement, the funding that the devolved administrations currently expect would still be paid. HM Treasury recognises that it will be crucial to develop new frameworks to decide how to replicate or replace funding after the UK’s departure from the EU. The UK Government has already set out that it will introduce the UK shared prosperity fund to replace EU structural funding. The Government is currently consulting, including with the devolved administrations, on how this will work.
Recommendation: On conclusion of discussions and negotiations about allocating replacement EU funding, HM Treasury should write to the Committee with details of its proposals.