Today’s (13 Mar) investigation by the National Audit Office sets out how HM Treasury allocates funding to Scotland, Wales and Northern Ireland (the devolved administrations).

At Spending Reviews, which take place every 2-4 years, HM Treasury decides how much funding it will allocate to each of the devolved administrations. Initial funding allocations are based on the funding they received in the previous year plus a population-based share of funding for changes in planned UK government spending. HM Treasury uses the Barnett formula to calculate these changes. 

In 2017-18, total UK spending on public services was £617 billion, of which England accounted for £505 billion, Scotland £59 billion, Wales £32 billion and Northern Ireland £21 billion.

The highest spend per person on public services was in Northern Ireland (£11,190), followed by Scotland (£10,881), Wales (£10,397) and England (£9,080). As a large part of funding is simply rolled forward annually and unaffected by population changes, funding per person is increasing for the devolved administrations as their populations fall relative to that of England.

Outside of Spending Reviews, the devolved administrations can receive extra funding when spending priorities change and more funding is provided to UK government departments.

The devolved administrations told the NAO that they received less money than they expected following an announcement in June 2018 that NHS England would be given £20.5 billion of additional funding.

This is because they only receive additional funding if the money given to UK government departments by HM Treasury is financed from new funding rather than from within existing budgets. The extra money for the NHS was part-funded by HM Treasury from within existing Department of Health & Social Care budgets.

The devolved administrations are not required to use their funding allocations for the same service or area of spending as the UK government.  For example, more than 50% of the additional funding given to the devolved administrations at the 2018 Budget resulted from their share of the increase in funding to NHS England, but there is no requirement for this to be spent on the same services within the nations.

The devolved administrations are not required to use their funding allocations for the same service or area of spending as the UK government.  For example, more than 50% of the additional funding given to the devolved administrations at the 2018 Budget resulted from their share of the increase in funding to NHS England, but there is no requirement for this to be spent on the same services within the nations.

Where services or activities are partially devolved, such as transport, HM Treasury’s decisions can be more subjective as to why one devolved administration benefits from additional funding but not others.

For example, the categorisation of Crossrail as a ‘local’ rail project has triggered payments of around £500 million to Scotland, and some additional funding for Wales and Northern Ireland. Whereas the High Speed Two project, where rail infrastructure is again to be located in England, is categorised as a ‘national’ project, with the result that additional funding is payable to Scotland and Northern Ireland but not to Wales.

In other examples, England, Scotland and Wales did not receive additional funding as a consequence of funding directly allocated to Northern Ireland as part of the agreement reached between the Conservative party and the Democratic Unionist Party in 20173.

Meanwhile, England did not receive additional funding as a consequence of the £375 million allocated to the devolved administrations for ‘city deals’ since the Spending Review 2015, even though Scotland, Wales and Northern Ireland have previously received additional money because of funding allocated to the Department for Communities and Local Government for spending on city deals in England.  

In some instances, it can be difficult to determine the basis of how funding has been allocated. For example, Scotland, Wales and Northern Ireland have been given additional funding as a result of money being allocated to UK government departments for EU exit-related work. However, it is hard to understand how HM Treasury calculated the additional funding, which has led the Scottish government to query how much it has received.

The additional administrative and legal powers that have been devolved to each nation has changed the way their funding is calculated, with nation-specific adjustments in place depending on the extent of devolution. Scotland is subject to the most adjustments, reflecting its extra powers for setting its own income tax bands and retaining revenues. Greater tax and revenue-raising powers have also been extended to Wales and Northern Ireland, but they have yet to exercise these to the same degree.

As the Barnett formula is not set in law, HM Treasury is able to decide whether and how the formula applies as new funding is announced at annual budgets or when UK Government spending priorities change.

These decisions can have the effect of increasing or decreasing the initial calculation of funding to devolved administrations. Additional funding allocations are often referred to as Barnett consequentials – their calculation will depend on the extent to which the service or activity that is subject to a change in funding has been devolved to the nations.

This is based on spending by the devolved administrations and UK government departments that can be identified as benefitting the population of individual regions – HM Treasury, Country and Regional Analysis, November 2018

The investigation focuses on UK government funding to the devolved administrations. We did not examine any other income sources available to the devolved administrations, their tax and revenue-raising activity, or how spending decisions are made by the devolved administrations, or the value for money of their spending decisions. These are all topics that fall within the remit of the respective audit offices of Scotland, Wales and Northern Ireland.

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