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Funding devolved Government

Papers by the Institute for Government (IFG) and the Institute for Fiscal Studies (IFS) argue that the Barnett formula, used to determine funding from the UK Government to the devolved administrations, should be reformed. 

The IFG explains how the Scotland, Wales and Northern Ireland governments receive funds from a variety of sources, including devolved taxes and borrowing. However, a key source of income is money provided by the UK government. This is calculated according to the Barnett formula. The formula provides that changes to spending in England in any devolved policy area (for example, health) would lead to an equivalent change in the UK government’s funding (the ‘block grant’) to each devolved nation. The relative populations determine the money value of the change. 

The IFG says that advantages of the system include that it: 

  • is simple and predictable; 
  • “embodies a certain common-sense ideal of fairness” from being based on population size; and 
  • allowed “sizeable additional funding” to be transferred quickly to the devolved administrations to deal with coronavirus. 

However, the IFG argues that disadvantages include: 

  • the UK Government has “substantial discretion” over how the formula is interpreted, and can even bypass it altogether. The IFG suggests this could lead to funding being allocated for political reasons, rather than based on need; 
  • the formula has not eroded historical differences in spending between the regions as it was intended to do. As a result, government spending per head remains higher in Scotland, Wales and Northern Ireland than in England; and 
  • during coronavirus, the devolved administrations have at times faced uncertainty about the level of resources they would receive, hindering their response planning. 

David Phillips from the Institute for Fiscal Studies (IFS) looks more closely at how devolved funding arrangements have operated during the coronavirus pandemic. He finds that they have provided a “significant degree of fiscal insurance for the devolved governments”, with much of the economic support measures funded by central government. They have also allowed flexibility, with money provided through “ad hoc changes to funding arrangements”, such as up-front guarantees. 

However, he says that central funding has insulated the devolved governments from a significant proportion of the costs of Covid-related restrictions. He argues this might, at times, have led these governments to implement, or lobby for, more stringent restrictions than if they were bearing the costs themselves. 

Phillips also states that the Barnett formula may not have been the optimum tool for allocating resources in the pandemic, because the needs of Scotland, Wales and Northern Ireland may differ from those of England. For example, the harder-hit hospitality sector represents a different proportion of the overall economy in different areas of the UK, and the age structures of the populations vary. 

Both the IFG and IFS conclude that the Barnett system should be reviewed.  

The IFG first suggests it could be replaced by an entirely new system, including for the English regions, that allocates resources according to “a clearly stated set of funding principles”. However, the IFG believes any such alternative model would be politically unacceptable as it is likely to lead to a reduction in funds transferred to the devolved nations. Therefore, it calls for reforms to the current system, including: 

  • greater transparency about levels of public spending on comparable services in each region; 
  • information alongside every spending decision about whether it will lead to additional resources for the devolved nations; 
  • independent annual reports on the system, perhaps by the National Audit Office; 
  • improvements in how the UK and devolved governments share information and resolve disputes about funding; and 
  • an analysis of the relative spending needs of each part of the UK. 

Writing for the IFS, Phillips argues that a review of Barnett should also consider other elements of devolved funding, such as the rules around borrowing by devolved governments. In addition, he raises the question of whether England should have the scope to amend areas of its own spending without incurring Barnett consequences for the devolved regions. 

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