HM Treasury News Release
157/97 8 December 1997
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TREASURY PUBLISHES PRINCIPLES TO GOVERN SCOTLAND'S AND WALES'
SHARES OF PUBLIC SPENDING UNDER DEVOLUTION
The Treasury today published the principles which will govern
changes to the Block budgets for the Scottish Parliament and
National Assembly for Wales after devolution.
The Government set out its position clearly in the White Papers
and what is published today follows on from that.
Chief Secretary, Alistair Darling, said:
"The paper published today follows the principles which the
Government set out in the devolution White Papers.
"The Government's decision to publish these principles now
shows our commitment to openness. The Block arrangements and
'Barnett' formula have operated for almost 20 years, but the
principles underpinning them have never been spelt out in
public before.
"We are publishing these principles now to inform debate
during the passage of the Scotland and Wales Bills."
NOTES TO EDITORS
The Government announced in the Scotland and Wales White Papers
published in July that it intended to retain the existing Block
and formula arrangements after devolution. These arrangements,
which have been operated by governments of both parties, have
been in use since the late 1970s.
Under these arrangements, the Secretaries of State for Scotland
and for Wales have Block budgets within which they are free to
deploy resources between the functions for which they are
responsible in the light of local priorities. Changes in these
Block budgets are linked by a population-based formula - the
'Barnett' formula - to changes in equivalent spending plans in
England.
A copy of the paper is attached.
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PRINCIPLES TO GOVERN DETERMINATION OF THE BLOCK BUDGETS
FOR THE SCOTTISH PARLIAMENT AND NATIONAL ASSEMBLY FOR
WALES
1. The Government set out its position on the Block and
formula arrangements in its White Papers on Scottish and
Welsh devolution published in July (Cm 3658 and Cm 3718
respectively). The Scottish White Paper, Scotland's
Parliament, said:
"In practice these arrangements, based on the
Block and formula, have produced fair settlements
for Scotland in annual public expenditure rounds
and have allowed the Secretary of State for
Scotland to determine his spending decisions in
accordance with Scottish needs and priorities.
They have largely removed the need for annual
negotiation between the Scottish Office and the
Treasury. The Government have therefore
concluded that the financial framework for the
Scottish Parliament should be based on these
existing arrangements with, in future, the
Scottish Parliament determining Scottish spending
priorities."
The Wales White Paper, A Voice for Wales, said:
"The Government proposes that the financial
arrangements for the Assembly will largely
replicate the existing system.
Annual changes to the Welsh Block will be
calculated by the population-based formula used
at the moment. These arrangements based on the
Block and formula have worked in practice,
producing fair settlements for Wales in annual
public expenditure rounds."
2. The Scottish Parliament and National Assembly for
Wales will therefore have block budgets, which they will
be free to allocate in response to local priorities
among the functions under their control and for which
they will be accountable to local people. This note
outlines the principles set out in the White Papers and
describes how they will govern changes made to these
block budgets under devolution.
Settling Scotland's and Wales' shares of UK public
expenditure: the "Barnett" formula
Existing position
3. All UK tax revenues are pooled. Decisions about the
allocation of UK public expenditure are made in the
light of the Government's judgement of relative
priorities and relative needs. Changes to the shares of
public expenditure available to the Secretaries of State
for Scotland and Wales are determined by a formula
linked to changes in provision for equivalent spending
programmes in England.
4. This formula, which has operated for almost 20
years, is known as the "Barnett" formula. It provides
that, in settling new plans for public expenditure,
Scotland and Wales should receive a share of the planned
cash changes in provision for equivalent public services
in England which is proportionate to their population.
In other words, Scotland's and Wales' shares of changes
in relevant planned spending in England are the same
proportions as their populations represent of England's
population. The formula applies only to changes in
spending plans, not to the underlying baselines which
remain unaffected. The formula also applies only to
changes in the block budgets: expenditure on agriculture
in Scotland and Wales, and expenditure on nationalised
industries in Scotland, is outside the block budgets at
present and is settled separately.
After devolution
5. These arrangements will continue under devolution,
with only minor adjustments. Changes to the block
budgets for which the Scottish Parliament and the
National Assembly for Wales will become responsible will
continue to be determined by a formula linked to changes
in provision for the equivalent spending programmes in
England. The formula will continue to be based on
relative populations. The spending for which the
devolved administrations in Scotland and Wales will
assume responsibility is set out in the annexes to this
note.
6. The Government intends that these population shares
will be re-calculated annually on the basis of the
latest population estimates for England, Scotland and
Wales published each year by the Office of National
Statistics. The population ratios will next be updated
for the purpose of determining changes in the Scottish
and Welsh block budgets for 1999-2000.
7. The Government intends that this population-based
formula will apply to changes in almost all the
expenditure under the control of the Scottish Parliament
and National Assembly for Wales. It will not apply to
changes in agriculture programmes 100% funded by the EU.
The Government will also want to consider whether this
approach or another formula is appropriate in relation
to provision for Council Tax Benefit and Housing Benefit
which will both come within the Scottish Block for the
first time after devolution; Housing Benefit is already
within the Welsh Block, but, as in Scotland, Council Tax
Benefit will come within the Block for the first time.
Adjustments to the Scottish and Welsh block budgets not
determined by the Barnett formula
8. There are a number of circumstances in which the
block budgets under the control of the Secretary of
State for Scotland and Wales are open to adjustment
other than on the basis of the Barnett formula. These
exceptions will continue to apply under devolution.
Adjustments may be made where:
a. the UK Government decides to make a uniform
general adjustment to public expenditure
programmes;
b. action taken by the Scottish or Welsh
administrations in a devolved area has knock-on
costs for the UK Government or vice versa. The
block budgets may be adjusted downwards to
compensate for costs incurred by the UK
Government as a result of the actions of the
devolved administrations, or upwards to
compensate the devolved administrations for costs
which they incur as a result of actions by the UK
Government and are not allowed for through the
operation of the Barnett formula. The block
budgets will not however be adjusted upwards by
reason of additional costs incurred as a result
of actions by the UK Government which the UK
Government is expecting English departments with
parallel responsibilities to absorb within
existing spending plans;
c. the devolved administrations receive capital
receipts as a result of a privatisation or major
change in the role of the public sectors in
Scotland or Wales. In these circumstances, the
block budgets may be adjusted downwards in the
year in which the receipts occur to reflect the
continuing interest in these receipts of UK
taxpayers as a whole who financed the underlying
capital assets in the past. Proceeds from the
sales of other capital assets under the control
of the Scottish Parliament or National Assembly
for Wales will be available to be re-cycled
within Scotland or Wales;
d. the devolved administrations receive significant
trading surpluses from the commercial
exploitation of publicly-funded assets: the UK
Government may take these surpluses into account
in settling block budgets;
e. local authority self-financed expenditure grows
more rapidly than equivalent expenditure in
England over a period and in such a way as to
threaten targets set for public expenditure as
part of the management of the UK economy. In
such circumstances it will be open to the UK
Government to take the excess into account in
considering the level of the block budgets.
9. These principles concern the determination of
changes to the block budgets under the control of the
Scottish Parliament and the National Assembly for Wales,
not the level of Westminster grant to support these
budgets. The latter may also be affected by changes in
the level of self-financed items of expenditure - local
authority capital expenditure funded by borrowing, for
example - which currently count towards the block
Budgets.
In-year changes to the block budgets for Scotland and
Wales
10. The arrangements outlined above apply to changes
in the plans for expenditure in future years in Scotland
and Wales. These paragraphs deal with changes in-year
to the budgets arrived at under the arrangements
outlined above and in particular with access to the UK
Reserve for the devolved Scottish and Welsh
administrations.
11. The general presumption, as at present, is that
the Scottish and Welsh administrations will contain in-
year pressures on their budgets by re-allocating
priorities within their Blocks, not through access to
the UK Reserve. Access to the Reserve may however be
considered at the discretion of the UK Government in
exceptional circumstances and specifically where:
a. the Government is making available additional
provision in-year for equivalent services in
England in order to cope with exceptional
circumstances affecting the UK as a whole
unforeseen at the time spending plans for the
year concerned were settled; and
b. Scotland or Wales face exceptional and unforeseen
domestic costs - arising, for example, from a
natural disaster - which cannot be reasonably
absorbed within the planned block budgets without
major dislocation to existing services.
Revising these principles
12. As noted above, the formula will be updated
annually to take account of population changes and from
to time to take account of other technical changes. Any
more substantial revision would need to be preceded by
an in-depth study of relative spending requirements and
would be the subject of full consultation between the
devolved administrations and the UK Government.
HM Treasury
December 1997
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Spending programmes forming part of the Welsh Block
Domestic Agriculture (after devolution)
Forestry (after devolution)
Health and Personal Social Services
Transport
Industry, Trade and Employment
Training (excluding ESF)
Education
Housing
Other Environmental Services
Arts and Libraries
Local Government
Central Administration
Office of Her Majesty's Chief Inspector of Schools in
Wales
European Regional Development Fund
Council Tax Benefit (after devolution)
Spending programmes forming part of the Scottish Block
Domestic agriculture, fisheries and food (after
devolution)
Forestry (after devolution)
Industry, enterprise and training
Roads and transport
Housing
Other environmental services
Law, order and protective services
Education
Arts and libraries
Health
Social Work Services
Other public services
ESF
ERDF
Nationalised Industries (after devolution)
Council Tax Benefit (after devolution)
Local authority expenditure