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Funding the Scottish Parliament,
National Assembly for Wales and
Northern Ireland Assembly
A Statement of Funding Policy
31 March 1999
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FUNDING THE SCOTTISH PARLIAMENT,
NATIONAL ASSEMBLY FOR WALES AND NORTHERN
IRELAND ASSEMBLY
SECTION
1. INTRODUCTION
1.1 The establishment of the Scottish Parliament, the National Assembly
for Wales and the Northern Ireland Assembly (the devolved administrations)
creates a requirement to define clearly the new financial relationships
to be established within the United Kingdom. The devolved administrations,
while assuming responsibility for many of the functions of the departments
which they inherit, will not, themselves, be departments of the United
Kingdom Government. Their funding arrangements will be the subject
of detailed scrutiny by the elected Members and those whom they represent.
It is important, therefore, that the way in which the budget of each
of the devolved administrations is determined should be clear, unambiguous
and capable of examination and analysis by each of the devolved administrations
and the United Kingdom Parliament. The purpose of this Statement is
to set out the policies and procedures which will underpin the exercise
of setting the budgets of the devolved administrations and to inform
those inside Government and outside how the funding process will operate.
1.2 The arrangements set out in this Statement represent, in most
cases, the continuation of long-standing conventions that have guided
funding for Scotland, Wales and Northern Ireland prior to devolution
and are consistent with the Devolution White Papers, Scotland's
Parliament (Cm 3658) and A Voice for Wales (Cm 3718),
published in July 1997 and the subsequent Scotland Act, Government
of Wales Act and Northern Ireland Act of 1998 (the Devolution Acts).
The terms of this Statement have been agreed between the Chief Secretary
to the Treasury and the Secretaries of State for Scotland, Wales and
Northern Ireland.
The United Kingdom public expenditure regime
1.3 Responsibility for United Kingdom fiscal policy, macroeconomic
policy and public expenditure allocation across the United Kingdom
will remain with the Treasury. As a result, the devolved administrations'
budgets will continue to be determined within the framework of public
expenditure control in the United Kingdom. However, once overall public
expenditure budgets have been determined, the devolved administrations
will have freedom to make their own spending decisions on devolved
programmes within the overall totals.
1.4 United Kingdom Government funding for the devolved administrations'
budgets will normally be determined within spending reviews alongside
departments of the United Kingdom Government and in accordance with
the policies set out in this Statement. After the United Kingdom Parliament
has voted the necessary provision to the Secretaries of State, they,
in turn, make grants to the devolved administrations as detailed in
each Devolution Act. Provision for the costs of the Offices of the
Secretaries of State for Scotland and Wales will be found from within
the total resources voted by the United Kingdom Parliament. Expenses
for the Office of Secretary of State for Northern Ireland will have
to be found from the resources of the Northern Ireland Office.
1.5 Each devolved administration's budget is not funded exclusively
by grant from the United Kingdom Parliament. Once the proportion of
the budget which requires Exchequer funding is determined, the United
Kingdom Parliament will vote the necessary provision by means of a
grant. Further elements of the budget will be covered, as at present,
by funding from locally financed expenditure (including non-domestic
rates and the Scottish Variable Rate of Income Tax if a decision is
taken to use the tax-varying power), the European Commission and through
borrowing by local authorities of Scotland, Wales and Northern Ireland
and other public bodies to fund their capital spending.
Public expenditure categories
1.6 The total budget of each devolved administration is composed
of a number of separate categories of public expenditure. These are
defined as Departmental Expenditure Limits (DEL) set over three years
and Annually Managed Expenditure (AME) set yearly. The tables in Sections
12 to 14 below detail the current position for each devolved administration.
In summary:
i. Departmental Expenditure Limits (DEL)
set firm, three-year spending limits. These will only be reviewed
if inflation varies substantially from forecast made at the time of
a spending review (plus or minus 1.5 per cent from the cumulative
projections for inflation for years 2 and 3 of the spending review
period). Expenditure in DEL is split between those items within the
assigned budget and those within the non-assigned budget. Most spending
within DEL is undifferentiated as the devolved administrations will
have full discretion over their spending priorities; these are 'assigned
budget' items. Changes in provision for these items are determined
through the Barnett Formula (see Section 3). Some spending in DEL,
however, is ring-fenced and specific to that spending priority: these
are known as 'non-assigned budget' spending items; and
ii. Annually Managed Expenditure (AME)
covers items whose provision is reviewed and set for the coming year
annually (in March) and certain self-financed expenditure. AME expenditure
cannot be recycled from one AME programme to another or recycled to
increase the DEL. Within AME, expenditure is classified between 'Main
Departmental programmes in AME' and 'other AME' spending. Main Departmental
programme spending covers policy-specific, ring-fenced items where
provision is included within the Vote from the United Kingdom Parliament.
The AME element of the budget is reviewed annually, and forecast twice
a year for the three years ahead. Thus the AME element of the budget
can move up or down and, hence, the total budget itself may move up
or down in line with AME. 'Other AME' spending includes locally financed
expenditure, including expenditure financed by the Scottish Variable
Rate of Income Tax; these are not ring-fenced and may be allocated
as the devolved administrations consider appropriate.
Resource Accounting and Budgeting
1.7 A fundamental change in the way the Government accounts for and
controls public expenditure will result from the move to Resource
Accounting and Budgeting (RAB) from April 2000 onwards. Resource Accounts
will replace Appropriation Accounts with effect from the financial
year 2001-02, moving accounting to an accruals basis. The aim of this
move is to focus more on resources consumed rather than cash spent;
to treat capital and current expenditure in a way that distinguishes
their economic significance and to focus on achievement of outputs,
aims and objectives.
1.8 The introduction of Resource Accounting and Budgeting will bring
no changes to the underlying principles set out in this Statement
and is not in itself intended to result in changes to the total resources
available to the devolved administrations. The underlying Barnett
Formula principles (described in paragraphs 3.1 to 3.16 below) will
continue to be applied to determine changes in provision. Nevertheless,
Resource Budgeting will inevitably require changes in the way the
Barnett Formula is applied. The Treasury will consult the devolved
administrations about these changes and publish its conclusions in
due course.
SECTION 2.
KEY PRINCIPLES OF ALLOCATING PUBLIC EXPENDITURE
WITHIN THE UNITED KINGDOM
2.1 The United Kingdom Government will apply certain principles in
allocating public expenditure between the countries of the United
Kingdom. These are based upon the Statement of Principles to govern
changes to the devolved administrations' budgets set out in the Chief
Secretary's reply to a Parliamentary Question answered on 9 December
1997 (Official Report, WA Col 510 to 513). This is reproduced
at Annex A to this Statement. Although not referring directly to Northern
Ireland (as the answer was made prior to the Belfast Agreement of
10 April 1998), the principles apply equally to Northern Ireland.
2.2 The principles are that:
i. all United Kingdom tax revenues and analogous receipts are passed
to the United Kingdom Consolidated Fund. Decisions about the allocation
of United Kingdom public expenditure rest with the United Kingdom
Government. This does not apply to the Scottish Variable Rate of
Income Tax or local taxes which are matters for the relevant devolved
administrations;
ii. changes in the budgetary provision of the devolved administrations
funded by United Kingdom tax revenues (excluding the Scottish Variable
Rate of Income Tax) or by borrowing will generally be linked to
changes in planned spending on comparable public services by departments
of United Kingdom Government;
iii. this linkage will generally be achieved by means of the population-based
Barnett Formula. This largely removes the need to negotiate directly
the allocation between Treasury Ministers, Secretaries of States
and Ministers of the devolved administrations;
iv.the allocation of public expenditure between the services under
the control of the devolved administrations will be for the devolved
administrations to determine;
v. the devolved administrations will be fully accountable for the
proper control and management of their public expenditure allocation
and for securing economy, efficiency and value for money through
scrutiny by the relevant Parliament or Assemblies and the detailed
accountability and audit procedures listed in the Devolution Acts;
vi. the devolved administrations will meet all the operational and
capital costs associated with devolution from within their allocated
budgets;
vii. if levels of self-financed expenditure generated by a devolved
administration grow significantly more rapidly than comparable 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 United
Kingdom economy, it will be open to the United Kingdom Government
to take the excess into account in considering the level of grant
to the devolved administrations. This principle will not apply to
the Scottish Variable Rate of Income Tax;
viii. where decisions taken by any of the devolved administrations
or bodies under their jurisdiction have financial implications for
departments or agencies of the United Kingdom Government or, alternatively,
decisions of United Kingdom departments or agencies lead to additional
costs for any of the devolved administrations, where other arrangements
do not exist automatically to adjust for such extra costs, the body
whose decision leads to the additional cost will meet that cost;
ix. the United Kingdom Government continues to reserve the right
to make across-the-board adjustments to the budgets for the devolved
administrations in cases of a uniform general adjustment to public
expenditure programmes of departments of the United Kingdom Government;
x. consistent with the arrangements for departments of the United
Kingdom Government, the devolved administrations will normally be
expected to accommodate additional pressures on their budgets. Unforeseen
pressures should be catered for by offsetting savings and re-allocating
priorities; and
xi. responsibility for contributions to and distribution of receipts
from the European Commission rests solely with the United Kingdom
Government.
2.3 Details of how these principles apply are set out in Sections
3 to 14 below.
SECTION 3.
PUBLIC EXPENDITURE CHANGES DETERMINED BY
THE BARNETT FORMULA
3.1 When the United Kingdom Government reviews its spending plans,
changes in the spending allocations to the devolved administrations'
Departmental Expenditure Limits are, with the exceptions noted in
Section 4, determined by applying the population-based Barnett Formula
to changes in planned spending on comparable services in departments
of the United Kingdom Government.
3.2 This system was first used in the 1978 Public Expenditure Survey.
The Devolution White Papers stated the Government's commitment to
retaining the existing Formula and arrangements. 'Scotland's Parliament'
states:
"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 spending priorities."
Similarly, 'A Voice for Wales' states:
"..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."
The Barnett Formula
3.3 The Barnett Formula determines changes to expenditure within the
assigned budgets of the devolved administrations. Under the Formula,
Scotland, Wales and Northern Ireland receive a population-based proportion
of changes in planned spending on comparable United Kingdom Government
services in England, England and Wales or Great Britain as appropriate.
It should be noted that the Formula determines the changes
to each devolved administration's spending allocations; it does not
determine the total allocation for each devolved administration.
3.4 There are three factors in determining changes to each devolved
administration's spending allocation in a spending review:
i. the quantity of the change in planned spending in departments of
the United Kingdom Government;
ii. the extent to which the relevant United Kingdom departmental programme
is comparable with the services carried out by each devolved administration;
and
iii. each country's population as a proportion of England, England
and Wales or Great Britain as appropriate.
3.5 Using these three factors, the net change to the spending allocations
for each devolved administration is determined as follows:
| Change to the department of the UK Government's
programme |
X
|
Comparability percentage |
X
|
Appropriate population proportion |
This calculation is made for each United Kingdom departmental programme
in DEL and the sum of these results represents the aggregate net change
to the assigned budget element of the Departmental Expenditure Limits
for each of the devolved administrations (as shown in the tables in
Sections 12 to 14 below). It is for each administration to allocate
spending within those budgets according to their own priorities.
3.6 Annex B shows an example of how changes are calculated using the
Barnett Formula.
Population proportions
3.8 The population proportions used reflect the latest available
mid-year estimates published by the Office for National Statistics.
For the 1998 Comprehensive Spending Review, these were the 1996 mid-year
estimates. The latest available mid-year estimates are used for future
allocations, including 'in-year' changes; as at 31 March 1999, the
1997 mid-year estimates apply. The Treasury will notify the devolved
administrations of the population proportions that will be applied
in advance. Allocations which have already been set, such as those
over a spending review period, will not be adjusted to reflect subsequent
population estimate changes. Population proportions are:
| ONS mid-year population estimates (per cent) |
1996 |
1997 |
| Scotland's population as a proportion of the population of England: |
10.45 |
10.39 |
| Scotland's population as a proportion of the population of England
and Wales: |
9.86 |
9.81 |
| Wales' population as a proportion of the population of England: |
5.95 |
5.94 |
| Northern Ireland's population as a proportion of the population
of Great Britain (as used in 1998 CSR): |
2.91 |
2.92 |
| Northern Ireland's population as a proportion of the population
of England: |
3.39 |
3.40 |
| Northern Ireland's population as a proportion of the population
of England and Wales: |
3.20 |
3.21 |
3.9 The population proportions used in the Formula reflect the coverage
of the United Kingdom departmental programme to which they are applied.
In the vast majority of cases, the United Kingdom departmental programme
covers England only and the proportion of England's population is
applied. However, where the United Kingdom departmental programme
covers England and Wales, such as the Home Office and legal departments,
then the proportion of the population of England and Wales is applied.
Finally, in the case of Northern Ireland, the Intervention Board for
Agricultural Produce, social security administration, Chancellors'
departments and Cabinet Office programmes are operated at a Great
Britain level and thus this population proportion is applied.
3.10 Northern Ireland: Prior to and during the 1998
Comprehensive Spending Northern Ireland's population as a proportion
of Great Britain's population had been applied to the planned spending
changes of each departmental programme including the allocations for
Scotland and Wales. The rationale for applying a proportion of Great
Britain's population, in contrast to Scotland and Wales where an England
population was applied, was that United Kingdom Government departments
previously had greater Great Britain-wide responsibilities which more
directly matched those functions and services carried out by the Northern
Ireland departments. However, the Scottish and Welsh Offices have,
in recent years, been steadily taking responsibility for more policy
areas which, hitherto, had been the responsibility of United Kingdom
Government departments, culminating with further policy responsibility
after devolution.
3.11 This means that very few Great Britain-wide programmes remain,
so there is much less of a rationale for the difference in treatment
to remain. Therefore, for the next spending review and for future
'in-year' changes, the population share applied in the Barnett Formula
for Northern Ireland will be determined by the geographical coverage
of the United Kingdom department to which it is applied and exclude
changes to Scottish and Welsh devolved administrations. Northern Ireland's
population as a proportion of England's population will be applied
for the Formula except where the programme in question generally has
a wider coverage than England only, such as those listed in paragraph
3.9, where using England and Wales' or Great Britain's population
is appropriate. This will ensure Northern Ireland receives its public
expenditure funding on the same basis as Scotland and Wales. In practice,
this change should have little effect on provision for Northern Ireland
and, based on the 1998 Comprehensive Spending Review outcome, Northern
Ireland will be no worse off as a result.
Comparability percentages
3.12 Comparability is the extent to which services delivered by departments
of the United Kingdom Government correspond to services within the
budgets of the devolved administrations. For each United Kingdom departmental
programme, defined by Departmental Expenditure Limits (DEL), a comparability
percentage is calculated by examining the component (sub-programme)
within that programme. Each sub-programme is weighted by its spending
in the base year (the year immediately preceding the first year covered
by a spending review) to give an overall level comparability. Annex
C lists the comparable sub-programmes used for the 1998 Comprehensive
Spending Review (adjusted in the case of Northern Ireland to reflect
the fact that the Northern Ireland Office law and order functions
will not be devolved).
3.13 Expenditure on services in England, England and Wales or Great
Britain (as appropriate) is normally regarded as comparable except
in cases where:
i other arrangements are in place to determine each devolved
administration's share of a budget. In such cases, the sub-programme
in question corresponds to a function falling outside the devolved
administration's assigned budget;
ii expenditure is incurred on behalf of the United Kingdom as a
whole or of Great Britain or of England and Wales as a whole at
programme or sub-programme level; or
iii a small number of exceptional sub-programmes that are regarded
as unique at a United Kingdom level, such as the Channel Tunnel
Rail Link.
3.14 Where classification, transfer or machinery of government changes
occur in departments of the United Kingdom Government which have the
effect of transferring provision from one departmental programme to
another or changing the structure of a departmental programme, this
may have a corresponding effect on comparabilities. Existing plans
will not be revisited and changes will be reflected in the next spending
review. The Secretaries of State and devolved administrations will
be consulted on these changes before they are applied as detailed
in the following paragraph.
3.15 The Treasury will, in good time, consult with each Secretary
of State and devolved administration to allow comments and discussion
prior to a spending review on the comparability percentages to be
used in that review. Specifically, the Treasury will advise which
Departmental Expenditure Limits contain comparable spending for the
purpose of applying the Formula, the comparability percentage of each
sub-programme and its spending in the base year (the year immediately
preceding the first year covered by a spending review). The availability
of comparability percentages, population proportions and changes in
United Kingdom departmental programmes will mean that the devolved
administrations will be able to verify that the Barnett Formula methodology
and arithmetic has been applied correctly. In case of any disagreement,
the resolution procedures described in Section 11 below will apply.
The levels at which the changes to UK departments' programmes are
calculated for application of the Barnett formula will be reviewed
by the Treasury and the devolved administrations alongside possible
changes from the introduction of Resource Accounting and Budgeting.
3.16 Northern Ireland value added tax abatement:
the changes to the Northern Ireland budget determined through the
Barnett Formula are abated to reflect the fact that under Section
49 of the Value Added Tax Act 1983, Northern Ireland departments,
unlike departments in the rest of the United Kingdom, do not require
provision to meet Value Added Tax expenditure since any valued added
tax paid by Northern Ireland Departments is refunded by HM Customs
and Excise. Currently, Barnett Formula changes for Northern Ireland
are abated by 7 per cent.
SECTION 4.
PUBLIC EXPENDITURE CHANGES NOT DETERMINED
BY THE BARNETT FORMULA
4.1 Although the majority of each devolved administration's spending
will be adjusted in spending reviews by applying the Barnett Formula,
there are a number of exceptions where the population-based approach
is not appropriate. These include some programmes within Departmental
Expenditure Limits, all Annually Managed Expenditure items and other
expenditure outside Departmental Expenditure Limits. The tables at
Sections 12 to 14 below show these various categories of expenditure
which are the responsibility of the devolved administrations.
4.2 Departmental Expenditure Limit items in the non-assigned budget
will be determined separately between the devolved administration,
the Secretary of State, the Treasury and, where appropriate, the relevant
department of the United Kingdom Government. These are currently for
each devolved administration, Welfare to Work expenditure which is
allocated at a United Kingdom level from a United Kingdom Departmental
Expenditure Limit on a United Kingdom-wide basis and on the relevant
client group, Hill Livestock Compensatory Allowances, set according
to European Union rules on eligible stock and rates per head. For
Northern Ireland, it also includes ring-fenced public expenditure
provision for the European Union's Peace and Reconciliation Programme
and European Regional Development Fund gas link and electricity interconnector
and housing loan charges. Non-assigned items may change between spending
reviews with the agreement of the Treasury.
4.3 Main programme spending items within Annually Managed Expenditure
are determined periodically and included within a Vote from the United
Kingdom Parliament. The devolved administrations will not normally
need to find offsetting savings from elsewhere within their budgets
when forecasts change at planning stage or during the financial year
to cover increases in expenditure on these items, but the Secretary
of State will have to seek approval from the Treasury for any increases
on their behalf, and any excess provision will have to be surrendered
to the United Kingdom Consolidated Fund, as at present. (This also
apples to police loan charges in Scotland, classified as 'other expenditure
outside Departmental Expenditure Limits). Increases in Annually Managed
Expenditure programme spending which arise from policy decisions taken
by the respective devolved administrations will be met from their
respective budgets.
4.4 The Main Programme Spending items within Annually Managed Expenditure
are:
i. Common Agricultural Policy programme payments, for each
country, which are received centrally from the European Union by the
Intervention Board for Agricultural Produce and distributed according
to entitlement;
ii. Housing Support provision in Scotland and Housing Revenue Account
Subsidy in Wales which are based on economic assumptions produced
by the Treasury and forecasts by the Department of Social Security
of the impact of all factors, other than changes in rent policy, on
the demand for gross rent rebates;
iii. National Health Service and teachers' pensions in Scotland and
Northern Ireland are calculated on the basis of forecasts provided
by the devolved administration (taking account of Treasury economic
assumptions) of gross expenditure and of income from employee and
employer pension contributions; and
iv. social security benefits in Northern Ireland where adjustments
are based on the latest economic assumptions produced by the Treasury
in conjunction with forecasts produced by the Northern Ireland department
with responsibility for social security. These benefits will be funded
on the same model as in Great Britain, that is funding will be in
line with actual entitlement of claimants. If, in the future, the
Northern Ireland Assembly change social security policy to differ
from the rest of the United Kingdom, United Kingdom Ministers will
need to take a view on whether and how to adjust this funding.
4.5 Other AME items include Local Authority Self-Financed Expenditure
(LASFE) or District Council self-financed expenditure in Northern Ireland,
which are determined by local authorities within the framework set by
the devolved administrations and expenditure financed by non-domestic
rates for Scotland and Wales and Regional Rates for Northern Ireland,
determined by the relevant devolved administration.
SECTION 5.
SELF-FINANCED SPENDING
5.1 The devolved administrations and, where necessary, their local
authorities have responsibility for spending financed from local government
and, to varying degrees, for spending financed from some other sources
of revenue, for example, non-domestic rates, the Food Standards Agency
levy and, in Scotland, the Scottish Variable Rate of Income Tax. Recurrent
spending funded by these revenues is an issue for the devolved administrations
and their local authorities.
5.2 It is, however, open to the United Kingdom Government to take
into account levels of this self-financed expenditure in each country
when determining the assigned budget where:
i. levels of self-financed spending have grown significantly
more rapidly than equivalent spending in England over a period; and
ii. this growth is such as to threaten targets set for the public
finances as part of the management of the United Kingdom economy.
Expenditure funded by the Scottish Variable Rate of Income Tax is
excluded from this policy; there is no equivalent expenditure element
in England.
5.3 This Statement is drafted on the assumption that current forms
of local taxation continue. Specific rules are as follows:
i. Council Tax Benefit adjustments: if, due to decisions
by the Scottish Parliament or the National Assembly for Wales or their
respective local authorities, the costs of Council Tax Benefit subsidy
paid to local authorities changes at a disproportionate rate (both
higher or lower), relative to changes in England, then appropriate
balancing adjustments will be made to the relevant devolved administration's
Departmental Expenditure Limits. The Government will apply a formula
to calculate balancing adjustments based on relative percentage changes
in Council Tax. The balancing adjustment would be an addition or subtraction
to the devolved administration's Departmental Expenditure Limits;
ii. Rates levels in Northern Ireland: these are dependent on
decisions of Northern Ireland Assembly Ministers (and in the case
of District Rates by District Councils) which influence the levels
of rate rebate. The principles and mechanisms applied to Council Tax
Benefit (above) will also be applied to rate rebates;
iii. Adjustments for levels of rent rebates: if, in any of
the countries, the actual costs of rent rebate subsidy expenditure
is disproportionate in relation to changes in England, the devolved
administration will need to make an equal and opposite adjustment
to its DEL or receive the appropriate credit. The Government will
apply a formula to calculate balancing adjustments based on relative
percentage changes in public sector rents;
iv. Non-domestic rate poundage: the power to adjust this in
Scotland and Wales is devolved. The devolved administrations will
have to set the level of spending in line with expected receipts;
and
v. Non-domestic rates pool mechanism for Scotland and Wales:
the pool mechanism through which non-domestic rates is distributed
will mean that over time grants distributed from non-domestic rates
income will match income raised. In-year variation of non-domestic
rates income will be manageable by this mechanism. A devolved administration
may, through the Secretary of State, seek a loan from the National
Loans Fund to cover any shortfall over the end of the financial year
(see paragraph 6.3 below)
SECTION 6.
EXPENDITURE FINANCED BY BORROWING
6.1 The devolved administrations will have the power to sanction borrowing
for capital investment by local authorities (District Councils in
Northern Ireland) and other public bodies. This borrowing counts towards
the United Kingdom Public Sector Net Cash Requirement (PSNCR) and
hence is included within the devolved administrations' total budgets
each year as a control mechanism so that any increases in borrowing
must be offset by reductions in other spending. The effect is to reduce
the level of grant from the United Kingdom Parliament and hence to
restore the United Kingdom borrowing position.
6.2 Generally the financing costs of higher borrowing are met locally
- either from the assigned budget itself, from local taxation or through
higher charges for services. Local authority capital is funded through
a balance of credit approvals, where financing costs must be met by
local authorities, and capital grants, where financing costs are met
by the United Kingdom Exchequer. In cases of a significant shift in
the balance between credit approvals (or net capital allocations)
and capital grants, the Treasury reserves the right to adjust the
assigned budget for the financing costs of this shift.
6. 3 Loans to the devolved administrations: each
Secretary of State may lend the devolved administration sums required
for meeting a temporary excess in expenditure over income or providing
the devolved administration with a working balance. The Treasury may
issue to the Secretary of State such sums out of the National Loans
Fund. These loans should be repaid by the devolved administration
to the Secretary of State at such times, methods and interest rates
as the Treasury determine. Sums received by the Secretary of State
will be paid into the National Loans Fund. The aggregate outstanding
amount of principal loans made shall not exceed £500 million
for the Scottish Parliament and National Assembly for Wales and £250
million for the Northern Ireland Assembly. The Secretary of State,
with the consent of the Treasury, can substitute these statutory limits
by order. These rules governing lending are laid out in Sections 66,
67, 68, 71 and 72 of the Scotland Act 1998, Sections 82 and 83 of
the Government of Wales Act 1998 and Sections 61 and 62 of the Northern
Ireland Act 1998.
SECTION
7. RECEIPTS AND CHARGES
7.1 Responsibility for setting charges for devolved public services
will rest with the devolved administrations. They can decide whether
they wish to follow United Kingdom Government policy on fees and charges
in specific cases. The general principle that applies is if a devolved
administration chooses to charge more, the additional negative public
expenditure receipts will accrue to its budget and if it chooses to
charge less it will need to meet the costs from within its budget.
Receipts
7.2 The treatment of receipts in Departmental Expenditure Limits should
follow the Treasury's normal rules as set out from time to time in
guidance papers. The Office for National Statistics define what scores
as a payment for a service, a tax or a fine in National Accounts and
the Treasury determines the treatment of receipts in Departmental
Expenditure Limits, which are normally in line with National Accounts
definition. There is also scope for negative DEL treatment for certain
fines and taxes. For Scotland, the Treasury will list those receipts
that will be surrendered to the United Kingdom Consolidated Fund under
an order by Section 64 (5) of the Scotland Act 1998. For Wales, a
Treasury direction under Section 88 of the Government of Wales Act
1998 will list those receipts that will not be surrendered to United
Kingdom Consolidated Fund.
7.3 The general rule is that revenue receipts from taxes and from
fines and charges which are analogous to taxes (with the exception
of some local authority fines and charges) will be surrendered to
the United Kingdom Consolidated Fund. Where charging more on fees
might lead to the excess being treated as taxation or revenue (as
defined by the Treasury and Office for National Statistics) the excess
should not be retained. Separate arrangements for Northern Ireland
are detailed at paragraph 14.2 below. The exceptions where the devolved
administrations' budgets will not be affected are:
i. recurrent receipts from charges set to recover the costs
of public services which will be available to be re-cycled by the
devolved administration and subject to the general principle set out
in paragraph 7.1 above; and
ii. revenue from non-domestic rates and the Scottish Variable Rate
of Income Tax, where use of the tax-varying power will not affect
the assigned budget.
Capital receipts
7.4 United Kingdom taxpayers will have a continuing interest in capital
assets under the control of the devolved administrations where they
originally financed these assets. Consistent with this the United
Kingdom Government may take into account proceeds from the sales of
such assets in setting its grant to the devolved administrations when
capital receipts are realised as a result of a privatisation of a
public sector trading body or a major change in the role of the public
sector such as might arise from a large scale asset disposal or a
public-private partnership in which the public sector contracts with
the private sector for the future delivery of a service. In such circumstances
Treasury Ministers reserve the right to reduce the grant to the devolved
administration to reflect receipts.
7.5 Current rules applying to all United Kingdom Government departments
state that, until 31 March 2001, 100 per cent of the receipts of all
assets disposals may be retained subject to certain limits. These
are that the value of an individual sale does not exceed £100
million and that the value of total sales for any financial
year does not exceed 3 per cent of a department's total provision
(or a Non Departmental Public Body's grant-in-aid). Automatic retention
does not apply to receipts from privatisations or similar sales and
Public Corporations. This policy does not apply to local authorities.
7.6 The devolved administrations should advise Treasury in advance
in circumstances where adjustments to the assigned budget may be made.
The Treasury will consult the devolved administrations and the Secretaries
of State before making such adjustments.
Trading receipts
7.7 Where a devolved administration receives significant trading surpluses
from the commercial exploitation of publicly funded assets, these
may be taken into account by the United Kingdom Government when setting
grants to the devolved administration or by the devolved administration
surrendering these to the United Kingdom Consolidated Fund. The United
Kingdom Government would not expect to take surpluses into account
where they are generated by a body which - over a period - is expected
to break even or where they are de minimis in public expenditure terms.
The Treasury will consult the devolved administration before trading
surpluses are taken into account.
7.8 Funding for Forestry Commission activities in Scotland and Wales
will be devolved having previously been funded on a Great Britain
basis. Timber receipts from the commercial side of this work will
be subject to a profit-sharing agreement. United Kingdom taxpayers
funded the original investment in the Commission's forests. To reflect
this investment while at the same time providing an incentive to maximise
receipts from timber sales, it is agreed that the Exchequer should
share half the net change in receipts with the devolved administration
from 2002-03. This will not apply to the years 1999-2000 to 2001-02
when funding for the Forestry Commission was settled at a Great Britain
level. This does not apply to the Forest Service in Northern Ireland
where responsibility for forestry has always been a transferred matter
funded from Northern Ireland's overall provision.
SECTION 8.
EXCEPTIONAL FUNDING ADJUSTMENTS
8.1 There are a number of other specific circumstances in which each
devolved administration's budget may be exceptionally adjusted. Adjustments
may be made where:
i. the United Kingdom Government decides to make a uniform
across the board general adjustment to public spending programmes
across departments;
ii. action taken by a devolved administration in a devolved area has
repercussive costs for the United Kingdom Government or vice versa.
The devolved administration will be able to make or receive payments
to departments of the United Kingdom Government directly in respect
of such costs. Alternatively, the Departmental Expenditure Limit of
the devolved administration will be adjusted downwards to compensate
for costs incurred by the United Kingdom Government as a result of
the actions of a devolved administration, or upwards to compensate
the devolved administration for costs which it incurs as a result
of actions by the United Kingdom Government not already allowed for
through the operation of the Barnett Formula. The Departmental Expenditure
Limits will not, however, be adjusted upwards to accommodate additional
costs incurred as a result of decisions by the United Kingdom Government
which the United Kingdom Government is expecting its departments with
parallel responsibilities to absorb within existing spending plans.
The general principle for establishing the burden of cost is set out
in subparagraph 2.2.viii above. The detailed arrangements between
each department of the United Kingdom Government and the devolved
administrations of how and where these adjustments might apply will
be set out in their respective concordats;
iii. EUROPES: adjustments are made for the cost of
financing certain European Union expenditure programmes which cross
more than one departmental area of responsibility (these are European
wide programmes and should be distinguished from Category 2, European
Structural Funds expenditure). Where appropriate, these adjustments
will continue to apply to the devolved administrations' baselines
on a fair and equitable basis, and in line with the treatment for
departments of the United Kingdom Government. An exercise will be
conducted each year to determine the liability for each United Kingdom
Government department and devolved administration. In the year of
a new review, this exercise will determine, where appropriate, a revised
allocation of shares of responsibility between each United Kingdom
Government department and devolved administration. This will identify
a liability that will go forward to the next review. Here, Ministers
of the United Kingdom Government and the devolved administrations
will continue to have the right to seek to have their identified EUROPES
adjustments annulled. Fundamentally, whether or not adjustments are
applied, in full or in part, in the next review will be a matter to
be considered by United Kingdom Government Ministers, including the
Secretaries of State in consultation with devolved administrations'
Ministers, as part of that review.
iv. Police adjustment for Wales: while funding for
police authorities in Wales and England is decided by a common Home
Office formula each year may require transfers from the Assembly to
Department of Environment, Transport and the Regions or from DETR
to the Assembly. These adjustments are outside the Barnett Formula
arrangements.
SECTION
9. IN-YEAR CHANGES AND ACCESS TO THE DEL
RESERVE
9.1 The Departmental Expenditure Limits set firm, three-year plans.
Departments of the United Kingdom Government and devolved administrations
must live within these plans and absorb unforeseen pressures. The
devolved administrations must ensure they introduce suitable arrangements
for the planning and control of public expenditure on devolved services
to achieve this. Thus the presumption is that departments and the
devolved administrations will contain pressures on their budget by
re-allocating priorities, seeking offsetting savings and using unspent
entitlements from the preceding year, not through in-year access to
the DEL Reserve. The establishment of Departmental Unallocated Provisions
is encouraged for this purpose. DEL Reserve claims may result in multi-year
plans being re-opened. The devolved administrations will be treated
in the same manner as departments of the United Kingdom Government
in decisions on access to the DEL Reserve.
9.2 Access to the DEL Reserve by the Secretaries of State on behalf
of the devolved administrations will be considered by Treasury Ministers
in exceptional circumstances, on a case by case basis and specifically
where:
i. a United Kingdom department is granted access to the
Reserve to enable it to meet exceptional pressures on a spending programme.
If a devolved administration has a comparable programme and establishes
that it faces similar exceptional pressures, unforeseen at the time
spending plans were settled, it will have the opportunity to make
its case on access to the Reserve which will be considered. There
is no automatic application of the Barnett Formula to Reserve claims
by departments of the United Kingdom Government. Reserve claims paid
to a devolved administration may be higher or lower than a population
share depending on the circumstances of the claim or other pressures
facing the United Kingdom Government; and
ii. Scotland, Wales or Northern Ireland faces exceptional and unforeseen
domestic costs which cannot reasonably be absorbed within existing
budgets without a major dislocation of existing services.
9.3 Reserve claims on behalf of the devolved administrations will be
judged by the same criteria as claims for departments of the United
Kingdom Government and devolution will not lessen in any way the basis
of entitlement of Scotland, Wales and Northern Ireland to access to
the Reserve. Ministers of the devolved administrations or Secretaries
of State will also be able to make representations directly to Treasury
Ministers.
SECTION
10. END-YEAR FLEXIBILITY
10.1 An important feature of three yearly allocations is that all
departments have much greater flexibility to carry forward unspent
provision into future years. End year flexibility (EYF) enables unspent
provision to be carried forward from one year to the next and encourages
good financial management. The whole DEL assigned budget of each devolved
administration will therefore be eligible for end-year flexibility.
10.2 Only carry-forward from one year to the next will be allowed;
expenditure cannot be anticipated. The exception to this rule is European
Structural Fund payments. If requests for payments exceed forecasts,
and thus provision for Structural Funds in that year, then the excess
up to 20 per cent of the following year's provision for Structural
Funds may be anticipated. The following year's DEL provision will
be adjusted by a corresponding amount.
10.3 As at present, the Secretaries of State will have a claim against
the DEL Reserve when EYF or Structural Fund anticipation is exercised
by the devolved administrations.
Breaches of Departmental Expenditure Limits
10.4 Breaches in DELs which materialise at the end of the year would
be viewed by the United Kingdom Government as serious mismanagement
on the part of the devolved administration and the presumption would
be that the following year's DEL and grant to the devolved administration
would be reduced by an amount equivalent to the breach. The same rule
applies to departments of the United Kingdom Government.
SECTION
11. CHANGES TO FUNDING POLICY AND RESOLVING
DISPUTES
11.1 The Chief Secretary has agreed this Statement with the Secretaries
of State for Scotland, Wales and Northern Ireland. The Treasury will
keep this Statement under review, in order to assess whether any amendments
are necessary to reflect changing circumstances, such as material
changes in policies or in the responsibilities of departments of United
Kingdom Government or a devolved administration. Prior to making any
changes to the Statement or the policies to which it applies, the
Treasury will as far as is possible consult in good time with each
Secretary of State and the devolved administrations, seeking their
agreement, before such a change comes into effect. It will also be
open to the devolved administrations and the Secretaries of State
to propose changes to this Statement which the Treasury will consider
and respond in writing with its assessment. In the event of any disagreement
over proposed changes that cannot be resolved between the Treasury,
the Secretaries of State and devolved administrations, then the issue
should follow the disputes procedure that follows. The rules will
be amended to reflect any changes and, if it is considered the change
has a material effect, published alongside each spending review.
11.2 If there is disagreement between Treasury Ministers and devolved
administrations about changes to the Statement or about any aspect
of its application to determining funding, the relevant devolved administration
or Secretary of State can pursue the issue with Treasury Ministers.
This is the normal procedure for resolving disputes on all financial
issues and mirrors the arrangements between the Treasury and departments
of the United Kingdom Government. The Treasury will consider and respond
to any such representation in taking this forward with the relevant
party. Such matters can also be raised at the Joint Ministerial Committee,
which will include the relevant Ministers from the United Kingdom
Government and devolved administrations. Funding policy and public
expenditure allocation across the United Kingdom, as non-devolved
or reserved matters, remain the responsibility of the United
Kingdom Government, and in cases where disagreements still cannot
be resolved, devolved administrations can request that the respective
Secretary of State raises the issue at Cabinet for a final decision.
11.3 Substantial revisions to this Statement of Funding Policy would
need to be preceded by a study of relative spending needs across the
United Kingdom. The detailed arrangements for such a study would need
to be decided at the time, but the Treasury would fully consult the
Secretaries of State and devolved administrations on the arrangements.
SECTION 12.
SCOTTISH PARLIAMENT
|
SCOTLAND
Public Expenditure Regime
|
| 1999-2000 onwards |
| Assigned Budget |
Non-assigned Budget |
|
| Departmental Expenditure Limit (DEL): |
Annually Managed Expenditure (AME): |
| Barnett Formula determined (1) |
Non-Barnett determined |
Main programme spending: |
| Secretary of State's/Advocate General's office(2) |
|
|
| Education and arts,
Health and social work
Industry, enterprise and training,
Transport and roads,
Housing, Scottish Homes external finance,
Law and order,
Crown Office
Domestic agriculture
Environmental services,
Forestry
CalMac and HIAL's External Finance Requirements
Student Loans: implied subsidies and provision for bad debts
Capital Receipts Initiative
Trust Debt Remuneration (3)
Scottish Renewables Obligation
Bus Fuel Duty Rebates
|
HLCAs(4) |
CAP(6) |
| Welfare to Work(5) |
Housing support grant (6) |
| NHS and teachers' pensions (6)(8) |
|
Other AME: |
|
Local Authority Self Financed Expenditure (LASFE)(7) |
|
Scottish Non-Domestic Rates |
| Scottish Variable Rate of Income Tax |
| Other expenditure outside DEL: Police Loans charges |
(1) Undifferentiated expenditure linked to
changes in provision to departments of the United Kingdom Government
through the Barnett Formula;
(2) remains part of the United Kingdom Government;
(3) Trust Debt Remuneration includes payments
and receipts;
(4) HLCAs (Hill Livestock Compensatory Allowance),set
separately in DEL, within the non-assigned budget;
(5) within the non-assigned budget, allocated
on a United Kingdom-wide basis and on relevant client group;
(6) items determined or forecast annually;
(7) post-devolution, determined by local authorities
within the framework set by the Scottish Parliament and;
(8) forecast by the Scottish Parliament, approved
by the Secretary of State and the Treasury and voted by the United
Kingdom Parliament.
The Scottish Variable Rate of Income Tax
12.1 The Inland Revenue will pay into the Scottish Consolidated Fund
(SCF) an amount equal to the estimated yield of any increased Scottish
Variable Rate of Income Tax. The Scottish Consolidated Fund will pay
the Inland Revenue any shortfall in yield from a reduction in the
Scottish variable rate as set out in Sections 77 and 78 of the Scotland
Act 1998.
Changes in Provision to Local Government
12.2 The Scottish Parliament is free to determine the provision it
allocates to local government. In the Comprehensive Spending Review,
changes in the English local government programme were reflected in
the Scottish assigned budget in the following way. The Barnett Formula
was used on the English local government programme, viewed on the
basis of Aggregate External Finance (Aggregate External Finance simply
means the mainstream grants paid to local authorities). Because of
the move to devolution, and the Scottish Parliament's responsibility
for Scottish Non-Domestic Rates, English Non-Domestic Rates payments
to local authorities were non-comparable for application of the Barnett
Formula, as were a few other, minor, sub-programmes. The Barnett Formula
was applied along the lines described in Annex B to the Department
of the Environment, Transport and the Regions local government Departmental
Expenditure Limit. The resulting consequential was added to the change
in the Scottish assigned budget. As in the table above, grants to
local authorities (other than Non-Domestic Rates payments) are included
in the Scottish assigned budget, while Non-Domestic Rates payments
and spending financed from Council Tax are outside it.
12.3 The principles adopted in the Comprehensive Spending Review will
continue. The allocation method will be improved on devolution to
reflect variability in non-domestic rates payments. The aim is to
determine consequentials based on the change in funding of English
local authorities that is not raised locally. These will be calculated
for the length of the public spending round based on the change in
English Aggregate External Finance minus a measure of English non-domestic
rates. For the subsequent review period, the measure of English non-domestic
rates for the new base year will be revised to take account of latest
information and this adjustment will be included in the next round
of allocations. Allocations in respect of consequentials for other
items such as any exchequer contributions to non-domestic rates transitional
relief schemes will be handled outside this formula. This is consistent
with current practice.
SECTION
13. NATIONAL ASSEMBLY FOR WALES
|
WALES
Public Expenditure Regime
|
| 1999-2000 onwards |
| Assigned Budget |
Non-assigned Budget |
|
| Departmental Expenditure Limit (DEL): |
Annually Managed Expenditure (AME): |
| Barnett Formula determined (1) |
Non-Barnett determined |
Main programme spending: |
| Secretary of State's office |
|
|
| Economic development, industry and training,
education and arts,
transport, planning and environment, local government,
housing and social services and health
Domestic agriculture
Forestry (from 1 April 2000)
Capital Receipts Initiative
Trust Debt Remuneration (2)
Bus Fuel Duty Rebate
|
HLCAs (3) |
CAP (5) |
| Welfare to Work (4) |
Housing Revenue Account Subsidy |
Other AME: |
|
Local Authority Self Financed Expenditure (LASFE) (6) |
|
Welsh Non-Domestic Rates |
(1) Undifferentiated expenditure linked to
changes in provision to departments of the UK Government through the
Barnett Formula;
(2) Trust Debt Remuneration is both payments
and receipts (both interest and dividends);
(3) HLCAs (Hill Livestock Compensatory Allowance),set
separately in DEL, within the non-assigned budget;
(4) within the non-assigned budget, allocated
on a United Kingdom-wide basis and on relevant client group;
(5) items determined or forecast annually;
(6) post-devolution, determined by local
authorities within the framework set by the Assembly.
Changes in Provision to Local Government
13.1 The Assembly is free to determine the provision it allocates
to local government. In the Comprehensive Spending Review, changes
in the English local government programme were reflected in the Welsh
assigned budget in the following way. The Barnett Formula was used
on the English local government programme, viewed on the basis of
Total Standard Spending. Total Standard Spending is Aggregate External
Finance ( the mainstream grants paid to local authorities) with the
addition of a standard level of Council Tax, called Council Tax at
Standard Spending. The Barnett Formula was applied along the lines
described in Annex B to the Department of the Environment, Transport
and the Regions local government Departmental Expenditure Limit. The
resulting consequential was added to the change in the Welsh block,
when viewed on the basis of Total Standard Spending. To go from the
Welsh block on the basis of Total Standard Spending to the Welsh assigned
budget, one subtracts Welsh Council Tax at Standard Spending. Grants
to local authorities (including Non-Domestic Rates payments) are included
in the Welsh assigned budget, while spending financed from Council
Tax is outside it.
13.2 A Total Standard Spending approach cannot be used in future reviews
as the Assembly will have full responsibility over local taxation.
The allocation method for Welsh grant after devolution will be the
same as that for Scotland explained in paragraph 12.3 above.
SECTION
14. NORTHERN IRELAND ASSEMBLY
|
NORTHERN IRELAND
(Excluding the Northern Ireland Office)
Public Expenditure Regime
|
| 1999-2000 onwards |
| Assigned Budget |
Non-assigned Budget |
|
| Departmental Expenditure Limit (DEL): |
Annually Managed Expenditure (AME): |
| Barnett Formula determined (1) |
Non-Barnett determined |
Main programme spending: |
| Agriculture,
trade and industry,
employment,
energy,
roads and transport,
housing,
environment and water,
fire,
education,
health,
social security administration, public corporations and other
public services,
Student Loans: implied subsidies and provision for bad debts
Capital Receipts Initiative
Trust Debt Remuneration (2)
Fossil Fuel Obligation
Bus Fuel Duty Rebate
|
Housing Loan Charges (3) |
CAP (6) |
| EU Peace and Reconciliation Programme (3) |
Social security benefits (6) |
| ERDF gas link and electricity interconnector (3) |
NHS and teachers' pensions |
| HLCAs (4) |
Other AME: |
| Welfare to Work (5) |
District Councils' self-financed expenditure (7) |
|
Regional Rates (7) |
(1) Undifferentiated expenditure linked to
changes in provision to departments of the UK Government through the
Barnett Formula;
(2) Trust Debt Remuneration includes both
payments and receipts;
(3) within the non-assigned budget, set separately
in DEL. Periodically updated in light of latest expenditure estimate;
(4) within the non-assigned budget, HLCAs
(Hill Livestock Compensatory Allowance) set separately in DEL;
(5) within the non-assigned budget, allocated
on a United Kingdom-wide basis and on relevant client group;
(6) items determined or forecast annually;
(7) Regional Rates will be determined by
the Northern Ireland Assembly and District Councils' self-financed
expenditure will be determined by District Councils.
Northern Ireland Office and Northern Ireland Courts Service
14.1 Provision for law, order and protective services and the Northern
Ireland Courts Service is not included in the public expenditure budget
for the Northern Ireland Assembly but are determined separately through
direct negotiations between the Treasury, the Secretary of State and
Lord Chancellor as appropriate. As areas of responsibility are transferred
to the Northern Ireland Assembly, their provision will also transfer
into the Northern Ireland assigned budget;
Non-Formula adjustments
14.2 The United Kingdom Government may adjust provision to Northern
Ireland to take account of revenue receipts from taxes and from fines
and charges which are analogous to taxes (with the exception of local
authority fines and charges) flowing into the Northern Ireland Consolidated
Fund. This will not apply to revenue from the Regional Rate which
will be available to finance spending in Northern Ireland.
Changes in Provision to Local Government
14.3 The Assembly is free to determine the provision it allocates
to local government. In the Comprehensive Spending Review, changes
in the English local government programme were reflected in the Northern
Ireland assigned budget in the following way. The Barnett Formula
was used on the English local government programme, viewed on the
basis of Aggregate External Finance. (Aggregate External Finance simply
means the mainstream grants paid to local authorities.) Because of
the move to devolution, and the Northern Ireland Assembly's responsibility
for Rates, English Non-Domestic Rates payments to local authorities
were non-comparable for application of the Barnett Formula as were
some other, minor, sub-programmes. The consequential on the Revenue
Support Grant (RSG) part of the AEF was also abated for capital financing
that has no equivalent in Northern Ireland. The Barnett Formula was
applied along the lines described in Annex B to the Department
of the Environment, Transport and the Regions local government Departmental
Expenditure Limit. The resulting consequential was added to the change
in the Northern Ireland's assigned budget. As in the table above,
Northern Ireland central government spending, that in Great Britain
would have been the responsibility of local authorities, and grants
to district councils are both included in the Northern Ireland assigned
budget, while spending financed from Regional Rates or District Rates
is outside it.
ANNEX A
'A Statement of Principles'
Text of a written answer by the Chief Secretary
to the Treasury:
WA Official Report: 9 December 1997 Col 510-
513
Mr Timms: To ask the Chancellor of the Exchequer
what arrangement will be made for determining changes to the budgets
of the Scottish Parliament and National Assembly for Wales under devolution;
and if he will make a statement.
Mr Darling: The Government set out their position
on the funding of the budgets for the Scottish Parliament and National
Assembly for Wales in the White Papers published in July (Cm 3658
and Cm 3718). The key to these arrangements is block budgets which
the devolved Administrations, like the Secretaries of State now, will
be free to deploy between the functions under their control in response
to local priorities. Changes in these block budgets will be linked
to changes in equivalent English spending plans by the Barnett Formula
which gives Scotland and Wales a population-based share of planned
changes in comparable spending in England.
In order to help inform debate about these arrangements during the
passage of the Scotland and Wales Bills, the government published
yesterday a statement of the principles which govern the existing
block/formula arrangements and which will continue to do so under
devolution. A copy of the statement is appended. Copies were placed
yesterday in the Libraries of both Houses and referred to by my right
hon Friend the Secretary of State for Wales when he opened the Second
Reading debate on the Government of Wales Bill.
Although the block and formula arrangements have operated for nearly
20 years, this is the first time that these principles have been spelt
out in public.
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.
Setting Scotland's and Wales' shares of United Kingdom public
expenditure: the "Barnett" Formula
Existing position
3. All United Kingdom tax revenues are pooled. Decisions about the
allocation of United Kingdom 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
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 per cent. 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 United Kingdom 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 United Kingdom Government
or vice versa. The block budgets may be adjusted downwards to compensate
for costs incurred by the United Kingdom Government as a result
of the action of the devolved administrations, or upwards to compensate
the devolved administrations for costs which they incur as a result
of actions by the United Kingdom Government and are not allowed
for through the operations 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 United Kingdom Government
which the United Kingdom 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 United
Kingdom 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
United Kingdom 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 United Kingdom economy. In such circumstances
it will be open to the United Kingdom 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 int he 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 United Kingdom
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 United Kingdom Reserve. Access to the Reserve may however
be considered at the discretion of the United Kingdom 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 United Kingdom 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 time 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 United Kingdom Government.
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
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).
ANNEX B
Numerical example of the workings of the Barnett Formula:
1. Section 3 sets out the workings of the Barnett Formula. If we
consider a single department of the United Kingdom Government, the
three factors determining any change to the budgets of the devolved
administrations in Scotland, Wales or Northern Ireland's provision
are:
| (i) Change to the department of the United Kingdom
Government's DEL |
X
|
(ii) Comparability percentage |
X
|
(iii) Appropriate population proportion |
2. Thus, if for example:
(i) the Government decides to increase or decrease this
department's DEL by £100 million; and
(ii) the comparability for each devolved administration is 75%
for the programme (perhaps because the department in question already
carries out some expenditure at an all United Kingdom level); and
(iii) the population proportions are 10.39% for Scotland, 5.94%
for Wales and 3.40% for Northern Ireland of England's population
or 2.92% of Great Britain's population for Northern Ireland;
then the following changes are then added to or subtracted from each
countries' overall baseline:
For the Scotland: 100 x 0.75 x 0.1039 = £7.79
million
For Wales: 100 x 0.75 x 0.0594 = £4.46 million.
For Northern Ireland:
Pre-1999 method: English change: 100 x 0.75 x 0.0292 = £2.19
million
Aggregate* Scotland and Wales change: (7.84 + 4.46) x 0.0292 = £0.36
million
Northern Ireland Total*: £2.55 million
7% VAT abatement*(see paragraph 3.16): £2.37 million
Post-1998 method: English change: 100 x 0.75 x 0.0340 =
£2.55 million
7% VAT abatement*(see paragraph 3.16) £2.37 million
3. Northern Ireland: two methods are shown for calculating provision
for Northern Ireland. The first uses the share of Great Britain's
population for English, Scottish and Welsh changes - this was applied
up to and including the 1998 Comprehensive Spending Review. The second
uses the share of England's population, consistent with the method
for Scotland and Wales - this will be applied in future reviews.
4. The devolved administrations do not have to adjust their programme
spending in line with England, they are free to adjust spending on
any of their functions. The same calculations will be carried out
for all comparable English spending. The sum of these changes will
give the overall change in each devolved administration's baseline.
ANNEX C
|
SCHEDULE OF COMPARABLE SUB-PROGRAMMES
|
|
Provision
for 1998-99
at
1 April 1998
£'000s
|
COMPARABILITY PERCENTAGES
|
| Sub-programme description |
Scotland |
Wales |
Northern Ireland |
| Ministry of Defence |
|
non-comparable |
| Foreign and Commonwealth Office |
|
non-comparable
|
| |
|
|
|
|
| Intervention Board for Agricultural Produce |
|
|
|
|
| Beef stocks transfer scheme |
216 |
0% |
0% |
0% |
| Selective cull |
36,060 |
0% |
0% |
0% |
| Aid to Renderers |
1,000 |
0% |
0% |
0% |
| Market support under CAP - BSE |
553,463 |
0% |
0% |
0% |
| Central administration |
58,978 |
0% |
0% |
100% |
| Total Intervention Board |
649,717 |
0.0% |
0.0% |
9.1% |
| |
|
|
|
|
| Ministry of Agriculture Fisheries and Food (MAFF) |
|
|
|
|
| Promoting food safety - CL2 |
99,216 |
|
|
100% |
| T | | 