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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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SUMMARY OF CONTENTS
Section   Paragraphs  
1 INTRODUCTION 1.1 to 1.8  
  The United Kingdom public expenditure regime 1.3  
  Public expenditure categories 1.6  
  Resource Accounting and Budgeting 1.7  
2 KEY PRINCIPLES OF ALLOCATING PUBLIC EXPENDITURE WITHIN THE UNITED KINGDOM 2.1 to 2.3  
3 PUBLIC EXPENDITURE CHANGES DETERMINED BY THE BARNETT FORMULA 3.1 to 3.16  
  The Barnett Formula 3.3  
  Population proportions 3.8  
  Comparability percentages 3.12  
  Northern Ireland value added tax abatement 3.16  
4 PUBLIC EXPENDITURE CHANGES NOT DETERMINED BY THE BARNETT FORMULA 4.1 to 4.5  
5 SELF-FINANCED EXPENDITURE 5.1 to 5.3  
6 EXPENDITURE FINANCED BY BORROWING 6.1 to 6.3  
7 RECEIPTS AND CHARGES 7.1 to 7.8  
8 EXCEPTIONAL FUNDING ADJUSTMENTS 8.1  
9 IN-YEAR CHANGES AND ACCESS TO THE DEL RESERVE 9.1 to 9.3  
10 END YEAR FLEXIBILITY 10.1 to 10.4  
11 CHANGES IN FUNDING POLICY AND RESOLVING DISPUTES 11.1 to 11.3  
12 SCOTTISH PARLIAMENT 12.1 to 12.3  
13 NATIONAL ASSEMBLY FOR WALES 13.1 to 13.2  
14 NORTHERN IRELAND ASSEMBLY 14.1 to 14.3  
Annexes  
A 'A Statement of principles' - text of a written answer by the Chief Secretary to the Treasury on 9 December 1997    
B Numerical example of the workings of the Barnett Formula    
C Schedule of comparable sub-programmes    
D Glossary of terms    
E Bibliography    



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