Fraser of Allander Institute
As part of the agreement reached between the Conservatives and DUP, the UK Government has agreed to allocate an additional £1bn to the budget of the Northern Ireland Executive over the next two years. The funding includes £100m to support health service transformation, a further £50m for various ‘immediate’ pressures in health and education, £200m for infrastructure investment and £75m to support ultra-fast broadband. The agreement also includes renewed commitments to devolve Corporation Tax and establish City Deals.
Scottish First Minster Nicola Sturgeon and Welsh First Minister Carwyn Jones have both argued that the additional funding associated with this agreement should go through the Barnett Formula and generate consequentials for the Scottish and Welsh budgets.
Is this a legitimate argument?
Firstly, a reminder about how the Barnett Formula works.
The Barnett Formula determines the change in the block grant from one year to the next. It allocates the Scottish (and Welsh and Northern Irish) budgets a population share of changes in comparable English spending. ‘Comparability’ measures the extent to which the activities of a given UK Government department correspond to the services provided by a devolved government. For spending by the UK Government on education for example, the comparability factor is 100%, because responsibility for education is completely devolved.
So, a £100m increase in spending on education in England by the UK Government would normally attract around a £10m increase in the Scottish Government’s budget (as Scotland’s population share relative to England is approximately 10%). The change in funding is added to the ‘baseline’ block grant the previous year.
Virtually all of the funding to the devolved governments is allocated by the Barnett Formula in this way.
Occasionally however, the UK Government can decide to allocate specific ‘targeted’ funding to a devolved government outwith the Barnett Formula. Such funding does not apply in England, and thus attracts no Barnett consequentials.
In the 2000s, Northern Ireland received various additional funding streams outwith Barnett to support capital investment, whilst Wales secured additional funding to support implementation of EU monies (Para 42).
Scotland has benefited from targeted funding outwith the Barnett Formula in the recent past. The 2016 Autumn Statement for example allocates just over £100m to Scotland for the Inverness and Aberdeen City Deals over the period 2017/18 – 2020/21. There was also a history of ‘Barnett bypass’ in the 1980s and 1990s, but since devolution this has – or had – largely ceased.
(Scotland’s budget also benefitted in the early 2010s as a result of mistake in the Barnett Formula, which effectively meant the Scottish budget was less exposed to English local government funding cuts than it should have been; the mistake has been rectified but the UK Government has never sought to clawback the windfall, which remains within Scotland’s baseline block grant).
So on a technical level, there is nothing in the Northern Ireland agreement that that contradicts any rules or laws. And of course, there are clearly special needs in Northern Ireland that may justify additional spending. However, there are a few reasons why the Scottish, Welsh (and also parts of England) might feel particularly aggrieved.
Firstly, this is the only time (certainly since devolution in 1999) that a decision to allocate outwith Barnett for devolved administrations has been made explicitly to secure the votes of a particular party at Westminster.
Secondly, the allocation of an additional £1bn funding to Northern Ireland over two years represents a particularly large financial settlement to have bypassed Barnett. To secure an equivalent funding increase via the Barnett Formula, the UK Government would have had to increase comparable English spending by £30bn; this in turn would have generated Scottish consequentials of £3bn (i.e. £1.5bn per year for each of the two years). This is clearly a substantial sum, equivalent to almost a 5% increase in the Scottish discretionary budget.
Thirdly, unlike previous Barnett bypasses, the additional funding announced for Northern Ireland isn’t simply for discrete, specific projects – or projects like City Deals which are joint initiatives – but includes a general funding uplift for broad elements of devolved spending.
Finally, HM Treasury acts as both rule-maker and referee. It appears to have complete discretion as to what is within and outwith the Barnett Formula, without consulting the devolved governments. Some could argue that this may not sit well with the ‘Principles for inter-administration financial relations’ set out in the Treasury’s ‘Statement of Funding Policy’ for the devolved governments, which states ‘the UK government and devolved administrations work together in a spirit of mutual respect, and aim to reach agreement wherever possible’ and also that ‘the system commands the support of governments, parliaments and people and is equitable and predictable in operation’.
It is therefore of no surprise that the devolved governments in Edinburgh and Cardiff feel aggrieved by the financial agreement, which could further strain inter-governmental relationships. Further tension will arise in future if – as some anticipate – a subsequent agreement is required to be reached between the Conservatives and DUP to cover the remainder of the parliamentary term.
The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.