HC Deb 09 December 1997 vol 302 cc510-3W

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 UK public expenditure: the "Barnett" formula

Existing position

3. All UK tax revenues are pooled. Decisions about the allocation of UK public expenditure are made in the light of the Government's judgement of relative priorities and relative needs. Changes to the shares of public expenditure available to the Secretaries of State for Scotland and Wales are determined by a formula linked to changes in provision for equivalent spending programmes in England.

4. This formula, which has operated for almost 20 years, is known as the "Barnett" formula. It provides that, in settling new plans for public expenditure, Scotland and Wales should receive a share of the planned cash changes in provision for equivalent public services in England which is proportionate to their population. In other words, Scotland's and Wales' shares of changes in relevant planned spending in England are the same proportions as their populations represent of England's population. The formula applies only to changes in spending plans, not to the underlying baselines which remain unaffected. The formula also applies only to changes in the block budgets: expenditure in Scotland and Wales, and expenditure on nationalised industries in Scotland, is outside the block budgets at present and

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:

  1. (a) the UK Government decides to make a uniform general adjustment to public expenditure programmes;
  2. (b) action taken by the Scottish or Welsh administrations in a devolved area has knock-on costs for the UK Government or vice versa. The block budgets may be adjusted downwards to compensate for costs incurred by the UK Government as a result of the action of the devolved administrations, or upwards to compensate the devolved administrations for costs which they incur as a result of actions by the UK Government and are not allowed for through the operation of the Barnett formula. The block budgets will not however be adjusted upwards by reason of additional costs incurred as a result of actions by the UK Government which the UK Government is expecting English departments with parallel responsibilities to absorb within existing spending plans;
  3. (c) the devolved administrations receive capital receipts as a result of a privatisation or major change in the role of the public sectors in Scotland or Wales. In these circumstances, the block budgets may be adjusted downwards in the year in which the receipts occur to reflect the continuing interest in these receipts of UK taxpayers as a whole who financed the underlying capital assets in the past. Proceeds from the sales of other capital assets under the control of the Scottish Parliament or National Assembly for Wales will be available to be re-cycled within Scotland or Wales;
  4. (d) the devolved administrations receive significant trading surpluses from the commercial exploitation of publicly funded assets: the Uk Government may take these surpluses into account in settling block budgets;
  5. (e) local authority self-financed expenditure grows more rapidly than equivalent expenditure in England over a period and in such a way as to threaten targets set for public expenditure as part of the management of the UK economy. In such circumstances it will be open to the UK Government to take the excess into account in considering the level of the block budgets.

9. These principles concern the determination of changes to the block budgets under the control of the Scottish Parliament and the National Assembly for Wales, not the level of Westminster grant to support these budgets. The latter may also be affected by changes in the level of self-financed items of expenditure—local authority capital expenditure funded by borrowing, for example—which currently count towards the block Budgets.

In-year changes to the block budgets for Scotland and Wales

10. The arrangements outlined above apply to changes in the plans for expenditure in future years in Scotland and Wales. These paragraphs deal with changes in-year to the budgets arrived at under the arrangements outlined above and in particular with access to the UK Reserve for the devolved Scottish and Welsh administrations.

11. The general presumption, as at present, is that the Scottish and Welsh administrations will contain in-year pressures on their budgets by re-allocating priorities within their Blocks, not through access to the UK Reserve. Access to the Reserve may however be considered at the discretion of the UK Government in exceptional circumstances and specifically where:

  1. (a) the Government is making available additional provision in-year for equivalent services in England in order to cope with exceptional circumstances affecting the UK as a whole unforeseen at the time spending plans for the year concerned were settled; and
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  2. (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 UK Government.

Spending programmes forming part of the Scottish Block

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