Scotland and Wales: Block Budgets (Hansard, 9 December 1997)

§ Lord McIntosh of Haringey

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 the Secretary of State for Wales when he opened the House of Commons 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 their 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."

9WA

The Wales White Paper, A Voice for Wales, said:

"The Government proposes that the financial arrangements for the Assembly will largely replicate the existing system.

Annual changes to the Welsh Block will be calculated by the population-based formula used at the moment. These arrangements based on the Block and formula have worked in practice, producing fair settlements for Wales in annual public expenditure rounds."

2. The Scottish Parliament and National Assembly for Wales will therefore have block budgets, which they will be free to allocate in response to local priorities among the functions under their control and for which they will be accountable to local people. This note outlines the principles set out in the White Papers and describes how they will govern changes made to these block budgets under devolution.

SETTLING SCOTLAND'S AND WALES' SHARES OF UK PUBLIC EXPENDITURE: THE "BARNETT' FORMULA

Existing position

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

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

After devolution

5. These arrangements will continue under devolution, with only minor adjustments. Changes to the block budgets for which the Scottish Parliament and the National Assembly for Wales will become responsible will continue to be determined by a formula linked to changes in provision for the equivalent spending programmes in England. The formula will continue to he 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 intend that these population shares will be recalculated annually on the basis of the latest population estimates for England, Scotland and 10WA Wales published each year by the Office of National Statistics. The population ratios will next he updated for the purpose of determining changes in the Scottish and Welsh block budgets for 1999–2000.

7. The Government intend 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 FOMULA

8. There are a number of circumstances in which the block budgets under the control of the Secretary of State for Scotland and Wales are open to adjustment other than on the basis of the Barnett formula. These exceptions will continue to apply under devolution. Adjustments may be made where:

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

(a) the Government are making available additional provision in-year for equivalent services in England in order to cope with exceptional circumstances affecting the UK as a whole unforeseen at the time spending plans for the year concerned were settled; and
(b) Scotland or Wales face exceptional and unforeseen domestic costs—arising, for example, from a natural disaster—which cannot be reasonably absorbed within the planned block budgets without major dislocation to existing services.

REVISING THESE PRINCIPLES

12. As noted above, the formula will be updated annually to take account of population changes and from 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.

HM Treasury

December 1997

12WA

Spending programmes forming part of the Scottish Block

Domestic agriculture, fisheries and food (afterdevolution)

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)