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The Barnett formula and fiscal devolution

The Barnett formula

The devolved administrations in Scotland, Wales and Northern Ireland receive grants from the UK Government that fund most of their spending. The largest such grant is the ‘block grant’.

The Barnett formula calculates the annual change in the block grant. The formula doesn’t determine the total size of the block grant just the yearly change. For devolved services, the Barnett formula aims to give each country the same pounds-per-person change in funding.

How does the Barnett formula determine changes to the block grant?

The Barnett formula takes the annual change in a UK government department’s budget and multiplies it by two figures that take into account the relative population of the devolved administration (population proportion) and the extent to which the UK department’s services are devolved (comparability percentage). The calculation is carried out for each UK department and the amount reached is added to the devolved administrations’ block grant.

For Wales and Northern Ireland the formula includes a needs based factor, which recognises the additional relative spending need of both. Northern Ireland’s formula also includes a factor recognising that the Northern Ireland Executive gets VAT refunds from more of its spending.

Does the Barnett formula determine changes to other grants?

The UK government provides other grants outside of the block grant. These are often for less predictable demand driven spending. The UK government and devolved administrations negotiate these grants. The Barnett formula does not determine their change.

How has the Barnett formula changed?

The funding system for the devolved authorities has changed in recent years with the devolution of more tax and spending powers, particularly to Scotland. This has meant some adjustments to block grants, to facilitate greater tax and spending devolution, but the Barnett formula itself has been largely unchanged. The main exceptions are the floors added to Barnett formula for Wales and Northern Ireland that prevent their block grant funding falling below a level related to its needs.

Fiscal devolution and block grant adjustments

Block grant adjustments

Beginning in the early 2010s, more tax and welfare powers have been devolved to the devolved administrations (see below). To facilitate greater tax and spending devolution block grants have been adjusted:

• where taxes have been devolved, block grants have been reduced in recognition of the greater revenue raising powers of the devolved administrations.
• where welfare spending has been devolved, block grants have been increased in recognition of the greater spending requirements.

The block grant adjustment ensures that neither the UK government nor the devolved administration is left worse off simply from the transfer of power.

Welfare devolution

Powers broadly relating to benefits for carers, disabled people, and those who are ill have been devolved to Scotland. The Scottish Fiscal Commission’s Social Security explainer sets out the social security policies the Scottish Government has introduced with the devolved powers.

Welfare is, technically, already a devolved matter in Northern Ireland but in practice policy has always closely mirrored that of Great Britain. No welfare powers have been devolved to Wales.

Tax devolution

The table below summarises the tax powers devolved to the devolved administrations. In addition to these, local taxes (for example, council tax and business rates) are devolved to Scotland, Wales and Northern Ireland.