Under the various devolution settlements the Scottish Government, Welsh Government and Northern Ireland Executive (the Devolved Administrations or ‘DAs’) are responsible for and make decisions about functions that were once carried out by the UK Government.
These areas are described as being ‘devolved’. For example health and social care is devolved meaning that Scotland, Wales and Northern Ireland have their own NHS and make their own decisions about how to run it.
As well as areas which are devolved some are ‘reserved’. This means that decisions are still taken by the UK Parliament at Westminster even though they have effect in Scotland, Wales, Northern Ireland. For example defence is reserved as we have a military policy and an Armed Forces that protects the whole of the UK, and decisions are made by the UK Government.
For devolved issues the UK Government still funds the DAs but they then make their own decisions on how to use that funding.
It is worth noting that in addition to the funding which is provided by the UK Government the DAs are also funded by local and devolved tax revenues, other revenue-raising powers (including fees and charges, and sales of goods, services and assets), grants from European institutions, and borrowing. For example following the full implementation of the Scotland Act 2016, more than half of spending by the Scottish Government will be self-financed
How does the UK Government fund the DAs?
The mechanism by which the UK Government allocates funding to the DAs is called the block grant.
It includes money the UK government has raised through fuel duty, oil and gas receipts, income tax, national insurance, corporation tax, air passenger duty, VAT, tax on alcohol and cigarettes, inheritance tax, and capital gains tax.
When is it allocated?
UK government funding for the DAs through the block grant is normally determined within spending reviews alongside UK government departments. They are set in advance for the full year.
How is it calculated?
The population of each nation of the UK differs which means that they get different amounts of funding. The amount given to each DA every year is calculated as a population share of changes in spending on public services. This is called the Barnett Formula (see further down this fact sheet).
Should the funding for UK government departments change over the course of the year then the Barnett Formula will be applied to reflect those changes in the block grant.
What is the Barnett Formula?
The Barnett Formula is the way in which funding is allocated in a fair way across the UK. It takes into account the following factors:
- The change in planned spending by UK government departments
- The extent to which the relevant UK Government department’s functions are similar to those carried out by the DA (departments are assigned a percentage to reflect this, see below example)
- Each country’s population as a proportion of England, England and Wales or Great Britain as appropriate
For example imagine that the UK Government has increased transport spending by £100m. The ‘comparability percentage’ for functions the Department for Transport provides in Wales is currently set at 80.9%. And the population share for Wales is 5.69%. Therefore the calculation is:
£100,000,000 x 0.809 x 0.0569
That would result in an increase around £4.6m for transport in Wales being included in the Block Grant.
How has UK Government funding to the DAs changed as a result of coronavirus?
To reflect the UK Government’s fast moving response to the coronavirus and its impact on the economy in July it announced an upfront guarantee of resource funding for the DAs. This has given the DAs the funding certainty they need ahead of the UK Government making announcements.
On 5 November the UK Government continued to provide that upfront certainty by giving the Devolved Administrations an additional £2bn as part of the guarantee, to at least £16bn this year above the funding outlined in the Spring Budget 2020.
This was based on the central forecast for UK Government expenditure in 2020-21 and meant an extra £1bn for the Scottish Government, £600 million for the Welsh Government and £400m for the Northern Ireland Executive.
It is a total increase of at least £8.2bn of additional funding for the Scottish Government, £5bn for the Welsh Government and £2.8bn for the Northern Ireland Executive, on top of their Spring Budget 2020 funding.
It is for the DAs to decide how to use this funding irrespective of how the UK Government provides support in England.