Funding flaws 'aid Scotland and NI'
Scotland and Northern Ireland have avoided spending cuts running into hundreds of millions of pounds due to "flaws" in the arcane formula used to determine the level of financial support they receive from central Government, according to a new report.
As the coalition Government imposed an austerity regime across the UK in the spending reviews of 2010 and 2013, a technical detail of the Barnett formula meant that devolved administrations were spared cuts totalling around £600 million in Scotland and £200 million in Northern Ireland, compared with if they were treated in the same way as England and Wales, found the Institute for Fiscal Studies (IFS).
This is the equivalent of around £113 for every man, woman and child in Scotland and £110 per head of population in Northern Ireland, and it follows on from budget increases worth £400 million to Scotland in the 2000s because of the same flaw. Taken together, the £1 billion in additional funding for Scotland represents around 3% of its budget in 2015/16.
The IFS found that the Barnett formula - the system devised in the 1970s for distributing central funds between the nations of the UK - deals with business rates in a "flawed" way which benefits Scotland and Northern Ireland to the disadvantage of England and Wales.
The rates are fully devolved to the administrations in Holyrood and Stormont, but in England the formula treats them as a contribution towards the Department for Communities and Local Government's budget for local authorities. In fact, the level of this budget is not affected by revenues from English business rates, which have been increasing at a time when DCLG has suffered deep cuts.
Because other devolved services such as the NHS and schools have been protected, this anomaly has resulted in block grants to Scotland and Northern Ireland being cut by much less than the average reduction faced by departments serving England, said the IFS.
And it warned that, just five months before they are due to be devolved, a decision is yet to be taken on how the grants will be adjusted to take account of the devolution of stamp duty land tax and landfill tax.
Business rates are only partially devolved to Wales at present, with full devolution set to occur in April 2015.
The report's author David Phillips, a senior research economist at the IFS, said the issue could be corrected by treating English business rates as part-funding all Whitehall departments which largely serve England.
Fixing the glitch in the formula would mean that devolved administrations' revenues more accurately reflect the decisions they make on tax.
"The Barnett formula looks set to remain in place for some years to come. This appears to rule out a move to a needs-based formula," said Mr Phillips.
"But it makes it more important than ever to examine the Barnett formula to see if it is working in the way intended, and if flaws are found, to fix them.
"Problems with the way the Barnett formula treats business rates mean that Scotland and Northern Ireland have avoided hundreds of millions of pounds of cuts that they would have faced under a corrected formula - cuts that England and Wales have faced.
"It is important to get the interaction between devolved taxes and the Barnett formula right. Whatever is decided about which taxes should be devolved, it is crucial to get right the seemingly technical issue of exactly how changes in revenues from those taxes translate into changes in funding."
The vast majority of the money spent by the devolved governments of Scotland, Wales and Northern Ireland currently comes in the form of block grants from the UK Treasury, calculated according to the Barnett formula, which aims to ensure that changes in funding for devolved services are the same - in pounds-per-person - as in England.
The formula's creator Lord Barnett, who died earlier this month, had called for reform of the system, which he said was unfair and out of date.
The Treasury insisted that the Barnett formula produces results that are "broadly fair, transparent and consistent" and said the IFS report concentrated on short-term results in one area of spending.
A Treasury spokesman said: "The arrangements for business rates in Scotland and Northern Ireland have been in place since devolution in the late 1990s.
"Like all other areas of spending, the treatment of local government spending in the Barnett formula is based on the level of devolution of services, not on individual revenue streams like business rates.
"The leaders of all three main UK parties have been clear that the Barnett formula will continue.
"As the report suggests, we will therefore need to put in place arrangements to ensure that neither the UK Government or devolved administrations gain or lose from further devolution.
"Ensuring that the risks and rewards associated with decisions taken by the devolved administrations are borne by them, and that mechanisms exist to adjust the block grant accordingly, will be a key consideration."
A Scottish Government spokeswoman said: "Scotland has generated more tax per head than the UK as a whole in each of the last 33 years. Even when North Sea revenue is excluded, on a per capita basis Scotland's national income and tax revenues are on a par with the UK. It should also be noted that even with the current Barnett formula, Scotland will continue to face cuts to its budget of 10% over the five years to 2015/16.
"The Scottish Government would agree with the findings in the IFS report that further devolution of fiscal powers should be accompanied by a block grant adjustment which ensured that new Scottish Government tax receipts were not exposed to risks which the Scottish Government did not have power over. This would be consistent with the principles agreed by the Smith Commission that cause neither the UK Government nor the Scottish Government to gain or lose financially simply as a consequence of devolving a specific power.
"The operation of the Barnett formula is a matter for HM Treasury and is set out in the Statement of Funding Policy which is published by HM Treasury. The Scottish Government has no control over the operation of the Barnett formula."