Luck, huge sums of money and ad-hoc bypassing of the normal rules mean the devolved governments’ funding arrangements have largely coped with COVID – but problems are brewing find IFS, Strathclyde and Stirling researchers
The funding and financial powers of the devolved governments of Scotland, Wales and Northern Ireland are governed by ‘fiscal frameworks’ that link changes in funding to changes in spending in England, and put strict limits and controls on borrowing. These features led to concerns at the outset of the COVID-19 crisis that the devolved governments could find themselves with insufficient UK government funding if hit particularly hard by the pandemic, and unable to raise more themselves.
As it turns out, the devolved governments’ funding arrangements have largely coped with the COVID-19 crisis. But this is the result of a combination of luck, the huge sums of money provided by the UK government to address the crisis in England, and ad-hoc bypassing of the normal rules of the frameworks. And there have been some tricky moments, notably at the beginning of the crisis, when the devolved governments had to wait for confirmation of funding following the announcements of new English spending, and in the Autumn as the second wave hit.
The UK government eventually bypassed the usual rules by giving up-front funding guarantees to the devolved governments, and additional flexibility to carry forward funding between years. This gave the devolved governments more certainty to plan their COVID-19 responses and helped avoid a wasteful rush to spend money at the end of the year. But such ad-hoc changes are not suitable for the long-term and may not be granted by future UK governments if other major crises arise.
It has also been lucky that the crisis did not disproportionately impact one or more of the devolved nations more than England, either economically or health-wise. If it had done, funding based on how much was spent in England could have been insufficient. And there is no guarantee that future crises – or indeed recovery from the current one – will be similarly symmetric.
It is therefore important to consider how the fiscal frameworks can be made more robust to future crises, and better able to support recovery from the current crisis.
These are among the findings of the first report by researchers at the IFS, Fraser of Allander Institute at the University of Strathclyde and the University of Stirling as part of a year-long project on the fiscal frameworks of the UK’s devolved governments, funded by the Economic and Social Research Council as part of UK Research and Innovation’s response to COVID-19.
In relation to the performance of the frameworks during the COVID-19 crisis, the report also finds that:
- The fiscal frameworks provide significant protection to the devolved governments against shocks that affect government spending needs and revenues in a similar way across the whole of the UK. The Barnett formula automatically provides them with a population-share of additional funding, and falls in devolved tax revenues are largely offset by equivalent-sized increases in block grant funding from the UK government.
- The frameworks provide much less protection against shocks that have significantly different impacts across the UK. Relative spending needs may exceed population-based funding shares, and devolved revenues fall more than block grant funding is boosted. Strict limits on how much and for what purpose devolved governments can borrow mean devolved governments may not be able to address a shortfall themselves.
- The COVID-19 crisis has turned out to be a common shock, rather than hitting one or more of the devolved nations harder than England, helping the fiscal frameworks to cope.
- Trends in employment, earnings, use of the furlough scheme, residential property transactions, and in the case of Scotland at least, GDP, have been similar to England (and if anything, employment and earnings have held up better in Northern Ireland and Wales, perhaps reflecting their large public sectors).
- Deaths have increased by less relative to normal – especially in the case of Northern Ireland and Scotland – than in England. This would suggest, if anything, lower health spending needs in the devolved nations. However, it is worth noting that many of the costs associated with the pandemic, such as purchasing PPE, contact tracing, construction and staffing of temporary hospitals, are preventative and precautionary and not linked precisely to COVID-19 case numbers or deaths.
- The large sums of funding allocated to tackling the pandemic and the ability and willingness of the UK government by make use of the non-statutory nature of the fiscal frameworks to bypass the usual rules has also helped ensure the devolved governments have sufficient funding. But this may not be sustainable.
- Extra funding for the NHS and the national contact tracing scheme in England in particular has been very significant, generating substantial population-based increases in funding for Northern Ireland, Scotland and Wales. The devolved governments may ultimately feel that they do not need to spend so much on health in their own territories.
- Up-front funding guarantees, and the power to carry-forward the final element of these in February 2021 into 2021-22, provide both greater certainty and more flexibility for the devolved governments. But these arrangements are only a temporary fix and may be considered unfair to England. They mean that the devolved nations will receive at least as much per person as is allocated to England – and potentially significantly more. This is not only because the guarantees potentially exceed the amounts allocated to England. UK government departments serving England also have much less flexibility to carry forward underspends into subsequent years: significant underspends are instead clawed back by HM Treasury. It may choose to return this to departments by topping up budgets in subsequent years. But this will generate additional Barnett consequentials for the devolved governments, on top of being able to carry forward their own funding.
The report also discusses another issue that has arisen over the last year – the potential of the UK Internal Market Act to reshape devolved funding arrangements:
- The Act provides a new means for the UK Government to directly fund economic development activities in the devolved nations. Any such funding would bypass the Barnett Formula and would likely be allocated on a different basis. In the absence of co-operation agreements, the devolved nations may be anxious that this will undermine their activities and authority in this area.
Over the next year, our project will consider what changes to the devolved governments fiscal frameworks could help make them more robust and fit for purpose. In doing this, it will consider the implications for England, and aim to feed into both an official independent review due to commence later this year in Scotland, and the new Northern Ireland Fiscal Commission.
David Eiser, Senior Knowledge Exchange Fellow at the Fraser of Allander Institute, and an author of the report, said: “The shift away from the usual process of allocating funding by Barnett consequentials to the concept of funding ‘guarantees’ has been critically important in providing the devolved governments the resources and flexibility they need to meet the evolving demands of the pandemic.
“Nonetheless, whilst crises have been avoided, at times this has perhaps only narrowly been the case. Uncertainty around whether the furlough scheme would be available within a devolved nation if a devolved government felt the need to apply tighter restrictions than prevailed in England may have influenced the timing of restrictions in Scotland and Wales at various points. But in the end, the UK government’s decision to extend lockdown in England averted major crisis around this issue”.
David Phillips, an Associate Director at the IFS, and another author of the report, said: “Luck – or the fact that the each of the nations was similarly unlucky in terms of the impact of the COVID-19 crisis – and ad hoc temporary changes to the usual rules helped avert major problems. In particular, the fact that the path of the pandemic and economy has evolved in similar ways across the UK, and required similar policy interventions, has avoided big differences in funding needs from opening up. And up-front funding guarantees and the ability to shift more funding from one year to the next has given the devolved governments both more financial certainty and flexibility.But if a future crisis affected one part of the UK much harder than elsewhere, or indeed if recovery is uneven across the country, bigger problems could arise down the line. It is therefore still vital to assess – and potentially change – the frameworks to make them more robust.”
David Bell, Professor of Economics at the University of Stirling, also an author of the report, added: “The existing fiscal framework has been severely stress tested by the pandemic. Being an ad hoc, rather than a formal, agreement has perhaps been beneficial on this occasion, allowing fiscal adjustments to be made on the fly, where the more formal structures present in some federal states would have struggled to cope. On the other hand, the Internal Market Act provides a new mechanism for the UK government to bypass the Barnett formula, and spend directly in devolved areas in Northern Ireland, Scotland and Wales. The devolved governments may feel that this ad hoc change weakens their powers, creates potentially inefficient policy overlaps and that a more formal fiscal agreement would protect their autonomy.”
Notes to editors
About the IFS
The Institute for Fiscal Studies (IFS) is Britain’s leading independent microeconomic research institute. IFS publications are free to view on the IFS website (www.ifs.org.uk), where you can also find more information about our research, governance and funding. Please follow @TheIFS on Twitter for regular updates or contact the Press Office on 07730 667 013.
About the Fraser of Allander Institute
The Fraser of Allander Institute (FAI) at the University of Strathclyde entered Scottish public life in 1975. In the 40 years since, it has become established as a leading independent economic research institute focused on the Scottish economy.
The Fraser of Allander Institute is part of the Department of Economics.
About Stirling School of Management
Stirling Management School’s reputation for excellence is reflected in our rankings. We’re rated among the top 10 Universities in the UK for Economics, Marketing and Human Resource Management, and the top 5 in Scotland for Business Studies, Accounting and Finance and overall research impact. Our close links with industry, range of professional accreditations and memberships with leading management education bodies help to ensure all our teaching is relevant in the real world and tailored towards your future success.
Corporate Communications Manager
Media and Corporate Communications
University of Strathclyde
+44 (0) 141 548 4373
+44 (0) 7976 660 433