Current funding formula for the devolved nations will lead to uneven public spending cuts across the UK

With the prospect of significant cuts in public expenditure after the General Election, the study argues that because of the way the Barnett formula works the budgets of the devolved administrations will be better protected than those in England for spending on comparable services. This means that although spending across the UK will fall overall, the spending disparities that currently exist between the devolved nations and England, which are the source of considerable and growing tension, may actually widen during a period of spending retrenchment. Certainly the spending gap will not narrow in coming years.

The study suggests two reasons for this:

• Firstly, devolved administration's budgets will be relatively well sheltered from the worst cuts that fall on England since the bulk of the block grant going to them is based on health and education spending which the Conservative and Labour parties have promised to protect. Health and education funding make up more than half of the 'comparable' spending programmes in England upon which the value of the grant is based.
• Secondly, the so-called 'Barnett squeeze', which means that over time the Barnett formula is supposed to bring about equal spending per head in the four nations, goes into reverse if spending cuts are being made. This means that the proportionate fall in spending in the devolved administrations will be lower than that experienced in England.

The study warns that public opinion may not tolerate a situation whereby the devolved administrations, and Scotland in particular, is perceived to be suffering less pain than England. Previous ippr research has shown that the number of people in England who think that Scotland gets 'more than its fair share of funding' has almost doubled in recent years (from 22% in 2003 to 40% in 2009) which suggests growing public unease about the distribution of money. This is only likely to grow if spending disparities widen during an era of cuts.

Devolution in a Downturn, by Professor David Bell, also highlights a number of other deficiencies with the way that the devolved administrations are funded. Since their grants are determined by spending decisions made in England by the government in Westminster, over which they exercise no influence, the devolved administrations cannot control the size of their budgets (though they are free to spend the block grant as they see fit). This also makes financial planning difficult and places the devolved administrations in a state of limbo: they know that spending cuts are coming from 2011-12 onwards but they do not know how these will affect them until these decisions are taken.

The study argues that the UK as a whole would benefit from more discussion on how the budgets for its constituent nations are set - this could lead to better decision making and improved economic performance. It suggests that the UK could learn from federal countries like Germany where the federal government formally consults with the L?nder over budgetary decisions.

Devolution in a Downturn shows that unlike in previous recessions, Wales and Scotland have not seen much higher levels of unemployment than elsewhere in the UK - though Northern Ireland has suffered steeper increases in joblessness than elsewhere. (Northern Ireland has also seen a worse crash in its house prices - partly because it is linked to the extremely depressed property market in the Republic of Ireland.)

The devolved administrations therefore face broadly similar economic problems, but are severely constrained in how they respond:

o They cannot significantly expand or reduce spending
o They cannot significantly change the tax burden
o They have very limited powers to shift the timing of spending
o or to reallocate spending to promote growth

The report's author, David Bell, Professor of Economics at the University of Stirling, said:

"The recession has exposed the lack of powers within devolved administrations to influence demand in their national economies. Control of macro-economic policy remains firmly in Whitehall.

"Having been tethered closely to the economic fortunes of the UK as a whole, the devolved administrations now await with some powerlessness significant cuts to their block grants.

"However, this lack of control is not unique to the UK - for example the German federal system does not allow the L?nder to respond differentially in any significant way. It is also the case that the funding formulas which leave the devolved administrations so dependent on Westminster could work in their favour when spending cuts begin to bite."

In the paper, Professor Bell argues that giving devolved administrations more fiscal powers is not necessarily the answer, however. The argument that giving them greater power to respond to local economic circumstances has to be offset against the danger that greater autonomy will simply lead devolved governments to spend more, knowing that in the end they will be bailed out by the UK Treasury if things go wrong.

Notes to editors
1. Devolution in a Downturn by David Bell is taken from the forthcoming book Devolution in Practice 2010 edited by Guy Lodge and Katie Schmuecker, to be published by ippr in May 2010. It assesses the impact devolution has made on a number of major policy areas in the last decade.
2. The devolved administrations are funded by an annual grant from the UK government. Its value is determined by the Barnett formula which relates changes in the grant provided to the devolved administrations to changes in spending on 'comparable' programmes in England. In effect, for every ? of extra spending in England on a service which is devolved Scotland, Wales and Northern Ireland will get an increase in their block grant proportionate to their relative populations.
3. The Barnett formula results in spending disparities per head across the nations of the UK. The figures for 2008/09 are below.

Identifiable public spend per head, minus social security, across the UK nations, 2008/09

(ippr analysis of HM Treasury Public Expenditure Statistical Analysis data)

4. In March 2010 ippr published Is an English backlash emerging? Reactions to devolution ten years on by John Curtice which showed that that 40% of people in England believe that Scotland receives more than its fair share of government spending compared, up from 22 per cent in 2003.

For further information please contact Monica Evans: m.evans@ippr.org / 020 7470 6112 / 07753 719289