NAO report highlights opaque and complicated system of devolved funding

The Scottish government said the chancellor should use today's spring statement to "provide a proportionate amount of additional finance and flexibility to Scotland "

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The National Audit Office has carried out an investigation into how the Treasury allocates funding for each of the devolved nations, which highlights the opaque way money is parcelled up between them.

The report examines the different methods by which funding has been allocated nationally and to each of the devolved nations in recent years.

This includes the Barnett formula, which is used to allocate the majority of UK government funding to the devolved nations, to ensure they receive a population-based share of what the UK government spends on public services in England that are devolved in Scotland, Wales or Northern Ireland. When money is allocated this way, the devolved administrations are not obliged to spend it on the same services as the UK government.


The NAO investigation was prompted by funding announcements including the £20.5bn for the NHS announced last summer, which the auditor said “prompted questions about whether consequential amounts of funding would be made available for health services in the devolved administrations and where this funding would come from”.

According to the report, the devolved administrations received less funding for 2019-20 than they had expected because so much had been given to the NHS in England. This was because part of the £20.5bn came from the Department of Health and Social Care’s existing budget, “and therefore not all of the funding represented additional funding”.

The report does not set out recommendations to address the issues raised in its investigation.

The Treasury has set out principles and rules for how funding is allocated to devolved administrations in its Statement of Funding Policy. The department shares a draft of the SFP with the administrations ahead of each Spending Review, on which they can comment, but they do not have the power to formally approve it.

In the 2015 Spending Review, the Scottish Government said it had “little opportunity to scrutinise the list of programmes and comparability factors” in the SFP, according to the SFP. The report also highlights the difficulty in categorising funding for services and functions that are not fully devolved.

Funding for railway infrastructure in England, for example, “does not always result in consequential amounts of funding for all devolved administrations”, the report says. It highlights the case of the HS2 railway, the £55.2bn rail link between London and the North of England. Rail infrastructure is the responsibility of the UK government in England and Wales but devolved in Scotland and Northern Ireland, and so when it funded the project the Treasury also used the Barnett formula to allocate large sums of money to Scotland and Northern Ireland, but not to Wales.

In contrast, the Crossrail project was treated as local transport in England, rather than national infrastructure. As a result, Wales, Scotland and Northern Ireland all received additional payments under the Barnett formula.

The report also highlights the complicated arrangements by which the Treasury determines how it will fund changes to the UK’s spending plans, including taking funds from the Central Reserve: a contingency fund to meet the costs of dealing with unforeseen circumstances that government departments could not be expected to meet out of their normal budgets.

“HM Treasury told us that the Barnett formula applies to funding from the Reserve that is allocated to UK government departments where there are similar pressures on spending in Scotland, Wales and Northern Ireland. But there are some exceptions where funding from the Reserve is allocated to a specific region of the UK,” it said.

For example, £410m of the funding allocated to Northern Ireland as part of the Conservative Party’s confidence and supply agreement with the DUP after the 2017 general election came from the Reserve. However, this funding did not cause the Barnett formula to be used.

The Treasury said this was because the funding was not linked to a change in the funding allocated to UK government departments, the NAO said.

Responding to the report, a Treasury spokesperson said the department “works closely with all three devolved administrations to ensure they understand how these arrangements have been applied”.

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