Spending in Scotland 30 per cent higher per person than in England because of Barnett formula, says IFS

Funding per person in Scotland is over 30 per cent higher than in England almost entirely because of the Barnett Formula, a new report from a leading think tank has claimed.

The new analysis from the Institute of Fiscal Studies (IFS) says that despite this extra cash, ministers in Edinburgh are funding permanent spending commitments from temporary COVID funding. 

In their pre-election briefing note, the think tank also warns that real-terms funding for the Scottish Government’s day-to-day spending in 2021-22 is still set to be two per cent lower per person than in 2010-11, after excluding temporary COVID-19 related funding, and adjusting for new responsibilities.  

However, this drop is smaller than the fall seen in England over the same period. 

The IFS say this is because of slower population growth and “a flaw in the Barnett formula” that meant Scotland escaped most of its share of cuts to local government funding up until 2015-16. 

The note said that Scottish Government’s resource funding fell by six per cent in real-terms between 2010-11 and 2017-18, as the Barnett formula passed on cuts to UK government spending in England. 

However, since then, increases in spending in England mean the Scottish Government’s funding has also been increasing. 

The thinktank also said net revenues from the Scottish Government’s devolved taxes make only a marginal contribution to Kate Forbes’ coffers. 

This is partly because tax reforms have been modest and because Scotland’s underlying income tax base has performed “relatively poorly compared to the rest of the UK since the devolution of income tax powers, reflecting slightly weaker economic growth.” 

This means that while the Scottish Government’s income tax reforms are estimated to raise around £456m, the latest forecasts suggest it will receive just £117m more in funding this year as a result of the devolution of income tax. 

About two-thirds of Scottish Government funding comes from the block grant it receives from the UK Government, but Scottish income tax will contribute 27 per cent and other Scottish taxes 5.5 per cent, with borrowing contributing the remaining 0.5 per cent.

So far, ministers in Edinburgh have been given an extra £9.5bn in consequentials as a result of UK Government COVID-related spending.

Some of that extra cash, the IFS said, was being used to extend free school meals and free bus travel.

But with that extra resource coming to an end when the pandemic ends, the IFS warned that in the very near future the Scottish Government would likely need to pay for this out of their own core funding.

And “likely tight spending plans in Westminster” could mean less cash coming to Scotland as part of the block grant, leaving Scotland’s finance secretary forced to consider “tax increases or cuts to some services”.

David Phillips, associate director at the IFS and author of the report said: “Excluding temporary COVID-19 funding, the Scottish Government has over £1.30 per person to spend on public services this year for every £1 of spending per person on comparable services in England.

“This is almost entirely due to funding received from the UK Government via the Barnett formula, with less than 2p of the gap due to the Scottish Government’s borrowing and higher income taxes.

“Indeed, the relatively weak performance of the Scottish economy means that the net revenues received from income tax have only increased slightly, despite tax increases in Scotland.

“They would have fallen relative to a world without tax devolution had those tax rises not been implemented, reminding us that devolution brings risks as well as opportunities.”

He added: “Likely tight spending plans in Westminster could mean the next Holyrood administration will have to consider tax increases or cuts to some services – not least to pay for long-term policies on free school meals, public transport, council tax and mental health services, that this year will be paid for using temporary COVID-19 funding.”

Responding to the report, finance secretary Kate Forbes said it highlighted a decade of “unrelenting” austerity from the Conservatives.

She said: “While the Barnett formula does provide Scotland with slightly higher public spending per head than in England, it is already under attack by the Tories at Westminster, who have cut our capital budget by five per cent and stripped the Scottish Parliament of powers so they can engage in ‘pork-barrel’ spending through the so-called levelling up fund.

“Scotland’s funding will never be safe under a prime minister who famously said that a pound spent in Croydon is better than a pound spent in Strathclyde.

“An independent Scotland would be able to make different choices, and give us all the economic levers needed to grow our economy and to make the public spending choices best suited to Scotland’s interests – such as not spending hundreds of billions of pounds on the Trident missile programme.

“Almost all independent countries operate a deficit and manage a debt – indeed the UK currently has a national debt in excess of £2 trillion.”

Responding to the report, Scottish Labour finance spokesperson Daniel Johnson said: “This calls into question the real motivation behind the SNP’s dismissal of Labour budget demands.

"We were told fair pay for care workers could only be met through recurring funds, not emergency COVID money.

“If temporary COVID funds are in fact being used for permanent spending commitments, what excuse does the SNP have for Scotland’s heroic social care workers being denied fair pay, and what do they say to those individuals and businesses who have had no or inadequate COVID support?

“We need action now not excuses. We need a recovery plan that restores and grows our economy, rather than budget fiddles to deliver election reveals. Businesses need help now, not the delays in support from the SNP”

Liberal Democrat economy spokesperson Katy Gordon added: "At some stage the nationalists are going to have to admit that if they ever achieved independence they would be throwing away billions of pounds a year for public services.

"Over the course of the pandemic the broad shoulders of the Bank of England have helped us to weather the storm.

"For fourteen years, the SNP have taken their eye off the ball when it comes to growing Scotland's economy."