Brexit means that Scotland, as well as the rest of the UK, cannot participate in the next round of EU structural funds. What is proposed to replace them?
First, what are EU structural funds?
One of the core policies of the EU is to reduce economic inequalities between its regions. Two funds have been available in Scotland to pursue this policy:
- European Social Fund (ESF)
- European Regional Development Fund (ERDF).
Together these are known as the structural funds. Under the EU’s 2014-2020 budget framework, Scotland was allocated up to €944 million in structural funding. To be used, EU funds needed to be match-funded from domestic budgets.
Structural funds are EU-wide, but as the “managing authority”, the Scottish Government played a key role in directing funding in Scotland. The chart below shows where decisions on structural funding were made:
What does Brexit mean for structural funds in Scotland?
The EU’s structural funds are only open to Member States. Brexit therefore means that Scotland cannot participate in the EU’s new structural funding programmes. The new funds will operate under the EU’s 2021-2027 budget framework but have not started yet, with the final rules and Member State allocations still to be agreed.
However, Brexit has not affected the 2014-2020 programmes, which continue today. Under the terms of the Withdrawal Agreement, Scottish projects allocated structural funding by the end of 2020 (i.e. before the end of the transition period) have up to a maximum of three more years to continue to spend and claim EU money.
A UK replacement
To compensate for the post-Brexit loss of EU structural funding, the UK Government committed in 2017 to a UK Shared Prosperity Fund (UKSPF). However, final details of the governance, funding and delivery model are still unknown.
A timeline of developments relating to the UKSPF is set out below:
In November 2020, the UK Spending Review 2020 included ‘Heads of Terms’ for the UKSPF where the UK Government states that:
- The fund will “operate UK-wide” using powers in the UK Internal Market Bill, and that investments and programmes will display common branding.
- Total domestic UK-wide funding will “at least match current EU receipts, on average reaching around £1.5 billion a year”.
- Further details of the UKSPF will be set out in a “UK-wide investment framework” to be published in spring 2021.
The Spending Review describes two “portions” of the UKSPF. These broadly mirror the two EU structural funds – ERDF and ESF.
- The first UKSPF portion will support skills, infrastructure and business innovation targeting “places most in need across the UK, such as ex-industrial areas, deprived towns and rural and coastal communities”. On management and decision-making, the Spending Review states:
“Places receiving funding will be asked to agree specific outcomes to target within the UK-wide framework. They will then develop investment proposals to be approved by the government among a representative stakeholder group. Investment should be aligned with the government’s clean growth and net zero objectives.”
- The second portion of the UKSPF will support “employment outcomes for those in and out of work in specific cohorts of people who face labour market barriers”. This will be targeted at “people most in need”. There are no further details on the management and decision-making of this portion.
What role for the Scottish Government?
“We do not know if we will be entrusted with the budget or the freedom to deliver on the plans in this paper.”Scottish Government, Minister for Trade, Investment and Innovation, November 2020
In November 2020, the Scottish Government published plans for its management of the UKSPF in Scotland. There are few surprises here. The plans largely replicate the approach to managing the structural funds, albeit with some potential simplifications and what could be described as a move back to the more regional delivery model that existed before 2014. But delivering on these plans is highly dependent on how much, if any, control will be given to the Scottish Government to direct the UKSPF in Scotland.
The Scottish Government’s future role is unconfirmed, but the signs are now there to indicate that it will be playing a lesser role.
Part 6 of the UK Internal Market Act 2020 allows UK Ministers to operate the UKSPF in Scotland with no formal role for the Scottish Government, and the UKSPF’s ‘Heads of Terms’ does not define a management role for any devolved administration. While UK ministers have said that all the devolved administrations will have a place within the UKSPF’s governance structures; the Scottish Government’s Minister for Trade, Innovation and Public Finance, Ivan Mckee reported that he has “seen none of that… there has been limited engagement and even less information coming forward”.
UK Ministers have emphasised that the Part 6 power is an “addition” which does not take away from any devolved responsibility. In evidence to the Finance and Constitution Committee on 20 January 2021, Ivan Mckee said:
“we learned over the weekend that the UK Government intends to deliver the shared prosperity fund throughout the United Kingdom on its own. That is hugely disappointing and, to be frank, it shows no respect for devolution.”
The Minister was referencing a Treasury letter to the Scottish Government dated 15 January 2021. This letter repeats the Spending Review 2020’s statement that the UKSPF will operate UK-wide, using powers in the UK Internal Market Act. The UK Government states it will “work closely” with the Scottish Government on the best use of £220 million in UK-wide funding in 2021-22 to prepare for the introduction of the UKSPF; but the letter does not define a management or delivery role for the Scottish Government.
Matching past funding?
On funding levels, the Scottish Government have called on the UK Government to:
“commit to transferring at least £183 million per year to the Scottish Government to replace the EU Structural Funds, and the European Territorial Cooperation and LEADER programmes.”
To arrive at this calculation the Scottish Government have:
- Uprated by inflation the maximum value of the structural funds at the start of the 2014-20 programmes – i.e. €944 million. This approach does not take account of the fact that due to unrecoverable underspends (known as decommitment) and not fully allocating EU monies to projects by the end of 2020, the current maximum value of the structural fund programmes for 2014-20 is now €767 million – i.e. over €170 million less.
- Used estimates for the much smaller European Territorial Cooperation (ETC) and LEADER funds. The Scottish Government is still seeking participation in ETC as it is open to non-EU states, however the UK Government has not sought to negotiate this.
As mentioned above, the UK Government’s Spending Review 2020 indicates that total domestic UK-wide funding will “at least match current EU receipts, on average reaching around £1.5 billion a year”, but no allocations have been published as yet. The UK Treasury said it would “confirm multi-year profiles at the next Spending Review” which would normally be expected in November 2021.
With the Scottish Budget being published this week, expect to hear more on whether it should be the Scottish or UK government who control the purse strings of the UKSPF. For the time being, EU money is still available to spend in Scotland from the 2014-20 structural fund programmes. But the longer the UK’s replacement takes, the more questions will be asked about any costly gaps in funding. Stakeholders and beneficiaries, who may have been waiting since 2017 to know how the UKSPF will operate, are being forced to bide their time a while more.
Environment, Rural, Constitution and International Research Unit
- A full briefing on EU Structural Funds in Scotland is available on the SPICe Digital Hub.