COVID-19 Barnetts: the story continues

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The evolving picture in 2020-21…

Through the course of 2020-21, a series of SPICe blogs tracked the fast-changing situation in relation to the additional sums of money being added to the Scottish Government budget as a result of the response to the pandemic.

This additional funding came via the Barnett formula, which is used to allocate resources to Scotland, Wales and Northern Ireland when the UK government spends money in areas that are devolved to the relevant administrations.  In total, during the course of 2020-21, an additional £9.7 billion was added to the Scottish Government’s budget by way of Barnett consequentials.

…and the picture continues to evolve in 2021-22

Of the £9.7 billion allocated for 2020-21, the Scottish Government decided to carry forward £1.1 billion to the current financial year (2021-22).  The Scottish Government requested permission to do this because the final £1.1 billion was allocated very late in the previous financial year (15 February).  As a result of the late notification, the Scottish Government did not consider there was enough time to allocate and spend the money before the end of March 2021.

The Scottish Government had also previously been allocated £1.3 billion in COVID-19 consequentials for 2021-22 as part of the UK Spending Review in November 2020.  A further £1.2 billion was allocated as part of the UK government’s March 2021 budget and an additional £1 billion as part of the Main Estimates.

In total, this means that the Scottish Government so far has £4.6 billion in COVID-19 consequentials for 2021-22.  Of this total, £4.4 billion is resource budget (for day-to-day spending) and £0.2 billion is capital budget and Financial Transactions money.

What decisions has the Scottish Government taken so far?

In 2020-21, due to the significant changes in the budget position early in the financial year, the Scottish Government decided to publish a 2020-21 Summer Budget Revision in May 2020 setting out how it had used the COVID-19 allocations made by that point in time.  Normally, budget revisions would only be published in the Autumn and the following Spring of a given financial year, so this was an additional publication, and was very helpful in tracking the changes early in the financial year.

At the end of the last Parliamentary session, the Finance and Constitution Committee’s legacy expert panel recommended the publication of a 2021-22 Summer Budget Revision.  It recommended that this should be done as early as possible after the election to allow the successor Committee an early opportunity to scrutinise the continuing impact of COVID-19 on the public finances.  In a letter to the successor Committee (the Finance and Public Administration Committee), the Scottish Government noted that there was not sufficient time for such a budget revision to progress through the relevant Parliamentary procedures before the summer recess.

However, in the same letter, the Scottish Government has provided some additional information on planned use of COVID-19 allocations.  This means that plans for the full £4.6 billion have now been announced, although there is a limited amount of detail in some areas. 

Breakdown of planned use

The Scottish Government has identified – in broad terms – how all the COVID-19 Barnett consequentials that it has received so far in 2021-22 will be used.  However, details on the planned use of the consequentials are incomplete.  The various statements, press releases and letters provide elements of the information but leave some gaps, and do not provide the same level of detail as a formal budget revision document would provide.  This presents some challenges in terms of fiscal scrutiny.  As Audit Scotland noted in its report “Tracking the implications of Covid-19 on Scotland’s public finances”:

“Transparency must be maintained as the budget and the response to Covid-19 becomes more complex.”

What do we know about planned use of the COVID-19 Barnetts?

We know some details of how the COVID-19 Barnetts will be used.  As might be expected, a significant proportion will be allocated to health and social care.  Significant sums will also go to local government, although much of this funding is for local authorities to distribute onwards to individuals and businesses, rather than for running local government services.  Transport is also set to receive additional sums to support public transport services that continue to face much lower demand due to the pandemic.  Together, these three areas account for at least three quarters of the COVID-19 Barnett consequentials currently known about.

Other, smaller allocations account for a further 10% of the £4.6 billion total.  Then there is just under £800 million of allocations where costs have not been specified.  This total is largely, but not fully, accounted for by two policy announcements:

  • The extension of non-domestic rates relief for retail, hospitality, leisure and aviation businesses for the whole of 2021-22 (rather than the 3 month extension that had originally been included in the budget) – as announced in the budget update on 16 February.  The Scottish Fiscal Commission has estimated that this will cost £539 million in income foregone.

Ideally, a full breakdown of the costs of the announcements that make use of the COVID-19 Barnetts would be made available in a single document to support transparency.  As it is, different bits of information are spread across a number of different documents making it hard to follow.

Under normal circumstances, the next formal budget update would be the Autumn Budget Revision, usually in September/October.  However, in her letter to the Finance and Public Administration Committee, the Cabinet Secretary set out her commitment “to providing the Committee and Parliament with timely details of all substantial funding changes proposed throughout the year” in recognition of the larger-than-normal in-year changes that have already taken place and the further changes expected through the course of the year.  This is to be welcomed.

Further assurances sought

In 2020-21, as the pandemic took hold and the public finances changed rapidly in response, the UK government took a different approach to the notification of Barnett consequentials to devolved nations. 

In normal times, when in-year budget changes are relatively infrequent and generally small relative to the overall budget, the devolved nations get notified of additional Barnett consequentials as and when they arise in relation to UK government announcements.  However, the pace and scale of change during the coronavirus pandemic called for a different approach to enable devolved nations to plan their pandemic response effectively.  Devolved nations also needed to be sure that funding would not later be withdrawn if the UK government spent less than anticipated on its COVID-19 response, or was able to re-direct funds from other parts of its budget. 

In order to provide greater certainty for planning, the UK government provided a ‘Barnett guarantee’ to allow the devolved nations to plan with greater confidence over funding.  This change in approach was discussed at the time in a SPICe blog outlining the new approach.  The Scottish Government has called for a similar ‘guarantee’ approach to be adopted in 2021-22 and has also requested early confirmation from HM Treasury of further COVID-19 Barnetts that are already anticipated. 

Is it all COVID-19 spend?

A further issue that is likely to continue throughout 2021-22 is disentangling COVID-19 spend from other areas of spend.  Last year, the Cabinet Secretary for Finance stated that “Every penny [of COVID-19 Barnett consequentials] will be allocated on Covid spend”.  As noted by Audit Scotland, as we move into a different phase of the pandemic, it is likely to become harder to separate out “Covid spend” from other areas of spending. 

For example, which areas of business support are “Covid-related” and which are part of more general business support?  Which areas of health and social care spend are specifically “Covid”?  Are the changes to the public sector pay policy that were agreed as part of the 2021-22 budget deal related to COVID-19?  That is perhaps less obvious, but the letter to the Scottish Green Party suggests that changes to the pay policy are being funded using COVID-19 Barnett consequentials.  The budget deal also used COVID-19 Barnett consequentials to fund energy efficiency and biodiversity measures where the link to COVID-19 is not so obvious.  But perhaps the longer we live with the impact of the pandemic, the harder it becomes to treat the COVID-19 Barnetts as distinct pots of money.  Although the budget deal appears to use COVID-19 Barnetts to fund some areas that are not directly COVID-related, this might then ease pressure on other budgets that are being used to meet COVID-19 pressures.

Maybe as we emerge from the pandemic, it becomes less and less realistic to separate out COVID-19 spend from the wider budget.  It certainly is already a challenge, even this early in 2021-22 and the challenge looks set to continue.  Future SPICe blogs will seek to keep track of the money coming in and where it is being spent, but it seems clear that “Following the pandemic pound” – as Audit Scotland is also seeking to do – will be complex.

Nicola Hudson, Senior Analyst, Financial Scrutiny Unit