Fiscal frameworks of UK devolved governments must be made more robust to future crises, experts say

Economic experts have warned that the fiscal frameworks of the UK’s devolved governments must be made more robust to future crises and better able to support COVID-19 recovery.

The research team – from the University of Stirling, Institute for Fiscal Studies (IFS) and Fraser of Allander Institute at the University of Strathclyde – found that the Scottish, Welsh and Northern Irish governments had “largely coped” with the economic pressures brought about by the pandemic. However, they attributed this to “luck, huge sums of money and ad-hoc bypassing of normal rules”.

They also said that the devolved administrations had been fortunate that their nations had not been disproportionately impacted by the virus, compared to England, economically or health-wise. If they had been, funding for the devolved governments – which is based on how much is spent in England – may have been insufficient, they concluded.

The findings are outlined in a new report published as part of a year-long project on the fiscal frameworks of the UK’s devolved governments, funded by the Economic and Social Research Council as part of UK Research and Innovation’s response to COVID-19.

Professor David Bell is one of the authors of the new report.

David Bell, Professor of Economics at the University of Stirling, co-authored the report. He said: “The existing fiscal framework has been severely stress tested by the pandemic. Being an ad hoc, rather than a formal, agreement has perhaps been beneficial on this occasion, allowing fiscal adjustments to be made on the fly, where the more formal structures present in some federal states would have struggled to cope.

“On the other hand, the Internal Market Act provides a new mechanism for the UK government to bypass the Barnett formula, and spend directly in devolved areas in Northern Ireland, Scotland and Wales. The devolved governments may feel that this ad hoc change weakens their powers, creates potentially inefficient policy overlaps and that a more formal fiscal agreement would protect their autonomy.”

"Tricky moments"

The funding and financial powers of the devolved governments are governed by fiscal frameworks that link changes in funding to change in spending in England, and put strict limits and controls on borrowing. Due to the nature of these frameworks, concerns were raised at the outset of the pandemic that devolved nations could find themselves with insufficient government funding, if hit particularly hard by the pandemic and unable to raise more themselves.

Despite having largely coped with the crisis, the devolved governments have experienced some “tricky moments”, the report’s authors said, such as at the beginning of the pandemic when they had to wait for confirmation of funding following the announcements of new English spending, and in the autumn as the second wave hit.

The UK government eventually bypassed the usual rules by giving up-front funding guarantees to the devolved governments, and additional flexibility to carry forward funding between years. This gave the devolved governments more certainty to plan their COVID-19 responses and helped avoid a wasteful rush to spend money at the end of the year. But such ad-hoc changes are not suitable for the long-term and may not be granted by future UK governments if other major crises arise, the researchers said.

Uncertainty

David Eiser, Senior Knowledge Exchange Fellow at the Fraser of Allander Institute, and an author of the report said: “The shift away from the usual process of allocating funding by Barnett consequentials to the concept of funding ‘guarantees’ has been critically important in providing the devolved governments the resources and flexibility they need to meet the evolving demands of the pandemic.

“Nonetheless, whilst crises have been avoided, at times this has perhaps only narrowly been the case. Uncertainty around whether the furlough scheme would be available within a devolved nation if a devolved government felt the need to apply tighter restrictions than prevailed in England may have influenced the timing of restrictions in Scotland and Wales at various points. But in the end, the UK government’s decision to extend lockdown in England averted major crisis around this issue”.

Robust

David Phillips, an Associate Director at the IFS, and another author of the report said: “Luck – or the fact that the each of the nations was similarly unlucky in terms of the impact of the COVID-19 crisis – and ad hoc temporary changes to the usual rules helped avert major problems. In particular, the fact that the path of the pandemic and economy has evolved in similar ways across the country, and required similar policy interventions, has avoided big differences in funding needs from opening up. And up-front funding guarantees and the ability to shift more funding from one year to the next has given the devolved governments both more financial certainty and flexibility. But if a future crisis affected one part of the UK much harder than elsewhere, or indeed if recovery is uneven across the country, bigger problems could arise down the line. It is therefore still vital to assess – and potentially change – the frameworks to make them more robust.”

The report, Designing and funding the devolved nations’ policy responses to COVID-19, is available to download now.