Block grant adjustments

Block grant adjustments (BGAs) are adjustments to the block grant funding that the devolved governments of Scotland and Wales receive from the UK government to reflect the devolution of certain tax powers and revenues and, in Scotland’s case, certain benefits. (See our other explainers on devolved government funding and on the powers and responsibilities of the devolved governments.) The BGAs for devolved taxes are subtracted from the block grant – with the devolved governments retaining the devolved tax revenues instead. The BGAs for Scotland’s devolved benefits are added on to the block grant – with the Scottish Government free to spend these on benefits or other spending as it sees fit. The rules for these are set out in the Fiscal Framework Agreements for Scotland and Wales. Their design was guided by various official commissions on devolved funding arrangements including the Silk Commission (2012) for Wales and the Calman Commission (2009) and Smith Commission (2014) for Scotland.

Setting the initial block grant adjustments

At the point of devolution of a particular tax or benefit , the BGAs were set at the amount of tax revenues or benefit spending being devolved. This would mean that neither the devolved governments nor the UK government would be financially worse or better off simply as a result of the decision to devolve a tax or benefit. This was in line with what the Smith Commission termed the ‘no detriment’ principle.

Updating the block grant adjustments over time

These BGAs cannot just be held fixed in cash terms in subsequent years: both revenues from the devolved taxes and spending on devolved benefits will change over time, not least because of inflation. The BGAs would become too small over time – falling further and further behind both the devolved revenues and spending to which they relate.

However, it would not be appropriate to increase the BGAs in line with the revenues from devolved taxes, or the spending on devolved benefits. Doing so would remove the incentive for the devolved governments to grow their revenues or to control spending on benefits: any increase in devolved revenues or benefit spending would be offset by an increase in the associated BGAs. 

To avoid this problem, the BGAs have instead been updated in line with the changes in revenues or spending in those parts of the UK where the UK government is responsible for the taxes or benefits in question. As discussed below, the precise way this is done differs between Scotland and Wales, but this broad approach has some attractive properties. 

• It means that neither the devolved governments nor the UK government are financially worse or better off as a result of devolution, if devolved revenue or benefit spending grew ‘in line with’ the equivalent revenues in those parts of the UK where the UK government is responsible for them. This can again be considered consistent with the ‘no detriment’ principle advocated by the Smith Commission. We return below to the different ways ‘in line with’ can be defined. 
• It means that the devolved governments bear the financial effects of policies that lead to increases or decreases in devolved tax revenues or benefit spending, as the BGAs do not change in response to these. This includes both policies that directly affect revenues or spending (such as changes in tax or benefit rates) and those which affect them through affecting the size of the tax base or the numbers of people eligible for particular benefits (such as policies that help improve general economic performance). This satisfies the ‘economic responsibility’ principle of the Smith Commission. 
• It means the devolved governments are insulated from the financial effects of shocks to revenues or spending that affect the whole of the UK. This is because if a shock leads to a reduction in revenues in the rest of the UK as well as the devolved nation, the BGA will also be reduced, offsetting the reduction in devolved revenues. This is again in line with the principles set out by the Smith Commission, which in turn were based on the idea that the UK government has greater ability to respond to and smooth shocks facing the whole of the country. 
• It helps prevent the residents of the devolved nations from benefiting or losing financially from changes in taxes or benefits that only apply in the rest of the UK – what has been termed the ‘taxpayer fairness’ principle of the Smith Commission.

This last feature is the most complicated and is worth exploring with some examples.

It is important to note that it is not possible to fully achieve all of the principles set out by the Smith Commission at the same time, as discussed in Bell, Eiser and Phillips (2023). Instead, the precise way in which ‘in line with’ the change in equivalent UK government revenues and benefit spending is defined means achieving some principles to a greater extent and others to a lesser extent. The definition used in Scotland and Wales was subject to negotiations between the devolved and UK governments, with different priorities leading to different outcomes from these negotiations.

Updating the block grant adjustments in Scotland: the ‘indexed per capita’ approach

For Scotland, the BGAs have been updated each year accounting for two factors: 

• the percentage change in revenues per person (or benefit spending per person) for equivalent UK government taxes (or benefits);
• the percentage change in the Scottish population.

This ‘indexed per capita’ approach means that the Scottish Government’s overall funding is higher as a result of tax devolution if, over time, its devolved revenues per person grow by more in percentage terms than the equivalent UK government revenues. On the other hand, its funding is lower as a result of tax devolution if revenues per person grow by less in percentage terms than the equivalent UK government revenues. Similar reasoning applies to devolved benefits: the Scottish Government has to spend more on a benefit than it receives from the corresponding BGA if, over time, spending per person grows more quickly than equivalent UK government benefit spending.

Updating the BGAs on the basis of changes in revenue or spending per person by the UK government and the change in the Scottish population insulates the Scottish Government from the effect of differential population growth. If, for example, equivalent UK government revenues grew faster than Scottish revenues only because of faster population growth, this would not be reflected in updates to the BGAs.

There is one BGA for each tax and benefit devolved to the Scottish Government, and they are updated individually using the ‘indexed per capita’ method. 

Updating the block grant adjustments in Wales: the ‘comparable model’

There are three main differences for how the BGAs are updated for the Welsh Government’s devolved taxes. 

First, rather than using the ‘indexed per capita’ method, which accounts for differential population growth, updates are based on what is termed the ‘comparable model’. This works similarly to the Barnett formula: the BGA in a given year (t) is equal to the BGA from the previous year (t-1) plus a population-based share of the change in equivalent UK revenues multiplied by a ‘comparability factor’ which adjusts for differences in the levels of revenues per person when taxes were first devolved to Wales. Thus, unlike in Scotland, the Welsh BGAs do not insulate the Welsh Government’s funding from the impact of differential population growth. This is because the comparable model takes account of the level of Wales’s population, but not its growth rate. 

Second, rather than there being one BGA for each devolved tax, there are three separate BGAs for income tax in Wales: one for income subject to the basic rate of tax; one for income subject to the higher rate of tax; and one for income subject to the additional rate of tax. Having these three separate BGAs helps insulate the Welsh Government’s funding from the impact of differences in growth in incomes and hence tax revenues from different parts of the income distribution. For example, less of the Welsh income tax base comes from high-income individuals than the UK income tax base: if income growth was concentrated at the top of the income distribution, one would therefore expect lower income growth in Wales than in the rest of the UK. Having separate BGAs for each tax band, and updating them separately each year, addresses this.

These first two differences reflect different priorities on the part of the Welsh and Scottish Governments. A long history of much slower population growth than in England meant the Scottish Government wanted to be insulated from the revenue effects of this. In contrast, Wales’s much lower income level meant that protection from different trends in tax revenues for different tax bands was deemed more important for Wales – meaning that the Welsh Government was willing to concede to the use of the ‘comparable model’, as was the UK government’s preference. 

The third difference is that rather than adjusting the BGAs for income tax in line with equivalent UK government income tax revenues, in Wales they are adjusted in line with changes in the equivalent UK government tax bases (i.e. the income subject to income tax). This reflects the fact that changes in UK government income tax rates still apply in Wales – the Welsh Rates of Income Tax sit on top of (reduced) UK rates of income tax in Wales, rather than replacing them entirely (as in Scotland). If the BGAs were indexed to UK income tax revenues, residents of Wales would lose twice over from UK government increases in income tax – first from paying higher taxes, and second from higher BGAs deducted from Welsh Government funding. Indexing the BGAs to tax bases rather than tax revenues avoids this issue, and still means the Welsh Government gains or loses if its income tax base grows more or less quickly than the equivalent UK government income tax base.