‘Bending the rules’ vital to avoiding Holyrood funding crisis in pandemic

ONLY a combination of luck, “huge sums of money” and a bending of the rules avoided a financial crisis for the three devolved governments during the pandemic.

A new study found the “fiscal frameworks” governing the finances of Scotland, Wales and Northern Ireland had to be bypassed to cope with the economic shock of Covid.

The work, by researchers at the Institute for Fiscal Studies (IFS), Fraser of Allander institute and University of Stirling, warned the system had to be made more robust to cope with future crises. The finding comes as the fiscal framework governing Holyrood’s finances undergoes its first five-year review to see if it needs rewriting.

The fiscal frameworks, which link changes in devolved funding to spending changes in England and put strict controls and limits on borrowing, are supposed to cope with economic shocks.

However, the study found they were “clearly not designed” with a shock as profound as Covid in mind, and it had “exposed some limitations and risks of devolved funding settlements”.

Indeed, the mechannisms only survived because the UK and devolved governments responded flexibly and ignored precedent.

Initially, the UK Government tried to apply the traditional Barnett funding formula to the crisis, generating extra cash for the devolved governments known as “Barnett consequentials”.

But this proved a too slow and blunt a response, so the Treasury switched to upfront funding guarantees, bypassing Barnett.

This allowed an extra £9.7 billion, £5.85bn and £3.3bn to be allocated to Scotland, Wales and Northern Ireland far faster than would otherwise have been the case. The study found the vast sums meant financial crises were avoided, but also warned that such ad-hoc changes were “not suitable for the long term and may not be granted by future UK governments if other major crises arise”.

There was also an element of “luck”, in that all parts of the UK were affected broadly similarly.

If one devolved nation had suffered disproportionately from Covid, a funding system linked to spending in England “could have been insufficient”, the study said.

The authors warned: “There is no guarantee that future crises – or indeed recovery from the current one – will be similarly symmetric. It is therefore important to consider how the fiscal frameworks can be made more robust to future crises, and better able to support recovery from the current crisis.”

Co-author David Bell, professor of economics at the University of Stirling, 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 more formal structures present in some federal states would have struggled to cope.”