How much will the Scottish Government benefit from additional health funding in England?

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How much extra money for health has been announced?

In June 2018, the Prime Minister announced additional funding for the NHS in England.  By 2023-24, the NHS England budget will be £20.5 billion higher than in 2018-19.  The ‘Barnett formula’ means that this additional funding will result in additional money for the Scottish budget – known as ‘Barnett consequentials’.  The additional health funding will result in Barnett consequentials for Scotland over the period 2019-20 to 2023-24, including £600m in 2019-20  The Scottish Government can spend this money however it chooses, but has made a commitment to pass on any health-related Barnett consequentials to the Scottish health budget.

Where might the money come from?

The UK Government has indicated that it might decide to increase taxes to pay for at least some of the additional health spending.  In her original announcement, the Prime Minister said “across the nation, taxpayers will have to contribute a bit more in a fair and balanced way to support the NHS we all use”.  The details of what this might mean remain unclear, but further clarity is likely to come in the UK budget on 29 October.  If the UK Government does decide to increase income tax to pay for additional health spending, this could have implications for the Scottish budget through the operation of the ‘fiscal framework’ – a framework that was put in place in response to the additional tax raising powers that the Scottish Government now has.

What could this mean for Scotland?

The diagram below sets out a hypothetical situation in which the UK Government decides to fund the additional health spending by increasing the basic and higher rates of income tax by 1p.  This would raise just over £5 billion per year, so would be the scale of change required to fund the additional health spending in 2019-20 through income tax changes.

Now that income tax powers have been devolved to Scotland, changes to income tax rates and bands in England do not affect Scottish taxpayers (other than changes to the personal allowance).  As a result of this devolution, the money that Scotland receives from HM Treasury is adjusted downwards to reflect the fact that Scotland now raises its own income tax.  This is known as the block grant adjustment (BGA).

The BGA is designed to reduce Scotland’s block grant by the amount that would have been raised through income tax in Scotland if its income tax receipts (per head) were changing at the same rate as in England.  This means that if the UK Government increases income tax in England in such a way that income tax receipts per head in England grow at a faster rate than in Scotland, then Scotland’s block grant reduction is more than Scotland is raising in income tax.  This means there is a negative impact on Scotland’s budget.  The principle here is that, if taxpayers in the rest of the UK are having to pay for the additional health spending, then it would be unfair for Scottish taxpayers to benefit from the additional funding without also having to pay higher taxes.

So, in principle, the Barnett consequentials could be partially offset by a reduction in the block grant as a result of changes to income tax in England that are not matched in Scotland.  However, this all depends on what the Scottish Government decides to do in respect of income tax – if it also raises income tax, then this effect could be neutralised or even reversed.  Also, the exact outcome will depend on other factors such as relative economic growth rates in England and Scotland.  So, the final outcome will be determined by a complex interaction of different factors.

What other options might the UK Government pursue?

The diagram above sets out a situation where the full amount of additional health spending is raised through income tax changes.  In reality, it is more likely that a combination of measures will be used to fund the additional health spending. The UK Government might choose to make changes to non-devolved taxes, such as national insurance contributions, VAT or corporation tax.  Or, the UK Government might borrow more to fund the health spending, in which case there is no direct implication for the Scottish budget.  Finally, the UK Government has referred to using the ‘Brexit dividend’ to fund at least part of the additional health spending.  These other funding options are explored more fully in a blog by Full Fact.

What does it all mean for Scotland?

The fiscal framework has made the determination of the Scottish budget much more complex.  So, the final outcome for the Scottish Government’s budget following the announcement of additional health funding is difficult to determine.  The essential point is that funding decisions made by the UK Government could have an impact on the final amount that the Scottish Government receives as a consequence of the additional health funding in England.

Nicola Hudson, Senior Researcher, Financial Scrutiny Unit