Rachel Reeves has been accused of shortchanging the UK’s devolved nations after leaving the Welsh, Scottish and northern Irish governments with multimillion-pound funding gaps.
The chancellor said the Treasury would fully cover the 1.2% rise in national insurance contributions for employers on salaries above £5,000, which came in on 6 April.
However, Reeves has calculated the amount of money needed by using the Barnett formula, which ensures funding increases proportional to England in terms of population.
Cardiff, Edinburgh and Belfast – which all operate larger public sectors than England – now say they have been left in the red.
The Celtic nations’ finance officials have argued the move violates the UK’s statement of funding policy, which states each constituent government is not allowed to act in a way that creates adverse financial implications for the others.
The Welsh cabinet secretary for finance, Mark Drakeford, announced last week that the Welsh government would use £36m annually, taken from its reserves, to plug half the gap, but a further £36m would have to be funded by public sector employers, including health boards, all 22 local councils, Natural Resources Wales and Cardiff airport. The funding shortage amounts to cuts across the board of about 14%.
Drakeford said: “We have made our position very clear with the Treasury that using the Barnett formula in this instance is a breach of the rules. If this was a one-off, we may have been able to use more of our reserves to cover the shortfall, but as it is, this will unfairly impact Wales year after year.”
The bill for Scotland’s public services amounts to an estimated £700m, and about £200m in northern Ireland. The Treasury has agreed an additional £339m for Edinburgh and £146m for Belfast.
Scotland’s budget is already under significant pressure from the rising cost of devolved welfare benefits, public sector pay settlements, and new policy commitments – including the mitigation of the two-child limit.
Holyrood’s finance secretary, Shona Robison, has called repeatedly for the tax increase to be fully funded by the UK government. She said: “We have been calling for the UK government to abandon its employer national insurance rise, which risks damaging the economy by making it harder for businesses to take on or keep staff.
“Failing that, we have asked that they fully fund this tax increase to ensure Scotland’s NHS, councils and other public services don’t lose out on vital revenue.
“As such, it is deeply disappointing that the funding falls so far short of the more than £700m bill we estimate public services face. It feels like Scotland is now being punished for having decided to employ more people in the public sector and to invest in key public services.”
The UK government has defended the use of the Barnett formula in calculating public sector national insurance contributions. A spokesperson said the changes were “in line with agreed funding arrangements and longstanding precedent”.
However, the row has reignited a longstanding debate over whether the Barnett formula – in use since 1978 – is fit for purpose, and whether it should be reformed or scrapped in favour of a universal needs-based approach.
It also adds to growing friction between the Welsh Labour and UK Labour administrations.
Wales has consistently voted Labour for 100 years, and Welsh Labour has controlled the Senedd since its inception in 1999. However, with a year to go before the next Welsh elections, recent polling has suggested the party will trail in third place behind Plaid Cymru and Reform UK, with just 18% of votes, putting the first minister and Welsh Labour leader, Eluned Morgan, under pressure to differentiate her wing of the party from its Westminster counterpart.
Rory Carroll contributed reporting
