Barnett formula

The Barnett formula is a mechanism used by The Treasury in the United Kingdom to adjust the amounts of public expenditure allocated to Northern Ireland, Scotland and Wales automatically to reflect changes in spending levels allocated to public services in England, England and Wales or Great Britain, as appropriate.

The formula is named after Joel Barnett, who devised it in the late 1970s, while Chief Secretary to the Treasury, as a way of allocating additional or reduced finance based on population (and not need) as a short-term solution (in the runup to the planned devolution in 1979) to minor Cabinet disputes. Thereafter, it has been retained by Conservative Governments of 1979 to 1997 under Prime Ministers Margaret Thatcher and John Major, and by Labour Governments since 1997 under Prime Ministers Tony Blair and his successor Gordon Brown, with the Government declaring its intention to continue to use it as the basis for funding the three devolved governments.

The Barnett formula is said to have "no legal standing or democratic justification", and, being merely a convention, could be changed by the Treasury at will. In recent years, Barnett himself has called for a review of its long term viability.

How the formula works

Barnett consequentials are calculated to ensure that a particular change in public expenditure in one geographical area leads to a change in public expenditure in others that are proportionate to population in the different areas. It is not applied to all public expenditure but remains a default option unless other decisions are made. A decision to change expenditure in Great Britain will lead to changes in Northern Ireland; a change in England and Wales to changes in Northern Ireland and Scotland; and a change in England to changes in Northern Ireland, Scotland and Wales.

The Barnett formula applies only to certain areas of 'identifiable' public spending and excludes large items of expenditure such as defence.

Simply put, any increase (or decrease) each year in public expenditure in England on matters devolved to one or more of the other countries of the UK leads to an increase to these other countries' areas, in proportion to their relative population at that time. Expenditure is allocated en bloc, not per service (health, transport, etc.), allowing to each devolved administration the opportunity to allocate these funds as it believes appropriate.

Proportional to population

At the introduction of the formula in 1978, Scotland benefited from higher expenditure per head, as a result of the legacy of the 1888 Goschen formula (introduced by chancellor George Goschen as part of the proposals for Irish Home Rule), which originally allocated 80% of funding to England (Wales was considered as part of England), 11% to Scotland, and 9% to Ireland. This was later adjusted to calculate the funding in terms of the English amount instead of the overall total, thereby fixing the Scottish share at 11/80th (13.75%) of the English amount.

By 1970, Treasury preparations for devolution meant that changes in the relative populations were examined. By then the relative populations were 85% English and 10% Scottish, meaning that the new Barnett formula was brought in fixing changes to Scottish expenditure at 10/85th of the change in England (or 11.76%), 2% lower than the amount that was being received.

The population percentages have been recalculated annually since 1999 and the Scottish share was in 2002 set at 10.23% of the English amount, reflecting the lower population growth north of the border.

Political unwillingness to manage the difficult task of making the big changes necessary to rebalance existing expenditure meant that the Barnett formula was applied, as has been stated, only to changes. This means that the Scottish 'advantage' is over time eroded. The initial baseline and non-formula adjustments are accountable for the current differences in per-capita spending. As new expenditure is added in proportion to population, the differences in the baseline become less and less important. Thus, the formula acts to bring each home nation's share in line with the relevant share of the population (the so-called 'Barnett squeeze'). The greater the spending increases, the quicker is the adjustment.

Details of the funding arrangement can be found in HM Treasury's Statement of Funding Policy.

However, the continuing distribution of a per capita amount to each devolved areas higher than that allocated to England still continues to attract calls for the formula to be renegotiated. Using figures for the financial year 2006/2007, if a UK-wide per capita average were a notional 100%, identifiable per capita expenditure on services in England would be 97% and the Scottish amount 117%. Wales would be 111% and Northern Ireland 127%. This comprises all expenditure that can be identified as being to the benefit of a particular country. It does not, however, take account of non-identifiable expenditure, such as defence and debt interest, which are deemed to be for the benefit of the entire UK, regardless as to where the money is all actually spent.

In actual monetary figures, this would work out as (per person):

• England £7,121
• Scotland £8,623
• Wales £8,139
• Northern Ireland £9,385

As these variations were not ever a consciously decided policy of the Treasury or Parliament, that has been cited as a reason for reform. However, as noted earlier, these differences may be eroded over time but very slowly. For example the trend in Scottish identifiable expenditure as a percentage of English identifiable expenditure is as follows for the six years from 2001/2002 to 2006/2007 (a period of very large increases in public expenditure): 121.3%, 120.6%, 120.3%, 117.1%, 119.7%, 121.1%. Some estimate that these differences should disappear in 30 years, but that is by no means evident from recent data.

The population of England is 83% of the population of the UK. Instant abolition of the Barnett Formula, based on the above figures would result on an average UK expenditure of approximately £7,362. This would be a large decrease for each person in Scotland, Wales and Northern Ireland but an increase of less than 4% per person for England.

Although not subject to the Barnett Formula, there are significant variations in identifiable spending between the regions of England:

• North East £8,177 - 111% of UK average identifiable expenditure
• North West £7,798 - 106%
• Yorkshire and Humberside £7,188 - 98%
• East Midlands £6,491 - 88%
• West Midlands £7,065 - 96%
• Eastern £6,144 - 83%
• London £8,404 - 114%
• South East £6,304 - 86%
• South West £6,677 - 91%

Based on need?

Naturally, as further noted below, there is no account made of the amounts raised by taxation in each of the home nations, nor the relevant fiscal need (based on factors such as sparsity of population, cost of travel, unemployment rates, and health) in each area. The Barnett formula, however, never claimed to address these issues and was a basic calculation on the basis of proportions of the population.

The Government's official measures of fiscal need (including the age distribution of the population, road lengths, recorded crimes and numbers of sub-standard dwellings) clearly show a per capita need in Wales far higher than that of Scotland, yet the Barnett formula allocates the higher amount to Scotland.

Barnett himself viewed the formula that he devised as unfair. In The Scotsman, in January 2004, he wrote, "It was never meant to last this long, but it has gone on and on and it has become increasingly unfair to the regions of England. I didn't create this formula to give Scotland an advantage over the rest of the country when it comes to public funding."

According to Scotland on Sunday, moving to a needs-based allocation of government finances would cost Scotland around £2.5 billion a year. On the other hand, the Audit Commission (for England and Wales) concluded in a 1993 report that 'needs assessment can never be perfect or fair.'

Regional assemblies

In addition, the Barnett formula would not be practical in a system of English regional assemblies, so if such a proposal were to be resurrected, a new system of financial allocation would have to be devised.

Controversy

The Barnett formula is widely recognised as being controversial, but there is no consensus on how to change it.

1. It takes no account of different needs or different costs in different areas.
2. It does not affect existing levels of public expenditure, even if relative population shares change.
3. Since existing levels of public expenditure are not allocated in proportion to population, a particular expenditure decision will lead to different percentage changes in different areas.
4. It takes no account of different amounts of tax paid in respect of different areas or of changes in these amounts.
5. It does not apply to divisions of expenditure between the different regions of England.
6. Neither the Barnett formula nor needs-based spending is incentive-compatible, so neither plan would give the territories any fiscal incentive to become more productive.

English criticisms

The perceived unfairness of the Barnett Formula is often raised in association with the West Lothian question. In the period since the establishment of the Scottish Parliament, the two issues are often grouped together as the 'English Question'^{[citation needed]}.

Taxation and charges applied in only one nation controversially affect the Barnett formula too. In one example, the top-up tuition fees introduced in England are counted as additional English public expenditure (as the extra income is spent by the universities) and, therefore, an equivalent amount from the Consolidated Fund, paid for by UK-wide taxation, transferred to the Scottish Executive.^{[citation needed]} It was argued that this meant that only the English paid tuition fees, yet this money would be shared with the Scottish universities, despite Scottish students studying at those universities not having to contribute any extra fees.

In contrast, if the Scottish Parliament was to use its tax-adjusting powers (often referred to as the 'tartan tax'), then the additional (or reduced) revenue would not be considered in any calculations by the Barnett formula of the block grant for Scotland.

Scottish and Welsh criticisms

The lack of legislative basis for the formula also troubles Scottish and Welsh Nationalists. The devolution legislation states that the Scottish (or Welsh) Secretary will make a grant of such monies as Parliament makes available. This is seen as relying too heavily on the good will of the Westminster Parliament, and impinging on the independence of the devolved Executives.

The Scottish National Party also pointed to what has been termed the Barnett squeeze. They say that rather than protecting the favourable spending position of Scotland, the Barnett formula is a method to steadily erode that advantage. They point out that if a 4% increase is needed in expenditure to cover inflation, Scotland will get an increase of only 3% of its total budget, whereas England will get the full 4% (proportional to population share). After inflation, that would mean a 1% budget reduction for the Scottish Executive.

Opponents of that view claim that these are not cutbacks, merely lower growth, and that spending convergence between the Home nations is not a policy objective of the current UK Government or Scottish Executive.

Options for change

The Barnett formula is a simple mechanism that is only loosely related to the actual need of the countries of the UK, based on the assumption that fiscal 'need' is related directly to population.

The formula does not provide for proper fiscal independence of the devolved governments. They still have to work within a total budget that is not of their choosing or under their control (although the Scottish Executive do have limited tax-varying powers - the so-called 'tartan tax').

The Scottish Liberal Democrats commissioned Lord Steel of Aikwood to investigate what options existed for changing the present arrangement. The report of the Steel commission was published on 6 March 2006 and calls for greater fiscal powers for the Scottish Executive, similar to the Common Purse Agreement that exists for the Manx Government.

The Scottish National Party has also called for full 'fiscal autonomy' or 'fiscal independence' for Scotland. Based on ONS regional accounts data, Scotland's GDP per capita was 96% of the UK average of £26,700 in 2005. This figure excludes oil and gas revenue and when adjusted Scotland's GDP per capita rises from £25,600 to between £30,000 and £31,000 (depending on the agreed division of oil and gas fields.)

Given worse public health and greater rurality, and in the case of Northern Ireland greater security concerns, it would appear that the devolved governments will continue to rely on above average levels of per capita expenditure.

See also

• Equalization payments
• Government Expenditure and Revenue Scotland
• Government spending in the United Kingdom
• Scottish Consolidated Fund
• Union dividend

References

• Constitutional Law, 2002, The Laws of Scotland, David Heald and Alasdair McLeod (2002)
• Principles to govern determination of the block budgets for the Scottish Parliament and National assembly for Wales, HM Treasury departmental paper 3s/5621
• Research Paper 07/91, The Barnett Formula, House of Commons Library (2007)