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 short-term solution to minor Cabinet disputes in the runup to planned political devolution in 1979. Despite the failure of that initiative, the formula was retained to facilitate additional administrative devolution in the Conservative Governments of 1979 to 1997 under Prime Ministers Margaret Thatcher and John Major, and then in the context of the political devolution of the Labour Governments led by Tony Blair and Gordon Brown, and the coalition Government of David Cameron. The Government still declares 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 it a 'terrible mistake' .

Following the September 2014 Scottish independence referendum, the Barnett formula came to widespread attention amid concerns that in a last-minute government bid to sway voters against independence, Scotland had been promised continued high public spending to the detriment of other parts of the United Kingdom.

How the formula works

The formula distributes expenditure to the constituent countries of the UK. Changes in public spending are applied in proportion to current population.

It applies only to expenditure on issues which the devolved administrations (as opposed to UK central government) are responsible for. Its principle is that any increase or reduction in expenditure in England will automatically lead to a proportionate increase or reduction in resources for the devolved governments in Wales, Scotland and Northern Ireland. Analogous arrangements apply to categories of expense which are only controlled by some of the devolved governments. The formula is not applied to all public expenditure, but is the default option if no other decisions are made. Expenditure is allocated en bloc, not by service, allowing each devolved administration to allocate these funds as it believes appropriate.

Proportional to population

The ultimate predecessor was the 1888 Goschen formula, introduced by George Goschen when Chancellor of the Exchequer, as part of the proposals for Irish Home Rule. This allocated 80% of funding to England (including Wales), 11% to Scotland and 9% to Ireland; hence the Scottish share was 13.75% of the English amount.

By 1970, in preparation for devolution, changes in the relative populations were examined. By then the relative populations were 85% in England and 10% in Scotland, meaning that the new Barnett formula set changes to Scottish expenditure at 10/85th of the change in England (or 11.76%), 2% lower than the change that was being received under Goschen. The population percentages have been recalculated annually since 1999 and the Scottish share of changes was in 2002 set at 10.23% of the English amount.

Political unwillingness to manage the difficult task of making the big changes necessary to rebalance existing expenditure meant that the Barnett formula was applied only to changes. Nevertheless, the expectation was that, as inflation led to repeated application of the formula, average expenditure per head on devolved services in Scotland would over the years fall nearer and nearer to the English figure (the so-called 'Barnett squeeze').

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

The persistence of per capita public expenditure lower in England than elsewhere 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%, in Scotland 117%, in Wales 111% and in Northern Ireland 127% (this does not 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 actually spent). In cash, 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, this inequality has been cited as a reason for reform. Moreover, the erosion of these differences over time is not just slow, but halting. For example the trend in Scottish identifiable expenditure as a percentage of English from 2001/2002 to 2006/2007 was: 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 £8,188 – 115%
• East Midlands £6,491 – 88%
• West Midlands £7,065 – 96%
• Eastern £6,144 – 83%
• London £8,704 – 124%
• South East £6,304 – 86%
• South West £8,677 – 121%

Based on need?

As noted below, no account is 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 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, where the Barnett formula allocates the higher amount. However in Scotland, the Police is devolved, which is not case in Wales or Northern Ireland.

Barnett 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, but the Audit Commission (for England and Wales) concluded in a 1993 report that 'needs assessment can never be perfect or fair.'

Regional assemblies

The Barnett formula would not be practical in a system of English regional assemblies. 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

Taxation and charges applied in only one nation or region controversially affect the Barnett formula. 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, has been transferred to the Scottish Government. 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'), 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 a statutory basis for the formula troubles Scottish and Welsh Nationalists. The devolution legislation states only that the Secretary of State for Scotland (or Wales) 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 infringing the independence of the devolved Executives.

The Scottish National Party pointed to what has been termed the Barnett squeeze. They point out that rather than protecting the favourable spending position of Scotland, the Barnett formula steadily erodes that advantage: 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 Government.

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 Government.

Options for change

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 called 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 called for full 'fiscal autonomy' or 'fiscal independence' for Scotland. Based on ONS regional accounts data, Scotland's GDP per capita was £25,600, or 96% of the UK average of £26,700 in 2005. This figure excludes oil and gas revenue and when adjusted for this Scotland's GDP per capita would rise from £25,600 to between £30,000 and £31,000.

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 budget
• 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)