Barnett formula

The Barnett formula is a mechanism used by Her Majesty's Treasury in the United Kingdom to adjust automatically some elements of public expenditure in Northern Ireland, Scotland and Wales to reflect decisions affecting other parts of the country. The Barnett System of allocating finance based on population (and not need) was devised in the late 1970s by the then Chief Secretary to the Treasury, Joel Barnett, as a short-term solution (in the run up to the planned devolution in 1979) to minor Cabinet disputes. Whereas the Barnett System was retained by the Conservative Government of 1979 under Prime Ministers Margaret Thatcher and John Major and by the Labour Government of 1997 under Prime Minister Tony Blair and his successor Gordon Brown, Joel Barnett later called for a review of its long term viability.

The Barnett formula has no 'legal standing or democratic justification' [http://www.parliament.uk/commons/lib/research/rp2007/rp07-091.pdf] , it is merely a convention and could be changed by the Treasury at will. However, the Government has stated the intention to use it as the basis for funding devolution.

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 which are proportionate to population in the different areas. It is not applied to all public expenditure, but it remains a default option unless other decisions are made. A decision to change expenditure in Great Britain will lead to Barnett consequentials in Northern Ireland; a change in England and Wales to Barnett consequentials in Northern Ireland and Scotland; and a change in England to Barnett consequentials in Northern Ireland, Scotland and Wales.

The Barnett formula only applies 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 is to be distributed evenly across the home nations, in proportion to their population at that time. Expenditure is allocated en bloc, not per-service (health, transport, etc.) and this gives the devolved executives the opportunity to reallocate funds between services to suit their needs. The formula does not reallocate existing expenditure, merely any changes made that year.

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, 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 of the total (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% England and 10% Scotland, 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 in 2002 the Scottish share was then set at 10.23% of the English amount, reflecting the lower population growth north of the border.

It was 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 the adjustment. In Scotland, static population numbers counteract the 'squeeze'.

Details of the funding arrangement can be found in HM Treasury's [http://www.hm-treasury.gov.uk/documents/public_spending_and_services/devolve/pss_devolve_devolveUK.cfm 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 re-negotiated. Using figures for the financial year 2006/2007 (source: HM Treasury, [http://www.hm-treasury.gov.uk/economic_data_and_tools/finance_spending_statistics/pes_publications/pespub_index.cfm Public Expenditure Statistical Analyses (PESA)] ), if a UK-wide per-capita average was a notional 100% then 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 monies are actually spent.

In actual monetary figures, this will work out as (per person): [Public Expenditure Statistical Analyses (PESA) 2007, chapter 9, table 9.2]
* 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 has been cited as a reason for reform. However, as noted earlier these differences are eroded by time, and at current rates of growth in public expenditure they should disappear in thirty years.

The population of England is 80% 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 £7362. 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 Barnett, there are significant variations in identifiable spending between the regions of England: [Public Expenditure Statistical Analyses (PESA) 2007, chapter 9, table 9.2]

* 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 factors) 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. [HM Treasury, evidence to the Treasury Committee, The Barnett Formula, second report HC 341 1997-98 p.12] [Scottish Parliament Research Note RN 00/31 - "The Barnett Formula"] .

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. [HM Treasury, Needs Assessment Study, 1978. Later assessments have not been made public.]

Lord 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" ["Scotland on Sunday", 'Unfair formula?' by Brian Brady, Westminster Editor, Sunday January 11th 2004] , 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, meaning that 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, though there is no consensus on how to change it.
#It takes no account of different needs or different costs in different areas.
#It does not affect existing levels of public expenditure, even if relative population shares change.
#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.
#It does not apply to divisions of expenditure between the different regions of England.
#It takes no account of different amounts of tax paid in respect of different areas or of changes in these amounts.
#Neither Barnett nor needs-based spending is incentive-compatible. Neither, that is, gives the territories an incentive to become economically efficient. ["The Fiscal Crisis of the United Kingdom" by Iain McLean and Alistair McMillan, Nuffield College Working Papers in Politics 2002 W10]

The English complaint

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 devolution, the two issues are often grouped together as the 'English Question' Fact|date=February 2008.

Taxation and charges only applied in a single nation also affect the Barnett formula, and this has been controversial. In one example, the variable ('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, was transferred to the Scottish Executive. [http://www.number10.gov.uk/output/Page5186.asp] [Note that in this linked article the Prime Minister's Official Spokesman claims that the Barnett formula had been "agreed by Parliament", which is not correct. The formula was agreed by the Cabinet and was not originally revealed to Parliament"] It was argued that this meant that only the English paid tuition fees, and yet this money would be shared with the Scottish universities, despite Scottish students studying at those universities not having to contribute any extra.

In contrast to this, 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.

A nationalist viewpoint

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 goodwill of the Westminster Parliament, and impinging on the independence of the devolved Executives.

Scottish Nationalists have also pointed to what has been termed the "Barnett squeeze" [Scottish National Party - "The implications of the Barnett formula". Saltire Paper No. 1, J. Cuthbert (1998)] . They say that rather than protecting the favourable spending position of Scotland, that instead 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 only get an increase of 3% of its total budget, whereas England will get the full 4% (proportional to population share; however, both amounts will be equivalent). After inflation, this 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. ["The Scotsman", 'Devolution finance has been stabilised by Barnett formula' by Peter MacMahon, Friday June 24th 2005]

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 [For a recent discussion of these points see [http://www.gla.ac.uk/Acad/PolEcon/pdf05/2005_24.pdf Gallagher and Hinze] .] (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 [http://www.scotlibdems.org.uk/files/steelcommission.pdf 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. The SNP does not accept arguments that Scotland has a fiscal deficit of expenditure over taxation.

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.

However, it could be reasonable to give devolved parliaments and assemblies greater budget powers, and allow them the fiscal accountability to make the trade-offs between taxation and spending in whichever direction the voters of their nations demand.

Notes

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)