Barnett Formula ‘protected Scotland from cuts’, IFS finds

12 Nov 14
A quirk in the Barnett Formula for determining the public spending share of the UK’s constituent nations has spared Scotland £600m of cuts since the UK coalition’s austerity programme began in 2010, according to a paper issued today by the Institute of Fiscal Studies.

By Keith Aitken in Edinburgh | 12 November 2014                 

A quirk in the Barnett Formula for determining the public spending share of the UK’s constituent nations has spared Scotland £600m of cuts since the UK coalition’s austerity programme began in 2010, according to a paper issued today by the Institute of Fiscal Studies.

The claim comes as Barnett faces increasing scrutiny, in view both of the Scottish independence referendum and of new tax powers coming to Holyrood under the 2012 Scotland Act. Some English MPs want the formula, used since the 1970s, to be replaced with a more up-to-date needs-based system, though all the main party leaders remain committed to its retention.

According to the IFS’s paper, Business as Usual, Barnett is ‘flawed’ in the way it treats business rates, with the result that Scotland and Northern Ireland will by 2015/16 have sustained block grant cuts that are respectively £600m and £200m less than should have been applied.

Additionally, it says, the spending reviews in 2010 and 2013 gave Scotland an extra £400m above what a corrected Barnett would have delivered, bringing its relative gain to £1bn, or around 3% of its 2015/16 budget.  

It claims that the cuts imposed in Scotland and Northern Ireland since 2010 have been a fifth smaller than they should have been – an advantage equivalent to £113 per head of the Scottish population.

The technical flaw identified by the IFS arises because of business rates, which are fully devolved in Scotland and Northern Ireland (and in Wales from next April).  The Barnett calculation assumes that these rates part-fund England’s local government budget, but in practice this budget has been cut even as business rate revenues rise. Scotland and Northern Ireland have gained accordingly.

‘This is clearly not in the spirit of the Barnett Formula, suggesting that the existing formula treats business rates in a flawed way,’ the IFS paper argues.

‘The flaw in the Barnett Formula’s treatment of business rates means Scotland’s budget has increased by significantly more since 2000 than it would have done had business rates not been fully devolved.’

But the IFS claims won little support from either central or devolved government. The UK Treasury insisted that the Barnett outcomes were ‘broadly fair, transparent and consistent,’ and were based on the degree of devolution applying to services rather than on individual revenue streams.

The Scottish Government drew on the annual GERS (Government Expenditure & Revenue Scotland) figures to show that Scotland’s tax per capita contributions to the UK exchequer had been above the UK average in each of the past 33 years.

 

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