Is time running out for the Barnett Formula?

23 Jul 09
A Lords inquiry has issued the latest in a series of official reports calling for the scrapping of the controversial 30-year-old funding mechanism for the UK nations. But replacing it will not be easy
By David Williams

23 July 2009

A Lords inquiry has issued the latest in a series of official reports calling for the scrapping of the controversial 30-year-old funding mechanism for the UK nations. But replacing it will not be easy

The conclusions are unequivocal and the language unambiguous. The Barnett Formula, which accounts for £50bn of public spending every year, is ‘arbitrary and unfair’ and must be scrapped.

That verdict, issued by a House of Lords committee on July 17, forms the core of the fourth official report in two months to recommend that the funding mechanism be replaced.

The formula is the method used by the Treasury for allocating cash grants to Scotland, Wales and Northern Ireland (see below). It dates back to 1979, and has survived the introduction of devolved government in Stormont, Holyrood and Cardiff.

But calls for its abolition have been mounting. The Lords’ report followed the landmark findings from the Scottish Parliament’s Commission on Scottish Devolution, chaired by Sir Kenneth Calman. A wider review on devolution from the Commons justice select committee condemned Barnett as lacking ‘any basis in equity or logic’.

The Lords’ conclusions are in line with those of the Independent Commission on Funding and Finance for Wales. Both recommend a needs-based system of distributing money, and that the new rules should be applied by a body independent of the Treasury.

At present, the Barnett Formula ensures higher per head funding for Scotland (117% of the UK average) and Northern Ireland (127%) than for England (97%) and Wales (111%). In 2007/08, this meant that £1,644 more was spent per head in Scotland than in England.

This is partly due to Barnett’s tendency to entrench previous spending patterns. Over the past three decades, the gap in quality of life between Scotland and England has narrowed, and Scotland’s population has fallen while England’s has increased, but the change is barely reflected in today’s grants.

The Lords’ report found that when the nations were compared in terms of factors such as child poverty, unemployment and disability, Barnett funding ‘in no way’ reflected relative needs.
The study showed that Northern Ireland, with its young population, high levels of people on low incomes and historic under-investment in infrastructure, needed more money. So did Wales, which has proportionally more pensioners and people with debilitating long-term illnesses than any other UK nation.

The report swept aside the traditional argument that Scotland needed extra cash because sparsely populated areas such as the Highlands were more expensive to serve. The Lords found the number of people living in those regions was so small as to have a negligible impact on overall funding.
Launching the report, committee chair Lord Richard said successive governments had been reluctant to review the system because the Barnett Formula was simple and stable. Reform would ‘take time and be an effort, and governments won’t like taking the trouble’.

Richard also dismissed former prime minister Tony Blair’s assertion that the formula was a ‘small price to pay’ for keeping the union together. ‘That’s an absurd proposition,’ he said.
He was highly critical of the Treasury, which he accused of administering Barnett ‘in ways which are not transparent and are difficult to understand’.

The committee called for a UK Funding Commission to make recommendations on funding allocations, similar to the system in Australia. Richard said the advantage of this model, which is also advocated by CIPFA, is that the Treasury would no longer be the ‘judge in its own cause’, emphasising that such a panel should be politically neutral.

Concluding, Richard described the Barnett arrangement as ‘extraordinarily simple but also extremely unfair’.

The committee’s findings have been welcomed in Northern Ireland and Wales. Stormont Finance Minister Sammy Wilson said: ‘The report simply bears out what we in Northern Ireland know to be the case.’ A statement from the Welsh Assembly Government pointed out the emerging consensus that the formula was ‘overdue for reform’.

Even the formula’s creator, Lord Barnett, has admitted the system is inadequate. Giving evidence to the committee in January, he said he devised the scheme when chief secretary to the Treasury to make his job easier. ‘I just wanted to get through every day without too much trouble,’ he told the Lords.

‘I do not consider it is successful. I do not think it is fair… I thought it might last a year or two before a government would decide to change it. It never occurred to me for one moment that it would last this long.’

Surely then, the momentum against the formula has become irreversable?

Reformers might yet be disappointed. The Treasury continues to insist that Barnett is a ‘robust mechanism’, which ‘has stood the test of time’, and says there are no current plans to replace or alter it.

And, perhaps unsurprisingly, the Lords report has had a cool reception in Scotland. Finance Minister John Swinney said the formula should remain in place unless Scotland is given full fiscal autonomy.
Professor Arthur Midwinter, of Edinburgh University’s Public Policy Network and an adviser to the Scottish Labour Party, maintains that Barnett has its advantages.

‘The system is a simple and objective way of sharing out the money that brings stability to all three devolved administrations,’ he says. ‘All the indicators show Northern Ireland as having the highest need, Scotland next and Wales third, which I would expect to continue whichever formula they replaced it with.’

But Guy Lodge, associate director of the Institute for Public Policy Research, which carried out its own analysis of Barnett, says the government must act. ‘We’ve had all these reports – the government needs to pull it all together,’ he says.

‘The Treasury just don’t know what to replace it with. They’re anxious about moving to a needs-based system because those are complex, and they like Barnett because it’s straightforward and simple.
‘But the evidence is fairly compelling, and they’re isolated in their view. The awareness of the disparity in public spending is growing – it’s creating tension across the union and so it’s important to deal with it now.’

Economist Gerry Holtham, chair of the Independent Commission on Funding and Finance for Wales, agrees that the case against Barnett has been made. ‘I hope the intellectual consensus means reform is inevitable,’ he tells Public Finance. ‘The original baseline is 30 years old – we’ve had the rise of North Sea Oil, the collapse of the financial sector.

‘If the Barnett Formula does roughly meet need, it’s by accident. We shouldn’t rely on the accident continuing. Everyone uses needs formulae, all over the place. The argument that it’s impossible – tell it to the Australians, tell it to half the states of the United Nations.’

Barnett Formula made simple

The Barnett Formula was introduced by Joel (now Lord) Barnett in 1979 as a method for setting levels of funding to the nations in the UK. It does not apply to social security funding, but still accounts for more than half of total public spending in Scotland, Wales and Northern Ireland.

Each nation’s annual allocation is made up of a baseline and an increment. The ­baseline is always the total block grant (baseline plus increment) from the previous year. Under Barnett, the increment is calculated on a per capita basis, with no adjustment for need.

The UK government has in ­principle backed the findings of the ­Scottish Parliament’s Calman ­Commission, which recommended increased tax-raising powers for Holyrood and that the Barnett Formula be replaced with a new needs-based grant system.

Did you enjoy this article?