What price the Barnett Formula?

3 Nov 14

Scotland’s post-referendum debate has put the controversial funding mechanism back in the spotlight. However, its future looks uncertain

A veteran of Jim Callaghan’s government once told me that the Barnett Formula only came into being because the Labour prime minister hated to miss his lunch. Cabinet meetings were regularly prolonged by rows between the territorial departments – the Scottish, Welsh and Northern Ireland Offices – over spending allocations. So the Chief Secretary to the Treasury, Joel Barnett, whose death was announced today, was sent away to find a mechanism where rows were avoided, agendas completed by lunchtime and the PM kept happy.

Whether this story is true, Barnett was certainly only ever intended as a temporary fix. That it has kept the peace, more or less, through decades of constitutional argument and change bemuses many, including its inventor, who is on record as calling its survival ‘a national disgrace’.

So it’s ironic that Barnett may finally bite the dust because of a popular decision in favour of the status quo: Scotland’s 55%-45% September referendum vote against independence. Even before the vote, a Dods poll found that nearly two-thirds of English MPs (83% of Tories, 41% of Labour and 78% of Liberal Democrats) wanted Barnett scrapped. Following the vote, the clamour grew for promised extra powers for Scotland to be balanced by fixing devolutionary anomalies for the rest of the UK, including Barnett. CIPFA has added its voice to this debate, with chief executive Rob Whiteman saying retention of the formula ‘just isn’t feasible’.

The formula works by applying UK departmental spending decisions, up or down, proportionately to the block grants that fund the nations. Proportionately, though, is a loaded word. How the devolved administrations then spend these ‘Barnett consequentials’ is left largely up to them.

Everyone agrees that Scotland does well out of Barnett, with a per capita spend some £1,200 above the UK average. Barnett himself has insisted that the baseline population figure on which the formula was calculated was simply wrong from the first, and has become more so over the years. Supporters say the differential reflects the higher costs of delivering services to a population dispersed across remote highlands and islands, and Scottish National Party ministers add that, if oil revenues are taken into account, Scotland remains a consistent net contributor to the UK Exchequer.

Most of the fiscal proposals before Lord Smith’s commission on further devolution would move areas of the Scottish Budget outside the block grant, and therefore beyond the reach of Barnett. The Conservatives want to devolve all of income tax and hypothecate corporation tax raised in Scotland to Holyrood. Even if only some of that comes to pass, the block grant will shrink by some 15% under the provisions of the 2012 Scotland Act, which from 2016 allows Holyrood to vary the basic rate of income tax above 10p in the pound.

These fiscal adjustments, actual or potential, are reinforced by political threats. Many Tory backbenchers are demanding a resolution to the ‘West Lothian Question’, by restricting Commons votes on England-only issues to English MPs. The problem is the definition of England-only. Spending decisions on the NHS or schools in England might seem the epitome of England-only issues. But, as Gordon Brown has warned, they would have a knock-on effect on Scotland through the Barnett consequentials.

Perhaps more compellingly, Labour foresees a position where it might have an overall Commons majority but be outnumbered by Tories for most Commons votes. England-only is not popular either with the Liberal Democrats, who can block it for as long as the coalition persists.

Meanwhile, both Labour and Plaid Cymru are demanding that the benefits of any further devolution to Scotland be matched in Wales. Today’s Chief Secretary to the Treasury, Danny Alexander, has accepted in principle the case for a better Welsh Barnett deal in a 2012 inter-government agreement with Welsh finance minister Jane Hutt. And the Treasury has tacitly acknowledged Wales’s spending disadvantage with occasional ad hoc allocations, such as help to match-fund EU money.

Hutt told Public Finance that Welsh ministers felt ‘very strongly’ about redressing the imbalance, and saw clear scope in the post-referendum constitutional review to do so.

‘The now recognised issue of underfunding must be dealt with – there should be an overall funding package which is fair to Wales.’

So are Barnett’s days finally numbered? Former Calman Commission secretary and Better Together adviser Professor Jim Gallagher told PF: ‘What the pro-union parties were saying when they committed to the Barnett Formula during the referendum campaign was essentially that the Scottish Government would always be funded by a mixture of its own taxes and shared UK taxes – that was one of the big messages of the [No] campaign.

‘You have to get beyond the arithmetic of Barnett and understand what it’s trying to do, which is to recognise that we are an asymmetrically devolved country.

'Only Westminster can decide the priorities of the reserved powers, and therefore between the reserved and the devolved. Having made that choice, the UK has then to find a way of allocating the devolved administrations a fair share of all the money that’s being spent on devolved services and it has to do that in a way that doesn’t interfere with the rights of the devolved administrations to decide the priorities within that spending. A block grant is the logical way to do that.

‘The Barnett Formula works very simply to do that. It survives because it works, because it does the job.’

But at CIPFA, Whiteman observes that such pragmatism might not be able to endure for much longer now the constitutional landscape has started to shift. ‘If political parties are sincere in their stated vow to share resources equitably across all four nations, the Barnett formula in its present form is likely to be unworkable.’

The institute wants to see an independent commission established to develop a fair and transparent means of allocating resources across the UK.

John Curtice, veteran commentator and professor of politics at the University of Strathclyde, does not foresee an abrupt early end to Barnett, but thinks it will wither away in coming years. Barnett, he says, is much bigger politically than financially. ‘The Tories might try, but the angst you create in Scotland is greater than the benefit you get south of the border.’

At most, he reckons, England might gain £2bn from scrapping the formula, hardly a massive boost to spending. Early action is more likely to redress Welsh grievances. ‘I think what will happen is that the UK Government will up the baseline to which it applies – the amount of money involved would be so small anyway in UK terms,’ he predicts.

‘The crucial bridge that was crossed by the 2012 Scotland Act is that the Treasury has signed up in principle to the idea that certain revenues raised in Scotland are already hypothecated to Scotland. It’s very, very difficult to see why it’s worth the political hassle of explicitly getting rid of Barnett as opposed to letting it wither on the vine.’

 

  • Keith Aitken
    Keith Aitken

    covers Scottish affairs for Public Finance from Edinburgh. He was formerly economics editor and chief leader writer on The Scotsman and now has a busy freelance career as a writer, broadcaster and event chair.

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