Is Barnett breaking Britain?

Gwern Gwynfil

There was trumpeting of the benefits of a Labour government at either end of the M4 earlier this year.

The budget has now arrived and if the proof is in this pudding, then it leaves a very bad taste in the Welsh mouth.

What Labour Government Dividend?

The London Labour Chancellor, Rachel Reeves, proudly announced at the despatch box in the Commons that she was providing an additional £3.4bn for the Scottish government, £1.7bn for the Welsh government and £1.5bn for the Northern Ireland executive.

Let’s break this down, shall we?

On a population basis this is approximately £785 per person for Northern Ireland, £620 per person for Scotland and a comparatively derisory £541 per person for Wales.

Wales shortchanged as always. This is not new. We are victims of a system that’s so far out of date that its creator, Joel Barnett, died a decade ago. A creator who was himself on record saying that continued use of his formula would be a ‘terrible mistake’.

The Barnett Formula’s Failings

A quick recap of the history of this inappropriate allocator of funds:

Created by Joel Barnett, then Chief Secretary to the Treasury, as a short-term solution to combat Cabinet bickering in the run up to the 1979 devolution referendums in Scotland and Wales.
Its original intention was to cap spending in Wales, Scotland and Northern Ireland at a time in the late 1970s when a bloc of SNP and Northern Ireland MPs were in a whisker of holding the balance of power at Westminster.

It has no legal standing and is nothing more than a convention which could be changed by the Treasury at will.

To be clear – any Chancellor, at any time, for the past 45 years, could have ditched, adapted, improved or altered the formula.

Fifteen years ago, a Select Committee concluded that the formula should no longer be used and needed to be replaced with a ‘new system which allocates resources to the devolved administrations based on…their relative needs’.

A reminder here that Wales is one of the poorest parts of the United Kingdom and on many measures the absolute poorest part of the state – on a relative needs basis Wales should be receiving more money per head of population than anywhere else (as opposed to significantly less than Scotland and Northern Ireland).

To be clear, both Scotland and Northern Ireland should also receive more than their current allocations on a relative needs basis but Wales is winning the gold medal when it comes to being shortchanged – the only victory consistently ours within this United Kingdom…

Let’s also remember that Wales is not simply gifted money by England, the people of Wales produce, pay and generate tax revenue for the Exchequer. Wales provides resources and has done so for centuries. It is likely that Wales will be a key part of the future energy mix for the UK. If we’re ‘all in this together’ why are we not all treated equally and equitably? A question pertinent for other parts of the United Kingdom as it is for Wales.

At the core of Barnett is that funding for Wales, Scotland and Northern Ireland is always dependent on policies and choices made by the Westminster government. Austerity or largesse is determined, often whimsically, by a very different government with very different priorities. Barnett fundamentally undermines the principle of devolution as it structurally hamstrings devolved governments when it comes to policy choices – they become glorified administrators, working in arrears as they have no foresight of resource availability.

No wonder that Joel Barnett himself demanded that the formula be scrapped in 2014, shortly before his own demise.

How it Works (or doesn’t)

For those of you unfamiliar with Barnett it is deceptively simple: take any extra funding for England and multiply by the population proportion relative to England and this gives you additional funds for the devolved administration.

But (there is always a but) there is a catch even to this simple formula as there is wriggle room around the definition of how much any relevant English departments programme is considered comparable with services delivered by the devolved administrations.

For example Wales had a population proportion of 5.6% allocated for the 2021 spending review, education does have a 100% multiplier, so for every £1 spent on education in England, Wales gets 5.6p.

Other departments have far lower multipliers so the ‘consequential’ is chipped away. For example, the department for Digital, Culture, Media and Sport has a 67.7% multiplier – for every £1 spent by DCMS in England, Wales gets 3.79p (£1 x 5.6% x 67.7%).

At the other end of the departmental spend spectrum let’s take a quick look at the example of HS2. This came under parts of the transport department not nominally devolved to Wales and so the Treasury justified the project as an England and Wales one – £1 multiplied by 5.6% multiplied by 0% equals zero ‘consequential’ for Wales. This was something of an accounting trick by the Treasury, even within Barnett, the Department of Transport has a nominal multiplier of 36.6% (for every £1 they spend in England, Wales should receive 2p).

Even fully devolved departments like health may well have reductions in their comparability factors – outside education, barely any departmental spending will have a factor of 100%.

Barnett has become a tool to shave down the block grants for Northern Ireland, Scotland, and Wales. It is not particularly transparent, there is a degree to which it is subject to the whims of Treasury officials. It is a convenient excuse to perennially underfund Wales.

• As a funding solution for devolved governments this is the worst of all worlds.
• There is structural and chronic underfunding.
• Visibility of funding is limited (devolved governments must wait for the budget to discover what they may have in the bank, then they must wait for the Treasury to calculate their allocation and the actual amount they’ll receive).
• Distribution of funds is frequently heavily in arrears, often many months delayed.
• Worse than this, if the money is not spent within the correct financial window, it is clawed back by the Treasury – frugality and good management in devolved governments rewarded by losing money rather than being able to put it to good use.
• In a classic government ‘sticking plaster’ the Treasury agreed that from 2018-19 Wales would have an additional ‘needs based’ factor to its calculation. This is set at 105% with an agreement that it should rise to 115% in the future.

Notwithstanding sticking plasters, the Barnett formula is not fit for purpose. Wales is the biggest loser because of this inadequacy. It is also clear that having Labour governments at both ends of the M4 make not a blind bit of difference to the Treasury’s indifference towards Wales and the people of Wales – for them, the other end of the M4 may as well be another country. This reality will eventually fuel the breakup of the UK and their disdain will become a self-fulfilling prophecy.

Solutions?

Forty five years since Joel Barnett used his simple formula to resolve Cabinet conflict there is no reason to cling to this calculation. The UK has changed dramatically, devolution is here to stay, the opportunity for constructive reform exists.

With Labour at both ends of the M4, why are we not seeing a constructive, bold conversation about strengthening devolution? Using the opportunity to transform the Welsh government’s revenue raising powers and the way in which funds are redistributed to Wales by the Treasury.

Labour ushered in devolution at the end of the last century, a shame that they have lost their ambition and have no desire to make it work properly. The Commission on the Constitution for Wales laid out the essential next steps in January of this year.

Reframing devolution, giving Wales more fiscal powers, stepping closer to the ‘radical federalism’ often espoused by the Labour party in Wales, creates the opportunity for fairer, better and more robust funding for our nation. It aligns incentives within Wales too, creating the right conditions for a culture more orientated towards economic sustainability and vibrancy.

Where is Cymru’s Voice?

Muscular unionism may have passed with the demise of the Conservative government at Westminster but the Labour substitute has merely talked down to Wales in nicer language. The Barnett formula, the stuttering way in which Welsh Government is funded by the Treasury, and a devolution settlement riven with frictions, will suppress opportunities to improve the lives of people in Wales.

The solution must be a more vocal government in Cardiff Bay. If Labour will not do it, with their own party in power in London, the time has come for them to make way.

But if Labour can’t or will not do it, who will step up?