The Barnett formula: Where next?

Mike Hedges – MS for Swansea East

The Barnett formula is a mechanism used by the Treasury to automatically adjust
the amounts of public expenditure allocated to Northern Ireland, Scotland and Wales to reflect changes in spending levels allocated to public services in England.

The formula applies to a large proportion, but not the whole, of the devolved governments’ budgets. The city and regional deals in Wales for example are outside the formula.

The formula is named after Joel Barnett, who devised it in 1978 while Chief Secretary to the Treasury, as a short-term solution for providing money to Wales and Scotland.

The Barnett formula has no legal standing, and it is a convention that could be changed by the Treasury. Joel Barnett called a 2014 pledge to continue using it a “terrible mistake”.

There has been near universal opposition to the Barnett Formula as a means of determining annual increases. There are three ways of changing it.

The Scottish National Party proposed Full Fiscal Autonomy for Scotland which would have given the Scottish parliament full control of Scottish taxation, the result of which would have been a reversal in funding with the Scottish parliament paying the UK government a grant to cover the Scottish share of reserved issue spending.

This option was rejected by the UK parliament but for Wales it would lead to a catastrophic reduction in income.

Catastrophic

Another way would be to give Wales its population share of the expenditure on devolved areas. This would also have a catastrophic affect on the Welsh budget.

In 2009, the House of Lords Select Committee on the Barnett Formula concluded that it should no longer be used to determine annual increases in the block grant for the United Kingdom’s devolved administrations.

A new system which allocates resources to the devolved administrations based on an explicit assessment of their relative needs should be introduced.

From 2018-19 a new needs-based factor was included in the Barnett Formula to determine changes to Welsh Government block grant funding in relation to spending.

This needs-based factor was set at 115% based on the range suggested by the Holtham Commission. While relative Welsh Government funding per head remains above 115%, a transitional factor of 105% was set.

Any increase or reduction in expenditure in England will automatically lead to a proportionate increase or reduction in resources for the devolved governments in Wales, Scotland, and Northern Ireland.

The formula is not applied to all public expenditure but is the default option if no other decisions are made. The expenditure is allocated as a sum of money not by service, allowing each devolved administration to allocate these funds as it believes appropriate.

For areas of funding where the corresponding central government department funding covers England only, for example education and health, the formula for funding to Scotland, Wales and Northern Ireland consists of a baseline plus increases based on the increases in public spending in England in comparable programmes, applied in proportion to current populations and the extent to which the relevant English departmental programme is comparable with the services carried out by the devolved administration.

This for Scotland and Northern Ireland replaced the 1888 Goschen formula, This allocated 80% of funding to England and Wales, 11% to Scotland and 9% to Ireland; hence the Scottish share was 13.75% of the English/Welsh amount which were treated as one.

By 1970 changes in the relative populations were examined. By then the relative populations were 85% in England and 10% in Scotland, meaning that the new Barnett formula set changes to Scottish expenditure at 10/85th of the change in England (or 11.76%), 2% lower than the change that was being received under Goschen.

Issues

The population percentages have been recalculated annually since 1999. No account is 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, health, age distribution of the population, road lengths, recorded crimes, and numbers of sub-standard dwellings) in each area.

The Barnett Formula was not intended to address these issues and was a basic calculation based on proportions of the population. When Scotland’s population reduced the amount per capita provided to Scotland increased.

There have been controversies most recently on HS2 expenditure where it is treated as an England and Wales project, so Wales gets no consequential payment. Crossrail was treated as an England only project, so Wales got a consequential payment.

The Barnett formula is widely recognised as being controversial but there is no consensus on how to change it. Concerns publicly expressed include:

• 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 takes no account of different amounts of tax paid in respect of different areas or of changes in these amounts.
• It does not apply to divisions of expenditure between the different regions of England.

It is possible to produce a needs-based formula. The local government formula is a needs-based formula, but it is not without controversy and the formula is very long and complicated.

Work needs to start on this now. Whilst most will be driven by population and population change as is currently done with the local government formula, items such as sparsity of population, cost of travel, unemployment rates, health, age distribution of the population, road lengths, recorded crimes, numbers of sub- standard dwellings and age weighting will need to be built into any formula.

Once a formula is created it can be updated each year and updated as necessary with changes in weighting. There is no guarantee that Wales will do better under a needs based formula than it does under the current Barnett formula with a Barnett floor.