Review of the Barnett Formula
240. More recently, calls for a review of the Barnett
Formula have come from a wide range of voices and perspectives,
and from all parts of the United Kingdom. For example, in written
evidence to the Committee, Sustrans Cymru, the sustainable transport
charity, the British Medical Association (BMA Cymru Wales) and
The National Association of Headteachers (NAHT Cymru) are demanding
a fresh look at the workings of the Barnett Formula. They agreed
that "too few people understand the way the Barnett Formula
works. We need to clear the dense funding fog to see if Wales
is being well served".
A report in the Guardian newspaper on 27 March 2007 said:
"The Formula doesn't take into account the fact
that Welsh income levels are among the lowest in Europe. Nor does
it factor in the legacy of ill health left over from heavy industry.
In short, the Formula takes no account of Welsh social and economic
need. Indeed, experts reckon that Wales is losing out on between
£300m and £800m a year. But the real point is that nobody
241. Following the 2007 Assembly elections in Wales,
the new Labour/Plaid Cymru administration issued the document,
One Wales: a progressive agenda for the government of Wales.
This document included a commitment to "an independent
Commission to review Assembly Funding and Finance, to include
a study of the Barnett Formula, of tax-varying powers including
borrowing powers and the feasibility of corporation tax rebates
in the Convergence Fund region, including the implications of
recent European Court of Justice Rulings in this area".
242. On 8 July 2008, Gerald Holtham was appointed
as Chair of the Commission on Funding and Finance, whose terms
of reference were to look at the pros and cons of the present
formula-based approach to the distribution of public expenditure
resources to the Welsh Assembly Government; and to identify possible
alternative funding mechanisms including the scope for the Welsh
Assembly Government to have tax varying powers as well as greater
powers to borrow.
The work is expected to take place in two phases, with the interim
findings for phase one (which includes a review of the working
of the Barnett Formula) due to be published in the summer of 2009.
243. Similar calls for reform have also come from
Scotland. Speaking in July 2007, Alistair Carmichael, MP for Orkney
and Shetland and the Liberal Democrat Scottish spokesman, insisted
the Barnett Formula had to go. He said: "there is an urgent
need to reform the way in which Scotland's budget is set. A full
constitutional convention to examine expanding the powers of the
Scottish Parliament, including greater control over Scotland's
finances, is urgently needed. It is clear this is far and away
the most popular option with the people of Scotland. If Gordon
Brown is serious about constitutional change and increasing democracy,
he cannot fail to act". 
244. Lord Sewel, the former Scottish Office Minister,
has also called for a review of the Formula. He said "Barnett
served the UK well prior to devolution and was important in enabling
a smooth transition to be made to devolved government. It has
now outlived its usefulness. Its lack of transparency is, at least
in part, the reason for it being perceived as a cause of grievance
between England and Scotland".
The Calman Commission is currently considering the financial accountability
of the Scottish Parliament, and while it has not made any firm
recommendations yet, the first report considers options for the
funding of the Scottish Parliament which could potentially replace
the Barnett Formula. Professor Mitchell suggested that this could
provide an opportunity to "square the circle" to give
the Scottish Parliament the powers to raise its own revenue in
some measure, alongside a reformed formula".
245. Rt Hon Lord Barnett himself has called for reform
of the Barnett Formula. He requested the creation of an ad hoc
Select Committee in the House of Lords to re-examine the Formula
in the light of changes in the economic and constitutional complexion
of the United Kingdom since it was devised. He further suggested
that although the issue was one of public spending it would benefit
from the dispassionate and non-partisan approach of a Lords committee.
246. Initially, the House of Lords Liaison Committee
refused Rt Hon Lord Barnett's request. They explained:
"We have some sympathy with Rt Hon Lord Barnett
on the case for a review of the Formula in principle. However
we are not convinced that this is an appropriate subject for an
ad hoc inquiry by a Lords committee. Although it was suggested
to us that a large part of any such inquiry would be involved
in simple collation of factual information, we have some doubts
about the extent to which any review of the Barnett Formula could
be limited or constrained, either from ranging over devolution
issues or from assessing macroeconomic arrangements for government
spending more generally. We think that in principle the subject
matter falls within the area of scrutiny more obviously undertaken
by the Commons, and we are doubtful about the extent to which
any inquiry by a committee of this House would carry influence
in decision-making. Accordingly, we do not recommend the establishment
of an ad hoc committee on the Barnett Formula".
Nevertheless, on 10 December 2008 the
Lords agreed a motion to create an ad hoc Select Committee to
consider the Barnett Formula. Its terms of reference are to "examine
the purpose, methodology and application of the Barnett Formula
as a means of determining funding for the devolved administrations
of the United Kingdom, to assess the effectiveness of the calculation
mechanism to meet its purpose, and to consider alternative mechanisms".
247. However, to date, the Government have refused
to undertake a review of the Barnett Formula. On 6 March 2008,
Rt Hon Alistair Darling MP, Chancellor of the Exchequer said that
the House will know, the Unionist parties
in the Scottish Parliamentthe Liberals, Conservatives and
Labourhave agreed to review arrangements under the Scotland
Act 1998. As part of that, the Government have said that they
will publish the way in which the Barnett formula has operated
over the past 30 years. We are not currently reviewing it, but
it will inform debate. There will have to be a lot of discussion
is important that we have that debate, and I shall publish somethingprobably
in the summerthat will contribute to it
to publish the position on the Barnett formula, probably in the
summer, but there ought to be a debate.
A factual paper on how the Barnett Formula works
was submitted as evidence to the House of Lords ad hoc Select
Committee on the Barnett Formula on 3 March 2009.
However, to date, the Government's position on the Barnett Formula
has not been published.
248. Following this debate, it was reported in the
press on 6 March 2008 that Downing Street had issued "furious
denials" of any plans to review or change the Barnett Formula..
Speaking in the House of Commons on 11 March 2009, Rt Hon
Paul Murphy MP said that he understood that "the Treasury
has no plans to review the funding arrangements".
Rt Hon Lord Barnett told the Committee it was "crystal
that the Treasury do not want to consider any change
However, Rt Hon Jack Straw MP told us that the Government
would take into account the recommendations of both the Calman
Commission's Report and this report "before coming to a decision
about whether there are any changes that need to be made".
249. Rt Hon Lord Barnett told us that the Barnett
Formula was "one of those odd policies which seems to have
very little support". He said that it only reason that it
continued to exist was because it had proved "very difficult
to find an alternative".
However, in the current political and economic environment, the
formula is no longer sustainable. Professor Mitchell argued that
any resolution had to be consensual, it had to involve all parts
of the UK agreeing to any changes and has to involve cross party
Rt Hon Lord Barnett told us that he thought there would be widespread
support for reform of the formula, he doubted that this support
would extend to the political parties. 
250. We identified two key tenets upon which any
revised formula should be based. First, was that the formula should
be needs based. Despite recent confusion suggesting the contrary,
Rt Hon Lord Barnett emphasised strongly that the current Formula
was "not based on need, it is based on population".
He added that he had not expected the original Formula to
last for so long and said that he "would have hoped to have
changed it to a policy that is truly based on need".
There is no doubt that any assessment of need would be controversial
and politically sensitive, as different people would define need
in different ways. Professor Mitchell defined need as "a
highly political thing ... we will all disagree on needs".
However, Rt Hon Lord Barnett was convinced that a needs assessment
could be achieved".
Professor Mitchell said that despite the difficulties in defining
the needs basis for a formula, at least "there will be a
transparent formula in existence about which we can argue".
251. Rt Hon Lord Barnett also emphasised that a needs
based formula should take into account the needs "of the
regions and counties of England as well as Scotland, Wales and
Mr Ieaun Wyn Jones AM, Deputy First Minister, National Assembly
for Wales agreed that "needs to be looked at in the English
context as well",
and argued that this issue was particularly pertinent when "CSR
settlements are tighter".
Professor Bogdanor argued that "any revision of the Barnett
Formula would have to confront the problem of the allocation of
regional and local government spending in England".
252. Any formula will require periodic review and
will need to address anomalies as they arise, and for this purpose
there need to be an adjudicating body which can command the respect
of the devolved administrations and representatives of the bodies
governing England as well as of the UK government.