Devolution: A Decade on - Justice Committee Contents


6  Finance and the Barnett Formula

231. The Barnett Formula is not a consequence of devolution: it dates from much earlier but it has been maintained under devolution and given added political significance because the use made of the funds allocated by it is wholly determined by the devolved administrations. Some type of formula for allocating funds between the countries of the Union can be traced back to arrangements introduced in the 1880s by the then Chancellor of the Exchequer, George Goschen. In 1888 he decided to use a formula to allocate probate duties in support of local government.[373] During the 1960s and early 1970s, public expenditure plans for Scotland, Wales and Northern Ireland were settled collectively and by negotiation within the wider public expenditure framework on much the same basis as other public spending programmes.[374]

232. However, in 1978 there was a return to a formula for determining public expenditure to Scotland. The formula was extended to Wales in 1980.[375] The specific origins of the formula are not well documented, and were described by Professor Mitchell as "quite murky".[376] In an article written in 1980, Professor David Heald named this formula "the Barnett Formula ... after Joel Barnett MP, the then Chief Secretary of the Treasury with responsibility for public expenditure".[377]

233. In his evidence to the Treasury Committee's inquiry in 1997, Rt Hon Lord Barnett described the purpose of this formula. He said:

"Put simply, the Barnett Formula set percentages of changes in comparable expenditure in Great Britain. That is to say, it would be 85 per cent for England, 10 percent of expenditure for Scotland and 5 percent for Wales. That is exactly what the Barnett Formula is. It was set up for a variety of reasons. First of all, for the need to recognise the spending levels between the various parts of the UK-population sparsity in Scotland, transport needs, needs because of relative ill health, rural needs for education and so on and industrial needs—but above all … with income per head … I do not know what is happening today—I do not know who does but, as far as I am concerned, what happened then was that I first of all had to persuade Cabinet to agree a total level of public expenditure. Having got that agreement, to make life a trifle easier and have to handle only English departments, I then got Cabinet approval for what is now (not then) called a Barnett Formula—the way public expenditure should be allocated and the changes in public expenditure should be allocated between England, Scotland and Wales—and they agreed that. Then I had a much tougher job of persuading departmental ministers to accept their budgets as I had allocated them. It was a bit easier, I could play one off against the other by saying "You cannot have any more because it would mean taking it away from somebody else", and they could not say anything about the allocation to Scotland and Wales because they, in Cabinet, had agreed it. So all those factors were taken into account in deciding what should be the allocation of public expenditure".[378]

234. Today, the non-statutory Barnett Formula is still a part of the mechanism used to determine the budgets of the devolved administrations. Expenditure by the Scottish Government, the Welsh Assembly Government and the Northern Ireland Executive is largely funded by block grant from the UK Government.[379] The Barnett Formula determines the change in these budgets rather than their absolute level. This mechanism allocates funding to Scotland, Wales and Northern Ireland at the same per capita levels as funding decisions for policy programmes in England.[380] The Formula is designed to apply automatically a proportionate share of any increase (or decrease) in comparable English spending programmes to the other constituent parts of the UK based upon population shares.[381]

235. These arrangements for funding devolution are well-established. Baseline funding levels for Scotland, Wales and Northern Ireland, the block grants, were set in the period 1979-82 at levels higher than per capita spending in England and have been adjusted incrementally since by the Barnett Formula and its variations. In its first report The Future of Scottish Devolution within the Union, the Commission on Scottish Devolution (the Calman Commission) point out that the size of the current block grant is exactly what it would have been had the Scotland Act never been enacted.
The Barnett Formula

The Formula dictates that for every extra £1 the Government distributes, 85p goes to England, 10p to Scotland and 5p to Wales.[382] Strict operation of the Barnett Formula could lead to slower percentage increases in public spending for Scotland, Wales and Northern Ireland compared with those for England. This has been called the "Barnett squeeze". It is difficult to verify empirically whether this has occurred. [383]

The ESRC Devolution and Constitutional Change research team concluded that the allocation of increments on a simple per capita formula has had the effect, in principle and over time, of eroding the initial per capita spending bonus set in 1979-82 and bringing down per capita spending levels in Scotland, Wales and Northern Ireland towards the English level—the so-called 'convergence effect' of the Barnett Formula.

However, while the annual increase in Scotland's allocation is falling, the historical disparity created in 1978 and Scotland's increasing prosperity have meant the apparent generosity of the Treasury towards Scotland has persisted.[384] That has led to a situation where "identifiable spending" in Scotland on public services is £1,500 higher per person than in England, according to Treasury figures.[385]

236. The funding arrangements for Scotland and Wales did not change post-devolution. In the early years of devolution, the Formula was described as having "the merit of familiarity", and therefore helped avoid serious dispute over territorial finance since devolution.[386] Simplicity and predictability do have advantages to financial planning. The Calman Commission interim report said that one of the merits of the Barnett Formula was that post-devolution the Scottish budget had been "stable and substantially predictable",[387] getting the Scottish Parliament "off to a good start" because there had been "no wild fluctuations in financial provision".[388] Rt Hon Des Browne MP said that the Formula had "served us well in those years ... it has been transparent. People understand it."[389]

237. However, the Calman Commission said that despite the Formula's simplicity, "it has not avoided all political concern about its application".[390] Professor Mitchell said the Formula "provokes hostility both sides of the border": at Scotland having more generous public policies but not having to pay for them;[391] and in Scotland and Wales about what is included in the Barnett Formula and what is not. For example, the Calman Commission pointed to the "arbitrary decision" not to include Olympic spending and new spending on prisons in England within the calculations for the Barnett Formula.[392] Nicola Sturgeon MSP told the Committee that this had "caused great consternation on the part of all devolved administrations",[393] while Rt Hon Rhodri Morgan AM identified this as a "major financial dispute".[394] On the other hand, a decision to give free prescriptions to cancer patients in England generates an increase in funding for Scotland, where prescriptions are already free. The content of the Statement of Funding Policy,[395] and how it is applied, are matters for the UK Government, and there is no independent oversight of those decisions".[396]

238. Rt Hon Ken Clarke MP identified the Barnett Formula "as the biggest single cause of resentment",[397] while Rt Hon Lord Barnett himself said that the Formula provokes "hostility" In Scotland and England.[398] Lord Tyler CBE described it "as a very convenient place on which people hang all their problems of feeling aggrieved".[399] Furthermore, Professor Bogdanor identified a lot of "misunderstanding" around the Formula[400] and Rt Hon Ken Clarke MP argued that "hardly anybody understands it".[401] Rt Hon Lord Barnett said that when talking about the Formula, most people, including senior politicians "do not know what they are talking about".[402]

239. Many of these issues were raised in the Lords Constitution Committee's 2003 Report, Devolution: Inter-Institutional Relations in the United Kingdom, which reviewed the operation of the Formula and commented "that there are serious difficulties presented by the long-term continuation of the Barnett Formula. We do not think that it will be a sustainable basis for allocating funds to the devolved administrations in the long term. Many of those in Wales and Northern Ireland, as well as those in parts of England, consider that the Formula is unfair in its allocation of funds to them in comparison to its allocation of funds to other areas, and does not provide them with the resources they need. Even if it does provide those resources, it does not do so in a manner that convincingly demonstrates that. This is largely because so much control remains in the Treasury's hands".[403]

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".[404] 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 knows".[405]

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".[406]

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.[407] 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.[408]

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". [409]

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".[410] 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".[411]

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. [412]

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".[413]

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".[414]

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 Parliament—the Liberals, Conservatives and Labour—have 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…It is important that we have that debate, and I shall publish something—probably in the summer—that will contribute to it … I intend to publish the position on the Barnett formula, probably in the summer, but there ought to be a debate.[415]

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.[416] 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..[417] 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".[418] Rt Hon Lord Barnett told the Committee it was "crystal clear … that the Treasury do not want to consider any change at all".[419] 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".[420]

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".[421] 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 support.[422] While 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. [423]

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".[424] 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".[425] 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".[426] However, Rt Hon Lord Barnett was convinced that a needs assessment could be achieved".[427] 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".[428]

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 Northern Ireland".[429] 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",[430] and argued that this issue was particularly pertinent when "CSR settlements are tighter".[431] 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".[432]

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.
The Lords Constitution Committee recommendations

In their 2003 Report, Devolution: Inter-Institutional Relations in the United Kingdom, the Lords Constitution Committee envisaged that any alternative to the Barnett Formula would incorporate the following elements:

(a) an assessment of the needs of the devolved administrations, and the different regions of England, taking into account the nature of their responsibilities and the demographic characteristics of the relevant population;

(b) that needs assessment would not be repeated every year but only at periodic intervals. Adjustments to the funds available, whether annually or in year, would be made by means of a formula;

(c) however calculated, funds made available to the devolved administrations would remain in the form of a block grant which the administration could allocate as it wished;

(d) funds for the devolved administrations should be payable solely to them. The present arrangement by which the offices of the Secretaries of State are 'top-sliced' from the devolved administration's block grant should be ended and payments for those offices made separately and directly by the Treasury;

and

(e) the transition to a new arrangement should be phased over a number of years, to minimise the effects of it for those parts of the UK which lose out relatively in terms of funding.[433]

253. The Barnett Formula is overdue for reform and lacks any basis in equity or logic. It creates controversy in all of the constituent parts of the UK. There is controversy in England that the Barnett Formula allows for higher levels of public spending in Scotland from the UK Exchequer and does not deal with different needs in different parts of England. There is concern in Wales that allocation of funds through the Barnett Formula does not adequately meet the higher structural costs of the delivery of some public services. We are concerned that the lack of adequate understanding of the Formula and how it operates has the potential to create tension and fuel disputes.

254. We are also concerned at the lack of transparency in the process of decision making by the UK Government as to what spending is included in the calculations for the Barnett Formula and the rationale for those decisions. This lack of transparency has already caused political disputes between the UK Government and the devolved administrations. These difficulties are only likely to intensify in the current economic climate.

255. We therefore recommend a two stage approach. First, we recommend that the Government publish, as a matter of urgency, the long promised detailed factual paper about how the Formula works. This should include the criteria for the inclusion or exclusion of spending in the Statement of Funding (i.e. for inclusion in the Barnett Formula). This overdue document is essential to remove misunderstanding about the operation of the Formula and to introduce an element of transparency and oversight into the Government's spending decisions.

256. This, however, is only a first step. We welcome the reviews of the operation of the Barnett Formula currently taking place in both Scotland and Wales. However, there is an urgent need for the Government to undertake a UK wide review of the Barnett Formula, and to put forward an alternative system for the allocation of funding between the nations and the regions of the UK and a generally accepted mechanism for reviewing its operation and adjudicating disputes which arise.

257. Any new system should be robust and long term - enabling Departments and Agencies of Government to have dependable indicative figures on which to plan and budget at least three years ahead. Any new system should be introduced with care, with at least a two-year period of transition built into the system for its introduction. It should not be adjusted on an annual basis—a five-year review should be the minimum review period.


373   The Barnett Formula, Research Paper 01/108, House of Commons Library, November 2001. Back

374   Ibid Back

375   Treasury Committee, Second Report of Session 1997-98, The Barnett Formula, HC 431, q 195 Back

376   Q 276 Back

377   David Heald, Territorial Equity and Public Finances: Concepts and confusion. University of Strathclyde Centre for the Study of Public Policy, Studies in Public Policy No.75  Back

378   Treasury Committee, Second Report of Session 1997-1998, The Barnett Formula, HC431, p 1 Back

379   Scotland is different from Wales and Northern Ireland in that it has the power to vary the standard rate of income tax levied, thus raising additional or less income. Back

380   Economic and Social Research Council: Devolution and Constitutional Change Programme: Final Report, March 2006 Back

381   For further information see the Lords Constitution Committee Report, Second Report of Session 2002-03, Devolution: Inter-Institutional Relations in the United Kingdom, HL 28. Back

382   www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/03/05/nscots205.xml Back

383   Summary, The Barnett Formula, Research Paper 07/91, House of Commons Library, December 2007 Back

384   www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/03/05/nscots205.xml. With five million people, Scotland now has only 8.3%of the UK population Back

385   www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/03/05/nscots205.xml Back

386   Economic and Social Research Council: Devolution and Constitutional Change Programme: Final Report, March 2006 Back

387   Commission on Scottish Devolution, The Future of Scottish Devolution within the Union: A First Report, Para 6.12 Back

388   Commission on Scottish Devolution, The Future of Scottish Devolution within the Union: A First Report, Para 6.15 Back

389   Q 81 Back

390   Commission on Scottish Devolution, The Future of Scottish Devolution within the Union: A First Report, Para 6.15 Back

391   Q 279 Back

392   Commission on Scottish Devolution, The Future of Scottish Devolution within the Union: A First Report  Back

393   Q 303 Back

394   Q 636 Back

395   This sets out publicly how the Barnett formula works. See hm-treasury.gov.uk/pbr_csr07_statement_of_funding_policy.htm Back

396   Commission on Scottish Devolution, The Future of Scottish Devolution within the Union: A First Report, Para 6:15 Back

397   Q 138 Back

398   Q 408 Back

399   Q 140  Back

400   Q 139 Back

401   Q 137 Back

402   Q 408 Back

403   HL Deb, 27 January 2003, col 914. An in-depth analysis of the Barnett Formula is provided in The Barnett Formula , Research Paper 01/108, House of Commons Library, November 2001 Back

404   Ev 236. Press release 27 March 2007 Back

405   The Guardian,27 March 2007 Back

406   Available at news.bbc.co.uk/1/shared/bsp/hi/pdfs/27_06_07_onewales.pdf, p 6 Back

407   http://new.wales.gov.uk/news/topic/officefirstminister/2008/2364708/?lang=en Back

408   http://wales.gov.uk/icffw/home/?lang=en Back

409   http://200.115.171.174/htmlfiles/scotnews07/070711_scrap.html Michael Settle, July 2007 Back

410   Lord Sewel, The Union and devolution- a fair relationship, in Chris Bryant MP (ed) Towards a New Constitutional Settlement, The Smith Institute, p 78 Back

411   Q 279 Back

412   Liaison Committee, First Report of Session 2007-08 , HL 33, 15 January 2008 available at www.publications.parliament.uk/pa/ld200708/ldselect/ldliaisn/33/33.pdf Back

413   Liaison Committee, First Report of Session 2007-08 , HL 33, 15 January 2008 available at http://www.publications.parliament.uk/pa/ld200708/ldselect/ldliaisn/33/33.pdf Back

414   www.parliament.uk/parliamentary_committees/hlbarnettformula.cfm Back

415   Treasury questions, HC Deb 6 March 2008 cc1908-09 Back

416   www.parliament.uk/parliamentary_committees/hlbarnettformula.cfm Back

417   See www.journallive.co.uk/north-east-news/todays-news/2008/03/06/pm-denies-rethink-on-barnett-formula-61634-20564698/ Back

418   HC Deb, 11 March 2009, col 285 Back

419   Q 449 Back

420   Q 657 Back

421   Q 276 Back

422   Q 270 Back

423   Q 411 Back

424   Q 400 Back

425   Q 403 Back

426   Q 279 Back

427   Q 431 Back

428   Q 279 Back

429   Q 417 Back

430   Q 638 Back

431   Q 638 Back

432   Q 139 Back

433   For further information see the Lords Constitution Committee, Second Report of Session 2002-03, Devolution: Inter-Institutional Relations in the United Kingdom, HL 28, p 32 Back


 
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