The Barnett Formula is the mechanism used by the United Kingdom Government to allocate more than half of total public expenditure in Scotland, Wales and Northern Ireland.
The Formula has been used for the last thirty years to determine the annual increase in allocation (the increment). Each year these increments are added on to the previous year's allocation (the baseline) to create what is now a significant block grant of funds. The Formula accounted for almost £49 billion of public spending in 2007-08. Despite the political changes within the United Kingdom the Formula has continued to be used. The Formula has been neither reviewed nor revised during the last thirty years.
There is both increasing debate on the future funding of the devolved administrations and increasing scepticism about the fairness of the Barnett Formula which may be exacerbated by any deterioration in the public finances.
We have concluded that the Barnett Formula should no longer be used to determine annual increases in the block grant for the United Kingdom's devolved administrations.
Although the annual increment in funds is made on the basis of recent population figures, the baselineaccumulated over the last thirty yearsdoes not reflect today's population in the devolved administrations. The Barnett Formula also takes no account of the relative needs of any of the devolved administrations.
A new system which allocates resources to the devolved administrations based on an explicit assessment of their relative needs should be introduced. Those devolved administrations which have greater needs should receive more funding, per head of population, than those with lesser needs. Such a system must above all be simple, clear and comprehensible. It must also be dynamic: able to be kept up to date in order to respond to changing needs across the United Kingdom.
The precise details of a new system are not defined in this report. Rather we set out broadly how a new system might be determined. However we are satisfied that an alternative to the Barnett Formula that meets the criteria we have set out can be achieved. The process of reviewing the grant allocation and the range of functions needed to make the new system work should be carried out by a new independent expert body perhaps called the United Kingdom Funding Commission.
The Commission should begin its work by determining a new baseline based on up to date population figures and an assessment of relative needs. Relative needs should be decided by using a small number of need indicators. The Commission should then conduct a periodic assessment to review the allocation. Some factors affecting the grant allocation should be adjusted automatically and annually as new statistics are published. In addition a periodic review of the baseline should be carried out by the Commission.
There will need to be a transition period to bring the baselines and the levels of funding under the new system into full effect. The transition to the new system could be asymmetric, reflecting both the nature of the United Kingdom's devolved administrations and the differing levels of funds devolved to them. We anticipate that the level of increased grants due under the new system could be reached within three years and that where grant is to be reduced it could be phased over a longer period, preferably not exceeding seven years, depending on the degree of change.
This inquiry was designed to examine the operation of the Barnett Formula; whether it should be replaced and, if so, by what. We have concluded that it is now time for the Formula to be changed. This report demonstrates that a formula based on relative need is a practical possibility.