CHAPTER 3: THE DEVELOPMENT OF FORMULA
FROM 1978-1997
The original purpose of the Formula
23. A formula was first used to calculate funding
for services in Scotland and Ireland compared with England and
Wales in 1888. The 'Goschen Formula', named after the then Chancellor
of the Exchequer, allocated funds based on population in the proportion
80:11:9 to England and Wales, Scotland and Ireland respectively
(p 301). After World War II successive Scottish Secretaries
of State negotiated additional allocations for their territorial
departments by arguing special needs, such as sparsity of population
in the remote areas and density and poor housing in the central
belt. The current Secretary of State for Northern Ireland, Shaun
Woodward MP, suggested: "certainly what was there before
1979 was tortuous, unfair, involved line by line negotiation,
was pretty opaque and did not much work" (Q 893).
24. The introduction of what became known as
the Barnett Formula was part of a wider attempt to constrain public
spending in what were difficult times, for the economy in general
and for public spending in particular (Q 7). It coincided
with the introduction of cash limits for public spending by Denis
Healey MP, then Chancellor of the Exchequer, following the
1976 loan from the International Monetary Fund. The creator of
the Formula, Joel Barnett MP, intended to find a way of apportioning
changes in public spending to the territorial departments by allocating
proportional shares to the Scottish and Welsh Offices and Northern
Ireland departments when there were changes in spending on 'comparable
functions' for England. Those proportional shares were based on
the relative populations of the regions and countries of the United
Kingdom in the late 1970s (Q 11).
25. In essence, Barnett was an update of Goschen,
but with the distinguishing feature that, instead of quantifying
the annual per capita spending increase as a percentage of the
Scottish baseline it was granted instead as a cash figure per
capita, derived from the percentage increase granted to the (lower)
English baseline. In other words, if England received say, a 4
per cent increase per capita which amounted to £1,000, Scotland
would receive £1,000 per capita although that would be less
than 4 per cent of the (higher) Scottish baseline. This new arrangement
injected into the process the concept of gradual convergence.[22]
26. The Barnett Formula began to operate in Scotland
and Northern Ireland in 1979 and in Wales in 1980. The Secretaries
of State continued to be free to allocate money to their chosen
spending priorities in Scotland, Wales and Northern Ireland (p 204).
27. The purpose of the new Formula was to respond
to pressure from ministers in other departments to rein in the
excessive, as they saw it, share of resources going to territorial
departments, in particular to Scotland, at a time of cash limits
and in dire economic circumstances nationally. Although intended
to be temporary, until a formula that paid more attention to relative
need could be devised and agreed, Barnett brought a welcome measure
of certainty and stability. However, since the Formula did not
cover all public spending in Scotland, Wales and Northern Ireland,
the territorial Secretaries of State remained able to negotiate
special deals outside the Formula.
The Formula before devolution
THE 1979 AND 1993 NEEDS ASSESSMENT
STUDIES
28. The decision to introduce the Formula took
place at a time when devolution to elected assemblies in Scotland
and Wales was being contemplated by the Government, and the question
of their funding had yet to be resolved. The Government planned
to fund the devolved administrations on the basis of their relative
spending needs, and details were to be discussed with the devolved
bodies when they came into being.[23]
At the time the Formula was introduced, a needs assessment
study was underway in the Treasury to assess the relative needs
of Scotland and Wales for the six main policy areas which were
to be devolved.[24] Following
referendums in March 1979 the project to create devolved assemblies
was halted and the Needs Assessment Study was never pursued.[25]
29. Although the Formula (including the baseline)
was not reviewed during this period, funding was nonetheless a
recurrent topic of debate between the Scottish and Welsh Offices
and the Treasury. The Treasury periodically sought a review of
Scotland's relative needs in order to counter bids from Scotland
for increased spending; it was for the Scottish Secretaries to
resist such calls. Twice this reached the stage of an interdepartmental
discussion: in 1986 a report was prepared by the Cabinet Office
on 'corrective action' which might be undertaken; and in 1993
a new needs assessment was carried out by the Treasury updating
the 1979 exercise but its results were never published.[26]
The most recent needs assessment is therefore fifteen years out
of date.
30. Had the Needs Assessment Studies been brought
into effect, they would have changed significantly the levels
of spending across the United Kingdom. Table 5 below illustrates
the impact they would have had both for the 1970s and the 1990s:
TABLE 5
United Kingdom Government Needs Assessments 1979 and 1993 and
actual levels of spending (in index terms)
| |
Per capita spending on 'devolved services' in 1976-7
| Per capita spending on 'devolved services' recommended in 1979 Needs Assessment study
| Per capita spending on 'devolved services' in 1993-4, according to 1993 Treasury Needs Assessments
| Per capita spending on 'devolved services' recommended in 1993 Treasury Needs Assessments
|
| England | 100
| 100 | 100
| 100 |
| Scotland | 122
| 116 | 133
| 115 |
| Wales | 106
| 109 | 122
| 112 |
| Northern Ireland | 135
| 131 | 127
| 122 |
Sources: HM Treasury Needs Assessment Study—Report (London:
HM Treasury, December 1979), pp. 6; HM Treasury Assessment of
Relative needs—Scotland, (September 1993), chapter 4; HM
Treasury Assessment of Relative needs—Wales, (September
1993), chapter 4; and HM Treasury Assessment of Relative needs—Northern
Ireland, (September 1993), chapter 4.
31. In both cases, this would have meant a reduction
in Northern Ireland and in Scotland relative to spending in England
and an increase in spending in Wales in 1979 but not in 1993.
THE FUTURE OF THE FORMULA
32. Lord Barnett made clear to us that the Formula
was not designed as a permanent solution: "I thought it might
last a year or two before a government would decide to change
it. It never occurred to me for one moment that it would last
this long" (Q 2). The fact that the Formula was intended
originally as a short-term expedient was echoed in other evidence
(p 145, p205). Despite this, the Formula has proved remarkably
durable, surviving both financial stringency and retrenchment
in the 1970s and 1980s and considerable growth in public spending
in more recent times.
Application of the Formula in
practice up to 1997
CONVERGENCE 1978-1997
33. It is a mathematical property of the Formula,
all other things being equal, that spending subject to the Formula
in Scotland, Wales or Northern Ireland would tend to converge
on the English level, per head of population, over time (QQ 81-82,
86). Lord Barnett told us that he did not intend the mechanism
to produce convergence and was not aware at the time that it should,
or could, do so (Q 12). As it was not expected that the Formula
would last long, the convergent aspects of the Formula were not
material when it was first applied.
34. In fact there is little evidence that convergence
actually took place during the period 1978-1997.[27]
This appears to be the result of the fact that population changes
were not adequately reflected year by year in the baseline.[28]
The relative populations were not updated until the 1990s, despite
significant changes—in particular, a decline in Scotland's
share of the United Kingdom population from 9.3 per cent in 1976
to 8.7 per cent in 1995.[29]
'FORMULA BYPASS' UP TO 1997
35. The application of the Barnett Formula during
this period did not remove all negotiations between the Treasury
and the Scottish and Welsh Offices. There were extensive discussions
which were vital in ensuring that the system was appropriately
flexible to respond to the differing needs of Scotland, Wales
and Northern Ireland. This worked well when all three administrations
were part of a single United Kingdom Government before devolution,
and for a while after the Scottish Parliament and Welsh Assembly
were in operation, as it applied in the context of decisions taken
within Governments (based at Westminster, in Edinburgh and Cardiff)
with predominantly shared common agendas. However, in the process,
it appears that Scotland and Northern Ireland were more successful
than Wales in obtaining favourable treatment from the Treasury
in allocations of public spending outwith the Formula. In that
respect, Wales was the least generously treated (p 178).
During this period the most significant formula bypasses were
to cover public sector wage increases which, if met from within
the block grant, would have had a disproportionate effect on the
other elements of the territorial departments' spending programmes.
22 See paras 33-34. Back
23
Devolution: Financing the Devolved Services Cm 6890 (London: HM
Stationery Office, July 1977); p 66. Back
24
HM Treasury Needs Assessment Study-Report (London: The
Treasury, December 1979). The service areas were Health and personal
social services, Education and libraries (excluding universities),
Housing, Other environmental services, Road and transport (excluding
railways), and Law, order and protective services (excluding police).
Back
25
HM Treasury Needs Assessment Study-Report, December 1979. Back
26
The Unwin Report 1986, was disclosed by HMT, but not published,
following a request made under the Freedom of Information Act,
Sir Brian Unwin QQ 509-10. The 1994 Needs Assessment was not published
and was only made available to us by HM Treasury in June 2009.
Back
27
See Chapter 3. Back
28
See Chapter 5. Back
29
Ibid. Back
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