The Barnett Formula - Select Committee on the Barnett Formula Contents


A needs based approach

79.  The Chairman, in summing up Lord Barnett's evidence, said: "you devised a mechanism which you hoped would last for a few years. You did not expect it to last for as long as it has lasted. You are not sure now whether it is based on the right criteria and you lean towards having, among other things, a needs-based assessment". Lord Barnett agreed (Q 77). The first assessment of relative needs across England, Scotland, Wales and Northern Ireland was conducted between 1976 and 1979. That study was confined to the main services which were to have been devolved under the Scotland and Wales Acts 1978.[52] The Government's White Paper of November 1975, Our Changing Democracy, stated that, although a neat formula could not be devised to produce fair shares for the devolved administrations from year to year "objective information on standards and needs would help the Scottish [and Welsh] administration[s], the Government and parliament to make their judgments".[53]

80.  The idea of an assessment of relative needs was developed in the July 1977 White Paper, Devolution: Financing the Devolved Services, which stated: "it is clearly desirable that discussion of the appropriate level of devolved expenditure should be informed to the greatest possible extent by objective data and a mutual understanding of needs and problems".[54]

81.  We find the argument that devolution funding should be based on relative need to be a compelling one. Public spending per head of population should be allocated across the United Kingdom on the basis of relative need, so that those parts of the United Kingdom which have a greater need receive more public funds to help them pay for the additional levels of public services they require as a result. Those levels of need—and those parts of the United Kingdom which require them—may well change over time. Historically, they have certainly done so.

Achieving substantive fairness

82.  The territorial Secretaries of State told us that the Formula was 'fair' (Q 878).The Chief Secretary to the Treasury said that he considered the Formula to be "fair enough" and "It does a pretty good job. There is a minefield of issues involved in moving away from it which produce new risks to good public administration" (QQ 979, 988, 993). On the other hand most witnesses thought that the allocation of public expenditure under the Barnett system produced results that were not fair or equitable, though the reasons for their opinions differed. Lord Barnett said of the Formula, "The latest figures ... show that in England the average public expenditure is some £1,600 per head less than in Scotland ... I do not think it is fair. It cannot be fair with this kind of gap" (QQ 4-6). This was a view shared by the TaxPayers' Alliance: "The Formula has failed to deliver the more equitable and fair allocation of spending originally envisaged ... In an era of devolved government, such spending gaps are impossible to justify to English taxpayers. They ask why they should subsidise higher Scottish, Welsh and Irish spending" (p 353). Many witnesses argued that the Barnett system produced unfair and inequitable results because it took no account of need (pp 132-3, 222, 344).

83.  At present the annual adjustments in funding are calculated by reference to population figures. We heard evidence that this fails to recognise the particular needs in Wales and Northern Ireland. The Northern Ireland Confederation for Health and Social Services pointed out that because it is purely based on population, the Formula "places Northern Ireland at a disadvantage trapping the region within an ongoing cycle of underinvestment" because it fails to recognise the higher levels of deprivation in Northern Ireland (p 222). Plaid Cymru argued that the Formula disadvantages Wales because it "takes no account of the disproportionate impact that [the relative economic decline for much of the twentieth century] has had on Wales compared with the rest of the UK" (p 130). It could also be argued that the Formula fails to take account of the increased relative economic prosperity Scotland enjoyed over much of the past two decades.

84.  The Chief Secretary to the Treasury, when asked about the Calman Commission report, indicated to us that his concern was not with the principle of a needs-based distribution but its practice: "I think it should be justified by need. I would agree with that, but my concern would remain that we would still need to devise a way of moving towards that position" (Q 1001). He argued that it might not be possible to agree on a new formula—to achieve what he described as 'consent'—"I wonder whether you could come up … with a UK-wide formula which was able to command the consent of political parties and politicians in different parts of the UK"(Q 984).

85.  He also said that he was open to suggestions: "if there is an alternative which is better, which is capable of commanding political consent, which can be delivered with satisfactory transitional arrangements which do not disturb too much the predictability which good public servants need in their finances, then I am all ears!" (Q 988).

86.  John Swinney MSP told us that it would be very difficult to undertake an assessment of relative need (Q 192) and that in any event such an assessment should not be undertaken because it could not be 'objective'. Others said that financial arrangements should only be changed as part of a much more comprehensive review of devolution as a whole (or indeed of the whole constitution and governmental structure of the United Kingdom) (Q 741). We reject these views.

87.  The 1979 Needs Assessment drew the conclusion that a simplified method of assessing need produced a very similar outcome to the more comprehensive and time-consuming approach which was the main focus of the study. This supports the view that a small number of broad-brush, proxy indicators may be a viable way to assess the relative needs of the devolved administrations.

88.  Any new system of allocating funds should retain the clarity of the Barnett Formula and the stability over time which it affords. But unlike Barnett, it should also be related explicitly to an assessment of need. To do that it should be based on the following principles:

  • The new system should consider both the baseline and any increment in funds. The entire block grant for each devolved administration should be subject to regular review to ensure that it continues to be appropriate for the needs of each administration and fair in relation to the needs of the other administrations.
  • The new system should be fair and seen to be fair. By relating resources to current relative needs the system should help distribute funding to those areas of particular need across the United Kingdom as a whole and avoid the anomalies which arise from the present arrangements. Consequently it should ensure a substantial degree of territorial justice—something that is not achieved presently.
  • The new system should be comprehensible. Although the Formula is clear in its method of calculating the proportion of incremental changes in the block grant, the basis on which the baseline—and therefore the block grant as a whole—rests is not. The statistics on which each allocation is made and the details of the allocations themselves should be placed on record and published. There should also be an audit process to ensure that the system is being appropriately administered.
  • The new system should respect territorial autonomy. The new system must leave the devolved administrations free to decide what to do with their block grant. There should be no ring-fencing. Neither should the new system attempt to duplicate the detailed assessments of local needs that the devolved administrations must themselves necessarily make.
  • The new system should be stable and predictable. Each administration must be able to make budgetary decisions in advance and to plan their spending as they see fit. The new system needs to reconcile flexibility (so resources change when relative needs change), with consistency of funding over budgeting periods to enable planning for both financial matters and service provision by the devolved administrations.


89.  Any assessment of need involves both technical expertise and judgement. Many of these judgements will actually be made by technical experts (for example, the choice of precisely which version of any particular measure to use). If such an assessment is to command respect, it must be conducted by a body that is seen to be impartial. This is vital since any needs assessment is bound to be confronted with conflicting interests, not just between England and the devolved administrations but among the devolved administrations themselves. Scrutiny can be expected from all quarters. It is for this reason among others that we recommend that the work be carried out by an independent Commission. An explanation of that conclusion was set out in Chapter 6. But while independence is essential, it is not on its own enough to meet the vital condition that the results of the assessment must be capable of being clearly explained to the public. That depends on the method for assessing relative need adopted.

90.  On the basis of our earlier consideration of specific needs across the four countries, we believe that a method capable of providing comprehensible answers is feasible. Its key features should be:

  • a top-down approach;[55]
  • the use of only a small number of specific measures of need, restricted to national statistics and, ideally, measured by the number of people having that particular need; and
  • combined into a single measure for each country using weights that are consistent with the actual level of UK public expenditure.


91.  Our argument in favour of a top-down approach, using a small number of aggregate statistics, is based on the following considerations:

  • given the priority we accord to comprehensibility, a simple approach is a high priority. While it may reasonably be countered that the cost of simplicity is a certain rough justice, we would expect that cost to be lower at the national level than locally since differences between countries are much smaller than differences between localities within countries;
  • we also favour a top-down approach because of the inherently top-down nature of the exercise itself. The opposite approach, that the formula should be built up from a detailed assessment of a full range of needs locality by locality, would mean trespassing on the domains of the devolved administrations; and
  • finally, although we are not recommending the Big Lottery Fund formula should be adopted, its formula shows that such an approach is viable.


92.  The first step is to choose measures of particular aspects of need which are deemed to be important. We can illustrate our approach with a few underlying points:

  • First, we want indicators that measure the number of people with particular need X as a proportion of the total population of the country in question. This approach has a number of features. As a principle, it reflects the view that needs are inherent to people and that any two people with the same need should be treated equally. In practical terms, once the particular needs indicators are agreed what is then required is to count the number of people with that need.
  • Second, each of the measures of need chosen should be a national statistic. While there will always be room to challenge the choice of measures, we believe that the measures themselves should be beyond reproach. The creation of the UK Statistics Authority (UKSA) in 2008 strengthens the capacity of the United Kingdom to take decisions about sensitive matters such as these on sound evidence. A way should be found to involve the UKSA in the process of needs assessment, not just in a quality assurance role but also in the construction of new measures of need where necessary. For example, the absence of any housing measure reflects the lack of a UK-wide measure of housing need (quantity and/or quality) and likewise, the absence of any sparsity measure.
  • Third, the indicators should not be capable of being affected by the policy choices of the devolved administrations. It would be inappropriate to create incentives which could be seen to encourage the devolved administrations to make policy choices which might increase their need.

93.  Our starting point is that funding should reflect the size of population. If that were all there was to it, an allocation would be one in which the amount of grant per head was uniform.[56] But needs also vary according to other factors. Children have very different needs from pensioners; and we would expect that both groups would have a higher overall level of need per head than working-age adults. It will be up to the Commission to decide on the factors used to build up the specific needs assessments but we expect it to take account of the age profile of the population—which therefore serves to modify the starting point of a uniform allocation per head. We also envisage other factors that might affect the territorial distribution of need. As with children and pensioners, there are groups of people whose overall level of need could be expected to be above the average such as: those with low incomes; those with disabilities or suffering from ill-health; and those with needs that may arise from a country's economic weakness. Some of these needs are met to a greater or lesser extent by social security.

94.  However, these indicators matter only insofar as there are differences between the four countries and regions. Figure 2 shows a small selection of what we regard as some of the key measures of relative need. It suggests that there are indeed differences between the needs of the devolved administrations and England, in some cases to a considerable extent. We do not regard this selection as complete or definitive; other factors might be chosen with equal validity. However, we consider that any needs assessment should take these aspects into account, the four aspects shown here being represented by eight measures of relative need, as follows:

  • The age structure of the population is represented by the number of a) children aged under 5; b) children aged 5 to 16; and c) adults aged over 65.
  • Low income is represented by the number of children in poverty as conventionally defined (that is, belonging to households with an income below 60 per cent of the UK median; and per capita household income). This is a measure of a very different kind from all the others. It is expressed as an inverse so as to preserve the rule that a high number (low income per head) indicates high need and vice versa. Since poverty tends to be associated with other aspects of deprivation, child poverty may also be seen as a more general measure of need.[57]
  • Ill-health and disability are represented by the mortality rate (the number of deaths in each country, standardised for the age profile of the population) and work-limiting disability (the number of people of working-age in each country with a work-limiting disability).
  • Economic weakness is represented here by unemployment (the number of people of working-age in each country without a job and actively seeking one). Along with work-limiting disability, this may be seen as capturing aspects of additional need among the working-age population.

Measures contributing to relative need:

95.  Figure 2 shows each country's level of need for each measure relative to that of the United Kingdom. So for example, a value of 105 per cent indicates a level of need 5 per cent above that average. The further away from the centre a country is on any particular dimension, the higher its level of relative need on that measure. An appropriately coloured line then joins each country's eight points. All the measures used here come from official statistics for each of the four parts of the United Kingdom.

96.  The main points of note here are as follows:

  • On most measures, the levels of relative need in England and Scotland are quite similar (that is, the blue and the white lines are usually quite close to one-another). England has slightly higher levels in matters to do with children and poverty and Scotland has much higher levels regarding disability and mortality.[59]
  • With the main exception of mortality, need in Wales is usually higher than in Scotland (that is, the red line is usually outside the blue one).
  • Reflecting its young population, need in Northern Ireland is high on the children measures and low on the pensioner measure. In this combination of highest need on some measures and lowest need on others, Northern Ireland is unique.

97.  This diagram does not produce a single overall estimate of relative need for each country because to do so requires that the individual measures be brought together in a weighted combination. On the other hand, provided that any two countries' lines in this diagram do not cross one-another too often, a robust conclusion can be drawn about which of the devolved administrations or England have the higher overall level of relative need irrespective of the precise weights chosen. On that basis, we could conclude that any well-based combination of the measures would show that England and Scotland have lower overall needs than Wales or Northern Ireland. But while overall need in England is almost certainly lower than that in Scotland, the relative positions of Wales and Northern Ireland could reasonably differ depending on precisely how the different measures end up being combined.

98.  Figure 3 is an extended version of Figure 2 that includes four extra measures. Two of these are possible alternatives to those shown in Figure 2 (to do with disability and employment) while two are additions or elaborations (to do with poverty and the age profile). Choosing different indicators obviously produces a slightly different picture. On this analysis there is some uncertainty about precisely how need in Northern Ireland relates to the others. The conclusion regarding England, Scotland and Wales remains undisturbed. This highlights the need to ensure that the choice of indicators is made by the independent Commission, as with the choice of weights that go with the chosen indicators.

An extended selection of measures contributing to relative need

99.  Neither of our lists is definitive nor complete. The absence of any measure of housing need is the single most obvious gap, arising from the fact that there is no UK-wide standard (at least later than the 2001 Census) on which to base a measure. Another such gap is the lack of any measure of sparsity, which is usually seen as raising the cost (and therefore the need for resources) in remote areas. In acknowledging this last point, we would draw attention to the effect of sparsity in the latest resource allocation formula for the NHS in Scotland. This shows that while taking account of sparsity is vital for several remote areas (adding more than 15 per cent to the allocations for the Northern and Western Isles, and around 6 per cent to that for Highland), the overall resource effect is slight (between 1 per cent and 2 per cent for Scotland as a whole). This reflects the very small proportion of the total population actually living in such areas.[61]

100.  The order of relative need among the four devolved administrations and England shown here (with England and Scotland quite close to one another, and both clearly lower than Wales and Northern Ireland) in no way corresponds to the pattern followed by the current allocation of public expenditure per head which is shown in Table 4.

101.  While we are not in a position to reach a conclusion about precise relative needs in the four countries and regions, on the basis of our initial analysis, we believe that Scotland now has markedly lower overall need than Wales and Northern Ireland in comparison to England. The current allocation of spending does not properly reflect this basic pattern across the devolved administrations.

102.  We recommend that an alternative system on the broad lines suggested above be created to establish a new baseline grant for the devolved administrations and to review needs on a regular basis so that allocations of funds to the devolved administrations reflect the changing patterns of relative need.


103.  Our examination of relative need in the devolved administrations has stopped short of taking the next step of combining the individual elements of need into a single overall measure for each country. To do this, weights are required to be attached to each individual measure of need, based on an analysis how much public expenditure each type of need gives rise to. In some cases, the public expenditure statistics provide the information required: for example, the division of educational spending between different age groups (under fives, other children, young working-age adults etc). In others, a crucial judgement has to be made as to what causes or drives cost: for example, although health spending per head can be broken down according to age, age may not be the critical factor driving spending. As for a need like child poverty, the question of how much spending (beyond social security benefits) this gives rise to (or ought to give rise to) is more uncertain.

104.  Such a task is not for us to undertake. Clearly, the weights used to combine the specific measures of need into a single measure should yield results which in aggregate correspond to the actual level of public expenditure at the United Kingdom level. The aim is that the overall level or relative need in a country or region can be explained as the combination of (a) the number of people with various types of need (such as in the measures above) multiplied by (b) the United Kingdom average amount of public expenditure per head devoted to meeting that need at the moment.

105.  In a sense, this is the precise opposite of the kind of approach (which has been suggested to us by some) that relative need should be measured by a single, simple proxy. If such a proxy were to be used (the inverse of household income per head seems the most suitable because it reflects the dampening effects of social security payments), it would lack any basis in how public expenditure is actually deployed to defend it.

106.  The task envisaged for the Commission is to select indicators of the type illustrated above and to combine them in the way suggested. It is a feature of this approach that there can be choice in which, and how many, of the indicators are used for the ultimate formula. All of them will be brought into the analysis.

107.  Within this overall approach, other issues will need addressing. One which we suspect may be quite important concerns capital expenditure and whether it should be treated equivalently to current expenditure. While a case can certainly be made to base current spending on current needs, capital may need to move more slowly—or indeed be adjusted for a period to reflect past over- or under-investment. Exactly how this might fit into the overall framework would need to be determined.


108.  Although we suggest that the baseline will require investigation and re-ordering on a needs-basis every five years, it will be for the Commission to determine changes made to the block grant on an annual basis. Two features of the current Formula should be retained for this annual up-rating. One is the degree of predictability over the aggregate grant which the devolved administrations currently enjoy. The other is the way that, by relating increases in each devolved administration to that in England, the Treasury is able to retain control over the aggregate increase in public expenditure.

109.  The Chief Secretary to the Treasury told us that "there are big administrative and political risks associated with fundamentally restructuring some of these arrangements in a way which is contested. So given the complexities … which I think would be involved in coming up with this formula, I think it would be inevitable that the dimensions, the mechanics of that formula, would be contested. I think the result of that would be quite complicated change arrangements" (Q 1004).

110.  We recognise the need for a carefully-handled transition to implement the new arrangements. We anticipate a transitional period of between three and five years, preferably no more than seven, before the new arrangements are brought wholly into effect. Smoothing mechanisms would need to be put in place to manage the change from present levels of funding to those that the new arrangements would supply. If the pattern of grant per head related to need is indeed a long way removed from the current pattern, then these smoothing mechanisms will be a very important element of the new system. Since relative need can be expected to continue to evolve in the future (not least due to the continued divergence in population trends that is currently expected), these mechanisms will be a permanent part of the new system. It may be appropriate to manage the transition to reflect the needs of the devolved administrations so that those who are shown to need more funding should receive additional funds more quickly than those who are shown to need less funding to achieve their new level of block grant. An asymmetric answer may be appropriate when applied to an asymmetric problem. Both the length of the transition period before the new system is brought wholly into effect and the pace at which the actual levels of grant per head converge with the needs-based levels are issues upon which the new Commission should advise the United Kingdom Government.

Other matters


111.  A system of the sort we recommend would minimise the likelihood of any disputes between governments about grants or related matters. However, if there were such a dispute, we regard the JMC as the appropriate forum for its resolution.


112.  We acknowledge that there are other detailed administrative decisions which are for the new Commission to determine. The new arrangements we propose will need to be embodied in statute, at least in general outline. That legislation should contain provisions to ensure that the quinquennial reviews indeed take place.

52   See Chapter 3. Back

53   Cm 6348, paras 99, 100 and 222. Back

54   Cm 6890, para 71. Back

55   That is, top-down rather than the bottom-up very lengthy approach used by HM Treasury in the 1979 Needs Assessment exercise. Back

56   It should be stressed that this is not just a statement about the increment added to last year's grant (which is, under Barnett, allocated on a uniform per head basis) but about the grant as a whole, that is, the baseline amount inherited from last year plus this year's increment. Back

57   Note that both these income measures include the offsetting effects of the transfer payments made via Social Security and tax credits.  Back

58   A full description of the data used here, their sources and the numerical values, are contained in Appendix 5. Back

59   One point to note is that the lower level of need on the dimension of child poverty in Scotland is a very recent phenomena dating only from the middle years of this decade. Back

60   A full description of the data used here, their sources and the numerical values, are contained in Appendix 5.  Back

61   Source for the 2009/10 formula: Summary.xls&pContentDispositionType=attachment  Back

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