The Barnett Formula - Select Committee on the Barnett Formula Contents

Memorandum by Plaid Cymru

  Plaid Cymru welcomes the establishment of the Lords Select Committee on the Barnett Formula.


    — Wales for much of the 20th century has experienced relative economic decline compared with the rest of the UK: this was principally a consequence of the decline in traditional industries such as coal, steel, agriculture and slate quarrying. Decline in these industries in Wales has accelerated since 1980, the year when the Barnett formula was introduced and used to determine changes in the block grant allocated to Wales. The formula, introduced only as a temporary measure, takes no account of the disproportionate impact that this decline has had on Wales compared with the rest of the UK and the current funding formula not only reflects the spending needs and priorities of England but seeks to converge identifiable funding per capita across the four countries of the UK irrespective of the differing and diverging needs.

    — In designing a funding mechanism for funding the countries of the UK a set of principles needs to be established.

    — The funds available should be related not only to need but to remediation of disadvantage.

    — The Assembly Government should have some tax varying powers.

    — The Assembly Government should have borrowing powers.

    — The forum in which decisions are made regarding the allocation of funding to the four countries of the UK should be such that the governments of the devolved administrations have a key say in such decisions.

    — The Barnett formula is both unfair and unsatisfactory and should be replaced. A detailed analysis of the strengths and weaknesses of the current formula is set out in Appendix 1 of this submission. It is estimated that Wales lost £778 million in 2006-07 due to the convergence effect of the Barnett Formula.

    — A set of proposals designed to ameliorate the unfavourable treatment of Wales under the current formula and an approach to replacing it with a more satisfactory system involving the establishment of an independent funding commission is included in this submission.

  This submission will: provide the background to the current position; propose the guiding principles for a fair and adequate funding mechanism; demonstrate the unsatisfactory nature of the current funding arrangements; and propose a set of measures to establish a more satisfactory approach.


  1.  Plaid Cymru has a long record of opposition to the Barnett formula and welcomes the establishment by the House of Lords of a Select Committee on the Barnett Formula.

  2.  In economic terms Wales has long been a relatively poor country compared with other parts of the UK. The reasons for this are complex. Wales was slow to urbanise; was very dependent on an agricultural sector which suffered from a high proportion of poor quality, low productive land; and when industrialisation came it was concentrated initially on extractive industries with much of the added value being contributed elsewhere. Viewed from a UK perspective such specialisation may have made sense but it left Wales with an economy highly dependent on a few business sectors all of which suffered long term decline over much of the twentieth century (agriculture, coal, steel and slate quarrying). Although the Welsh Assembly Government is now making considerable efforts to strengthen and diversify the Welsh economy, most of the significant levers remain in the hands of Whitehall.

  3.  Thus Wales has the challenge of dealing with this legacy but during much of the last hundred years or more UK governments have regarded Wales as being on the periphery and have sought at best to ameliorate economic weakness rather than address the root causes. Since the implementation of the Barnett formula, which takes no account of relative need, GVA per capita has declined from 88 per cent of the UK average in 1978 to 75 per cent in 2007.

  4.  The way successive UK governments view Wales is reflected in the way that devolved services are funded: in particular both the formulation and operation of the Barnett formula reflect the peripheral status of Wales. Changes to the block grant are a consequence of spending decisions made with respect to spending departments with responsibility for England. Indeed as is noted in the Treasury's Statement of Funding Policy "in the vast majority of cases, the United Kingdom departmental programme covers England only" (this is further demonstrated in the next paragraph) yet it is decisions made by such departments that drive changes to the funding of Wales.

  5.  Out of UK total managed expenditure (TME) in 2007-08 of £590 billion,[1] the UK Government was directly responsible for:

    — non-identifiable expenditure for the UK (£108 billion). This encompasses defence, interest on the national debt, cost of central government etc;

    — Social Security (£156 billion) which is a standard, needs related, UK wide set of programmes;

    — identifiable but non-devolved expenditure in Scotland, Wales and Northern Ireland (£3 billion); and

    — all public expenditure in England (£243 billion) excluding locally financed expenditure.

  6.  The devolved governments and local authorities of Scotland, Northern Ireland and Wales had responsibility for £60 billion of expenditure.

  7.  Thus essentially the UK Government is, from a financial viewpoint, responsible for all public expenditure associated with the UK per se (central government expenditure including social security) and for all public expenditure in England. In addition it is responsible, with the important exception of Social Protection, for a very small amount of spending on non-devolved, identifiable expenditure in the other three countries of the UK (£3 billion in 2007-08) which is less than 0.5 per cent of TME. The UK Government has a dual role: it is responsible for central expenditure and it is responsible for all non-local authority expenditure in England. This duality is the source of many of the difficulties associated with the allocation of funding for devolved services in the other three countries of the UK.

  8.  In addition the UK Government is responsible for fiscal policy ie setting and collecting all taxes and duties in the UK with the exception of council tax and business rates. A third financial role is that the UK Government is responsible for macroeconomic policy including the setting of overall public expenditure levels in the UK and determining the level of public sector indebtednesses.

  9.  The Welsh Assembly Government:

    (a) is responsible for public expenditure on devolved services in Wales;

    (b) has no fiscal powers;

    (c) has no control over the amount of funding it has at its disposal for public expenditure; and

    (d) has no long term borrowing powers.

  10.  Of total identifiable public expenditure of £24.2 billion in Wales in 2007-08, the Assembly Government and Welsh local authorities were responsible for £15.2 billion. The balance of identifiable public expenditure was Social Protection (£7.5 billion) and other programmes (£1.5 billion) which were controlled by Whitehall departments.[2]


  11.  In reviewing the funding and financial arrangements for Wales we believe that certain principles should be agreed:

    (a) the funds available should be related not only to need but also to the remediation of disadvantage. Funding should be sufficient to enable the devolved administrations to address the underlying causes of any relative underperformance of the economy and its consequential social impact;

    (b) the Assembly Government should have tax varying powers;

    (c) the Assembly Government should have borrowing powers; and

    (d) the forum in which decisions are made regarding the allocation of funding to the UK and to its four member countries should be such that the governments of the devolved administrations have a key say in such decisions and the conflicted position of the UK government in its dual role as the government of the UK and of one of the four member countries of the UK should be recognised.

  12.  It is not sufficient to set funding levels in terms of relative need. It should be the objective of the UK Government to ensure that the devolved administrations have the financial means to address and materially reduce economic and social disparities between the member countries of the UK. The present funding arrangements appear, at best, designed to ameliorate the effects of economic and social disadvantage. It is noteworthy that in recent times the UK Government has to a marked extent abdicated to the EU its responsibility for the additional funding of disadvantaged areas. Even in the case of EU funding the UK Government sought initially not to pass on to Wales the EU Objective 1 funds but sought to treat these funds as part of Treasury receipts to be used for the benefit of the UK as a whole. The UK Government continues not to provide additional funding over and above the Barnett determined increase for the purpose of public sector match funding. As a result the Assembly Government has had to use the block grant to provide its share of the match funds for Objective 1 and successor Convergence Funding programme.

  13.  According to Eurostat 2008 Statistical Handbook the UK is the most regionally unequal country in the EU. In the case of the UK there is a factor of 3.9 between the two extreme values of regional GDP per capita. (The lowest values in the EU are in Sweden and Ireland where the factors are 1.6 and 1.5, respectively.) This outcome is indicative of the hitherto highly centralised nature of the UK state and of the failure of central government effectively to address the issue of regional disparities. The current Select Committee has excluded from its terms of reference the distribution of funds within the different regions of the UK. It should be noted that if identifiable public expenditure per capita were the same across the countries and regions of the UK then such expenditure in the case of England would increase by three per cent only and that the variation within England (ranging from 117 per cent of the UK average in London to 84 per cent in Eastern and South East England) is not a function of the Barnett Formula but of the distribution mechanisms employed within England. Thus concerns in parts of England regarding relative identifiable public expenditure compared with Scotland and Wales are often erroneously blamed on the Barnett Formula.

Pros and cons of the present formula-based approach to the distribution of public expenditure resources to the Welsh Assembly Government.

  14.  The strengths and weaknesses of the Barnett formula have been the subject of much analysis and comment and the balance of independent and academic opinion has long been unfavourable. No doubt the Select Committee will receive submissions drawing attention to weaknesses of the formula particularly from the point of view of its unfair and damaging impact on Wales over the last 30 years.

  15.  A summary of the strengths and weaknesses is set out here and covered in more detail in Appendix 1. It is in the context of the principles set out in paragraph 11 that the strengths and weaknesses of the formula are assessed.

  16.  In summary the weaknesses of the formula are:

    (a) the arbitrary setting of the baseline expenditures in 1978;

    (b) the inaccurate population ratios used to the detriment of Wales between 1980 and 1997;

    (c) the application of the formula is not subject to independent audit;

    (d) the formula is mechanistic rather than needs based;

    (e) it is an arbitrary convergence formula. In Appendix 1 we estimate that using 1999-2000 as the base-line year Wales lost £700 million in 2006-07 due to convergence;

    (f) there is a lack of transparency in its application particularly with respect to the determination of comparability factors and the resulting consequential changes to the block grant;

    (g) the formula is driven by the public expenditure priorities of England;

    (h) no account is taken of the massive structural changes that have taken place in Wales since 1978—changes which were proportionately far greater in Wales than in England; and

    (i) it is an outdated formula whose operation does not reflect devolution and the existence of the National Assembly.

  17.  It is claimed that the formula has certain strengths:

    (a) the formula reduces the need for negotiation with the Wales Office and the Assembly Government;

    (b) the formula leads to predictable outcomes; and

    (c) the way the formula operates in practice offsets Wales's weak negotiating position.

  18.  As noted all these points are developed at greater length in Appendix 1 to this paper. It is our conclusion that the Barnett formula is unfair and inadequate and should be replaced.

Replacing Barnett

  19.  It is clear from the above and our detailed analysis set out in the Appendix 1 that Plaid Cymru considers the current funding formula both unfair and unsatisfactory. We advocate a number of steps to reform and then replace the current formula. The first three steps proposed here would be simple to implement but would not address the key weaknesses of the Barnett formula.

  20.  A useful first step, albeit a modest one, would be more clearly to identify within government reporting, expenditure by Whitehall departments which is for those services in England which in the case of the other three countries of the UK are devolved. This would enhance transparency and facilitate comparisons between the member countries of the UK. This would also reflect the recommendations of the Treasury-sponsored Allsopp Review.

  21.  A second step would be for the National Audit Office and the Wales Audit Office to review and report annually to Parliament and the National Assembly, respectively, on the operation of the Barnett formula. It is clear that many of the decisions made regarding the comparability factor of spending programmes are questionable and should be open to independent challenge (for examples see paragraph 6 of Appendix 1).

  22.  A third step would be to stop the Barnett squeeze by increasing the block grant to Wales by the same percentage as the corresponding increases in expenditure in England. In the absence of evidence to the contrary there is no justification for arbitrarily reducing relative identifiable public expenditure per capita on devolved services in Wales. Such a change would be a trivial modification to the current Barnett formula and would not increase total managed expenditure (TME) but would be a rebalancing of country allocations within the TME envelope.

  23.  A fourth, more significant step would be to apply the principle that relative funding of services in the four countries of the UK should be related to relative need as is the case for intra-country distribution of funding. Determination of relative need is of course a complex and potentially contentious subject. Given that expenditure on devolved public services is concentrated on health and education (approximately 70 per cent of the total) it should be possible to formulate an acceptable needs model. Assessment of need is a challenge not unique to the UK and the Select Committee should consider models employed in other countries with varying degrees of devolution. The additional funding needed to address remediation would be over and above the needs requirement.

  24.  Appendix 2 sets out relative identifiable public expenditure (IPE) excluding social protection, relative GVA and relative expenditure on social protection (SP) in the four countries of the UK (all on a per capita basis). As can be seen there is little correlation between IPE and SP in the cases of England, Wales and Northern Ireland. Whilst a case could be made for a correlation between IPE and the inverse of GVA there is no such pattern in practice. The position of Wales with low GVA and relatively high expenditure on social protection but a modestly higher identifiable public expenditure (excluding social protection) confirms the poor funding deal that Wales has received since the implementation of the Barnett Formula.

  25.  An independent standing commission should be established which would either determine or advise on the allocation of funds to the four countries of the UK. Such a commission should be at arms length from the UK Government in a similar way to the Monetary Policy Committee (MPC) of the Bank of England. The commission would:

    — be given terms of reference unanimously agreed between the UK Prime Minister and the First Ministers of Wales, Scotland and Northern Ireland;

    — be advised by experts;

    — have an equal number of representatives drawn from each of the member countries of the UK;

    — have a suitably qualified secretariat to support the work of the commission together with an appropriate budget;

    — receive representations from interested parties;

    — commission appropriate external work to support the commission in its task;

    — as in the case of the MPC publish minutes of its meetings together with the evidence on which its recommendations are based; and

    — schedule its deliberations to fit in with the Spending Review cycle of the UK Government.

  26.  Some may object that the allocation of public funds is a political matter that is too important to delegate to a commission. A similar view was taken by many when the MPC was established. At a minimum publication of the evidence gathered and considered by the commission, minutes of its deliberations and its recommendations would bring considerable pressure to bear on those charged with the allocation of funds to the four countries of the UK particularly if the recommendations of the commission were rejected.


  27.  Plaid Cymru believes that the current funding arrangements for Wales are both unsatisfactory and unsustainable and should be replaced. Wales has suffered for far too long in terms of inadequate and unfair funding. The funding approach advocated in this paper would lead to a fairer allocation of funds.

1   Pre Budget Report and Comprehensive Spending Review 2007. HM Treasury. Cm 7227. Back

2   PESA 2008. HM Treasury HC489. Back

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