The Barnett Formula - Select Committee on the Barnett Formula Contents



  1.  To calculate "devolved" spending, "social protection" is excluded from "regionally identifiable public spending", because most of this expenditure is not devolved. Agriculture is also excluded from "devolved" spending on similar grounds to "social protection". Most of the two categories are classified as Annually Managed Expenditure, rather than the Department Expenditure Limits expenditure, which broadly corresponds with the block grant to devolved governments (as well as with UK government departments' budgets).

    "Spending that cannot reasonably be subject to firm multi-year limits is included in Annually Managed Expenditure (AME). … It includes social security benefits, local authority self-financed expenditure, payments under the Common Agricultural Policy, net payments to EC institutions and debt interest." (

Aggregate Needs Indicators

  2.  GVA is available for 2007 (ONS First Release December 2008 Regional, sub-regional and local gross value added) whereas household income by region is only available for 2006 (ONS First Release May 2008 Regional Disposable Household Income). On the other hand, at first sight GVA is not such a good needs indicator as household income—because it includes the benefits in kind that we are trying to predict. These benefits are supplied at regional level and therefore their resource costs should be included in regional value added. Insofar as greater benefits are provided to lower income households, this redistributive effect of taxation should therefore tend to equalize GVA per head between regions with different household incomes. But, in the opposite direction, a region such as Wales with a low labour force participation will also have a low GVA per head. Household income on the other hand, which includes central government transfers designed to reduce interpersonal inequalities and "needs", will show less divergence from the national average.

  3.  The figures for Wales for these two sources show a marked divergence, with Wales 25 per cent below the UK average GVA per head in 2007 but only 11 per cent behind for household income in 2006. Although Welsh GVA grew more slowly than the UK average 2006-07, by 0.9 per cent, this is insufficient to account for the discrepancy when used to extrapolate the household income divergence.

  4.  Gross disposable household income is income after taxes and social contributions, property ownership and provision for future pension income. It includes pension income, income support[7] and imputed rent values—what owner-occupiers would have to pay for living in their homes if someone else owned them. Subtracted to get household incomes are "Other outgoings". These payments include those made by households to other sectors on interest (eg mortgages) and rent. So apparently the lower costs of property ownership in Wales are already taken into account with this measure.

  5.  The GVA measure (income approach) excludes transfer payments such as child benefit and the state retirement pension. It also includes an imputed value for rental incomes of owner-occupiers to cover the rental value of their properties. Regional estimates are calculated using estimates of average property prices by region. Higher property pries in SE England mean higher imputed rentals and therefore higher GVA and disposable income. But they also mean higher mortgage payments for those buying property, or higher actual rent outlays. GVA and disposable income should be deflated by the price index including housing costs in any needs index.

Estimates of UK State Benefits in Kind By Income Group

  6.  Data for the relation between state benefits and final income are from the official Economic and Labour Market Review, Vol 2 No 7 July 2008 "The effects of taxes and benefits on household income, 2006-07", Table 14 (Appendix 1). Average incomes, taxes and benefits by decile groups of all households, 2006-07. Figure 2 below shows the household deciles with a constant proportionate relation between the variables, and this is the basis of the calculation of Table 6 above. An equation relating benefits to the reciprocal of income fits the data slightly less well.

  7.  The largest spending items are health and education. How well does the ONS ELMR study estimate these items? Any survey-based estimate of, say, health spending utilisation will reflect not just "need" but the demand and supply responses as well. Higher income people may well be more articulate and accomplished at extracting the health benefits they require from the NHS. So if we could get actual health state benefits consumed by income group it would not necessarily tell us precisely what we want. The approach used in this survey (described below) is reasonable.

    "Data are available on the average cost to the Exchequer of providing the various types of health care—hospital inpatient/outpatient care, GP consultations, dental services, etc. Each individual in the EFS is allocated a benefit from the National Health Service according to the estimated average use made of these various types of health service by people of the same age and sex, and according to the total cost of providing those services. The benefit from maternity services is assigned separately to those households containing children under the age of 12 months. No allowance is made for the use of private health care services."

Figure 1

March 2009

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