The Barnett Formula - Select Committee on the Barnett Formula Contents

Memorandum by Dr Gillian Bristow, School of City & Regional Planning, Cardiff University


1.  What do you understand was the purpose of the Barnett Formula was when it was first introduced, and has its purpose changed over time? Was it designed to reduce tensions arising from disparities in public spending per head of population? Has it succeeded in resolving such tensions?

  The Barnett Formula constitutes a temporary, political expedient which became permanent. In the run up to the devolution referendums for Scotland and Wales in 1979, the Treasury began to make plans for life after devolution and, specifically, the funding arrangements that would be required. The Barnett formula—named after the then Chief Secretary to the Treasury, Joel Barnett who formulated it—was the product of these plans. The Barnett formula was first used in relation to Scotland in 1978. Its origins are not well documented although it appears that it was introduced as a temporary expedient to determine how public expenditure should be allocated to Scotland in the context of preparations for devolution that subsequently did not occur (Treasury Committee, 1997). Indeed, Lord Barnett himself has subsequently stated that he did not expect the formula to last for more than a year, and certainly not for 30 (Barnett, 2000). However, the formula was extended to Wales in 1980 and has been used continuously, with some modification, ever since in public expenditure surveys.

  The Barnett formula was designed to relate incremental changes in expenditure in Scotland, Wales and Northern Ireland to the expenditure margins which existed in 1978 between these countries and England. Baseline funding levels for Scotland, Wales and Northern Ireland were set at levels higher than in England to reflect the historic tendency for the territories with their particular economic and social conditions to receive higher per capita levels of funding than England. Thus the pre-existing pattern of territorial spending differences was built into the baseline.


2.  Do you consider that convergence in per capita levels of public spending on the English level was an intentional feature of the formula, or merely an incidental one? Do you think it is overall a beneficial or harmful feature of the working of the Formula?

  The Barnett formula was intended to provide a pragmatic way of allocating increases in spending to the territories in line with their population shares. Over time, initial expenditure advantages which were frozen into the base would depreciate as the base would come to constitute a smaller proportion of the block. The Treasury acknowledged in evidence to the Treasury Committee enquiry into the Barnett Formula in 1997 that one of the properties of the formula was that it would produce convergence in levels of public spending per head across the UK over time (all other things being equal) (House of Commons Treasury Committee, 1997). This was based on the assumption that the population-based increments would gradually predominate over the disparate inherited levels of public expenditure thereby effecting the so-called "Barnett squeeze". As such, the formula appears to have been designed to limit the financial commitments from England (the dominant UK state) to the smaller states (or to gradually reduce Scotland's spending advantage) and to provide a short-term means of obviating repeated cabinet battles over budgetary allocations. It was fully anticipated by the architect of the system, Lord Barnett, that when spending levels had converged sufficiently to be aligned with needs, the formula would have been replaced by a need-based system (Barnett, 2000; McLean, 2005). This suggests convergence was intended, although this is difficult to verify with any certainty. Convergence does not sit comfortably with the notion of territorial justice—that public spending levels should provide the opportunity for equal levels of public service provision across regions.

  The long-term has been much longer than anyone expected and the predicted convergence has not occurred everywhere to the same extent. Convergence has certainly been less evident in relation to Scotland than it has in relation to Wales. This has allowed the system to perpetuate but has not fundamentally addressed growing disquiet from all quarters about the equity of the system, particularly in respect of its implications for levels of public spending per head.


3.  What criteria do you consider to be important in assessing the success or otherwise of the present formula, and of any possible replacement to it? Would a fair or equitable allocation system necessarily be a needs-based system?

  Any funding system ought to be judged in relation to its ability to deliver territorial justice. This has long featured as a principle for guiding the spatial distribution of welfare services and the appropriate distribution of fiscal powers between different tiers of government, and has attracted renewed interest as a principle for guiding policy and underpinning inter-governmental financial relationships under devolution.

  Traditionally, territorial justice has been understood as the principle that citizens should be provided with broadly equal levels of public services at a similar tax burden, irrespective of where they live, or to each according to the needs of the population of that area. Thus need here is specified very generally in relation to relative shares and not absolute levels of public service provision. This principle of equal social rights across the UK territory implicitly asserts that the UK is a unitary state with no sub-divisions subject to a different set of social rights. The onset of devolution changes things since it empowers autonomous regions and nations with the freedom to vary the provision of services to suit the demands of their own jurisdiction. As a consequence, territorial justice should now be defined in terms of equalising the capacity of decentralised governments to provide the same level of public service provision should they choose to do so.

  Operationalising this principle in the particular context of UK devolution presents a considerable challenge since policy competencies are asymmetric among sub-central units, their sizes are not uniform and where social and economic needs are diverse and territorially concentrated. Any fair division procedure requires a prior agreement among the dividing players of their different entitlements or claims on collective resources. Entitlements may be couched in terms of proportionality, whether to units of measured need, to some notion of merit or desert, such as the inverse of Gross Domestic Product (GDP) per capita, or alternatively to the contribution made to financial resources. Needs assessments are commonly used in formal fiscal models but can prove problematic not least because in empirical terms, the identification of needs appears to be highly dependent upon the position of those making the identification. Thus, needs may be specified quite narrowly in relation to ensuring continued physical existence, or more broadly in relation to providing a broad range of opportunities. Allocations on the basis of merit are less common but may be invoked where there is some notion of providing a disproportionate benefit for some places which others are justly required to contribute to. The distribution of government resources on the basis of contributions is more familiar and well established in the UK welfare state through the insurance principle.

  In other words, justice or equity does not necessarily require a needs-based system. It is not necessary to select one single overarching principle of equity or justice for guiding action. Indeed, it may well be more appropriate to use multiple notions of justice and equity and to prioritise them through ordering or trade-offs.

4.  To what extent are there tensions between allocating expenditure according to such criteria as need, efficiency and effectiveness? How would you suggest those tensions might be resolved?

  There is unlikely ever to be a perfectly rational, objective approach to allocating expenditure that will be entirely free from the primacy of politics or from potential conflicts and trade-offs with other factors such as policy choice or efficiency. In particular, there are likely to be tensions between the desire for policy autonomy over spending choices and the principle of equity. The key is thus finding the system that provides the most reasonable, acceptable working compromise. In the politically contentious arena of public expenditure allocations, agreement on an acceptable compromise will indeed be more important than the search for perfection and it is this somewhat pragmatic principle that should ultimately determine how the various questions surrounding the conduct of needs assessment are approached and indeed answered. Clearly the ability to reach such a compromise depends upon initial agreement among the different tiers of government that an objective of inter-regional equity is a desirable one to strive to achieve.

  It follows that securing what is required is agreement around the principle that a sense of justice is essential to the legitimacy and cohesiveness of a devolved union state, and a sense of allegiance to and identification with a common set of beliefs and attitudes. A clear understanding of when territorial differences in per capita expenditure are just and when they are unjust or unacceptable, is critical to determining when and what sort of equalisation and constitutional structure is legitimate. In other words, we need to know the objective we are trying to satisfy through our territorial finance system, before we can re-design it accordingly.

5.  How effective would it be to use population or other proxy indicators of need, such as inverse GDP or perhaps social security spending per head, as alternatives to carrying out a detailed needs assessment? What would be the overall effect, in terms of the distribution of spending, of adopting those?

  A rigorous annual assessment of territorial equalisation and needs overseen by an independent body represents the best approach to achieving a more transparent, accountable and fair system of public expenditure allocation across the UK. As McLean and McMillan (2003) observe, there are various principles which could be applied to the design of the system to help ensure that it remains practicable:

    — As with the present Barnett regime, the baseline level of expenditure per head could remain constant, and an independent territorial finance Commission could be established to recommend changes to the increment in grant to each territory. This would have the advantage of avoiding any unacceptable shocks;

    — The apportionment to each territory should be unanimously agreed—the so-called "unanimity rule". This would give each region equal bargaining power—an equally credible threat, against the centre;

    — If no unanimity can be reached by an agreed deadline, then the increase of grant to each territory should be calculated using a default or predetermined proxy for relative needs.

  There are two possible default measures that could be adopted. The first is a poverty-based approach. This takes country social security expenditure per head as the guide to relative country need. MacKay and Williams (2005) argues that the case for a poverty-based measure is strengthened if one accepts the basic Rawlsian notion that a just society would have particular regard for the welfare of its most disadvantaged and vulnerable citizens. The poor have limited choice and their needs are thus greater. MacKay and Williams show that taking dependency levels (social security) as a measure of relative need, devolved spending per head should be roughly one-fifth higher in Wales and Northern Ireland than in England and more than one-tenth higher in Scotland than in England.

  An alternative option is to use inverse GDP (or GVA) as a proxy for need (ie the increase in grant to each territory should be inversely proportional to its GDP). The problem with the social security option is that it itself derives from a government programme (albeit a non-devolved one). This risks circularity with elements of the same programme appearing on both sides of the regression equation. Furthermore, it may create perverse incentives for a region to become and remain "needy". The argument around the funding of Objective One in Wales represents a good example of the current perverse incentives that reside within the Barnett system. Wales gained from being "needy" and it will lose if and when West Wales and the Valleys cease to be needy.

  The inverse GDP option has a number of advantages. It is transparent and less open to political manipulation. GDP per head is also not the direct result of government policy, although it is highly correlated with certain variables that governments must seek to improve such as health status and levels of human capital. Furthermore, GDP per head has the added advantage of being measured by an independent non-partisan body—the Office of National Statistics. Finally, GDP per head would not create perverse incentives to be "needy". If a devolved administration improves it GDP per head, then income per head must rise by more than the grant per head would fall on an inverse GDP formula as government spending is less than 100 per cent of GDP.

6.  Assuming there is to be a mechanism for distributing financial resources from the UK Government to the Devolved Administrations, as the main source of revenue for the Devolved Administrations, do you think that a needs-based formula is the only real alternative to the current Formula? What other alternatives might there be?

  Equalisation payments from central government to regional governments based on needs are not the only way to achieve inter-regional equity. Central government can also employ a more active, redistributional regional policy, or utilise the territorial effects of national social security systems.


7.  Are there still problems relating to the collection, quality or availability of data on the distribution of public spending and its effects? What issues are there on data about indicators of need and tax revenues?

  Positive steps have been taken to improve the transparency surrounding the calculation of the formula which was previously shrouded in mystery. In particular, in March 1999 the Treasury published a technical document outlining the categories of the devolved budgets over which there is scope for annual negotiation, and the role of the formula in determining changes in other elements of expenditure. In so doing, the comparability percentages and sub-programmes of spending to which they are applied were published for the first time. Since then, programme comparabilities have been updated at the start of each public spending review to reflect any changes in the policy responsibilities of the devolved administrations. Whilst the English spending programme figures to which the Barnett formula is applied remains opaque, it is understood that the devolved administrations are now provided with the Treasury's calculations of spending consequentials (ie the impact of changes in spending in England on the block grants) to enable them to establish firmly that they represent the full extent of the share of any new money that is announced. Data on inter-regional fiscal flows across the UK nations and regions is patchy (well-developed for Scotland, but poor elsewhere).


  8.  Most writers consider that procedural fairness and transparency are important aspects of any system of financing the devolved administration, and that this an area in which the present arrangements are defective. Do you agree? What information should be published or other processes adopted to improve procedural transparency?

  Any fair division procedure should also satisfy the notion of procedural fairness and should thus be just in relation to its processes as well as its outcomes. Procedural fairness requires the existence of rules (formal or informal, explicit or implicit) which are consistently applied over space and time (Hay, 1995). In order to be sustainable, the mechanisms used to distribute public spending resources need to be transparent and fair in terms of both outcomes and the mechanics of their distribution.

  There is mounting evidence to suggest that the Barnett formula provides a spurious sense of exactitude which belies a significant degree of discretion in its application. The consequence is that it is increasingly and widely perceived to be unfair. The increased incidence of formula bypass presents a case in point. The formula bypasses that occurred prior to devolution did so not because of pure political lobbying, but as an outcome of bureaucratic negotiations and wrangles. The Comprehensive Spending Reviews since 1997, which determine the budgets of the devolved administrations, however have produced political lobbying from the devolved governments in respect of specific, ad hoc funding demands or "needs" (as discussed above). These are addressed through bargaining procedures with no formal institutional arrangements for their presentation, assessment and resolution. With variable lobbying powers evident in the context of asymmetric devolution, the inevitable claim is that those better equipped to voice their demands have an unfair advantage (Bristow, 2001). A considerable degree of discretion also surrounds the classification of spending programmes by the Treasury and the decisions regarding which are deemed to be "English" programmes (for which there is a calculable Barnett consequential for the devolved block grants), and those which are deemed to be "UK spend" (ie which ostensibly benefits the whole of the UK and thus not subject to the Barnett formula and generative of additional spending for the devolved administrations). These decisions can have significant budgetary consequences for the devolved administrations however and provoke incendiary debate and reaction. Two recent examples highlight the growing dissatisfaction in Wales in this regard. The decision to regard spending on the 2012 London Olympics as "UK spend" has cost Wales an estimated £437 million in incremental spending to the Assembly budget (Shipton, 2007). Similarly, the decision to classify the spending by Cycling England as UK spend cost Wales a further £8 million when Cycling England was awarded an additional £140 million in government funding (Livingstone, 2008).

9.  How workable would be a UK Territorial Grants Board given that its Australian prototype, the Commonwealth Grants Commission, operates in a symmetrical, federal system of government, with substantive fiscal autonomy for the States? Can a Territorial Grants Board improve procedural fairness or provide a system which is deemed legitimate?

  The Australian experience provides some important less for the UK (Pickernell et al, 2008). It demonstrates:

    — It is possible to develop an alternative to the Barnett formula.

    — That any federal grant giving system opens up temptations by the grant giver to try to control where the grant is spent.

    — A federal-state government arrangement can be particularly prone to attempting to direct where resources go if the federal government is responsible for substantial proportions of a state's expenditure through grants.

  The choice in the UK is unlikely to be straightforwardly between a simple per capita Barnett-type system and an independent formula based system governed by a grants board. In practice, both these systems have some advantages and some disadvantages. The true choice is between sets of institutions for governing lobbying and deal making in determining budgets, and the openness of these arrangements. Most importantly of all, it is clear that while the formula design and system constructed around it may affect the form and nature of the politics of intergovernmental fiscal relations, they do not remove politics altogether. Any Commission-based system, however independent the committee calculating it and however sophisticated the estimates of need and cost relativities, is subject to lobbying.

  More transparency and agreement in a Commission-based arrangement involving more co-operative solutions including agreed outcomes would, however, have the advantage of being based on partnership arrangements and would, in all likelihood, result in better outcomes. This would also obviate the need for "Barnett bypass" by making the governance arrangements transparent in areas likely to become increasingly contested. While it would also give some degree of leeway for the devolved administrations to pursue different policies, this would allow the UK government some "steer" over important areas of government expenditure, a solution perhaps more in keeping with the political realities of the UK's experience of devolution. Clearly there is no ideal technocratic solutions to the problem of allocating public expenditure, and whichever system is adopted, the power of politics will continue to prevail.


  Barnett, J Lord (2000) "The Barnett formula: how a temporary expedient became permanent", New Economy, vol 7 (2), pp 69—71.

  Bristow, G (2001) "Bypassing Barnett: the Comprehensive Spending Review and Public Expenditure in Wales", Economic Affairs, September 2001; pp 44-47.

  Bristow, G. (2008) "All for one and one for all? Territorial solidarity and the UK's system of devolution finance". Paper presented to Seminar on Regional Economic Disparities, University of Edinburgh 10-11 April 2008.

  Hay, AM (1995) "Concepts of equity, fairness and justice in geographical studies", Transactions of the Institute of British Geographers, vol 20, pp 500-508.

  House of Commons Treasury Committee (1997) The Barnett Formula. Second Report of the Treasury Committee, House of Commons, Session 1997-98. London: The Stationery Office.

  Livingstone, T (2008) "No cash for Wales—Barnett needs change", Western Mail, February 21, 2008; p 7.

  MacKay R R and Williams J (2005) Thinking about Need: Public Spending on the Regions, Regional Studies vol. 39 (6), pp 815-828.

  McLean I and McMillan A (2003) The Distribution of Public Expenditure across the UK Regions, Fiscal Studies vol 25 (1), pp 45-71.

  McLean, I (2005) The Fiscal Crisis of the United Kingdom. Basingstoke: Palgrave.

  McLean, I, Lodge, G and Schmuecker, K (2008) Fair Shares? Barnett and the Politics of Public Expenditure. Institute for Public Policy Research.

  Pickernell, D, Bristow, G, Kay, A and Ryan, N (2008) "The Primacy of Politics: Intergovernmental Fiscal Relations in the UK and Australia", Public Money and Management, vol 28, no 2, pp 115—122.

  Shipton, M (2007) "Shocking 'cost' to Wales of Olympics", Western Mail, October 6 1007; p 3.

March 2009

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