Memorandum by Dr Gillian Bristow, School
of City & Regional Planning, Cardiff University
DEVELOPMENT OF
THE FORMULA
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.
APPLICATION OF
THE FORMULA
IN PRACTICE
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.
NEED FOR
REFORM/ALTERNATIVES
TO THE
EXISTING FORMULA
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.
DATA QUALITY
AND AVAILABILITY
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).
DECISION MAKING
AND DISPUTE
RESOLUTION
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.
REFERENCES:
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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