The Barnett Formula - Select Committee on the Barnett Formula Contents



1.  Application of the Formula in Practice

    a. Are the present disparities in public expenditure per head of population between the countries of the UK a consequence of the Formula itself, the historic baseline or of other factors? To what extent are those disparities related to need?

    b. What effect does the Barnett Formula have in terms of equity and fairness across the UK as a whole?

    c. What effect does the Barnett Formula have on the aggregate control of public expenditure?

    d. What measure of flexibility do the Devolved Administrations (DAs) presently enjoy in allocating funds, between various policy areas, between capital and current spending, and for accounting purposes? Is there any need for reform in this area?


    a. The current relativities between public expenditure per head in the countries of the United Kingdom are the result of decades of fiscal arrangements, including special deals and the outcome of successive rounds of applying the Barnett formula, and relative population growth between these countries. In Northern Ireland special factors such as the acceptance of the need to "make up leeway" in expenditure in areas such as road infrastructure in the 1960s and the effects of the "troubles" which spread far beyond security issues to loosen up funding from the Treasury all played a part.

    b. The Barnett formula takes population as the effective measure of need but equity is not only an expenditure issue it also refers to tax effort so that shortfalls in the use of population as a guide to equitable treatment in expenditure have to be balanced with the cost to other regions in making good a shortfall of revenue in any country of the UK.

    c. It reinforces control because the mechanism allows the Treasury to know exactly how much a given increase in comparable expenditure per head in England will cost in aggregate simply by using the comparabilities and relative populations for the rest of the UK to establish an overall control total.

    d. The devolved administrations have total flexibility to allocate their Assigned Budget (the bit controlled by the Barnett formula) subject to the normal rules of the public expenditure regime which usually prevent veering from capital to resources (current). Changing this needs to balance the need for flexibility with the need for discipline in financial planning and the protection of capital spending which is always an easy target in the short term.

2.  Formula By-Pass and the Barnett Squeeze

    e. Has convergence of levels of public spending in Scotland, Wales and Northern Ireland based on the English level of spending happened and, if not, why?

    f. To what extent did bypassing of the Formula occur before 1999? Has scope for such "Formula by-passes" changed? What have been the consequences of that change in scope?


    e. The evidence on convergence based on identifiable public expenditure figures is ambiguous and depends on the period examined (unfortunately changes in methodology for estimating identifiable public expenditure and sorting out the assigned budget elements for long periods, including times when this concept did not exist, makes this sort of analysis dubious). The chart below shows consistent figures but only over a five year period. The absence of strong convergence is noticeable.

    f. There has been extensive bypassing of the formula going back decades. As noted in the main text, Northern Ireland got money outside the formula for the EU Peace and Reconciliation Programmes from 1996 onwards as well as money for police and prisons reforms which went through the Northern Ireland Office, the benefit of which will, in due course, be inherited by the devolved administration. Wales got additional cover for Objective 1 receipts as a political arrangement. There were also deals done in Scotland and all of these are merely a sample.

     Getting special deals from the Treasury has become more difficult and especially where these add to the baseline. Thus virtually all of the financial package given to the NI parties when devolution was restored after the St Andrew's agreement involved additions within a financial year and not a permanent baseline uplift.

3.  Data Quality and Availability

    g. Are sufficient data available to enable a clear understanding of how public spending is distributed across the UK and to show the working of the Formula as set out in the Statement of Funding Policy?

    h. What additional data, or ways of presenting data, would be necessary to undertake a new needs assessment, or otherwise to reform the Formula?

    i. What additional data, or ways of presenting data, should be available to ensure that the Formula is transparent in its application?

    j. What body should undertake the collection and publication of such data?


    g. In general there is sufficient information to estimate the distribution of public expenditure in the UK but it is scattered across many publications and is very difficult to interpret when the underlying institutions vary. Thus estimating expenditure on schools, for example, is virtually impossible to do on a consistent and accurate basis. Similarly housing expenditure is a nightmare to sort out. In the same way even though comparabilities and population figures are published in advance, working out whether the additions to the devolved countries are accurate is really only possible with inside knowledge.

    h. Needs Assessment is an enormously data heavy exercise and offers endless possibilities for argument. The 1979 Study was only a summary document and there are detailed individual programme studies behind it which were never published. A classic argument at that time which has never been resolved is, what is a good measure of health, mortality (which is fairly definite) or morbidity (which isn't). It is crucial to realise that the formula has nothing to do with needs assessment which is a periodic way of resetting the baseline whereas the formula is an ongoing way of adjusting it.

    i./j. It is an illusion to think that public expenditure and its presentation can be entirely divorced from politics. Spending Review documents, funding rules and statistical publications involving public expenditure are very carefully vetted.

4.  Need for Reform/Alternatives to the Existing Formula

    k. Do the advantages of the Formula as presently constituted outweigh its disadvantages?

    l. Should the Barnett Formula be (a) retained in its current form, (b) amended or (c) replaced entirely?

    m. Should the Barnett Formula be replaced by a system more adequately reflecting relative needs, costs of services or a combination of both? If so, what factors should be considered as part of a needs assessment?

    n. What practical and conceptual difficulties (particularly for defining "need") would arise in carrying out a needs-based assessment? How can these difficulties be overcome?

    o. Should a needs-based assessment seek to encompass a wide-range of factors or be limited to a smaller number of indicators of "need"?

    p. Who should carry out a needs-based assessment, if one were to take place?


    k. The formula has the benefit of 30 years of refinement behind it and it's interaction with the other funding rules is reasonably well understood. It offers a considerable degree of protection to the devolved administrations and it is by no means certain that they would be better off with a direct negotiation approach. There is no favourite alternative formula that has been thoroughly tested in the many situations that the Barnett formula has survived. In the absence of an alternative formula that all of the devolved administrations could unite behind they should weigh heavily the very great risks of direct negotiation with the Treasury which, after all, represents, in one sense, the 80 per cent of taxpayers that keep the rest afloat.

    l. If there is a workable formula that is fair to all who have a stake in financing the devolved administrations then it should certainly be adopted. None of the solutions presented by academics begin to approach this requirement.

    m. Practicalities have to be considered in this matter. It is not ideal that devolved administrations get their share of changes in a Spending Review on the basis of the average comparability of English departments but at least they get their allocations on the day of the Spending review announcement. Would the devolved administrations be prepared to await the announcement of detailed allocations within English departments, which might be months behind the broad allocation to these departments' as a whole, before they knew the resources they had available? The preparation of estimates takes a long time and if the devolved administrations are dependant on the final distributions made by Whitehall Ministers amongst their comparable programme objectives to inform them of what their consequentials might be they would be a long way behind in their planning process.

    n. The concept of "need" has to be anchored in criteria that are relatively immune to manipulation in the short term. That is why the "objective" factors used in traditional needs analysis tend to be population based such as the total population or its structure for various client groups such as school age children. Alternatively physical measures such as population density or even physical area might be used for some programmes. The more that one moves away from these relatively immutable factors the greater the difficulty in relation to need. Unemployment is a good example. What does this mean? Is it the administrative measure of claimants—Northern Ireland 38,000—or perhaps the Labour Force Survey definition—42,000—or perhaps economic inactivity in the population of working age—circa 100,000. The easier that a weighting factor like this can be manipulated by definition the less valid it is in a needs assessment. In addition it is a central assumption of needs assessment that throughout the UK administrations are striving to the same basic standard of public provision, the benchmark for which is provision in England. If that is in fact a deficient benchmark (as it might be in education, for instance) in what sense is the need being properly assessed. In 1979 when this technique was adopted it was at the cutting edge of methodology for a relatively homogeneous country. This may no longer be the case.

    o. The larger the number of factors in any assessment of need the greater is the problem of assigning weights to these factors to come to an overall judgement. This is rich ground for argument. If a small number of factors are included that are closely correlated the result of a composite indicator is not much different than for a single indicator such as population proportions.

    p. If this is going to be done then it cannot be a Treasury led exercise as in the past. Probably the best way forward would be a joint exercise by independent bodies from the various jurisdictions, such as the Institute for Fiscal Studies in London and research institutes or universities in the devolved countries. The funding should be borne jointly with a joint steering group drawn from officials in all of the countries involved.

5.  Decision-making and Dispute Resolution

    q. How effective, appropriate and fair are the processes and criteria by which HM Treasury determines matters relating to the Barnett Formula? In particular, is the way HM Treasury determines whether items of spending in England do or do not attract consequential payments under the Formula, and claims by the DAs on the UK Reserve, appropriate and fair?

    r. Are the existing procedures for resolving disputes between HM Treasury Ministers, territorial Secretaries of State and the Devolved Administrations about funding issues adequate?

    s. How could dispute resolution procedures be improved?


    q. On paper the procedures are very fair. Officials from the Treasury and the devolved administrations meet well in advance of the conclusion of the Spending Review and agree the necessary figure work regarding population proportions and degrees of comparability. Outside Spending Reviews the situation is less well structured and less transparent. Typically an initiative will be announced for England and when the DAs ask about their share the response will be that this is an existing allocation which is being re-brigaded and of course the DAs already have their consequentials. What is particularly annoying is when the Treasury announce at very short notice a change which though not strictly part of the formula nevertheless has implications for the DAs. The revisions made to certain UK departmental baselines just before the SR 2007 announcement is an example.

    r. At the end of the day how negotiations between Ministers go depends on the force of the argument and the strength of the individuals. A DA with a good case and supported by a strong Secretary of State generally prevails over a Chief Secretary. However if the argument is weak and particularly if the Chancellor sees no merit in it the Treasury will usually carry the day. The current dispute between the DAs and the Treasury over bearing a share of additional resource releasing efficiency savings in UK departments (the Barnett formula working in reverse) should be instructive in this matter.

    s. Perhaps inserting a "no suprises" clause in the Funding Rules could help but this could be honoured more in spirit than practice.

February 2009

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