In 1978, the Chief Secretary to the Treasury, Joel Barnett, introduced a mechanism to assist with the allocation of public expenditure to the devolved nations of Scotland, Wales and Northern Ireland. This has, no surprise, now become known as the Barnett Formula. Although this was initially intended to be a short-term solution to determine funding across the UK, it is actually still in use today to determine the changes in block grants allocated to each nation.
So how does the formula actually work? The Barnett Formula has changed slightly since its inception and is now only used to determine the rate of change of the grants allocated to the devolved nations rather than the overall level of government spending. The previous year’s budget is taken as a starting point, this is then adjusted based on a population-based proportion to allocate funding increases or decreases.
Prior to the introduction of the Barnett Formula, it wasn’t uncommon for political bargaining to heavily influence the annual distribution of funds. This, as well as a need to simplify the funding allocations across the devolved nations, were the primary reasons for the introduction of the mechanism as there was a need for more transparency in the proceedings and to avoid any ad-hoc negotiations with UK treasury.
Although the introduction of the Barnett Formula solved some of these issues, the system has come under criticism in many other areas for not being an effective mechanism to allocate funding fairly, transparently, and sustainably. The first major issue stems from the simplicity of the formula and its focus on population share rather than any other needs-based analysis. Without taking into account demographics, poverty levels, healthcare demands, and infrastructure, the funding allocated to the devolved nations has often been criticised for not taking into account the specific needs of each region.
Other concerns have been raised about the lack of transparency and accountability of the formula as it is not set in legislation which means there is no formal accountability for how it is applied. Regional inequality also makes reaching fair settlements across the devolved nations particularly difficult. Scotland has traditionally received the highest payments from this model, with Wales being relatively underfunded.
Although there is not much evidence in practice, there have always been concerns over a potential “Barnett Squeeze” which is the theoretical situation where increases in public spending in England do not result in proportionate increases in funding for devolved nations. As the devolved nations have historically received more per capita public spending than England, but only receive increases proportionate to population, this could eventually lead to a convergence of per capita spending levels. This would eventually reduce the funding advantage of Scotland and Northern Ireland but hasn’t not happened in practice due to adjustments made to prevent this.
There have been reviews into the system such as the Holtham Commission in 2010 that explored ways to improve the system but without ever implementing change. Some examples of potential improvements have been a move to a needs-based formula that would take into account factors such as income, health inequalities and demographic challenges rather than relying on population-based proportional funding.
Other improvements that have made their way into practice include funding floors, such as the 115% funding floor that Wales received in 2015 as well as the further devolution of tax powers which allows Scotland, Wales, and Northern Ireland to raise more of their own revenues and reduces reliance on central block grants. This devolution of power also comes with increased risk as some devolved nations have lower tax-raising capacity and can be more exposed to economic shocks.
At this time the Barnett formula remains in place to calculate adjustments to public expenditure for Scotland, Wales, and Northern Ireland. While further devolution has taken place and temporary measures have been put in place to reduce inequalities in financing, no permanent solution has been reached.
A bill to find a suitable replacement formula has been raised and is on its second reading in the House of Commons, but while changes may be on the way they are certainly not imminent.
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