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Barnett formula is inequitable and could undermine the Union unless reformed says the UK’s leading think tank

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Published date:  10 Jul 2008

The way the devolved institutions are financed in the UK is neither fair nor equitable, and is no longer appropriate for devolution, according to a report published today  (Thursday) by ippr north.

The way the devolved institutions are financed in the UK is neither fair nor equitable, and is no longer appropriate for devolution, according to a report published today (Thursday) by ippr north.

ippr north’s paper Fair Shares: Barnett and the politics of public expenditure  argues that current disparities in funding across the UK is becoming an increasing source of tension between the four nations, especially between England and Scotland, and that unless addressed it could have implications for the union. Thirty years after its introduction, ippr north is calling for the Barnett formula – which is used to fund the devolved administrations in Scotland, Wales and Northern Ireland – to be replaced with a more transparent and equitable funding system.

The report shows that the distribution of spending through Barnett does not correspond to need. In 2007/08 the spending disparities between the nations of the UK were:

  • Northern Ireland received £5,684 per head: 21 per cent above the UK average spend per head and £1,161 more per head than   that spent in England
  • Scotland received £5,676 per head: 21 per cent above the UK average and £1,153 more per head than that spent in England
  • Wales received £5,050 per head: 8 per cent above the UK average and £527 more per head than that spent in England
  • England received £4,523 per head:  3 per cent below the UK average.

Original research by ippr north shows that when modelled against economic performance and levels of poverty to see whether spending and need correspond, Scotland was found to be receiving more than its needs would suggest, while England is receiving less. And while the Barnett formula is intended to bring about equal spending per head across the nations – a process known as the ‘Barnett squeeze’ – the report only finds evidence of a spending squeeze operating in Northern Ireland and Wales, but not in Scotland.

The report also argues that the Barnett formula, which distributes a block grant to Scotland, Wales and Northern Ireland based on changes to spending in England, is no longer appropriate for devolution since it gives the devolved administrations little influence over the size of their funding grants, and they have few options for raising revenue. This could create a real problem if a devolved administration wanted to increase spending at a time when a UK government was cutting spending in England. In such a scenario the devolved administrations would be constrained in their ability to shape their own policy agenda.

Guy Lodge, Senior Research Fellow, ippr north, says:

"The Barnett formula is no longer fit for purpose. It does not result in a fair distribution of spending, and is becoming an increasing source of tension between the nations of the UK. There is currently popular support for the continuation of the union in all parts of the country, but failure to act now and address devolved funding could see this tension grow.

“Barnett has very few friends left. Political parties across the political divide and across the UK are voicing their concerns about the way it works. This presents a real opportunity for reform, which the UK government should now seize.”

ippr north says a new financial settlement is needed that combines greater revenue raising powers for the devolved administrations, with a block grant from the UK government based on an assessment of need.  Such a system would be more equitable and encourage efficiency.  It would also give the devolved administrations more control over the amount of funding available to them.  However, ippr north argues that because of the asymmetry of the UK devolution settlement, whereby the Scottish Parliament has full legislative powers but the National Assembly for Wales does not, reform will have to be staggered.

ippr north recommends:

For Scotland: Scotland’s full legislative powers should be matched by stronger revenue raising powers. There is already some devolution of income tax in the shape of the (unused) tartan tax and we recommend building on this by strengthening the fiscal powers of the Scottish Parliament. This could involve extending its powers over income tax, and could also be accompanied by assigning tax revenue, for instance a proportion of VAT. This would be topped up with a grant based on a needs-assessment. This would be in line with Scottish public opinion which supports stronger tax raising powers for Scotland.

For Northern Ireland: Northern Ireland could move towards the same model as Scotland, although the new assembly may need time to bed down before financial powers are devolved

For Wales: In the absence of full-legislative powers we suggest that the National Assembly for Wales could be funded from a full-needs based block grant, with the possibility of assigning some tax revenues. If the National Assembly gains primary legislative powers in the future, then it should be given greater revenue raising powers in line with what we recommend for Scotland.

- Ends -

Note to editors

About the Barnett formula
The Barnett formula is not based on an assessment of needs, but on historic spending patterns and population levels.  It is used to calculate the increase (or decrease) to a baseline block grant which is historically too generous to Scotland and Northern Ireland, and too mean to Wales.  In effect, for every £ of extra spending in England on a service which is devolved, Scotland Wales and Northern Ireland will get an increase in their block grant proportionate to their relative populations.

Calculating the distribution of public spending
The estimation of spending through the Barnett formula is calculated by removing the ‘social protection’ (benefits and pensions) and ‘agriculture’ (farm payments) categories from the Treasury’s figures for identifiable public expenditure by nation and region, as these are the two major categories of identifiable expenditure outside the Barnett formula. PESA data also allows us to compare public spending per head for each of the four nations of the UK with the nine regions of England. The Barnett formula does not govern the distribution of spending within England but including the English regions in the analysis provides a richer picture of how public spending is distributed across the UK.

 Nation or Region £ per head % deviation from UK average
 London 5,985 +28
 Northern Ireland 5,684 +21
 Scotland 5,676 +21
 Wales 5,050 +8
 North East 4,960 +6
 North West 4,927 +5
 UK 4,679 0
 England 4,523 -3
 Yorkshire and Humber 4,477 -4
 West Midlands 4,430 -5
 East Midlands 4,086 -13
 South West 3,947 -16
 South East 3,874 -17
 East of England 3,820 -18


The Barnett squeeze

Ultimately the Barnett formula was designed to bring about equal spending per head in the four territories of the UK, slowly reducing the differentials in spending between the four nations as the baselines are swamped by the successive increments added each year. This is known as the ‘Barnett squeeze’. The paper finds evidence of the ‘Barnett Squeeze’ in Wales and Northern Ireland between 2002-3 and 2007-08 but not in Scotland:

  • In Wales spending per head fell from 13% to 8% above the UK average in this period
  • In Northern spending per head fell from 38% to 21% above the UK average
  • In Scotland there is little evidence of a spending squeeze. Spending in Scotland declined between 2002-03 and 2004-05 (from 21% above the UK average to 15% above), but it then increased again sharply from 2004-05 onwards.

Public opinion
ippr north research shows that the Barnett formula is no longer seen to be fair and that an increasing number of people in England think Scotland receives ‘more than its fair share’ of public spending, rising from one in five in 2003 to one in three in 2007. It also shows that there is public support in both Scotland (57%) and England (75%) for the Scottish Parliament to fund a greater proportion of devolved services out of taxes raised in Scotland.  

Devolved finance is currently being reviewed
There are increasing concerns about Barnett across the UK. The Welsh are committed to reviewing the distribution of spending and there is pressure to do likewise in Northern Ireland. In Scotland, the Scottish Government's White Paper on constitutional reform is consulting on whether Scotland should be granted greater fiscal powers, while the pro-Union parties have established the Calman Commission to review the way Scotland is funded and the financial powers of the Scottish Parliament. Importantly, this review is backed by the UK government which suggests that the UK government is for the first time – albeit indirectly - backing a review of devolved finance.

Fair Shares: Barnett and the politics of public expenditure by Iain McLean, Guy Lodge and Katie Schmuecker is available upon request from the ippr press office.

Fair Shares: Barnett and the politics of public expenditure forms part of a series of commissioned research papers for ippr north and ippr’s ‘Future of the Union’ project. The project explores the state of the Union today, the challenges it faces and its future. Other papers already published in the series (and free to download) include:

ippr north, the Newcastle-based office of the Institute for Public Policy Research, produces far-reaching policy ideas, stimulating solutions that work nationally as well as locally.

Contact:

Kelly O'Sullivan, media officer, 020 7470 6125 / 07753 719 289 / k.osullivan@ippr.org 

Guy Lodge, senior research fellow and report author, 020 7470 6163 / 07825 581 071 / g.lodge@ippr.org