Irrational and unpredictable? Why we should replace the Barnett formula

An instrument seeking to ensure fair distribution of public spending across the UK has done no such thing

March 12, 2021
agefotostock / Alamy Stock Photo
agefotostock / Alamy Stock Photo

The relationship between different parts of the UK is a matter of increasingly pressing concern, with Scottish independence a distinct possibility and Northern Ireland adapting to a new reality post-Brexit.

One vital element in understanding the UK’s territorial politics is the Barnett formula, the well-known—though often misunderstood—mechanism used by the Treasury to calculate changes in the annual funding provided by Westminster to the governments in Scotland, Wales and Northern Ireland. As recent Institute for Government analysis shows, the formula produces some odd effects and distributes resources across the UK in a way that is hard to explain or justify. There is a good case for Barnett to be replaced.

At its heart, the Barnett formula is a simple mechanism that seeks to ensure that new spending on public services such as schools and hospitals is shared equally across the UK’s four nations. It provides that changes to public spending in England lead automatically to equivalent changes in the budgets of the devolved administrations. These changes are calculated by reference to relative population, with the result that per capita changes in spending are the same across the four nations (although a supplement has recently been added for Wales).

True, the formula offers some important advantages, which perhaps explains why it has endured. It is simple to operate and ensures that there is no need for regular renegotiation of the size of the devolved budgets. It gives the devolved governments a reasonable degree of certainty and autonomy over spending choices, while enabling the Treasury to maintain overall control of the UK public finances. And the formula can be cranked up in a crisis to deliver additional resources to all parts of the country. Since March 2020, a total of £19bn has been provided to the three devolved nations to support their coronavirus responses.

But many of the Barnett formula’s supposed advantages are overstated. In particular, although new government spending is allocated proportionately, Barnett does not correct for historical disparities in spending levels. The result is that the three devolved nations benefit from strikingly higher public spending than England.

Our analysis has found that Scotland and Northern Ireland enjoy spending on devolved public services that is 29 per cent higher than the equivalent figure in England. In Wales the figure is 23 per cent. This enables the devolved nations to offer benefits such as free NHS prescriptions and university tuition, unavailable in England.

In principle, the Barnett formula should provide for gradually converging levels of spending across the UK. But this has not happened, because the formula does not fully take into account different rates of population growth. The population of the devolved nations has grown more slowly than that of England, so their already generous level of public spending is shared among a gradually falling proportion of the UK population.

One possible justification for the higher spending could be that it costs more to provide a comparable standard of public services in those parts of the UK, for instance due to weaker economies, poorer public health, older populations, or higher costs of providing services in sparsely populated areas. But the higher spending level outstrips their estimated “needs.”

Scotland in particular is generously treated, since it receives substantially higher public spending per person than either England or Wales, even though it is wealthier than Wales and many parts of England. Northern Ireland also receives high spending, but this seems to be more in line with underlying needs.

Meanwhile, comparatively poor English regions such as the midlands and Yorkshire have lower-than-average levels of public spending without any good reason. The most obvious explanation is simply that the absence of strong devolved institutions at the regional level within England has made it easier for these areas to be ignored when spending decisions are taken in Whitehall.

This is not the only way in which the Barnett formula falls short of its promise of providing a rational and predictable distribution of resources between the UK nations. The UK government has substantial discretion over how the formula should be applied and how much additional funding the devolved nations should therefore receive when spending rises in England. This can lead to disagreement, but when this happens the UK government alone determines how the dispute should be resolved.

The UK government can also simply ignore the Barnett formula when it suits its political interests. In 2017, an additional £1.5bn was promised to Northern Ireland in exchange for support from the Democratic Unionist Party for Theresa May’s minority government. No extra money was granted to Scotland and Wales, despite protestations from Edinburgh and Cardiff. England received no extra funding as a result of the deal either.

The politics of the union make reform unlikely, since any alternative model would almost certainly lead to a big cut in devolved spending. With Scottish independence on the agenda, the UK government is unlikely to risk the political backlash that would ensue. But in terms of good governance and basic fairness, Barnett would ideally make way for a new mechanism that shares out resources in line with a clearly stated set of funding principles, applied consistently and transparently to devolved governments and to the cities and regions of England.

This article is based on the Institute for Government’s recent report “Funding Devolution: The Barnett formula in theory and practice,” of which Akash Paun was the lead author