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Although the Barnett Formula has no formal recognition in law, it is currently the mechanism adopted by the British government for the allocation of certain kinds of public expenditure between the various constituent nations of the United Kingdom. It is often blamed for the fact that the levels of current public expenditure are much higher in Scotland at £8,623 per person, compared to £7,121 for England and is therefore responsible for the annual £1,500 'tax subsidy' received by the Scots.

The predecessor of the Barnett Formula

The Barnett formula was inspired by the earlier Goschen Formula, named after George Goschen (later the Viscount Goschen) who as Chancellor of the Exchequer announced in his Budget Statement of 1888 that certain funds would be allocated to local authorities on the basis of a formula which gave 80 per cent to England and Wales, 11 per cent to Scotland, and 9 per cent to Ireland. Following Irish Independence it therefore became the case that Scotland received 11/80ths of the support given to England and Wales over a wide range of expenditure. This formula later received stautory recognition in respect of certain education expenditure in the Education (Scotland) Act 1918. That particular arrangement was formally discontinued in 1959, although it is suspected that the Goschen Formula was otherwise used informally as a starting point for the basis of negotiations between the Scottish Office and HM Treasury.

Although it has been claimed that the Goschen Formula was based on the relative populations at the time, it was in fact based on the relative contributions of probate duties to the Exchequer, and it has been suggested that Goschen deliberatley picked this rather obscure arrangement in order to ensure that both Scotland and Ireland received more money than was their due, in order to 'buy off' the respective Scottish and Irish attempts to obtain 'Home Rule', although fairly obviously it didn't work as far as the latter was concerned.

The emergence of the Barnett Formula

It was later claimed that something akin to the Goschen formula was later re-introduced as a temporary expedient by Joel Barnett, Chief Secretary to the Treasury, as a means of determining the Scottish Office budget in the 1978 Public Expenditure Survey in the run up to proposed introduction of Scottish devolution. Its use was subsequently continued by the new Conservative government elected in 1979, extended to Wales in 1980 and later to Northern Ireland as well.

These decisions were not made public at the time and only became a matter of public knowledge as a result of a meeting of the Select Committee on Scottish Affairs held on the 7th July 1980. It was then that Donald Dewar, the Committee's chairman, asked George Younger, the Secretary of State for Scotland, how the total of expenditure that lay within his responsibility was determined. Younger explained that there "two different sorts of expenditure" and distinguished between "those sorts of expenditure which have comparable forms of expenditure in England" being "things like education, health, etc are common to north and south of the border" and the "other sorts of expenditure which are not strictly comparable; they are dealt with differently". A far as the comparable forms of expenditure were concerned, Younger informed the Committee that;

it is agreed that the Scottish block expenditure as it relates to those programmes is adjusted by a formula, which is 10/85 in the case of programmes which are comparable between Scotland and England only, and 10/90 for programmes which are comparable between Scotland on the one hand and England and Wales on the other.

The academic David Heald wrote a paper later that same year on the subject of Territorial Equity and Public Finances, in which he drew attention to the existence of this formula, suggested that it needed a name, and concluded that in "the apparent absence of an official one, I now name this the 'Barnett formula', after the aforementioned Joel Barnett.

As it turned out this act of attribution was made in error, as it has since become known that the Treasury were already using the 'Barnett formula' or something very like it in January 1974, well before Joel Barnett ever appeared in Government, and indeed Barnett himself was to admit that it was a "fairly long-standing formula that has been used over many years before I became Chief Secretary to the Treasury", and was very likely nothing more than an ad hoc development of the old Goschen Formula. Nevertheless, whatever the provenance of the formula, subsequent governments of whatever political persuasion continued to adopt its use simply because it might life easier as, having agreed the totals for certain specific categories of public expenditure, they could then be allocated between England, Scotland, Wales and indeed Northern Ireland without any further arguments.

How the Formula works and the Barnett Squeeze

The Barnett Formula specified that expenditure should be allocated in accordance with the relative populations of the various constituent nations of Great Britain, which in 1978 were England 85.31 per cent, Scotland 9.57 per cent, Wales 5.12 per cent. However in order to simplify matters, expenditure was actually split in the ratio of 85 to 10 to 5. It was later decided to adjust these proportions in 1992 to reflect the actual relative populations at that time, whilst the formula is now updated annually on the basis of "mid-year population estimates". The important point to note is that the formula is applied only to the increases (or very rarely decreases) in allocations made in successive Public Expenditure rounds. It has not, and never has been, applied to the total provision of public expenditure which remain as previously determined in prior expenditure rounds. (It should be noted that similar arrangements were also adopted in respect of Northern Ireland.)

Therefore the fact that public expenditure in Scotland is higher per head of population in England has nothing to do with the so-called Barnett Formula and everything to do with the fact that existing expenditure levels in Scotland were higher back in 1978 when the formula was first applied. Why that was the case is an entirely different question and for which there is no straightforward or simple answer. However it has been suggested that the situation arose as a result of the application of the Goschen formula over the years, or perhaps because of the historic bargaining capabilities of previous Secretaries of State, or indeed simply due to the application of political expediency at various points in history. The Barnett Formula is only to blame for the current position to the extent that it doesn't presume to alter any of the spending allocations made in the past.

However the application of the Barnett Formula does mean that every extra tranche of public expenditure is allocated each year in accordance with relative population. Therefore as time goes by, the proportion of total public expenditure allocated in relation to population will increase relative to that allocated in accordance with the historical legacy position as of 1978. This means that over time the expenditure per head across both Scotland and England will converge and eventually become identical. Although obviously the speed with which this will happen will depend on future changes in relative population and the rate of increase in public expenditure, or as Professor Iain Mclean once explained, the "the faster the increase in public expenditure in England, the more the convergence effect of Barnett operates on Scotland, Wales and Northern Ireland."

Since eventually public expenditure per head in Scotland and England will became the same, it is simply an arithmetical fact that the rate of increase in public expenditure in Scotland will necessarily be less than that in England, giving rise to the phenomenon generally known as the Barnett Squeeze. One of the leading exponents of this theory is a Professor David Bell of the University of Stirling who has constructed a theoretical model of how the formula might work in the future and who has concluded that it will take something like thirty years for convergence to take place.

The Barnett Formula and the Needs Assessment

There are of course those in Scotland who believe that it isn't fair that they should face a lower rate of increase in public expenditure than their English cousins, and argue that Scotland needs more public expenditure. Indeed there are a number of people who have claimed that the disparity in public expenditure between the two countries is entirely explained by Scotland's greater need. Joel Barnett himself claimed at one time that the disparity was due to "the need to recognise the spending levels between the various parts of the UK - population sparsity in Scotland, transport needs, needs because of relative ill health, rural needs for education and so on and industrial needs - but above all, of course, although I know some distinguished people have suggested it had nothing to do with it, with income per head". Similarly George Foulkes, as Minister of State in the Scottish Office, once claimed in 2001 that the "spending allocations in Scotland were originally based on a needs assessment", whilst most recently a certain Gordon Brown insisted that the higher level of public spending in Scotland was "based on a needs assessment".

It so happens that all three of these individuals were in fact speaking that particular political language known as complete and utter bollocks, as the allocation of Scottish public expenditure was never based on any assessment of need. Indeed, as it turned out, when HM Treasury did conduct a needs assessment survey based on the fiscal year 1976/77, the study concluded that; whilst the expenditure level per head should be sixteen per cent higher in Scotland, actual expenditure per head was already twenty-two per cent above comparable spending in England. The conclusion was therefore that Scotland should not be receiving as much money as it was getting (and incidentally that Wales should be getting more). However as was noted by Michael Keating it was simply a "political impossibility" to cut spending in Scotland at the time and so the whole study was "shelved".

Of course that needs assessment is now thirty years out of date but, as the wealth gap between England and Scotland has narrowed over the past thirty years, it is believed that any new needs assessment would probably be even less favourable for the Scots. Or as research carried out by the Scottish Parliament itself concluded, "there is no guarantee that any new needs assessment would advantage Scotland". Which effectively means there is no way out of the Barnett Squeeze as far as Scotland is concerned.

The future of the Barnett Formula

It was one thing to spend more public money in Scotland back in the days when the money was spent by the Secretary of State for Scotland who, as a member of the British Cabinet, would therefore ensure that the extra spending was made in the least noticeable manner possible. It became a different matter when Scotland received its own Parliament in 1999 which made its own spending decisions. As a result certain manifest differences in the level of public services within the United Kingdom emerged; Scottish students at Scottish universities were not required to pay tuition fees, the elderly received free personal care, whilst Scottish residents also received free eye and dental checks which their cousins south of the border were required to pay for.

The emergence of such differences in the provision of public services between England and Scotland has led to an increased sense of resentment amongst the English and given rise to complaints regarding the way in which English taxpayers are 'subsidising' the Scots, and indeed the differences are substantial rather than trivial, as expenditure on health services in Scotland is something like 20% higher than in the poorer regions of England whilst expenditure on education is similarly greater by around 25%. However the Westminster based British Labour government was always reluctant to address this issue for fear of damaging the electoral prospects of the Holyrood based Scottish Labour government, and was indeed particularly embarrassed whenever John Prescott (a keen exponent of English Regionalism and the disadvantages suffered by his home region of Yorkshire and the Humber) spoke up on the iniquities of the Barnett formula.

Matters changed when the Scottish National Party took charge of the Scottish executive in 2007 and in March 2008 it was announced that Gordon Brown had ordered a 'review' of the Barnett formula. Although as it turned out, this appeared to amount nothing more than a request issued to HM Treasury to prepare a "factual paper" on how the Barnett formula operated. It was apparently the intention for this "factual paper" to be used as a basis for future "public discussion", whilst the official line was that there were "no current plans" to change the Barnett Formula.

However as far as the Liberal Democrats are concerned, Charles Kennedy was claiming that the Barnett formula was "outdated" back in 2000, and party policy is currently to establish a "Finance Commission of the Nations and Regions which would develop a new Revenue Distribution Formula (RDF) to replace the Barnett Formula". Similarly the Conservative Party have indicated that it too wishes to see an end to the Barnett Formula, as David Cameron told The Herald on the 23rd May 2008 that the Barnett formula "cannot last forever", and that it would eventually be replaced by a "UK-wide needs-based assessment" although he wanted "this to happen in a consensual, sensible, non-inflammatory way". Naturally the Scottish First Minister Alex Salmond was not happy with this and responded by saying that "It would be totally unacceptable to cut Scotland's spending share further", whilst of course, whenever the subject of Scotland and money arises, so does the question of oil and complaints from the Scots regarding 'our' oil money.

Of course the same considerations apply in respect to Wales, which now has its own National Assembly which has the freedom to make some decisions regarding public spending in the principality, and indeed there are occasional English grumbles about the fact that the Welsh receive free prescriptions on the National Health Service when, of course, the English don't. However even though public expenditure in Wales is generally above that of the poorer regions of England, the disparity is nothing like to the same extent as applies in Scotland's case, whilst any objective needs based assessment would result in Wales getting more rather than less money. Similarly in Northern Ireland where per capita public expenditure is even higher still, there are fairly obvious reasons why that should be the case.

The reality is that the whole argument over the equitable distribution of public money across the United Kingdom comes down to the question of how much money Scotland should get. Or as Iain McLean has noted as far as the Barnett Formula is concerned, "Only Scotland still believes that it profits from it".


SOURCES

  • David Heald, Territorial Equity and Public Finances: Concepts and Confusion (Studies in Public Policy No 75, Centre for the Study of Public Policy, University of Strathclyde, 1980)
  • Timothy Edmonds, The Barnett Formula House of Commons Library Research Paper 01/108 30 November 2001
  • David Heald and Alasdair McLeod, Public Expenditure, from Constitutional Law, The Laws of Scotland: Stair Memorial Encyclopaedia (Butterworths, 2002)
  • Minutes Of Evidence Taken Before The Treasury Sub-Committee, Wednesday 3 July 2002 http://www.publications.parliament.uk/pa/cm200102/cmselect/cmtreasy/1047/2070304.htm
  • Michael Keating, The Government of Scotland: Public Policy Making After Devolution (Edinburgh University Press, 2005)
  • Iain McLean, The English regions after regionalism, Nuffield College Working Papers in Politics 2005-W9 (12 April 2005)
  • Prime Minister attacked for spending gaffe, Liverpool Daily Post, Mar 20 2008
    http://www.liverpooldailypost.co.uk/liverpool-news/regional-news/2008/03/20/prime-minister-attacked-for-spending-gaffe-64375-20649206/
  • Cameron: Barnett formula’s days are numbered, The Herald, May 23 2008
    http://www.theherald.co.uk/news/news/display.var.2291777.0.Cameron_Barnett_formulas_days_are_numbered.php
  • James Mitchell, Letter to The Herald, Barnett did not create eponymous formula, Thu 10 Jan 08
    http://www.theherald.co.uk/features/letters/display.var.1954445.0.Barnett_did_not_create_eponymous_formula.php

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