This is an excerpt from a forthcoming book (Cairney, P. and McGarvey, N. (2013) Scottish Politics 2nd ed (Basingstolke: Palgrave) used to answer a question (about the Needs Assessment exercise conducted by the Treasury in the 1970s) posed by Peter Matthews @urbaneprofessor in a recent twitter conversation (I think the 1st ed. has a longer discussion). The real knowledge on this is held by David Heald http://www.davidheald.com/
“Life before Barnett
The modern history of funding settlements demonstrates the incremental and almost accidental side of Scottish politics. This began in 1888 with the Goschen formula, named after the then Chancellor of the Exchequer. The formula is a by-product of the attempts by Goschen to link local revenue to local spending and separate it from funding designated for Imperial finance. Although this overall project failed, the formula itself lasted over 70 years as a means of determining Scottish entitlement from the UK exchequer (Mitchell and Bell, 2002). The figure of 11/80 of England and Wales was a rough estimate of Scotland’s population share at that time, based loosely on Scotland’s contribution to probate duties (taxes levied on the estate of the deceased), but was never recalculated to take Scotland’s (relative) falling population into account.
As the size of the UK state grew, so did the size of the Scottish Office, with the Goschen formula more or less at the heart of its budget settlement. Indeed, although the formula was not used formally from 1959, the culture of accepting Scotland’s existing share as a starting point and adjusting at the margins became well-established. Therefore, what began as a formula which initially advantaged per capita spending in England and received minimal Scottish support, eventually became a system redistributing money to Scotland as its share of the UK population fell (McLean and McMillan, 2003: 50).
The long-term use of the Goschen formula reinforces the idea of incrementalism and inertia in politics: the existing or default position is difficult to shift. Fundamental change is expensive and likely to undermine a well-established negotiated settlement between competing interests. While the Goschen formula is not something that would have been chosen from scratch by a comprehensively rational decision-maker or a more open process of decision-making, as a default position it was difficult to challenge. We may then ask why this process was eventually replaced. The answer is that a ‘window of opportunity’ (see Kingdon, 1984) came in the 1970s with the prospect of political devolution which drew attention to Scotland’s share of public expenditure.
Barnett and needs assessment
The high level of UK attention to Scotland’s financial status (particularly among English MPs representing constituencies with ‘comparable needs’) was such that it prompted governmental action. The ‘window of opportunity’ was opened by the prospect of a referendum on devolution. This contributed to the ‘reframing’ of the policy problem – from a technical process to ensure Scotland’s share of resources to a political process providing advantage to Scotland. The Treasury’s response was to commission a Needs Assessment Study to establish the share that each UK territory was ‘entitled’ to (based on indicators of need such as proportions of schoolchildren and older people and population sparsity). This would be used in negotiations with the newly-formed Scottish Assembly, perhaps allowing the issue to return, eventually, to its low-salience status (although Barnett himself disputes this motivation – see Twigger, 1998: 8).
In retrospect we may say that the needs-assessment exercise was doomed to failure (in that it was not officially adopted) for three reasons. First, there is no common definition or consensus on the concept of need. More money spent on one ‘need’ means less on another; it is a political issue involving winners and losers, not a technical issue in which everyone’s problems can be solved. Second, there were problems with the quality of information and its implications. For example, even when ‘objective factors’ (e.g. population sparsity or age) were taken into account it was never clear if any extra spending would refer to inputs (e.g. number of doctors), outputs (number of operations) or outcomes (equality in levels of health). Third, the outcomes from a needs assessment will always require a political decision which takes into account not only the ‘facts’ but also factors such as the public reaction. The report itself represented only one aspect of that process. In particular, while the Treasury report in 1979 suggested that Scotland’s greater need was 16% (when at that time the level of extra spending was 22%) there was no rush to close this perceived gap.
Instead, the Barnett formula was introduced on an interim basis. Then, following the negative referendum vote, the needs-assessment agenda was dropped. The Treasury was not inclined to impose a system with little more benefit than the Barnett formula in the immediate aftermath of a referendum process seen by many in Scotland as an attempt by the UK Government to thwart home rule. Effectively, the end result was the replacement of the Goschen formula with a very similar Barnett formula.
This formula remains in place today in large part because the existing process has several political advantages. First, it satisfies broad coalitions in Scotland and England. In Scotland, it maintains (at least in the short term) historic levels of spending. In England, the ‘Barnett squeeze’ gives the impression that, over time, this advantage will be eroded. Second, it satisfies many governmental interests. For the Scottish Government it traditionally provided a guaranteed baseline and a chance to negotiate extra funding. It allows Scottish control over domestic spending, with limited Treasury interference. For the Treasury, it provides an automatic mechanism to calculate territorial shares which represent a small part of its overall budget.
The adoption of the formula therefore represented successful agenda-setting – establishing the principle in fairly secret negotiations and then revealing the details only when the annual process could be presented as a humdrum and automatic process (allocating funding at the margins) which was efficient and had support from all sides within government. Indeed, the level of implicit support for Barnett was so high that there was no serious, sustained challenge to this formula either before or after political devolution in 1999 (perhaps aided by the perception that the Barnett ‘squeeze’ was working – Cairney, 2011a: 208). In fact, the value of Barnett has been reinforcedsince 1999; the trend is towards determining a greater proportion of Scottish Government spend from this process.”