A lot of the Scottish Independence debate takes place on the assumption that people know what the Barnett Formula is. Yet, when I ask people if they know what it is, many simply say ‘no’ and many say ‘yes’, perhaps because they think that everyone else knows what it means. Here is a quick description. The Scottish budget, transferred by the UK Treasury, comprises two elements: an initial block settlement based on historic spends and the Barnett formula to adjust spending in Scotland to reflect changing levels of spending in England. The formula only relates to changes in the level of spending. It is based on an estimate of populations within the UK. Initially this was a 10–5–85 split for Scotland, Wales and England which suggested that Scotland would receive 10/85 of any increase in comparable spending for England by UK Government departments (or lose the same amount if spending fell). This comparability varies according to department. While some are almost fully devolved (e.g. Health, Education), others are partly devolved (e.g. Transport) and only the comparable spending will be applied to Scotland. The size of these ‘Barnett consequentials’ are based on three estimates: Scotland’s share of the UK population; the change in levels of spending of UK Government departments; and the level of comparability in specific programmes.
The crucial thing to note is that a change in spending on, say, health in England does not mean a direct change in health spending in Scotland. Instead, the change is made to the overall Scottish Government budget, and the SG decides if it will follow the UK lead or, for example, find money for health from another public service.
So, Barnett underpins a lot of indyref discussion because Scottish spending is linked to spending in England, producing some anxiety about the effect of ‘austerity’, even if the impact is not direct.
Another thing to note is that Barnett has a weird history and that it has stood the test of time, despite repeated calls for its replacement. To some extent, the wider system will change if there is a No vote, because the Scotland Act 2012 provides a way for the Scottish Government to borrow (from the Treasury) to invest in capital projects, and gives some more (albeit very limited in practice) powers to change the rate of income tax.