The role of HM Treasury and the ‘Barnett formula’ #POLU9SP

Q: why has the ‘Barnett formula’ endured for decades as a political solution despite being so heavily criticized?

A: it suits both governments because it turns potentially controversial funding negotiations into a routine and humdrum process that normally takes place out of the public spotlight.

Think back to our previous lecture which explained why IGR is so smooth and informal:

• the arrangements suit both governments even though one is more powerful (and even when headed by different parties)
• key actors, sometimes political parties but always civil servants, help smooth relations
• there are well-established routines to solve overlaps in responsibilities and ward off potential disputes

The ‘Barnett formula’ is one of the best examples: the Treasury is the more powerful actor, but it has long accepted the use of a formula which appears to entrench Scotland’s advantageous funding settlement within the UK. It has the power to change the way in which it distributes territorial funding, but no alternative policy offers enough of an economic or political benefit to make up for the fallout from the opposition in Scotland to a major reduction of Scottish Government funding.

But what is the Barnett formula?

Here is a quick description. There is a longer description (and a list of further reading) in Scottish Politics.

The Scottish budget, transferred by the UK Treasury, comprises two elements:

1. an initial block settlement based on historic spends, and
2. 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.

So, ‘Barnett consequentials’ (how much does the relevant Scottish Government budget change when spending for England changes?) are based on three estimates:

1. Scotland’s share of the UK population
2. The change in levels of spending of UK Government departments
3. The level of comparability in specific programmes.

However, note 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 Scottish Government decides if it will follow the UK lead or not.

This final point is at the heart of a lot of futile debate on the extent to which Scottish Government spending on salient areas – such as the NHS – can/ does/ should rise at the same rate as spending rises in England because:

If the Barnett formula is working as allegedly intended it should not be possible for the Scottish Government to keep up (with a proportionate real rise in spending) without finding money from elsewhere.

What is the Barnett Formula allegedly supposed to do?

I say ‘allegedly’ because people have been piecing together the history of Barnett, and not everyone agrees on its primary function.

What we can say for sure is that – ‘all other things remaining equal’ (ceteris paribus) – the consequence of extra spending in England is extra spending in Scotland according to its estimated share of the population rather than its traditionally higher share of UK public expenditure (the latter is sometimes estimated at 20% per head higher than in England).

The latter is proportionally greater because Scotland’s initial block settlement produced much larger per capita spending than in England (‘per capita’ spend is the budget divided by the population). So, there should be significant convergence between spending in England and Scotland: the more spending there is, the smaller the gap in per capita spending.

Yet, the ‘Barnett squeeze’ didn’t happen as much or as quickly as we might expect because:

• The estimates are not accurate (England’s population is rising more quickly than Scotland’s)
• Spending doesn’t always go up
• The UK Government sometimes gives ad hoc funding to the Scottish Government without using the formula (‘formula bypass’)

Further, Scotland’s higher per capita spending is often maintained by UK Government spending that is not covered by the formula, in areas such as social security and agriculture.

Why has Barnett not been replaced by something more sensible?

The Barnett formula has stood the test of time despite repeated calls for its replacement. We can talk about two key explanations:

1. Agenda setting and incrementalism/ inertia. Imagine that both governments privately like the political advantages of the formula (although elected members often say something different in public) because (a) it reduces the need for heated negotiations by introducing a semi-autonomic routine, and (b) it might suit both audiences: you can tell an audience in Scotland that it helps maintain its financial position in the short term; you can tell an audience in England that it reduces Scottish advantage in the long term. There is little incentive for them to shift radically from a previously-negotiated settlement, or at least one that only attracts periodic attention.
2. The alternative is not easy. If you are going to change the system, it will produce winners and losers (and the losers may be more vocal). Ideally, you want to be sure that your alternative is demonstrably better. Maybe you even want to find a calculation that looks similarly technical and objective, so that it doesn’t look like you are making political choices to redistribute funding. Yet, no such objective calculation exists. Maybe the closest thing is a ‘needs assessment’ formula, but it suffers from three problems: a lack of agreement on the concept of need, or the criteria to use (let’s discuss some examples – free tuition fees, catholic schools), a lack of good information, and a lack of political will to go for the big change (or, a concern that the big change will tip the balance in favour of a Yes vote?)

What does this experience tell us about bigger issues of power and IGR?

Barnett is a good example of an effective IGR mechanism in the often-distinctive UK tradition: it helps maintain smooth governmental relations by using a routine measure to make big decisions. The Treasury has the power to change it, and to give the Scottish Government a smaller settlement, but it chooses to stick with a formula that suits both governments in important ways.

We can see a similar mix of power and flexibility in a broader discussion of their relationship:

• The Treasury still controls the size of the Scottish Government: how much is raised in taxation then passed on to the Scottish Government, and the extent to which the Scottish Government can borrow to invest.
• However, the Scottish Government has considerable power over how to spend its budget (particularly when compared with territorial governments in other countries).

When you put those statements together, you find some uncertainty about Scottish Government discretion:

• it has the power to spend, but most of it is effectively tied-up in existing spending decisions (although this would be true regardless of its power to raise money);
• it comes under partisan pressure to match Treasury decisions, particularly on higher NHS spending.

Further, the UK Government still makes the big decisions on how to deal with ‘austerity’ and, for example, how to reform social security spending.

In the next lecture, we can discuss how forthcoming constitutional changes may affect this relationship.