Everything you never wanted to know about the Barnett formula

Everything you never wanted to know about the Barnett formula

A few myths about the controversial Barnett formula

1. The Barnett formula is what’s responsible for higher public spending in Scotland, Northern Ireland and Wales

No – it has been Westminster policy to spend more on public services in non-English UK regions for well over a century, since Chancellor George Goschen introduced a similar rule in 1888. However, as the 20th century wore on, regional spending was seen as being prone to manipulation by individual cabinet members. In the 1970s, amid concerns that Scottish secretaries were extracting excessive spending north of the border, the Treasury attempted to depoliticise such decisions. The result was the Barnett formula – named after the Labour Chief Secretary to the Treasury, Joel Barnett.

Joel Barnett
Joel Barnett, Chief Secretary of the Treasury in the late 1970s

2. The formula is designed to ensure Scotland, Northern Ireland and Wales always have higher public spending than England.

Well, kind of. Under the formula, an extra pound of spending on public services per person in England (including, but not limited to, health, education, social protection and transport) should lead to a £1 increase in spending in the other parts of the UK. But while this makes it sound like the gap between the two regions should remain constant forever, there is an economic illusion at play. Because of inflation, the spending power of a pound will diminish over time. So while the cash disparity between the regions should remain constant over time, the actual real difference in spending should narrow as time goes on. This is what has become known as the “Barnett squeeze”.

3. So Barnett has actually caused a narrowing of the spending divide between Scotland and the rest of the UK?

Actually… no. Despite the Barnett squeeze, a quirk in the way the formula is calculated means the disparity in spending on public services between Scotland and the rest of the UK remains comparable to the levels when the formula was first, well, formulated. In the 1970s there was a gap in identifiable spending between Scotland and England of 22%. Today, the gap between Scotland and the UK as a whole is around 21%, according to the IFS – though it adds that the gap between Scotland and England (as opposed to the UK as a whole) is likely to be even higher than 22%.

The reason? Scotland’s population, which has not risen as fast as in the rest of the UK: the formula tends to be based on out-of-date population projections, meaning Scotland’s share of the spending pie gets divided between a comparably smaller number of people than England.

4. Because of the Barnett formula, Scotland always receives a subsidy from taxpayers elsewhere in the UK

This may well have been true in the mid-1970s, but it hasn’t been the case for most of the past couple of decades, for a simple reason: North Sea oil. Thanks to Barnett, Scotland receives more public spending than the UK average. However, thanks to North Sea oil, it generates more taxes than the UK average. In four of the past five years, Scotland’s total share of UK public spending was lower or equal to its total share of UK taxes.

According to an alternative calculation, from the Centre for Economics and Business Research, Scotland’s net subsidy from the rest of the UK in 2010/11 was a big fat zero.

That being said, oil revenues are volatile. For instance, in the most recent year for which we have figures (2012/13) overall spending in Scotland was £1,256 per head more than the UK as a whole. Its tax revenues were £789 higher than the UK average, meaning a net subsidy of £467 a head. This underlines why Scotland is reliant on North Sea oil revenues remaining strong in the coming years. If they don’t (and the OBR thinks they are on the way down), an independent Scotland would have a higher deficit than the rest of the UK – in order to support that bigger spending bill.

5. The Barnett formula isn’t about oil: it’s about getting public spending to where it’s needed most.

Not really. Well, you’re right that it certainly isn’t about oil. But nor has it ever strictly been about assessing the needs of those in the regions (and apportioning spending accordingly). Barnett was really primarily aimed at maintaining and managing (see 1 and 2) the gaps in spending that existed in the 1970s. If one were to examine public spending and try to apportion it based on need (eg social outcomes, levels of deprivation) the formula would probably look very different. A few years ago, the Holtham Report found that the Barnett formula was responsible for giving Scotland more spending than it needed. It calculated that Scotland really only needed 5% more public spending than the national average – as opposed to the circa-20% it gets. Then again, that report was produced by the Welsh Government, which has long felt hard done by by the formula.