Much of the Brexit-related talk has focused on the size of the money pie but, says Michael Keating, determining how it will be cut is just as important.
After Brexit, money currently spent on EU agriculture and structural funds will revert to the UK. These are the largest items in the EU budget so that the sums are important. The question has arisen as to how they will be distributed across the UK. Currently, the devolved governments do rather well in these fields.
- Agriculture: Department for Environment, Food & Rural Affairs, Northern Ireland Office, Scotland Office, Office of the Secretary of State for Wales, UK CAP allocations announced, 2013.
- Structural Funds: Department of Business, Innovation and Skills, Government sets out how the UK’s allocation of EU Structural Funds will be divided across England, Northern Ireland, Scotland and Wales, Press Release 26 March 2013.
These moneys are not part of the block grant that governs other transfers but are ring-fenced for agriculture and regional development programmes. There is some flexibility within these programmes. In principle, they are governed by European rules.
In practice, matters are more complicated. Like all public finance decisions, they are governed by a mixture of technical criteria, political bargaining and inertia. In both fields, there are de facto national quotas for each member state. A lot of haggling is required to square these with technical criteria and the balance shifts from one spending round to another.
Within the UK, a similar process is at work. The final decision is taken by the UK Government, again squaring these with the EU technical criteria. In the current round (running from 2014-20), the Government took the easy way out and gave each nation the same share of both agriculture and structural fund money as in the previous round, within a reduced overall budget (see sources for table above). This is typical of incremental budgeting and of the Treasury’s way of dealing with the devolved governments.
In the debate about how these moneys will be allocated after Brexit, some stakeholders have expressed fears that they will be distributed by the Barnett Formula, so that each nation will get only its population share. This is based on a misunderstanding. The Barnett Formula, which is used for most transfers to the devolved administrations, gives each of the devolved nations the same spending as in the previous round, increased or reduced by the change per head in England on the same services. So if England gets £10 per head extra for education, each of the devolved nations gets an additional £10 per head. The devolved nations do not have to spend that money (known as Barnett consequentials) on education but can spend it any way they like as it is part of their block grant. Cuts are distributed in the same way (generating negative consequentials)1.
The effect is to preserve relative spending levels, at least in the short run, as population numbers govern only the changes, not the whole transfer. In the longer term, if expenditure is increasing, then spending levels should converge – this is known as the Barnett squeeze. In practice, this has not happened, for a variety of reasons
[PDF]. It is well known that changing spending formulas is never a political winner as the beneficiaries will keep quiet and the losers will shout loudly.
If spending is falling, the Barnett squeeze is reversed. As cuts are expressed as a proportion of population figures and not of existing spending levels, the existing beneficiaries suffer less.
When new competences have been transferred to the devolved authorities, the practice has been to set spending at the existing level and then roll it into Barnett. So future spending changes (but not the initial allocation) are governed by population relativities.
There is a lot of argument about who wins and loses from Barnett. The Welsh have argued for years that they get a raw deal and have demanded a needs-based system.
In the separate system for allocating European agriculture and structural funds, however, there is no doubt that Wales benefits, as our table shows. So does Northern Ireland, while Scotland gains from agricultural spending and neither wins nor loses from structural funds. Other calculations suggest that Scotland is a net contributor to the EU while Wales and Northern Ireland are net beneficiaries.
If the present system for allocating these European moneys were rolled over after Brexit, the devolved administrations would keep their advantage, albeit probably of a smaller total sum. Cuts would be applied in the same percentage across the nations. The best deal of all for them, however, would be to ‘Barnettize’ the money. As in the first scenario, they would keep their historic relativities but any changes would be applied on a pound for pound basis per capita and each pound would represent a smaller proportion of their existing budgets. As the overwhelming probability is that these funds will be cut rather than increased, the devolved nations would face less severe reductions than under the present system.
Of course, the UK might decide to do away with agricultural support and structural policy altogether. It could use the money for deficit reduction. Alternatively, it could increase funding on other services, in which case, depending on the service, the devolved governments would get their Barnett share of the increase.
What would be bad for the devolved nations would be a decision to allocate future spending in agriculture and structural policy on the basis of population share alone. That is not Barnett and stakeholders are not helping their cause by suggesting that it is.
1 We need not, at this stage, get into the complications generated by the new Scottish tax powers.