What is the significance of the Barnett formula announcement?

Published: 17 September 2014
Author: Paul Cairney

Paul Cairney analyses 'the vow' made by party leaders on greater devolution and the maintenance of the Barnett formula and asks what impact this will have on the rest of the UK,

On the front page of today’s Daily Record, the three UK party leaders made ‘The Vow’ – to support a timetable for greater devolution and to retain the Barnett formula. For people who have been predicting the demise of the Barnett formula for years, this must seem like an astonishing move. For people calling for an end to the formula, as a symbol of financial advantage to Scotland, it must seem like a crushing blow. For others, less acquainted with the technicalities of public finance, the significance of this move must seem unclear. Yet, for each audience, the message is simple: they will protect the current way in which Scotland receives its budget, and promise further devolution, then deal with the rest of the UK later.

While the promise of further devolution is still unclear, the maintenance of Barnett represents a strong message of intent. To understand why, let’s consider what the formula appears to be designed to do.

The Scottish budget, transferred by the UK Treasury, comprises two elements: an initial block settlement based on historic spending in Scotland, and the Barnett formula, to adjust spending in Scotland in line with 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, in the 1970s, 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.

One 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 Scottish Government can decide if it will follow the UK lead.

Perhaps more importantly, a reference in the current debate, to ‘Barnett’ is a shorthand way to describe Scotland’s current budget settlement. By agreeing to maintain Barnett, the three parties leaders want to convince people that the Scottish Government will not be cut dramatically after, for example, a ‘backlash’ in the rest of the UK. Rather, the formula will, in theory, reduce Scotland’s financial advantage over a much longer period, as increases in the budget for England produce ‘consequentials’ for Scotland according to its population share, rather than protecting its initial higher levels of per capita spending. Or, as has been the case before (and, to some extent, after) devolution, the UK Government might find ways to ‘bypass’ the formula to provide additional funding to Scotland. Either way, the aim is to assure people that the onset of austerity will not have a dramatic effect on the Scottish Government budget, and that key services in health and education will not face radical changes.

Until the referendum vote, all eyes will be on the reaction in Scotland to this ‘vow’. Yet, it seems inevitable that our attention will shift, eventually, to the ways in which the rest of the UK reacts to these promises. Previously, the advantage to Barnett was that it seemed to satisfy two audiences: the Scottish audience, by promising not to reduce Scotland’s budget dramatically; and, the English audience, by promising that Scotland’s advantage would be eroded over decades.

Yet, this week, only one audience seems to count. Scotland’s advantageous public spending position (compared to Wales and many English regions) will be protected, at least in the short term, and Scotland will receive more powers to tax, borrow and spend. There appears to be no prospect for a UK-wide constitutional convention or a UK-wide ‘needs based’ exercise. In effect, the No campaign has been based on the idea that, in the UK, we are all in this together. Yet, to win the referendum, it has to accept that any promises given to Scotland will be at the expense of - at least one part of - the rest of the UK.