HOW DOES THE BARNETT FORMULA ACTUALLY WORK?

How does the Barnett formula actually work?

The Barnett formula: an often argued but little understood part of the UK’s uncodified constitution. It seems unlikely that even Joel Barnett, the minister who invented it purely as a temporary measure in 1978, could have foreseen the nature of its impact on devolved spending when applied for such an extended period.

Simply put, when public spending changes, up or down, HM Treasury uses the Barnett Formula to determine how the majority of public spending is spread across England, Scotland, Wales and Northern Ireland - the so-called ‘Block Grant’.

This ‘Briefing’ will look only at how the Formula works and not the other ways devolved administrations are financed nor whether it is a ‘fair’ system.

Background

During the 1960s and 1970s the allocation of public spending for England, Scotland, Wales and Northern Ireland was negotiated each year. However, in the run-up to the planned 1978 devolution of powers to a Scottish Assembly, the Treasury needed a formula to allocate public spending to the proposed Scottish Assembly without the need for annual negotiations*.

The Treasury drew upon an earlier example, the Goschen Formula, which had been used from 1889 to 1959 for the same purpose and, like that formula, the new method was named after a minister, this time the then Chief Secretary of the Treasury, Joel Barnett.

Even though Scottish devolution fell through after a referendum in 1978, the formula was implemented for Scotland and then extended to cover Northern Ireland in 1979 and Wales in 1980.

The Formula

The formula itself is a rather simple multiplication:

Despite popular opinion, the formula does not take ‘needs’ into account, only population and each countries’ current devolution settlement, the so-called ‘comparability percentage’. Also, it only covers UK department spending; any additional funds granted to the devolved administrations are not covered by the Barnett Formula.

The formula is not set out in any legislation. It is an internal Treasury method which has become, over time, a convention and, in theory, can be changed by the UK Government at any time (although it is now embedded within the Scottish government’s fiscal framework agreement¹).

Comparability Percentage

The ‘Comparability Percentage’ represents how much a UK government department spends on a public service that has been devolved.

If the comparability percentage is 0% that means none of that particular public service has been devolved and 100% means fully devolved.

Each UK government department’s services is broken down, service by service, and an overall percentage for the department calculated. Some, such as Education have a 100% comparability percentage because they are fully devolved whilst others, like the Home Office which are only partially devolved, a fraction is calculated.

Departments where all the services are reserved, such as the Ministry of Defence, are excluded from the Formula entirely.

Population Proportions

These are used so that each administration receives the same changes in spending per person using the Office of National Statistics latest mid-year estimates.

Most times the proportion is the country’s size as a proportion of England’s but it depends on the UK government department’s coverage. For example, the Ministry of Justice has no powers devolved to the Welsh government, so when its budget is changed, Scotland’s population in proportion to England and Wales is used.

The Formula in Hypothetical Practice

Say at a future Budget, spending at the UK Department of Transport was increased by £250 million. When the Barnett Formula is applied, using the percentages established in the 2015 Spending Review, this would mean:

The final figure is the ‘Barnett consequential’; the formula is applied to each of the departments in turn, the ‘consequentials’ are totted up and the ‘Block Grant’ adjusted accordingly. The devolved administration can then use the ‘Block Grant’ as they see fit within their devolved powers.

To Barnett or not to Barnett?

The Formula is a classic example of how the UK’s political system works: a temporary measure that has become permanent one. It has become an integral part of the system of devolution that binds the UK together into a ‘fiscal union’. Whenever adjustments are made to the financial side of devolution, the Barnett Formula is used as the basis for any negotiated change.

In practice, the formula has always provided a baseline figure which is then shaped by political circumstances. Scotland, Northern Ireland and Wales have received, at different times, non-Barnett related boosts to their funding according to ‘special circumstances’, whatever that might be chosen to mean.

The Barnett Formula was, is and will remain an imperfect method for allocating public spending across ‘These Islands’. Successive reviews of the Barnett Formula have concluded that a ‘needs based’ solution would be more appropriate² – but the challenge of engineering such a solution appears to be one nobody has yet been willing to take on. Furthermore, when or if that change happens, and for that to be a success, knowledge of how the Barnett Formula actually works as opposed to what some believe it to be, will be essential.

[For further information about the impact of the Barnett Formula in practice, read the separate briefing “What is the Barnett Squeeze?”]

Notes

* Clarification: as posted in the comments below by Prof Jim Gallagher (who was there at the time): "The plan in 1978 was to replace Barnett post-devolution with a Needs Assessment"

1. The agreement between the Scottish government and the United Kingdom government on the Scottish government’s fiscal framework
    
2. “There have been frequent calls for the Barnett formula to take greater account of need, or to be replaced with a needs-based formula. In 2010 the Holtham Commission, which considered funding for devolved government in Wales, recommended that a need-based formula should determine the block grant. After considering devolution in Scotland, the Calman Commission recommended in 2009 that the block grant should be justified by an assessment of need. Lords Committees in 2009 and 2015 recommended replacing the Barnett formula with a needs-based formula. Similar recommendations were put forward by the House of Commons Justice Committee in 2009 and by other Parliamentary committees in the past.” – House of Commons Briefing Paper

Additional Reading

Matthew Keep, ‘The Barnett Formula’, House of Commons Library Briefing Paper, No. 7386

David Torrance, ‘Nationalists should be careful what they wish for’

Edmund, Conway, ‘Everything you never wanted to know about the Barnett formula’