Funding devolution: The Barnett formula in theory and practice

Since March 2020 an extra £19 billion has been sent from the UK Treasury to the three devolved nations to tackle Covid. A total of £9.7bn more has gone to Scotland, £5.85bn to Wales and £3.3bn for Northern Ireland. This is on top of the £67bn originally allocated to the three devolved administrations for the 2020/21 financial year. A further £4.7bn, including £2.6bn for Covid, is promised for 2021/22.

This report shows how the Treasury calculates changes in the annual budgets of the governments in Scotland, Wales and Northern Ireland, and argues that the Barnett formula now shares out public spending in a way which is hard to justify and that it should be replaced.

The pandemic has exacerbated frustrations about the formula in Edinburgh, Cardiff and Belfast. With the UK government releasing additional funds only when it spends more in England, the devolved administrations complain that waiting for Westminster has made it harder to plan their own pandemic responses. Westminster’s power to bypass Barnett is also causing tensions, as shown by the fallout from the announcement that the Treasury will run the £4.8bn ‘Levelling Up Fund’ for all four UK nations, and over the UK Shared Prosperity Fund.

Barnett also produces lower-than-average (in the UK) public spending in poor English regions such as the Midlands and Yorkshire. The formula does not fully take into account different rates of population growth, and as the populations of Scotland and Wales have grown more slowly than England, the level of spending in those nations has outstripped their needs. Scotland receives funds for public services that is 29% above the level in England in per capita terms, even though Scotland is wealthier than most regions of England. Spending per person in Northern Ireland is also 29% above England. In Wales the figure is 23%.

The Barnett formula should be replaced by a system that shares out resources in line with a clearly stated set of funding principles. However, as this would likely lead to a fall in funding for Scotland, the UK government is unlikely to risk this outcome with Scottish independence on the agenda.

To improve how the devolution funding system works, the IfG report recommends:

• greater transparency about levels of public spending
• clarity about when UK government decisions will give more to devolved nations
• independent reporting (for instance by the National Audit Office) on how the system works
• a joint commission to analyse the relative spending needs of each part of the UK.