Monthly Archives: May 2023

The UK Government allocates funding to Scotland, Wales and Northern Ireland in two ways: either by spending UK-wide, or by allocating funding to the relevant devolved administration. The Barnett Formula is the way the UK Government provides the devolved administrations with a share of any additional funding. While intended to ensure each nation receives the same ‘pounds-per-person’ funding, there are calls to introduce a new ‘universal needs-based’ factor into the Formula. How does the Barnett Formula work, and are changes needed? Jessica Sellick investigates. ………………………………………………………………………………………………..

What is the Barnett Formula – and where does it come from? The Barnett Formula is named after its founder Joel Barnett – a former Chief Secretary to HM Treasury in the 1970s who devised the formula in 1978. The Barnett Formula was first used in the 1978 Public Expenditure Survey to provide devolved administrations with the same ‘pounds per person’ change in funding as the equivalent UK Government spending. Until 1999 it was used to determine the level of UK Government spending on public services in Scotland, Wales and Northern Ireland. Since then it has been used to set the budgets of devolved administrations.  

In practice, it means if spending on health in England increases by £100 per person, the devolved administrations funding will also increase by £100 per person. This is intended to ensure that cash changes in public spending per head will be equal across all 4 nations. The Barnett Formula is only applied to public services that are devolved. 

The devolved administrations are able to spend the increased funding they receive as they wish – i.e., if the additional £100 in England is for health, there are no requirements for devolved administrations to spend their increased allocation on health. Additionally, the UK Government is able to make changes to funding without applying the Barnett Formula (known as a ‘formula bypass’), and it is not a statutory instrument.  

How is it calculated? Under the Barnett Formula, the Scottish Government, Welsh Government and Northern Ireland Executive receive a population-based proportion of changes in planned UK Government spending on services in England and Wales, or Great Britain. It therefore determines changes to each devolved administration’s funding with references to changes in departmental expenditure limits (DELs) within UK Government departments. Three variables are multiplied together to determine each devolved administration’s block grant under the Barnett Formula:

(1) The change in planned spending by UK Government departments X (2) the extent to which services delivered by UK Government departments correspond to services delivered by devolved administrations X (3) each nation’s population as a proportion of England, England and Wales, or Great Britain [as appropriate]. 

 Mid-Year population estimates published by the Office for National Statistics (ONS) are used, with HM Treasury notifying devolved administrations of the population proportions that will be applied in advance. 

The Barnett Formula is applied slightly differently between spending reviews and budgets. At spending reviews, the Formula is generally applied to relevant changes in overall departmental spending. At Budgets, the Formula is applied to changes in funding for individual spending programmes. 

Is the Barnett Formula in need reform? The Institute for Government (IfG) describes the Barnett Formula as a ‘mechanistic formula’ that helps depoliticise the process of setting devolved budgets; and removes the need for annual negotiations between the UK Government and devolved administrations. The IfG cites the stability and predictability of the approach as each year’s budget uses the previous year’s budget as a starting point. The lack of ringfencing also means devolved administrations can use the funding to meet their own spending priorities. 

In practice, the application of the Formula results in higher spending per person in the devolved nations compared to England. This is because using the previous year’s devolved budget as a starting point preserves historic differences in spending between nations. This results in devolved nations starting from a higher base of public spending per head. Yet devolved administrations have argued that their populations are sparser (making the cost of providing the same level of public services as in England higher); the size of the public sector varies across all 4 nations; and in some areas there are higher levels of demand and need for public services. According to the IfG, for example, Scotland receives funding for public services that is 29% above the level in England in per capita terms. Spending per person in Northern Ireland is also 29% above England; and in Wales the figure is 23%. 

The Welsh Government published two reports back in 2009 and 2010 [as part of the Holtham Commission] highlighting what it called the “Barnett Squeeze”. The Commission concluded that “the Barnett Formula lacked any objective justification and had survived for 30 years solely for reasons of political and administrative convenience. As a direct result of the formula, the relative funding per capita for devolved activities in Wales has converged markedly towards the average level of funding in England over the past decade for reasons that have nothing to do with the relative needs of Wales”.  

The Holtham Commission recommended a funding floor be introduced to prevent the gap widening. It was estimated that Wales’s additional needs would mean its relative block grant funding per head would need to be around 114% to 117% of equivalent funding per head in England. The Commission’s work resulted in the introduction of a ‘needs-based’ factor into Wales’s block grant.

The UK government introduced the block grant floor for Wales in the 2015 spending review. In December 2016, the UK and Welsh governments agreed to implement a new funding floor that would apply from 2018-2019. This funding floor added a needs-based factor to Wales’s Barnett formula. Currently the needs-based factor is set at 105% of comparable funding per head in England, but the UK and Welsh governments have agreed that it will rise to 115% in the long term. The factor is currently lower (105%) as Wales’s relative block grant per head is greater than 115% at around 120% of England’s. Once Wales’s relative block grant funding reaches 115% of England’s, the multiplier will be set at 115%.

In another instance, Northern Ireland’s budget determined by the Barnett Formula is reduced by 2.5%. This is because the Northern Ireland Executive does not require funding for VAT expenditure because it is refunded by HM Revenue and Customs.

The UK Government only releases additional funds when it spends more in England. During COVID-19 devolved administrations argued it was harder to plan their own pandemic responses or recovery planning as they had to wait for confirmation of additional funding from the UK Government.  

In 2022, the Constitution Committee said it “continue[d] to believe” the Barnett formula required reform “to introduce a fairer allocation of funding among the four nations”. And it said that the Treasury’s statement of funding policy “merit[ed] a higher profile” and should be subject to greater parliamentary scrutiny.

Does the Barnett Formula work for rural areas? The Independent Commission on Funding & Finance for Wales demonstrated how a needs-based formula was achievable. They set out three types of need with seven indicators: 

1. Demographics: a higher prevalence of school age, older people and certain minority ethnic groups will generate a higher need for public services. Indicator 1: under 16 dependency ratio. Indicator 2: retired persons dependency ratio. Indicator 3: percentage of population that is from a minority ethnic group.
2. Deprivation: individuals who are disadvantaged in various ways will have a greater need to access public services. Indicator 4: percentage of the population claiming income-related benefits. Indicator 5: percentage of the population with a long-term limiting illness.   
3. Costs: the cost of delivering public services tends to be greater in areas where the population is relatively sparse. Indicator 6: proportion of people living outside of settlements of 10,000 people or more. Indicator 7: inner London weighting. 

The Commission recognised it would be ‘necessary to decide how much importance should be attributed to each indicator’ and how ‘real funding decisions are based on assessments of need that have thrashed out over the years and reflect decisions that are the responsibility of elected officials’ (page 26). 

In May 2023, the Northern Ireland Fiscal Council provided an estimate of relative need for public spending in Northern Ireland. They also highlighted differences in population characteristics and socio-economic conditions such as sparsity and replicated the Holtham Commission’s work to show how minor changes in inputs can affect the overall estimate of relative need, concluding that the relative need for public spending in Northern Ireland is around one-fifth to one-quarter higher than in England. 

The population proportion (mid-year estimates) and comparability percentage (the extent to which services are devolved) in the Barnett Formula do not take account of sparsity, the unavoidable costs of providing services in rural areas, or the public services needs of rural dwellers. 

In relation to farm and fisheries support payments, the UK Government decided to make above Barnett Formula allocations to the devolved administrations to replace EU funding. For agriculture this includes providing £3.7 billion to support farmers and land managers in Scotland, Wales and Northern Ireland. This includes £85 million for the Scottish Government and Welsh Government as part of the recommendations of the Bew Review.  Known as the Intra-UK Allocations Review, it was chaired by Lord Paul Bew of Donegore, supported by a team of advisory panel members appointed by the Prime Minister after consultation with the devolved administrations. The Review were asked to make recommendations on the allocation of farm support ‘convergence’ funding between different parts of the UK for the financial years 2020-2021 and 2021-2022. 

Stakeholders responding to the Bew Review argued that population size and distribution across the UK should not have any influence over the allocation of farm support funding – indicating that agri-food products are processed and consumed in different parts of the UK. For the 2020-2022 period, the Review proposed modest changes in the allocation of funding to benefit those farmers challenged by difficult terrain which coincided with areas recognised by the EU’s external convergence formula. In a UK context these areas are predominantly in Scotland. For the period 2020-2022 they therefore recommended that the convergence funding budget be split according to the proportion of low per-hectare land in each part of the UK. The Review concluded that this would offer a means of retaining a link to the formula whilst also enabling the UK Government to take advantage of the opportunities afforded by leaving the EU. 

An extra £51.4 million was allocated to Scottish farmers for 2020-22 (on top of the one-off historic convergence uplift). The Government also said that to implement Lord Bew’s recommendations while making sure that funding allocations for farmers in England and Northern Ireland were unchanged, the UK Government would commit over £56 million of new money. This included over £5 million for farmers in Wales. The Direct Payment to farmers (Legislative Continuity) Act 2020 enabled the UK Government to implement this decision allowing Ministers to increase the overall budget for direct payments.

Because the Barnett Formula is HM Treasury policy and not part of any legislature, it can be changed or omitted at any time. While the broad framework has been in place since 1978, and some fiddling has taken place since 2015-2016 in a Welsh context, it is in relation to farm support payments that above Barnett funding has been allocated. This has led to wider calls for the Barnett Formula to be reformed to take greater account of socio-economic needs. When asked back in February 2023 whether it would review the Barnett Formula, the UK government said it recognised that the system was not perfect but argued that it was “simple and efficient”, provided the devolved administrations with a “clear and certain outcome” and that it has “stood the test of time”. Do we need to better understand what the Barnett Formula allocations mean for rural areas? And what are the implications of the Holtham Commission and Bew Review in shaping future formulae?     

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Jessica is a researcher/project manager at Rose Regeneration and a senior research fellow at The National Centre for Rural Health and Care (NCRHC). She is currently supporting the National Federation of Young Farmers’ Clubs and Lantra to gather the views of young people on what the future of farming should look like, and what they want to see in new agricultural and environmental policies. Jessica also sits on the board of a Housing Association that supports older people and a charity supporting Cambridgeshire’s rural communities. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk. 

Website: http://roseregeneration.co.uk/https://www.ncrhc.org/ 

Blog: http://ruralwords.co.uk/ 

Twitter: @RoseRegen