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Barnett formula 'couldn't survive devolution'

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The Barnett formula for funding Scottish public services could not survive in its current form if financial devolution took place within England, the chief executive of the Chartered Institute of Public Finance & Accountancy has said.

In an interview with LGC, Rob Whiteman said the formula would “no longer be fit for purpose” if combined authorities, regions or directly elected mayors were allowed to raise their own taxes.

“Devolved taxation will fundamentally change the ability of the Barnett formula to work,” he said.

“That [the Barnett formula] won’t work when England and the devolved administrations have got different tax-raising [powers] taking place in different regions because you could reach a situation [in which] one region is being subsidised to cut its taxes while another region is passing its tax increases to other parts of the UK while receiving nothing in return.”

This comes after the three main parties in Westminster committed to the continuation of the Barnett formula as part of the Scottish devolution deal.

“In the cut and thrust of the debate, the fact a mechanism might no longer be fit for purpose is fairly low down the pecking order,” Mr Whiteman said.

“But actually most independent commentators say, and Cipfa would say, you’re going to have to look at this because it will no longer be fit for purpose.”

Mr Whiteman thought an independent commission should be set up to consider what would replace the Barnett formula but added any review would need to be undertaken with great care and have regional as well as cross-party support.

He said: “Any review of it might be seen as an attack on particular regions in the country and I think we have to try to take the heat out of the debate and in a very objective way say: ‘Even if you wanted to produce the same outcome, the Barnett formula is probably no longer a fit-for-purpose mechanism to be able to achieve that.’”

Mr Whiteman said finding a solution to the problem was “not an impossible task” and added: “As things stand, the way we distribute money through the Barnett formula and then redistribute money in England through the local government settlement, I don’t think these can survive devolution because they manifestly are not fit for purpose.” 

When asked whether he was in favour of localising tax-raising powers, Mr Whiteman said: “I personally think the fact that central taxation is a bigger proportion of the taxes citizens of the UK pay than in any other country in the developed world is a problem.

“I think it’s a problem that holds back the development of our local institutions to be able to carry out as effective a job as they can.

“We are at the stage where poor delivery locally leads to even greater centralisation when actually the reason for suboptimal delivery is the over-centralisation that already exists. So we have got to now break out of the cycle.”

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