Cipfa believes as independent commission should be established to develop a fair means of allocating UK government resources
Despite the recent vow made by politicians in Westminster, it remains an uncomfortable political fact that the Barnett formula is outdated and needs significant reform.
Continuing its use to deal with devolution from central government to the nations of the UK or even to the English regions in the next parliament just isn’t feasible. It feels a little like HMRC using the Domesday Book to collect income tax.
However, because of the profile of the formula and the trust placed in it by parts of the UK, changing the mechanism, as it becomes increasingly unworkable, will require significant transparency and engagement. Indeed, Barnett has become totemic of wider wealth and economic inequalities within the UK and this only adds to the highly contentious nature of the issue, especially if trying to achieve a shared evidence-based analysis of the mechanism.
In the run-up to the independence referendum, the vow of the three UK party leaders to the Scottish electorate to share “resources equitably across all four nations” while simultaneously promising “the continuation of the Barnett formula” holds an inherent contradiction and is not achievable if tax-raising powers are devolved across all four UK nations and the English regions.
In fact raising new taxes probably renders the Barnett formula redundant in a way that policymakers have not yet thought through. Given the sanctity of the formula to many, reform will need clear and careful explanation to the public.
The Barnett formula was a temporary population-based measure implemented over 30 years ago to maintain the higher differential public spending per head between England and Scotland, Wales and Northern Ireland. It stipulates one-way movement whereby, while the overall budgets and spending per head are unaffected, any marginal changes in England are reflected in marginal changes to the block grant received by the devolved administrations.
The intention was that as marginal changes were compounded over a period of time the budgets of the four nations would converge. While the Holtham Commission produced evidence that there had been a level of convergence in Wales, which was accepted by the UK government, due to a lack of transparency and information, it is difficult to ascertain whether convergence, referred to as ‘the Barnett squeeze’, has in reality occurred.
The design of the formula means that a proportion of any additional resources in England are automatically passed through in unhypothecated block grant to Scotland, Wales and Northern Ireland. If an administration decides to use new devolved tax-raising powers, the block grant is reduced by the amount that would have been received for the area of taxation they are taking control of.
Any additional resource raised in the devolved nations through new powers will not then form part of the Barnett process, with the devolved administrations keeping any additional revenues or bearing any costs. The Barnett formula also takes no account of factors such as need or density even though over the years they have been cited paradoxically to explain the favourable treatment derived.
Critically as the devolution debate moves forward, the differential spending per head between the four constituent nations of the UK is on the whole maintained by Barnett, but it plays no role in the very different spending per head across different regions of England.
Without radically altering Barnett some parts of the UK could in effect be funded by the formula to provide tax cuts while others could face tax increases in similar contextual circumstances.
We need new thinking or some parts of the UK could well receive some of the tax resources raised from other regions while keeping all the proceeds of their own tax increases. This is not sustainable.
If political parties are sincere in their stated vow to share resources equitably across all four nations, the Barnett formula in its present form is unlikely to be workable. Instead of continuing on this path of increasing inequality Cipfa believes that an independent commission should be established to develop and oversee a fair and transparent means of allocating UK government resources that reflects population, need and factors such as density.
In these circumstances Cipfa would also encourage implementation of similar fair and transparent approaches within England, Scotland, Wales and Northern Ireland to distribute the funds received by each devolved part of the UK.
Devolution should not stop at Edinburgh, Cardiff, Belfast or London, and powers should be allowed to flow to a local level where appropriate. We also believe that the allocation of funding for such local devolution should follow the same principles as for devolved governments, and similarly be de-politicised wherever possible by being overseen by a new and independent body.
Rob Whiteman, chief executive, Chartered Institute of Public Finance & Accountancy