Riding two horses on Barnett reform

Iain McLean examines the agreement between the Liberal Democrats and Conservatives to implement the Calman Commission proposals

The famous – although much misunderstood – Barnett Formula has governed the distribution of public spending across the UK for 40 years since the 1970s. Yet it is only in the last decade that devolution has provoked a growing and impassioned debate about how public spending is distributed. Politicians, commentators and the public are increasingly asking: who gets what, and is public money distributed fairly?

The Barnett formula is regularly attacked for allegedly over-rewarding Scotland, Wales and Northern Ireland at the expense of England. Territorial finance seems to be one of the key issues driving English dissatisfaction with the devolution settlement and the Union itself. Recent data from the British Social Attitudes Survey suggests that the proportion of people in England that think Scotland receives ‘more than its fair share’ of public spending has risen from one in five in 2000 to one in three in 2007. In reality, this is despite Barnett rather than because of it. Nonetheless, ‘Barnett’ gets the blame.

But Wales is different. Every authoritative survey since the Treasury’s half-suppressed Needs Assessment of 1979 has shown that, however relative ‘needs’ might be assessed, the current block and formula arrangements seem to be delivering less to Wales than it ‘needs’. Furthermore, the mathematics of the Barnett Formula are convergent. If Barnett were allowed to run undisturbed by politicians, in due course Wales would receive the same public spending per head as England, despite being one of the poorest of the UK’s twelve standard economic regions.

Thus the Welsh and Scots problems are different. Scotland has done very well out of the block grant; Wales has done badly. Scotland has a more robust tax base than Wales. The devolved parliaments in each country appointed a committee to study alternatives to Barnett. In Scotland, the Calman Commission, advised by an academic “Independent Expert Group”, of which I was a member, reported in 2009, and the UK Government has accepted almost all of its recommendations. In Wales, the Holtham Commission (the Independent Commission on Funding and Finance for Wales) is still sitting.

As the problems differ, so, unsurprisingly, do the solutions. Calman’s focus was on making the Scottish Parliament fiscally responsible. One of the fatal defects of devolution is not the centre taxes, but the periphery spends. To the Scottish Parliament and National Assembly, therefore, their block grant is like manna. It just arrives there on the ground: no effort is needed to pick it up. Accordingly, Calman’s central proposal is to cut the rate of UK income tax chargeable in Scotland by half, and force the Scottish Parliament into a mature discussion on tax and spend. Do we spend more, and therefore tax more, or tax less and therefore have to cut spending?

Calman also proposed the devolution of taxes on things that don’t move to Scotland, again in order to encourage the Parliament to make some serious tax effort. All parties in Scotland claim that they are in favour of something called ‘fiscal autonomy’. Calman has offered them that, and has started to force a grown-up debate on what fiscal autonomy would actually entail. It would entail grown-up attitudes to taxing and spending that, for all the many virtues of the Scottish Parliament, have not been seen at Holyrood since it started.

Calman did not discuss needs assessments at any length. It was obvious to all that Scotland would do worse under a needs assessment regime than it does now. By contrast, Holtham’s work to date has involved in-depth study of needs assessment. In December, Gerry Holtham and his colleagues threw a quiet bombshell into the debate. They first ran what economists call a regression model to determine what seems to influence actual expenditure on health, local government and schools in each local area in England. They found that:

“It is possible to replicate to a surprisingly high degree of accuracy the funding allocations of very complicated needs-based formulae using only a few key needs indicators. Over 90 per cent of the variation in funding for these public services across English sub-regions could be captured using a single equation with just two needs proxies.”

To determine the weights of each of these deprivation factors, or ‘needs proxies’, they extended the model to Scotland and Wales, again modelling the actual money available to spend on these services. They found that, using the actual allocations in place across the UK, public spending per head on these services for England, Scotland and Wales should be on the basis of the ratio 100:105:115. The Wales ratio is the same as that reached by other methods, which increases confidence in the method. The Scotland ratio is far below actual allocations, which is also true of other methods of attempting to judge relative needs. Any needs-based formula would lead to painful adjustments in Scotland – and probably also in Northern Ireland, although it was not in the Holtham model.

On a recent visit to Wales, Chancellor George Osborne said, “I would start with a needs-based assessment across the UK and that is a good basis for having a discussion on both funding and tax”. This is highly significant. It seems to indicate that the Conservatives are travelling in the same direction as the Holtham Commission. On the other hand, last week’s coalition agreement between the Conservatives and the Liberal Democrats committed to the implementation of the Calman Commission proposals It will not be easy for the new UK government to ride both of these horses at once.

Iain McLean is Professor of Politics at Oxford University. An earlier version of this article appeared in the Spring 2010 issue of the IWA’s journal Agenda.

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