The Barnett formula: for many years, no one cared about it. It sounded like something from 1066 and All That: “The Barnett formula. Choose to (a) Paint it in the style of Picasso; (b) Describe it in the language of Finnegans Wake; (c) Express it as a function of .” Now, though, in certain circles at least, it’s being widely discussed—if no more understood.
I recently chaired meetings held by the Chartered Institute for Public Finance and Accountancy at the Labour, Conservative and Liberal Democrat party conferences. The topic was how to revive the regions by removing the dead hand of the state. It was a provocative subject and created a lively debate among all the parties. Each had their own emphasis. For Labour, it’s about the northeast of England. For the Tories it’s the counties—Cambridgeshire, Hertfordshire, Kent—the most dynamic economic regions outside London. And for the Lib Dems it’s all about decentralisation—as a good in itself, as a process, not a means to an end. But all three parties identified two common enemies—London and Barnett (the formula, not the Labour peer, Joel, who died on 1st November at the age of 91.)
What’s the problem with the Barnett formula? It is seen as the basis for the apportionment of public spending between the nations and regions of the United Kingdom. So, if some region or nation is getting more money than yours, who gets the blame? Barnett, of course. All this is unfair. Barnett is not an allocation formula for all public spending. It is, rather, a much more modest thing—a formula for the allocation of changes in expenditure, whether growth or cuts.
It is certainly a crude formulation. When expenditure for England changes then automatically it changes for Scotland, Wales and Northern Ireland. A 2001 House of Commons Library research paper explained it thus: “There are three elements in the calculation: 1) The change in planned spending in departments in England; 2) The extent to which the relevant English departmental programme is comparable with the services carried out by each devolved administration; and 3) The population proportion in each country. Put simply 1 times 2 times 3 is the increased spending for each country funded by central government.”
Simple, really. And that’s the point. It was devised to be quick and simple. It was, after all, a political fix. Barnett, who was Chief Secretary to the Treasury in James Callaghan’s government, once gave a fascinating account of how it came to be:
“The Barnett formula… has nothing whatsoever to do with devolution… It was set up for a variety of reasons. First of all, for the need to recognise the spending levels between the various parts of the UK—population sparsity in Scotland, transport needs, needs because of relative ill health, rural needs for education and so on and industrial needs—but above all... as far as I am concerned, what happened then was that I first of all had to persuade Cabinet to agree a total level of public expenditure. Having got that agreement, to make life a trifle easier and have to handle only English departments, I then got Cabinet approval for what is now (not then) called a Barnett formula—the way public expenditure should be allocated and the changes in public expenditure should be allocated between England, Scotland and Wales—and they agreed that. Then I had a much tougher job of persuading departmental ministers to accept their budgets as I had allocated them. It was a bit easier; I could play one off against the other by saying, “You cannot have any more because it would mean taking it away from somebody else,” and they could not say anything about the allocation to Scotland and Wales because they, in Cabinet, had agreed it.”
It’s not a needs-based formula, it’s not scientific, it was just a blunt instrument to help with managing the spending round.
It left huge potential questions hanging. What is the right basis for allocating funding fairly across the UK? What should that be based on, and how should that be reviewed and revised? Barnett took a politician’s course to find a route through a potentially complex maze—he took existing, historic allocations for granted and looked only to the future. As he expressed it: “The Barnett formula set percentages of changes in comparable expenditure in Great Britain. That is to say, it would be 85 per cent for England, 10 percent of expenditure for Scotland and 5 percent for Wales.”
Those figures were based on comparative population share then and have been revised over time—though the 1976 census figures were used up until 1992. The future is a great resource for a politician. What’s the best thing to do with a problem? Obviously, solve it if you can. But if you can’t? Kick the can down the road. Time, as Groucho Marx observed, wounds all heels. Hold on and a present potential crisis may not actually crystallise. All advisors, myself included, have urged our bosses to address urgently an utterly defining issue, imploring them to use precious political capital on what we believe is urgent. All of us have been rebuffed and seen—after hours, days, weeks or months—our principals proved right. What is pressing in the silo looks different when you have the overview. Indeed, it seems to me that a key political skill is not knowing when to react, but knowing when not to.
That was Joel Barnett’s unacknowledged genius. Just think about it. Every 10 years since the 1960s we have had governments who have promised to reform pensions for a generation. A generation is at least 30 years. Every 10 years these guys try—and fail—to sort it. (I use the word “guys” advisedly, but so few pension reforms address the genuine issues of women that the Labour peer Patricia Hollis brilliantly, and doggedly, pursues.) In stark contrast, the Barnett formula lasted for 36 years before it received a serious challenge. That is a huge public policy achievement.
He did it by avoiding the fundamental question. But wouldn’t you have then? Just look at politicians dealing with something as nearly objective as you can get—house prices. There’s an actual market in houses, and real-time information based on real people’s choices. How hard is that to build into public policy? Pretty hard, it turns out. Every time a revaluation of property has come round it has been kicked into the future. And why? Because house prices move asymmetrically. Balham is up but Bolsover is down. It doesn’t fundamentally affect council tax yield—that is effectively capped by the government, so no area gets richer in usable resources. So what’s the problem? Relativities. Perceptions. Winners and losers. It’s a fundamental law of politics, articulated by Niccolò Machiavelli centuries ago: “There is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful in its success, than to set up as the leader in the introduction of changes. For he who innovates will have for his enemies all those who are well off under the existing order of things, and only lukewarm supporters in those who might be better off under the new.”
If it’s fixed, don’t break it. Or, as some shops say, “You break it, you pay.” And that is one of the secret laws of politics. For proof I give you, in descending order, the economy, employment, my hospital, my school, my road, my house, my life. Politicians mess them up at their own peril. The medics are right—first, do no harm. There is no political equivalent to the Hippocratic oath but we should understand the actions of politicians as though there were one—if harm is losing, avoid creating losers. Hence the Barnett formula.
So, what if there had been then—in 1978—a fundamental analysis of the fairness of existing public spending? Well, it would have opened the question of need. And what is need? That is the question around which all discussions of Barnett dance. In 1978, the Labour government decided not to open Pandora’s box. The existing distribution of public spending was assumed to be right. And it was assumed that any distortions could be sorted out over time.
So, we come to the present day. The patterns of spending are, apparently, stark. In 2012/13, the last year for which figures are available, public spending in England was £8,676 per head. In Scotland the equivalent figure was £10,327, in Wales it was £9,877 and in Northern Ireland it was £ 11,064. Now, there are reasons for this. Scotland, for example has 1/13th of the population of the UK but 1/3rd of the land mass, as well as something like 80-90 per cent of the UK’s coastline. Scotland has some of the most remote rural communities in the UK and it is expensive to provide access to health and education on broadly the same terms as the rest of the country. It’s a form of redistribution—the price we pay for being British. These are all good reasons for higher spending, but they don’t deal with the point. A lot has happened since 1978. The Scotland of those days has gone—the old industries of iron, coal and steel gone. Car manufacturing, carpet factories and train building gone, too. Replaced by financial services and modern manufacturing, particularly in defence, science and the creative industries. The transition was harsh, and for some both unforgiveable and unforgettable, but it is over. Before the recession unemployment was lower and employment higher in Scotland than in the rest of the UK. According to the Office of National Statistics, in 2012 the highest earnings in the UK were in the Inner London West area, but the second highest were in the City of Edinburgh. This makes the Welsh particularly angry. They have had the same loss of traditional industry but they have not—with the exception of Airbus—experienced the same successful economic modernisation as Scotland. In truth, they do get a rough deal, as the Holtham Commission—the Independent Commission on Funding and Finance for Wales—has identified.
The system in which Wales is trapped is not, however, easily changed. For a long time Northern Ireland’s share was untouchable because of the Troubles; now change is unthinkable because the votes of Northern Ireland MPs may make a workable majority available to either side. As for Scotland, Barnett has long been a sacred cow because of the threat of an independence referendum. Now with the Scottish National Party riding high in the polls and threatening the prospect of a second referendum, Barnett is even more sacrosanct. This not good news for Wales—however good its case.
In addition there are the English regions. They look at spending per head in the home nations and they compare them with their own spending. Per capita spend in the north east is £9,582, in the north west it is £9,411, in Yorkshire and the Humber £8,758, the East Midlands £8,258, the West Midlands £8,645, the east £8,000, London £9,598, the south east £7,770 and the South West £9,582
This is to compare apples and pears—the distribution of spending is the result of decisions by the UK government and their departments. Any ire should be reserved for them. Anyway, the populations of Wales, Scotland and Northern Ireland combined are so small—eight million, just 12 per cent of the UK’s total—that abolishing differences in per capita spending would bring nugatory rewards for England, though a sense of injustice would be responded to.
But what is justice in public spending? As I mentioned before, London is as much a villain in the eyes of the rest of England as Scotland. Look how wealthy it is, the English regions cry, and look at how much money is spent on transport in London. On the face of it, that is a strong argument. But consider this: the population of London is eight million now and heading for 10m. Also, two-thirds of all rail journeys start or finish in London with a third taking place entirely within London. The case for CrossRail and CrossRail 2 looks different from that perspective. Yes, London is rich, the case goes, but its global connectivity makes the whole of the UK rich. Anyway, there are deep pockets of deprivation in inner London and now, increasingly, in the outer suburbs. And London contains half of the UK’s total black and Asian population.
This latter point gets to the vexed question of what needs are. Is fair funding the same per capita everywhere? Or do some populations generate extra demands? We can all agree that a large number of children put additional pressure on education services. And that a lot of pensioners will make greater demands on the National Health Service and social care. But what about people with disabilities? Or communities for whom English is a second language? Or working-class households in social housing who we know have worse health, lower educational attainment and poor job prospects? Many, indeed, are the needs—and I have started only with those that are well recognised and relatively easy to identify. And what weight do we give them? Are they equal?
Decisions on what is a need, and what is not, are, in the end, political. Rob Whiteman, Chief Executive of the Chartered Institute for Public Finance and Accountancy, is fond of saying that in looking at the formula for local government funding Conservative politicians argue for transparency and simplicity and Labour ones for transparency and need. You see, simplicity favours counties—which are broadly Tory—and complexity favours urban areas, which are not. In the end, change normally comes slowly because of the fact that winners rarely thank you but losers always shout loudly. In truth, it is also because underlying public spending there is bipartisan agreement that equalisation is an important principle—poor areas shouldn’t get poor services just because they have a low tax base. It leads to some pinch points. Money is slow to move to areas of high population growth. But there’s a logic to that too. Growing areas have accompanying economic growth, while ripping money away from declining areas too rapidly just makes a hard task of local management worse.
It’s not just taxation that requires the skill of “plucking the goose as to get the most feathers with the least hissing,” as Jean Baptiste Colbert put it—it turns out that spending does too. The devil is not just in the detail, it’s in the the transition to a new system, too. After all, Barnett is in the long run broadly a formula for transition. But a highly pragmatic one. As devolution in England takes place—and it will—there will be no uniformity. London will get more powers, but so will the London boroughs. Manchester will have a maximalist package, and Cornwall a lesser one. The greatest powers will go to those who have the greatest confidence. But with rights come responsibilities. And powers to deliver will, increasingly, be matched by powers to raise revenue. All discussions of this assume that, in some way, there will be the existing settlement plus extra cash. This isn’t true. Block grants—for the nations and for local government—will be reduced to match revenue raising powers. In this way, risk will be devolved. And Barnett will gradually be eroded—pragmatically and over time.
This is not some weak-willed, line of least resistance position. It is the greatness of Britain that England has no nationalism. And it is to England’s credit that it has never exerted its power over the other home nations. The pollster Peter Kellner has described this as a “Burkean” pragmatism. We should embrace it. England bends because otherwise Britain would shatter.
