BARNETT FORMULA IN WALES

Barnett Formula in Wales

Introduction

There is growing academic and political debate across the UK concerning the implications of retaining the population-based Barnett formula as the mechanism for allocating changes in public expenditure to the devolved administrations. The formula funding system is internationally unique and was designed to relate incremental changes in expenditure in Scotland, Wales and Northern Ireland to the expenditure margins which existed in 1978 between these countries and England. The system was essentially devised to suit a context whereby fiscal relationships between the UK nations and regions were inter-departmental in nature. With the development of democratic as opposed to administrative devolution, these transfers have become inter-governmental in nature and thus exposed to much greater scrutiny.

Independent Commission on Funding and Finance for Wales has identified the importance of exploring more fully the relative merits of the Barnett formula for Wales. The Commission's terms of reference are to:

look at the pros and cons of the present formula-based approach to the distribution of public expenditure resources for he Welsh Assembly Government;

identify possible alternative funding mechanisms including the scope for the Welsh Assembly Government to have tax varying powers as well as greater powers to borrow.

The fundamental objective of this report is thus to provide an overview of the literature on the operation of the Barnett formula as it relates to Wales. More specifically, it aims to provide:

a brief history of the Barnett formula's operation in, and outcomes for, Wales;

a detailed review of the evidence on the relative advantages and disadvantages of the formula in allocating funds to the devolved regions of the UK, with a particular emphasis on the implications for Wales;

a review of the operation of the Barnett formula in the international context by making comparisons to existing resource allocation methods in other countries.

History of the Barnett Formula

The Barnett formula has attracted considerable attention and debate in recent years, but it is worth emphasising at the outset that it does not wholly determine the budgetary resources made available in Wales. The budget available to the Welsh Assembly Government is determined within a highly centralised framework of public expenditure review and control alongside departments of the UK government. The block grant (or assigned budget) is contained within the devolved administrations' Departmental Expenditure Limits (DELs). Annual changes to the DEL are calculated in accordance with a population-based formula (the Barnett formula).

In addition funds are allocated as Annually Managed Expenditure (AME), not calculated or varied according to changes in the Barnett formula. This covers various forms of funding passed directly to the devolved administrations, notably funding from the EU for agriculture under the Common Agricultural Policy (HM Treasury, 2007). In total, the devolved administrations on average account for between 50 - 55% of the total public spending in Wales, Scotland and Northern Ireland (see box 2.1 for further details).

The academic and policy literature on the Barnett formula is extensive and has grown exponentially with the post-1997 shift from administrative to democratic ...