A Barnett Formula primer
PAUL Hutcheon’s report (Owen Smith: No to Barnett Formula, Labour Leadership Special, July 24) does not clarify the operation of the Barnett Formula, although Smith’s quoted comments are partly responsible. His comments relate to the Welsh situation – anyone wishing to follow that up could refer to the Holtham Report on Wales’ funding. Here, we concentrate on Scotland.
The formula was introduced in 1978-79 by the outgoing Labour government. With Westminster governments pouring extra money into Scotland in the post-war years to thwart the nationalist threat, by 1979 our per capita advantage over England on the comparable devolved services reached 20 per cent. That was not population-based. However, Barnett laid down that we should receive a straight population ratio of any year-on-year enhancement from central government that England received. That meant the extra we had received would be clawed back, thus: if England had funding of £100, ours would be £120. If England received five per cent, they would get £5. We would also get £5, but on our £120 that would be worth only four per cent.
When the Labour-led coalition came in at Holyrood in 1999, it would be a shock to them that our funding was depleted in that way – their solution over their eight years was to short-change local authorities, which caused a consequential 61 per cent increase in council tax. That increased funding, but the absolute effects of the Barnett Formula remained intact. So it is block grant funding that is relevant, not expenditure.
It follows, therefore, that Paul Hutcheon’s claim about Scotland building up a sizeable per-head spending advantage over English regions is suspect. Whitehall distributes money to English regions from the same UK taxation source, so in certain cases cuts may have occurred there. Another explanation could be immigration in England causing an increase in population, without a corresponding increase in funding.
Regarding Scotland’s extra tax powers from 2017, there are complications for Barnett. As the tax powers come in from Calman in 2016 and from Smith in 2017, the original tranche of associated tax proceeds would come off the block grant. So the tax we would have got in the block grant will come separately, with no change to the overall situation at that point. To the extent that we are in “credit” in per capita terms, Barnett would still need to operate until such time as we have per capita parity with England. The major question is: how accurate will the Scottish HMRC tax figures be? And when it comes to us increasing our rate of income tax to spend more, would England accept that?