Why we shouldn't lose sight of the Barnett Formula

While the political temperature is rising over the fiscal framework negotiations, let’s not forget the Barnett Formula.

The fiscal framework is a key element in the devolution of income tax to Scotland. It should establish a mechanism for ensuring the ‘no detriment’ principle outlined by the Smith Commission.  Negotiations have been taking place for months between John Swinney, the Deputy First Minister and Greg Hands, the Chief Secretary to the Treasury. The details have been kept largely confidential although we can guess at the difficulties given Professor David Bell’s presentation at Holyrood and the IFS analysis.

The political rhetoric went up a gear today with Labour claiming Nicola Sturgeon has created an “artificial deadline” of 12 February and is intent on crashing the process for electoral gain. Ian Murray MP said: “Without full transparency, it would appear to the Scottish people the SNP Government is looking for an opportunity not to implement the Scotland Bill because it’s not in its political interests to have the powers to create one of the most powerful devolved parliaments in the world". In essence, Labour believes that by delaying the fiscal framework, the SNP won’t have to face up to the responsibilities of taxation before the election.

I don’t doubt the attractiveness to the SNP of a political strategy that simply focuses on ‘Wicked Westminster’ and allows us all to believe that we can have decent public services without difficult conversations about taxation - Scandamerica as I like to describe it. However, that doesn’t mean that there aren’t real risks in getting the fiscal framework wrong. Colleagues at the Reid Foundation have discussed these in a working paper, but as there is to be a revised paper shortly I will leave it at that for now.

An important part of the Smith Commission agreement was that the Barnett formula would be retained. In Saturday’s Scotsman Brian Wilson argued that we have much to thank it for. He said:

“The key to Scotland’s relative wealth and higher earnings is our old friend the Barnett Formula. This year, it provides Scotland with around £10 billion more for devolved spending than we contribute in taxation – equivalent to one-third of the Scottish Government’s entire budget and almost equal to total NHS spending.”

Historically, he has a strong point.  It means we spend £1,600 per head more than the average in England or about £8 billion. However, will the Barnett Formula continue to deliver in future?

A colleague in London recently got me thinking about this when he drew my attention to the impact changes in the way local government is funded in England is having on the Barnett Formula. In the 2010 and 2013 spending reviews the Barnett comparability percentage for Local Government was 17.3%, but in 2015 this was changed to 100%. This is mainly down to Non-Domestic Rates payments being devolved to councils 

In England, the Local Government budget is being cut over £6bn in the period to 2019/20 and the plan is to end the rate support grant in England by 2020, with further negative consequences for the Barnett formula. This year’s impact on the Barnett formula was more than £80m as shown in this table.

This isn’t a new problem. Since the privatisation of the water industry in England, Scotland hasn’t had any Barnett consequentials. This has rarely been significant because there is no real revenue support for Scottish Water – the main benefit of public ownership financially is cheaper borrowing. 

The same can’t be said for Higher Education. The reliance on tuition fees in England means negative Barnett consequentials because our universities don’t have that income flow and therefore UK government has been able to cut their contribution to the additional costs.

It’s not necessarily all one way.  As I pointed out in my analysis of the Draft Budget, there is a plan to devolve Attendance Allowance (AA) to English councils. When free care for the elderly was introduced the Scottish Government argued that they should get the savings this policy created for AA. Unsurprisingly, the Treasury said no. However, if they devolve this funding there should be Barnett consequentials of some £500m, although it will depend on how that is accounted for in English budgets.

All of this is because we made different choices in Scotland and that of course is what devolution should be all about.  However, that is the potential problem with the Barnett Formula as we go forward. In simple terms, with Barnett we are tied, financially at least, to English public service reform. With a Tory strategy of slashing the size of the state, this has serious consequences for long term funding. 

Which takes us full circle to the fiscal framework. The advantage of controlling more of our own taxation is that we are less beholden to Tory policies in England. So, yes of course we need to get that framework right, otherwise it could be a double whammy. However, it also means we need to have grown up conversations about taxation in Scotland and that appears to be equally challenging.