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On 15 March 2023, the House of Lords is scheduled to debate the following question for short debate:

Lord Shipley (Liberal Democrat) to ask His Majesty’s Government what assessment they have made of the relevance of the Barnett formula in the distribution of public spending across the UK.

This article provides an overview of how the Barnett formula operates, changes made to the formula, and proposals for its reform. Information and research on the role of the Barnett formula in total public spending in each of the four UK nations can be found in:

1. The Barnett formula

1.1 What is the Barnett formula?

The UK government allocates funding grants to the devolved administrations in Scotland, Wales and Northern Ireland. The largest of these grants is the block grant. The Barnett formula calculates how the block grant changes each year. It does not determine the total size of the block grant, just the annual change. The UK government provides other grants outside of the block grant, but the Barnett formula does not determine their change.

For devolved services, the Barnett formula aims to give each country the same pounds-per-person change in funding as the equivalent UK government spending. For example, if spending on education in England increased by £100 per person, the devolved administrations’ funding would increase by £100 per person. However, the devolved administrations can choose how they spend their funding. If the Barnett formula is applied to additional spending on education in England, it does not mean the devolved administrations have to spend the newly allocated funding in the same area. The Barnett formula only applies to public services that are devolved.

The UK government can make changes to the block grant of a devolved administration without applying the formula. This process is sometimes referred to as the ‘formula bypass’. Examples include the funding for city deals, which has been allocated directly to the devolved administrations, and the £1bn funding provided to Northern Ireland as part of the 2017 confidence and supply agreement between the Conservative Party and the DUP.

In theory, the formula should, over time, lead to a convergence of public spending per head across the four nations in the UK. If it is applied strictly, cash changes in per-person spending would be equal. However, the devolved nations have a higher base of public spending per head, therefore an equal per-person amount of extra money represents a smaller percentage increase for the devolved administrations. This effect is sometimes referred to as the ‘Barnett convergence’ or the ‘Barnett squeeze’. However, it is hard to determine the extent to which this is occurring and there are some factors which may slow or stop this from happening. Formula bypass is one factor which is thought to slow convergence.

The Barnett formula is not statutory; it is Treasury policy dating back to the late 1970s, and is laid out in the department’s ‘Statement of funding policy’. The devolved administrations are consulted on the statement. However, in theory, the UK government can determine how the formula is used or changed.

Alongside the statement, the Treasury publishes a ‘Block grant transparency’ (BGT) policy document. The BGT provides a breakdown of block grant funding for the Scottish government, the Welsh government and the Northern Ireland executive. It also details the impact of newly devolved taxes on the block grants.

The statement is usually updated every few years and is often published alongside the UK government’s spending review. The statement and BGT were last updated for the 2021 spending review.

1.2 How is the formula calculated?

The Barnett formula takes the annual change in a UK government department’s budget and multiplies it by two figures:

  • Comparability percentage: This measures the extent to which a UK government department’s services are devolved. It captures the extent to which spending by a UK government department corresponds to services provided by devolved administrations. Comparability percentages range from 0% to 100%: a department’s comparability percentage is 0% if none of its services have been devolved and 100% if all of its services have been. For example, all the Department for Education’s spending is in England, therefore education has a comparability factor of 100%.
  • Population proportion: This calculates the relative population proportions so that each administration receives the same pounds-per-person change in funding. The population proportions depend on the coverage of the UK government concerned. In most cases this is England only, so the proportion of the English population is used. The latest mid-year population estimates from the Office for National Statistics are used.

The calculation is carried out for each UK department and the amount reached is added to the devolved administration’s block grant.

Adjustments are made to the Barnett formula for both Northern Ireland and Wales. Changes to Northern Ireland’s budget determined by the formula are reduced by 2.5%. This is because the Northern Ireland executive does not require funding for VAT expenditure because it is refunded by HM Revenue and Customs. Wales’s formula includes a ‘needs-based’ factor to ensure its relative block grant funding per head does not fall below a specified percentage of England’s (see section 2.2).

The Barnett formula is mainly used at spending reviews, where the UK government sets UK government department budgets for the medium-term. The Barnett formula uses the change in the department budgets to calculate the annual change in the devolved administrations’ block grants.

The UK government can make changes to its departments’ budgets outside of a spending review, such as at a budget. For example, it may fund a new programme, or increase or decrease spending on an existing programme. If the spending changes a department’s total budget, the Barnett formula would be used to calculate changes to the devolved administrations’ block grants. However, the formula is applied to the spending of the individual programme, rather than at the department level.

1.3 When was the formula introduced?

The formula was first used in 1978, for Scotland. It was introduced by and named after the then Labour chief secretary to the Treasury, Joel Barnett. It was extended to Northern Ireland in 1979 and to Wales in 1980. It was meant as a temporary measure to avoid annual negotiations on funding allocations between the UK’s nations. The formula was used to determine the level of UK government spending on public services in Scotland, Wales and Northern Ireland until 1999, when devolution in the UK was brought in under the then Labour government. Since devolution, the formula has been used in setting the block grants of the devolved administrations.

2. Changes made to the Barnett formula

2.1 Concerns raised

The way the Barnett formula operates has been largely unchanged. As referred to above, its aim is to remove the need for annual budget negotiations between the UK government in Westminster and the devolved administrations. The Institute for Government (IFG) highlights that the process gives some “stability and predictability” for devolved budgets because each year’s budget uses the previous year’s budget as a starting point. Also, the “lack of ringfencing” within the block grants means each administration can choose how it is spent.

However, there are criticisms about how the formula operates. These include:

  • The formula results in higher per-head funding in the devolved nations than in England. This is because the formula uses the previous year’s devolved budget, and the devolved nations started from a higher base of public spending per head.
  • Convergence is slowed by factors such as formula bypass, slower population growth and the frequency of updates to the population estimates used in the formula. Also, some commentators, such as the IFG, have highlighted that convergence is reversed during periods of low public funding. This is because if each nation received the same pounds-per-person reduction it would equate to a smaller share of the devolved nations’ relatively higher levels of funding.
  • Not enough account is given to relative socio-economic needs in each nation.

2.2 Introduction of a needs-based factor

One element of reform that has been implemented since the formula was first introduced has been the application of a ‘needs-based’ factor to Wales’s block grant.

The 2010 Holtham report examined funding for the devolved government in Wales. It found that if the Barnett arrangements remained unchanged, there could be significant underfunding of public services in Wales. It argued this by applying to Wales the needs-based formulae used by the UK government to allocate resources within England. It identified a potential gap in the funding provided to the Welsh government for public services, relative to what it would have received if its services were funded on the same basis as in England. The commission recommended a funding floor be introduced to prevent the gap widening. It estimated that Wales’s additional needs meant that its relative block grant funding per head needed to be around 114% to 117% of equivalent funding per head in England.

The UK government accepted the recommendation to adjust the application of the Barnett formula to Wales’s block grant. The UK government first introduced the block grant floor for Wales in the 2015 spending review. In 2016, the UK and Welsh governments agreed to implement a new funding floor that would apply from 2018/19. The funding floor added a needs-based factor to Wales’s Barnett formula. This is sometimes referred to as the ‘Holtham floor’.

Currently the needs-based factor is set at 105% of comparable funding per head in England, but the UK and Welsh governments have agreed that it will rise to 115% in the long term. The factor is currently lower (105%) as Wales’s relative block grant per head is greater than 115% at around 120% of England’s. Once Wales’s relative block grant funding reaches 115% of England’s the multiplier will be set at 115%.

3. Proposals for further reform of the Barnett formula

There have been several calls since devolution in 1999 for the Barnett formula to take greater account of socio-economic needs, with some recommending that the existing formula be replaced with a needs-based one. In Scotland and Northern Ireland, population is the only consideration of “need”. As mentioned above, the introduction of the ‘Holtham floor’ ensures Wales’s grant does not fall below a relative needs-based floor.

The 2010 Holtham Commission considered the grant block floor introduced in Wales an “appropriate minimal solution” because it simply prevented Wales from “falling further below the lowest of all the estimates of relative needs”. The commission had proposed a new needs-based approach to replace the Barnett formula that would have considered factors such as each nation’s level of income poverty, prevalence of ill health and share of school-age and retired people in the population. The 2009 Calman Commission, which examined devolution in Scotland, also recommended that the block grant be justified by an assessment of need.

Several UK parliamentary committees have agreed that the Barnett formula should be replaced with a needs-based system. For instance, House of Lords committees, such as the Committee on the Barnett Formula in 2009 and the Constitution Committee in 2015 and 2016, called for it to be replaced with a needs-based system that was overseen by an independent body. In 2022, the Constitution Committee said it “continue[d] to believe” the Barnett formula required reform “to introduce a fairer allocation of funding among the four nations”. It said that in the meantime, the Treasury’s statement of funding policy “merit[ed] a higher profile” and should be subject to greater parliamentary scrutiny.

The Welsh government has also called for a new relative needs-based system within a “comprehensive and consistent fiscal framework” that has been agreed by all governments in the UK. The Independent Commission on the Constitutional Future of Wales, which was established by the Welsh government, has called for an objective and transparent UK-wide process. In its December 2022 interim report, the commission said that the disruption caused by introducing a relative-needs system could be addressed by phasing it in over a long period of time. It concluded:

The objective of achieving an evidence based, independently verified and transparent process for allocating resources between the nations and regions of the UK remains essential and should underpin any proposals for constitutional change.

When asked in February 2023 whether it would review the Barnett formula, the UK government said it recognised that the system was not perfect but argued that it was “simple and efficient”. The government said the formula provided the devolved administrations with a “clear and certain outcome” and concluded that for this reason it had “stood the test of time”.

4. Recent adjustments to the block grant

While the Barnett formula has undergone little change, there has been some adjustment to the block grant because of the devolution of more tax and spending powers to Scotland, Wales and Northern Ireland. Adjustments have occurred where:

  • Taxes have been devolved. Block grants have been reduced because of the greater revenue-raising powers of the devolved administrations.
  • Welfare spending has been devolved. Block grants have been increased because of the greater spending requirements.

The block grant adjustments are intended to ensure that neither the UK government nor the devolved administrations are negatively impacted by the transfer of power.

Further information on the block grant adjustments can be found in the House of Commons Library briefing ‘The Barnett formula and fiscal devolution’ (11 July 2022).

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Cover image by Sarah Agnew on Unsplash.