The Regional Distribution of Public Expenditures in the UK : An Exposition and Critique of the Barnett Formula

The Barnett formula allocates public funds to Northern Ireland, Scotland and Wales for those parts of the budget that are administered locally, by the relevant devolved authorities.1 The devolved authorities have discretion over the distribution of these budgets. The locally administered budget was previously the block grant, now the Department Expenditure Limit (DEL). The formula was put in place initially in 1979-80 in Scotland and two years later for Northern Ireland and Wales. However, the devolution process in the UK has significantly increased the level of scrutiny that the formula has been subjected to and has further fuelled the controversy surrounding its implications for each of the regions of the UK. This scrutiny is likely to increase in view of the likelihood of yet further devolution (among the English regions, although their own expenditures are not formula-driven) and of continuing pressures from some quarters for greater fiscal autonomy within the currently devolved territories. In this paper we provide a critical analysis of the operation of the Barnett formula. In Section 2 we explore the implications of the Barnett formula for regional government expenditure and expenditure per capita with the aid of some simple analytics. We then outline the history of the formula in Section 3. In Section 4 we discuss aspects of the “Barnett equilibria” that are implied by adherence to the formula and proceed to consider the determinants of the speed of adjustment to such equilibria in Section 5. In each of these sections we provide a brief discussion of the relevant and, as yet limited, empirical evidence on the likely economic impact of the Barnett formula. In Section 6 we briefly review the debate over the likely future of the Barnett formula. Finally, we present our conclusions in Section 7. While our focus throughout is primarily on Scotland, similar analyses would hold for Wales and Northern Ireland. Furthermore, we seek to provide a wider European perspective at appropriate points in the paper