Saturday, 5 August 2017

Barnett Formula: Keeping it Simple

My last (long and complicated) blog attempted to explain how the Barnett Formula affects the devolved nation's Block Grant funding over time. In particular it looked at the impact of different relative population growth rates and how the Barnett Formula has been applied in practice as opposed to how it was expected to work. So if you're interested in the how and the why of these dynamics, please read Calling Time on the Barnett Formula.

Free from the burden of explaining quite why all of these things happen, I wanted to take the opportunity to now write a simpler blog which simply demonstrates what happens under various circumstances in a way which I hope will be easier for the casual reader to digest.

My medium of choice will, of course, be the graph.

Simply put: annual application of the Barnett Formula increases each devolved nation's Block Grant by an amount calculated to give the same per capita increase to the devolved budget as that applied to England's comparable spend1.

To achieve this the formula therefore depends fundamentally on the relative population sizes and how they change over time - so to understand the Barnett dynamics we need to understand how these population proportions (devolved nation vs England) have changed over time.

This graph shows us that since Barnett was implemented in 1978 Scotland's population proportion has been consistently falling (because Scotland's population has been growing more slowly than England's) . Wales' proportion was stable through the 80s and early 90s and has only recently started to decline. Northern Ireland's actually grew slightly through the 80s and 90s and has stabilised more recently. These relative population growth differences entirely explain the differences we're about to see between the devolved nations when we model the impact of the Barnett formula over this period.

The next factor we need to consider is the actual nominal growth in spending in England in those areas where comparable spend is devolved. This is a hard number to get precisely right over such a long time period2 but for illustration purposes we'll use the actual annual growth rates for all public spending in "rUK" (where rUK = UK - Scotland)3. This matters because higher nominal growth accelerates convergence (and there were some high inflation years in this time-frame and nominal growth has clearly slowed dramatically in recent years).

The only other assumption we need is how much higher the (illustrative) devolved category spend per capita was for the devolved nation in 1978 when this all started. For illustration purposes I've chosen to use a fairly representative figure of 20%4.

So based on actual population changes and assuming the above nominal spend increases, we can now see how application of Barnett would affect that 20% premium in spend per capita over time for each of the devolved nations. Here's the graph:

The blue dashed line shows how "true" application of Barnett would have caused Scotland's spend per capita premium to have converged towards England's. Note that the uptick in recent years shows the premium is actually growing: this happens when absolute nominal spend/capita increases in England are small (as they have been) and Scotland's population proportion continues to fall5.

The solid blue line shows the benefit that Scotland achieved because "until 1992, the 1976 population estimates were used for the Barnett Formula"6, so "as applied" the Barnett Squeeze (which causes convergence in Spend per Capita between nations) was partially alleviated. As I said in my last blog on this topic: imagine the howls of grievance we'd hear if failure to apply the Barnett Formula as agreed had resulted in a 2.2% detriment to the Block Grant instead of a 2.2% benefit7.

The red lines show Wales. Because the population proportion didn't materially change between 1978 and 1992 the "true" vs "applied" Barnett Formula issue makes no material difference. What is clear is that simply because of the different trend in population proportion, Wales has seen a far more marked squeeze in Spending than Scotland.

The green lines show Northern Ireland. Because NI's population share was actually growing between 1978 and 1992 the impact of Barnett as applies (vs "true" Barnett) was to exacerbate the Barnett Squeeze. The Barnett Squeeze for NI is worse overall purely because of the different trend in NI population proportion vs Scotland or Wales.

So there we have it. The Barnett Formula was never intended as a long-term solution8 and - as I explored in my previous blog - there are strong arguments for changing to a system which is a) fairer between the devolved nations and b) fairer to the devolved nations insofar as there is a sound needs-based argument for maintaining per capita spend premia in some departments.

As I also argued last time: the easiest way to ensure spend is distributed based on need is not to devolve that spend so that e.g. social protection spend is allocated to individuals based on their need, not where they live.


1. This is a simplification; if you care for the more complicated detail see > Calling Time on the Barnett Formula

2. As the House of Commons briefing paper succinctly puts it: "it is hard to verify the extent to which the Barnett Squeeze is happening, largely due to a lack of comparable data". My previous blog Calling Time on the Barnett Formula provides a more detailed explanation of the complexities

3. This is mainly because I have these figures to hand and they're suitable for a realistic illustration. If one was so inclined one could dig out the England only figures, but that still wouldn't be giving us the spend just on departments which are devolved (which changes over time anyway) - this assumption is fine for illustrative purposes as it captures macro trends of inflation and general public spending policies. My rUK data series only goes back to 1981 (SNAP data), so for 1979 and 1980 only I simply assume inflation growth (inflation was high then: 13.4% and 18.0%).

4. In 1998/99 (the earliest year that GERS breaks spend out to this level) Scottish spend per capita on (the predominantly devolved areas) of [health + education + transport] was 20.1% higher than rUK.

5. Imagine the increase is zero: in this case neither England nor Scotland's absolute spend would increase, but because Scotland's poulation grows less quickly than England's, our spend per capita relatively increases

6. As per the House of Commons Briefing Paper, page 11 [and discussed in more detail in Calling Time on the Barnett Formula]

7. That being the impact of not updating the population proportions up to 1992

8. Because of my last blog and some happy happenstance, I have recently spoken with some people who were there and involved when the Barnett Formula was put in place. I think it's a fair sumary to say it was only ever intended as a short-term fix to avoid what were perceived as tedious department by department negotiations between the Scotland Office and the Treasury; the assumption was always that something better would be put in place within a handful of years.

For those who care about the spreadsheet mechanics, here's a snapshot of the "true" Barnett model


Anonymous said...

Why is the Barnett Formula needed and justified?

In this interview Nicola Sturgeon explains:

"In terms of the point about per capita spending, there are very good reasons, as anybody who knows Scotland well as you certainly do for that difference. We have a country where one in five of our population lives in our rural and remote community. I was Health Secretary for five years. It costs much more to deliver health services on an island or rural community than it does here in the centre of the city of Glasgow."

It costs a lot more to provide services in Scotland, because of the challenging geography.

When is she going to twig that after independence that same geography remains?

After independence we will either have to accept a lower level of services, a higher level of taxation, or all be herded into the Central Belt.

Drew said...

"It costs much more to deliver health services on an island or rural community than it does here in the centre of the city of Glasgow."

Scotland's population density is 67.2/km2 compared to Sweden 21/km2, Finland 16/km2 Norway 14/km2 and Iceland 3.1/km2.

The Scandinavian countries also have hundreds of islands like Scotland but our climate is milder.

The reason the former health secretary blamed geography is because that is more palatable than telling voters in urban areas like Glasgow they eat too much, drink too much, smoke too much, are more prone to commit crime or take drugs and don't pay enough tax!

Drew said...

I would like to challenge the myth that our geography prevents us from being able to adequately fund our public services.

If Scotland was an independent country we would be ranked 144 out of 233 countries and territories in terms of population density, which means we have about a middle ranked population density.

In fact the world's population density is 50 people per km2, so our 65 people per km2 is actually above average.

Population density has no direct link to economic development. Scotland's population density is higher than all of the Scandanavian countries put together, as well as half a dozen G20 economies including Canada and Australia.

By getting the powers of taxation over alcohol & tobacco, we can effectively & legally take on the alcohol companies & tobacco companies that cause so much harm to our health & well-being, which in turn puts a huge burden on our public services.

By getting control over the Misuse of Drugs Act in Scotland we can end the failed war on drugs which has seen drug-related deaths rise to record levels. Regulation & taxation can fund addiction treatment services instead of wasting billions of pounds every year putting addicts through the courts and in our prisons.

Kevin Hague said...

Drew - population density is one reason why compared to rUK it costs more per capita to deliver comparable services. The argument about whether we could afford that on our own doesn't rely on assumptions about population density, it's based on the simple fact that we know how much our economy generates in tax and what it costs to deliver public services so, to be independent and fiscally sustainable, something would have to give. is all.

Drew said...

'population density is one reason why compared to rUK it costs more per capita to deliver comparable services.'

SOME services will cost more to deliver comparable services to rural locations i.e emergency service call outs like police, fire, mountain rescue/coastguard and hospital treatment services to a more remote location.

But in rural locations, some comparable services will cost less e.g crime is lower, unemployment is often lower (compare Inverness's rate of 2% to Glasgow's 9%) and there are lower numbers of alcoholics, homeless people and drug addiction in rural locations.

Health and life expectancy is generally higher in rural locations due to less stress, more active outdoor lifestyles, less obesity, less fast food outlets etc.

So the cost of social work services, unemployment benefit, courts, prisons, police time and healthcare problems like long term sickness & illness, heart disease, cancer treatment may be less.

For example: Highlands & Islands Council area has a population density of 8 people per km2 but a funding deficit of £17 million.

Glasgow City Council area has a population density of 3,298 people per km2 but a funding deficit of £53 million.

My general point is many people assume we need Barnett funding because of population density (including Nicola Sturgeon it would seem). I don't believe that to be the case. It is as you say about making appropriate tax and spending choices based on need.

Drew said...

If the Barnett formula is reformed, we also need a wider review of tax and spending policy in the UK.

In my opinion the case for 'pooling & sharing' as it stands is failing and those on low incomes or at the very bottom have been suffering for decades, because there is an ever decreasing tax revenue available lost through lower tax rates and a failure to address the billions lost through tax avoidance in the UK's many overseas territories and Crown dependancies.

The gap between rich and poor has grown into a chasm and drug-related deaths are at their highest level.

The UK hasn't made a budget surplus since 2003 and has well over a trillion pounds in debt yet all this excess spending seems to be making the problem worse not better.

A damning report recently revealved the impact UK Government policy in the 1980s is still having to this day on poverty and mortality levels in Scotland

New research by Heriot Watt Uni estimates homelessness in the UK is going to double in the decades ahead

The UK has squandered the oil boom in the 1970s and 1980s giving tax cuts to the rich, Scotland's health inequalities are failing to improve despite Barnett while Wales and Northern Ireland have yet to see real economic growth and regeneration to rival their neighbours on both side of the Irish sea, nearly 20 years on from devolution.

There remains a large North-South divide in living standards in England and Brexit will likely make all of these economic problems much worse, not better.