Devolition finance: The Barnett foumula

Derivation v Equalisation: A row over Scottish funding from the 1990s, Arnold Kemp, the Herald. It is interesting to note how the debate over funding has changed since then, I think. Jackie Kemp.

The long-standing principle of equalisation means that all revenues (except local government tax) are remitted to the centre. They are then allocated according to a formula that takes account of need, sparsity of population and so on. This system reflects the essential idea of the unitary state -- that all its citizens should have a similar expectation of services irrespective of the wealth of their region.

[Critics] assumes that a Scottish Assembly would be financed by a system of derivation rather than equalisation. Under this principle expenditure is related to revenue raised in a particular geographical area. 

To assign income tax in this way is a novel proposition in Britain. Indeed, few devolutionary schemes have envisaged it. Most give the Assembly marginal tax-raising powers — and even those would cause the Treasury angst on the grounds that they might distort UK economic policy.

Professor David Heald, of Aberdeen University, observes in his new paper* on devolutionary finance: ”There would be severe dislocation if a financial system traditionally based upon equalisation were suddenly to be transformed into a system based on derivation . . . Given history and political context, viable financial mechanisms for a Scottish Parliament within the UK must be based, at least in part, upon continued equalisation across the UK.”

Michael Forsyth’s belief that Westminster might abandon the equalisation principle arises, he says, from conversations with English and Welsh MPs of all parties. It is true that since the devolution debates of the seventies the English have come to perceive that Scotland receives preferential treatment beyond its merits and needs, particularly in such fields as health and housing. It is this perception, Mr Forsyth calculates, which would lead Parliament to set up a Scottish Assembly with what would amount to a savage cut in funding.

The other day I bumped into a Scottish MP who represents an English constituency and he repeated to me what has now become received wisdom in the south. This is the belief that Scotland gets an unfair share of subsidies; that we are, in the words of the London Evening Standard, subsidy junkies.

Most politicians and commentators agree that Scotland does indeed get a good deal from the distribution of public spending.

Mr Rifkind, for example, thinks that its advantage arose from the Harold Wilson/Willie Ross years. Official sources pay tribute to the ”wizardry” of Ronald Dingwall-Smith who from 1970-78 was chief financial officer at the Scottish Office. In the days before cash limits and the introduction of new accounting principles, he was able to persuade the Treasury in the annual negotiations to revalue the Scottish grant generously.

This golden age came to an end with the Barnett formula, named after Sir Joel (now Lord) Barnett. This was introduced as the basis for funding the Scottish Assembly to be established under the Scotland Act 1978. The Act was repealed but the formula remains. It stipulates that of every £100 of new spending England gets £85, Wales £5 and Scotland £10. This formula flattened out the progressive improvement that Mr Dingwall-Smith had been able to achieve. But it applied only to new programmes, leaving the inherited advantage intact.

Even so, while conceding Scotland’s relative advantage, some commentators believe it to have been exaggerated by the per capita figures published by the Government.

The bald figures given in the annual statements break down spending on a territorial basis. They show that England, with about 83% of the UK population, gets just under 80% of the total identifiable public expenditure, which excludes defence, overseas aid and other overseas services. Scotland, with about 9%, gets about 11%.

When the figures are recalculated per head of population they show that in Scotland total identifiable public expenditure per head runs at about 123% of the UK average. In England the figure is 95%.

This is the calculation that causes the resentment in the south, although it is politically disingenuous. It has the mathematical effect of exaggerating the disparities because of Scotland’s much lower density of population. Scotland has only 66 people per square mile compared with 362 in England. The lower English per-capita figure therefore reflects the lower unit cost of delivering services to a more populous country.

Only a simple calculation is needed to show how misleading the per-capita figures can be. The standard cost of a motorway varies from £3m to £5m a mile, depending on the difficulty of the terrain. You don’t have to be a mathematical genius to work out that a mile of motorway in Scotland would cost much more per head than in England. The low-cost version would work out at 59p per head in Scotland (£3m / 5.1m people). The equivalent cost for England would be about sixpence (£3m / 47.4m people = 6.3p).

In the end of the day the arithmetic is arid. Mr Forsyth’s vision is apocalyptic. He assumes the funding formulae would be scrapped, that the Secretary of State would lose his seat in Cabinet, that the number of Scottish Westminster MPs would be reduced, all this in a punitive spirit designed to cut Scotland down to size. He fears that the more Scotland’s apparent advantages become a fixed prejudice in Westminster the more they will be at risk. It is a pity he does so little to modify these prejudices. Rather, he appears to encourage them.

Donald Dewar, by contrast, believes that if an Assembly is set up the principles of equalisation should not and will not be abandoned. It would seem an act of monstrous folly to hand over to an Assembly rolling programmes for which it had insufficient funds. In these circumstances it would have to grab for a share of the oil revenues. In other words it would become a locomotive for independence.

Labour’s plan sees it rather as one of a number of regional assemblies, although the Scottish version would be considerably more advanced in its responsibilities (reflecting the fact that in Scotland administrative devolution to the Scottish Office has already gone so far).

There is no reason why Scotland cannot have an Assembly if it wants it. There is no doubt that under existing programmes it can be adequately financed, with or without marginal powers of taxation. The fact is that Mr Forsyth can imagine no circumstances in which he would support an Assembly and, gifted politician that he is, is using every strategem to discredit the whole idea. But his hare, after a sparkling opening, has developed a limp.

* Financing a Scottish Parliament: Options for debate. By David Heald, professor of accountancy, University of Aberdeen. £5 from the Scottish Foundation for Economic Research, Elmbank Street, Glasgow G2 4PB: 041-226 3431.