Barnett formula bonus won’t last

The present and future  cuts may seem tough – and they are – but here I belatedly post the good news from the Institute for Fiscal Studies (IFS), s that they could be much worse, were it not for a” flaw “ in the Barnett formula for allocating the block grant.

 The calculations presented in this paper suggest that these flaws have resulted in Scotland receiving around £400 million more and Northern Ireland around £130 million more in funding this year than they would have if a ‘corrected’ version of the formula had been in place when the fiscal consolidation began in 2010. By next year, 2015–16, these figures will have grown to £600 million extra for Scotland and £200 million extra for Northern Ireland. In the context of block grants and business rates revenues that together total around £30 billion and £11 billion, respectively, this means funding will be over 2% higher than it would have been had a ‘corrected’ Barnett formula been introduced in 2010. Put another way, the cuts Scotland and Northern Ireland will have had to deliver between 2010–11 and 2015–16 will be more than one-fifth smaller than if the ‘corrected’ formula had been in place during this period.

The Barnett formula is based on the proportion  of English spending  Scotland, Wales  and Northern Ireland , W and NI  receive according to ( pretty ancient) population levels, were they part of England.  English local spending is dispersed by the Department of Communities and Local Government and has been subject to big cuts. But these cuts have not been factored in when it came to allocating the block grant. This to the English especially, seems like a political fiddle to try to buy off independence calls.

English opinion which is on the move will surely not tolerate this “unfairness” for much longer.

The Vow of the three UK party leaders signed in panic over  the slim lead in favour of independence  that registered  in the climax of the referendum campaign contained the pledge that the Barnett allocation of resources  would be maintained. It did not  say that the present level would be maintained.  Politicians are soft pedalling on this crucial  point. But the block grant which has in fact already reduced in real terms is bound to diminish  further, in proportion to the share of taxation which is newly devolved . Scotland be careful for what you wish for. And Northern Ireland, do nothing during the present austerity to reduce the level of subsidy from London. Leave corporation tax alone. Keep your wee heads  down.

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  • chrisjones2

    The behavior of Sturgeon this week may be calculated to make them ask why they wanted to keep Scotland in the first place. Again the citizens of England may be ahead of their ‘leaders’ in assessing the real worth of the relationship

  • barnshee

    SF- ODowd- wants the “the books opened by the Treasury”

    Here is a golden opportunity for the treasury to allow SF to agree for the taxes raised in NI to be the funds to “run” NI

  • SeaanUiNeill

    Oh dear, Barnshee, so we’re back to Indian Corn and relief dependent on road building, etc, as in Black 1847, but this time the famine will be from the dying away of the subsidies.

    While I’m all for real financial independence locally, if you are to rely on tax raised locally to run anything you’d better reduce Stormont to two men/women and a dog, and the civil service to another three or so with some decently reconditioned computers.

  • NMS

    Dr. Tom Healy of the Nevin Economic Research Institute devoted his Monday Blog to UKNI’s finances with a second part to follow shortly. It makes sober reading.

  • barnshee

    ” Stormont to two men/women and a dog”

    I regret I cannot support the use of a dumb animal in Stormont—oh wait a minute

  • SeaanUiNeill

    And my heart goes out to those poor MLAs already having to survive on a tiny fraction of what a similar career in the private sector might offer. At least they may now be able to offer their invaluable portfolio of skills on the open market and actually receive what salary they are really worth……..

  • Zeno3

    The UK Government borrow around £14 billion a year to give away in foreign aid. I can’t see them being over concerned about a few hundred million subvention.

  • Scots Anorak

    This is a “bonus” for Scotland only if one accepts the fiction that the main motivation behind the Barnett formula is addressing different levels of need across the constituent parts of the UK. Need related to geography and settlement patterns is difficult to quantify, and Scotland does have a lot of inhabited islands. However, it’s clear that if need were calculated based on average incomes, Scotland would receive about the same as England, while Wales and Northern Ireland would receive rather more.

    Why, then, does Scotland do better than England and Wales? Well, although Unionist commentators generally miss out oil and whisky revenues and stress income-tax takes to make Scotland look artificially poor, the fact is that over the last generation or so the country has almost always produced a higher proportion of revenue than it has received back from Westminster. The Barnett formula is merely a smoke-and-mirrors mechanism for letting Scotland keep an extra sliver of its own money in the hope that it will remain in the UK, and in that context any talk of a “bonus” is misleading.

    One difficulty faced by the Westminster parties is that their message to Scotland that the Barnett formula is über-generous has also been heard by another group of people — English voters — who unsurprisingly want rid of it, not knowing that, depending on future oil revenues, they might well lose out financially as a result. Those parties also “ruled out” a shared currency with Scotland in order to scare voters off independence, but have probably only succeeded in delaying it for a few years. In the next independence campaign, electoral calculus suggests that the Scots Nationalists themselves are likely to be those ruling it out, which will ultimately destroy rUK’s balance of payments and cause a run on the pound.

    But, hey, Gideon Osborne will be earning his money elsewhere by that stage, so who cares about English savers?

  • barnshee

    “miss out oil and whisky revenues”

    1 The revenue from “whisky” is mostly generated out side Scotland -the biggies are excise duty and vat so basically SFA help to Scotland

    2 The OIL and Whisky industries are all owned outside Scotland and OIL can be landed anywhere –to borrow from Joe Stalin “how may divisions has Scotland got “? should that happen.

    England “buys” the entity that it calls the UK by tolerating the buffoons on the fringes and funding their playhouses when they throw their toys out of the pram. They do this because they deem it cheaper/easier/can`t be arsed to change it.
    Thanks to the likes of the SNP the fact that they have now woken up to the costs of ” Barnett is welcome and— a long overdue review is at least on the cards.
    Progressively the regions will stand (or more likely fall)on their own feet – with one proviso when the posterior falls out of it don`t export your problems to England- keep your unemployed etc to yourself

  • Scots Anorak

    Glad to know that civilised debate isn’t dead.

    The oil companies don’t own the oil; they are licensed to extract it. Ninety per cent of that oil is in Scots territorial waters, and much of the remaining 10% would be likely to revert to Scots jurisdiction after an appeal to international arbitration (in 1999 “English” territorial waters were extended north of Dundee, a change that would clearly never have been made if, as you suggest, an independent Scotland could not derive any economic benefit from its own oil reserves).

    Of course, one has to be independent before one can seek arbitration of the kind in question.

    It is also highly unlikely that rUK would seek to hang on to Scots oil revenues by main force after independence. At the very least it would need to tempt Shetland to secede as a fig-leaf, which is easier said than done, and proportionally the oil money is of course worth only 10% as much to England as it is to Scotland. Hardly worth risking international opprobrium and sanctions for; something of the sort was attempted in Suez in 1956, and we know how that ended.

    The fact that, as you say, the oil companies themselves are owned outside Scotland suggests to me that the system is not working. In Norway, Statoil is 67% owned by the people, who in turn benefit from the profits. An independent Scotland could rectify that.

    On whisky I suggest you read this:

    As for all the Celtic buffoons in their playhouse parliaments, I’m afraid that I’ve always been rather an admirer of the English and can’t think of any generalised nastiness to spout in return. Sorry to disappoint.

  • barnshee

    “An independent Scotland could rectify that.”

    Where would they get the money to buy?- presuming the Oil companies wanted to sell

  • Scots Anorak

    Like I say, the oil companies don’t own the fields; they are licensed to extract oil from them. They own the platforms, but for new fields they would not be in the right place anyway. Just like any other government, the Scottish Government could raise funds in various ways — taxes, borrowing, bond issues, or selling a minority share of stock to investors as is the case in Norway. It wouldn’t necessarily need to take existing fields into public ownership, and if there were a lack of capital, some of the new fields could still be developed privately or as public-private partnerships. At the moment Mr. Osborne is borrowing £1 billion a week in order to pay the interest on the UK’s existing debts. I should have thought that borrowing money to invest in a rock-solid business would be attractive in comparison. I know that Norway was poorer than Scotland before it discovered oil, and Norway has a largely state-owned oil industry, so it can obviously be done. In the UK, BP was partly state-owned until 1987 and probably still would be today if Margaret Thatcher hadn’t won the election that year.

    The argument that Scotland is somehow uniquely incapable of handling its own affairs may have had traction before the establishment of the Scottish Parliament, but not so much since. Regardless of the party in power, it has consistently delivered more representative, more responsive and less ideological government than Westminster (as well as being far cheaper). As for the oil companies refusing to sell, sovereign governments have the right to make a compulsory purchase. Oil production is not like a normal business, and there is a strong case to be made that national resources should be exploited by the state.