Ambiguous no more: Time to de-mystify the Barnett Formula

Abstract

This paper sets out to de-mystify the effects of the Barnett Formula – the mechanism which has delivered the bulk of the funding for Scottish domestic services over the past forty years. There has always been considerable ambiguity about the effects of the formula: with some holding that it is a mechanism which would eventually deliver converging levels of per capita spending in the different countries of the UK: while others held that it protected expenditure differentials. The paper explains why, partly because of the effects of relative population change, both views were correct at different times in the period up to 2015. In particular, at times of austerity, the formula operated to protect relative per capita spending levels in Scotland. Largely by accident, the Barnett Formula delivered some of the features expected in a properly functioning monetary union. After 2015, however, with the introduction of the post referendum fiscal settlement, the position is quite different. While Barnett still plays a part, the overall effect of the new funding system is to place Scotland in a vulnerable position, where it is at much greater risk of falling into a cycle of economic decline relative to the rest of the UK.