briefing on the funding of the nhs in scotland
Public spending and the Barnett Formula
The Barnett Formula
The Barnett Formula was introduced in 1978 to essentially give territorial areas of the UK a proportionate increase or decrease linked to English public spending. Prior to 1978 Scotland had negotiated and bargained with the Treasury on an annual basis in the same way as Whitehall departments such as defence, education, health, etc. However the Barnett Formula, named after the then Chief Secretary to the Treasury Joel Barnett, was introduced, obviating the need for annual negotiation by the Scottish Office. Some commentators have observed that the formula was meant to be a transitional measure in the light of possible devolution at that time but this has subsequently been denied by Barnett himself. In any case the formula has endured subject to minor amendments and the Labour Government made clear their continuing commitment to the formula in the White Paper "Scotland’s Parliament" prior to the 1998 devolution referendum. The Barnett Formula has no statutory basis in law and is viewed as a working agreement.
The Barnett Formula has generated much confusion and misinformation as demonstrated by some statements from Westminster MPs ("10 facts about the Barnett myth", The Herald, 19 December 1999) and London mayoral candidates in the run-up to the recent election. It is perhaps useful, therefore, to spell out precisely what the Barnett Formula does not cover prior to an explanation of how in fact it does operate. The following information is drawn from a briefing document issued by the Scottish Parliament (The Barnett Formula, Research Note, Scottish Parliament Information Centre, May 2000, p2.)
What the Formula is not
The Barnett Formula does not determine the overall size of devolved Scottish expenditure. The formula is applied only when there are changes to expenditure headings in England. In these cases, increases are applied to comparable expenditure in the three non-English territories according to the formula which is based on population share. For example, an increase in spending on schools by the Department for Education and Employment will be matched by funding to the Scottish Executive.
However, once allocated, Scottish Ministers are not obliged to spend this money in the same spending area as England. Technically, they have freedom to allocate it to whichever Scottish Executive department they choose.
The formula has no relevance to Government expenditure in Scotland by other departments, e.g. expenditure by the Ministry of Defence or the Department of Social Security in Scotland.
Contrary to some popular misconception, the Barnett Formula is not and never has been a ‘needs-based formula’ and has never attempted to allocate expenditure on the basis of comparative need. It is purely a simple and transparent way of allocating funding changes on the basis of population share.
It is worth emphasising some of the key points outlined above. The formula is only applied to increases or decreases in English public spending on comparable programmes. The formula only determines changes to each territory’s block and not the total allocation. In terms of comparability, the Barnett Formula would be applied to, for example, health and education spending which have comparable spending programmes in England but not to areas such as defence and social security which are truly UK departments and coincidentally are reserved powers. Scotland receives a population based share of English increases or decreases which are not related to need i.e. Barnett is not a needs based formula which takes account of relative need between England and Scotland. Once Scotland has received the total increase to its block, Scottish Ministers have the discretion to allocate the block as they see fit. Relatively higher levels of deprivation, morbidity and rurality in comparison with other territories in the UK are commonly cited reasons for a higher per capita spend. For example, a recent study by researchers at Bristol University identified six of Glasgow’s parliamentary constituencies as being in the top 15 unhealthiest constituencies in the UK.
In summary, Scotland’s higher per capita spend on health in comparison to other territories in the UK is based on decisions made by Scottish Ministers in relation to Scotland’s overall budget and perceived need. Thus Scotland does not receive a disproportionate share from an imaginary UK health budget “pool”.
How the Formula operates
There are two components to public spending in Scotland:
The baseline or inherited expenditure base, i.e. the previous year’s budget figure.
Incremental expenditure changes, i.e. the element which is in part determined by the Barnett Formula.
The formula takes three factors into account in determining the change in each territorial administration’s spending allocations (Funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly - A Statement of Funding Policy, HM Treasury, March 1999, p7.)
1. The quantity of change in planned spending in departments of the UK Government.
2. The extent to which the relevant UK departmental programme is comparable with the services carried out by each devolved administration.
3. Each country’s population as a proportion of England, England and Wales or Great Britain as appropriate.
This gives the Barnett Formula as:
| Change to the department of the UK Government’s Programme | X | Comparibility percentage | X | Appropriate population share |
For example:
the UK government decides to increase or decrease a Departmental Expenditure Level (DEL) by £100m
the comparability factor for this DEL is 95% (for health the present comparability factor for Scotland is currently 99.2% with spending on EU medical costs and the Medicine Controls Agency being assessed as non comparable)
the population share for Scotland is 10.34% (the latest mid year population estimate from the Office for National Statistics)
£100m x 0.95 x 0.1034 = £9.823m
Thus £9.823m would be added or subtracted to Scotland’s block.
Scotland’s population is declining over time in comparison to that of England and the government’s policy is to now re-calculate the population share on an annual basis. In terms of health funding, Scotland’s population share prior to 1992 was 11.76% (mid 1976 population estimate). In 1992 this was amended to 10.66% to reflect the findings of the 1991 Census. As noted above, the current mid-year estimate from the ONS is 10.34%. The decline in the population share has resulted in Scotland receiving a smaller proportion of the growth of UK departmental spending programmes. This reduction has been termed the “Barnett Squeeze”. However it should be noted that in the event of a reduction in a UK department’s spending, the formula works to Scotland’s advantage in that it receives a smaller proportionate decrease.