The Barnett formula and the Olympics

The unfairness of the institutional arrangements surrounding the Barnett formula is an issue that the devolved administrations fairly regularly raise.  Most recently, they did so at their trilateral meeting in Belfast (there’s a news report from the Scotsman here and the Scottish Government’s news release here). Over the last couple of years, the classic example has tended to be funding for the 2012 London Olympics. It’s one of few financial issues where the three devolved governments speak with one voice, and where their interests are the same.

The devolved governments say that they have been unfairly deprived of Barnett consequentials they should get from spending on the 2012 London Olympics, most of which relates to regeneration projects in east London.  They argue, rightly, that if this spending were on any other regeneration project in England, they would get those consequentials.  In Scotland’s case, the figure being used is £165 million, which implies a total ‘lost consequential’ of about £330 million for all three devolved governments (£104 million for Wales and £61 million for Northern Ireland).  Figures cited by Plaid Cymru and Northern Ireland finance officials in evidence to the Lord Barnett Formula Select Committee were rather higher – Plaid claimed a loss to Wales alone of £330 million (taking into account the effect of the Olympics on distributions from the National Lottery as well as the missing Barnett consequential), while Northern Ireland quantified the loss to the Executive’s budget there as over £100 million. The Treasury’s classification of this spending as ‘UK’ rather than ‘English’ had the effect of depriving them of this money. It has become both a cause célèbre, and a rod which the devolved governments use to beat the back of UK Government.  It’s not just a ‘nationalist’ argument, either – I know that the views of devolved Labour politicians were profoundly affected by how the Treasury behaved in this case, and so they have sought a more disciplined approach to how funding is allocated.  The story of how this actually came about doesn’t appear to be widely known, though, and so I’ll tell the story as I’ve pieced it together.

First, it’s worth a reminder about the practical effect of the Barnett formula.  Changes in spending for England trigger consequential payments to the devolved governments, of around 15 per cent if a programme is entirely a ‘comparable’ one.  While a  spending department may not notice it, from a Treasury point of view this means adding in 15 per cent to the ‘English’ cost of extra health, education or environment spending, to cover the cost of the Barnett consequentials as well.  It’s a bit like an auction where bids may be denominated in guineas as well as pounds.

When the financing arrangements for the 2012 Olympics were being discussed at the time of the 2007 Comprehensive Spending Review, the initial idea was that there would be three funding streams for the costs.  One would relate to ‘Team GB’ expenses – training, sports promotion and so on.  A second would cover the direct costs of building the stadiums and other facilities for the event.  The third would cover the costs of the wider regeneration projects.  The first two would be ‘UK’ matters, even though the second only had a direct impact in London, and the devolved administrations were willing to accept that – not least because the consequential payments they might get were not that large.  But the third stream – by far the largest of them – would be avowedly for England only, and so the devolved would receive consequential payments for that.

That was the basis on which the negotiations about the devolution effects of the financing proceeded, until the very last stage.  At that point, the Chief Secretary to the Treasury jibbed, as the amount was clearly too large once the Barnett consequentials were added in.  The Chief Secretary decided that the easiest way to bring the costs under control was to eliminate the Barnett consequentials.  (He may also have had in mind that this would reduce the Treasury’s exposure to any further cost over-runs.)  So he merged the three funding streams into one single stream for the Olympics 2012, and designated that as ‘UK’ spending so it did not trigger consequentials for the Scottish or Welsh Assembly Governments or Northern Ireland Executive. This appears to have been sanctioned by Cabinet (that was Shaun Woodward’s evidence to the Lords Barnett Formula Committee), but the initiative was clearly the Chief Secretary’s.

There are two reasons to tell this story now, apart from the fact that the events should be better known than they are.  One is to show the danger of a decision taken for short-term, instrumental reasons.  The decision to have a single ‘UK’ Olympics funding stream saved the Treasury money, helped control some risks and made administering a complex project a bit easier.  It wasn’t, in that sense, a bad decision.  But it was a bad decision because it illustrated the arbitrary nature of the Treasury’s power over the block grant and formula system, and how it acts as both judge and jury in its own cause.  This power had existed since the present system was put in place, and regularly exercised (often in favour of the devolved administrations – for example, over London Transport in 2000, or Crossrail in 2007).  But this use of it discredited and undermined a system that suited the Treasury very well.  Politically, it has been a gift to the devolved administrations who regularly and repeatedly raise it as an example of what’s wrong with the present arrangements.  The short and medium-term benefits have been hugely outweighed by the medium and longer-term costs.

The other will particularly concern Labour Party members who are considering whom to support in their party’s leadership election.  The Chief Secretary involved was Andy Burnham, now one of the candidates to be party leader.  They’ll have to decide whether this sort of approach is what they want to see in a potential future leader of their party.

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19 Comments

Filed under Devolution finance, Labour, Northern Ireland, Scotland, Wales, Whitehall

19 responses to “The Barnett formula and the Olympics

  1. Hendre

    And Burnham tried to organise a blackleg GB football team in defiance of the FAW, SFA and IFA. The man has no shame…

  2. Michael Knowles

    It seems to me as I read this piece that Professor Trench is arguing for the extension or application of the BF to S, W and NI of the cost of the London Olympics on the grounds that, as the BF is a given, it should so be applied. I would prefer it if dealt with the BF for what it is, a very unfair device introduced under Wilson to undermine the SNP. There is no justification for it whatsoever. There might well be a case for arguing that expenditure should be equalised throughout the UK but there is absolutely no case for arguing that S, W and NI should have preferential treatment over, say those areas of England such as the East End or North and East Manchester or Sunderland or Cornwall etc etc etc which are no better off than S, W or NI. As long as S, W and NI can rely on holding out the begging bowl for the English to keep them solvent, they will never knuckle down to earning their own living. They are pampered parts of the UK. they do not pay their way. It’s time they lived within their means, which will then give them the impetus to earn more. London is holding the 2012 Olympics. It costs. That has to be paid for. The English taxpayer, not the S, W and NI taxpayer, is paying for it. The blunt fact is, S, W and NI athletes are being provided with a glorious moment in their lives with the London Olympics. And because S,W and NI do not pay their way, because S,W and NI spend more than than they contribute to the UK tax revenue, those athletes aren’t just getting this fantastic opportunity free of input, their countries are now whining that they want more of the spend as well. S, W and NI should pay their own way. That’s where they should start.

    • Michael Knowles’s comments merit a response. The key points are as follows:

      1. The issue here isn’t whether the Barnett formula is a good thing or not. It’s whether, having adopted it, the Treasury will apply it fairly and consistently or not. Here, they’ve been neither fair nor consistent.

      2. What appears to underlie this argument is that, as the Barnett formula is unfair, it’s appropriate for the Treasury to make unfair adjustments in it to put matters righter, if not right. But two wrongs don’t make a right – especially when it comes to what’s become a constitutional matter, not just the allocation of spending within a single government.

      3. The way places like Sunderland, Cornwall, Manchester or the East End of London are treated when it comes to public spending is nothing to do with the Barnett formula. These are decisions made by ministers like the Secretaries of State for Communities and Local Governments or Health, who are responsible for (largely) English matters, sitting (normally) for English Westminster constituencies, answering to a (largely) English House of Commons. If one regards those allocations as being wrong, it reflects not a problem with the Barnett formula but with English political processes. Personally, I doubt an English parliament will remedy those problems, though others may disagree.

      4. The idea that spending should be related simply to the tax revenue arising from a particular part of the UK has many attractions. It’s clearly very attractive to many in Scotland, including the SNP and many in the business community (on which I’ll be writing shortly). But quite apart from workability (there are no data to tell us this), it hasn’t formed part of the principles governing the allocation of public within the UK, at least in the lifetime of anyone now living. The UK Government, and all political parties, are committed to the idea that public spending should be allocated according to ‘relative need’; poorer places should get more spending, not less, so that the public services that can be provided across the UK are similar whether you live somewhere rich like Kensington or somewhere poor like Bradford.

      5. The first problem with Barnett is that it fails in its own terms, because it doesn’t deliver this. The second is that it doesn’t relate to the constitutional division of powers already put in place – hence, among other things, the Calman Commission recommendations. The third is that there appears to be a clear desire in Scotland, at least, to go beyond that. And those are the conundrums with which politicians and other policy-makers are presently grappling.

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  7. Mike Blundell

    There is a Barnett consequence to the UK’s Govt expenditure on the Olympics. Firstly there is the Barnett consequence on analagous taxes paid, eg. water bills include an element of abstraction and discharge “taxes” collected and spent by the Environment Agency (this expenditure by this member of the Defra family has a Barnett consequence).

    There is also churning in that assets funded by the expenditure will be sold with the money raised by the public purse subsequently being channelled through to the consolidated fund or whose subsequent expenditure is for the benefit of the UK as whole or which if identified (by Treasury) as England related will carry a Barnett consequence.

    Forget the detail. There has been no independent review of Treasury’s operation of the Formula since its inception. If our politicians were serious they would change the terms of reference of the National Audit Office to enable it to audit Treasury’s operation of the formula, they have always been banned from doing this.

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