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.