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Thursday, November 13, 2014

IFS confirms Scotland gains from from the Barnett formula

The Public Finance magazine contains an interesting report of a paper issued by the Institute for Fiscal Studies which confirms previous studies, that Scotland benefits disproportionately from the Barnett formula.

In fact it is a bit more complex than that as the first part of their study concentrates on the different way that business rates are treated in Scotland and Northern Ireland for the purpose of distributing grant to those countries as compared to Wales.

In their paper, Business as Usual, Barnett say that the result of this different treatment means that Scotland and Northern Ireland will by 2015/16 have sustained block grant cuts that are respectively £600 million and £200 million less than should have been applied:

The technical flaw identified by the IFS arises because of business rates, which are fully devolved in Scotland and Northern Ireland (and in Wales from next April). The Barnett calculation assumes that these rates part-fund England’s local government budget, but in practice this budget has been cut even as business rate revenues rise. Scotland and Northern Ireland have gained accordingly. 

‘This is clearly not in the spirit of the Barnett Formula, suggesting that the existing formula treats business rates in a flawed way,’ the IFS paper argues. 

‘The flaw in the Barnett Formula’s treatment of business rates means Scotland’s budget has increased by significantly more since 2000 than it would have done had business rates not been fully devolved.’

In fact we were already aware of this issue from the comprehensive spending review in 2010 when Wales got less than it should have done because of this anomaly. I believe from memory that the Welsh Government had been offered the opportunity to correct this in the past but had declined.

The IFS goes on to say that additionally the spending reviews in 2010 and 2013 gave Scotland an extra £400 million above what a corrected Barnett would have delivered, bringing its relative gain to £1 billion, or around 3% of its 2015/16 budget.

Naturally the Treasury does not want to know anything about any of this. It seems that for them it is business as usual. But how much longer can they ignore the evidence stacking up in front of their eyes?
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