George Kerevan: We’re all poorer without Barnett

PASSING of the Labour MP who created budgetary formula highlights crisis facing devo reform, writes George Kerevan

JOEL Barnett, the accountant turned politician who (most unwillingly) gave his name the eponymous “formula” that
governs the split of public spending between the four UK nations, has passed on to the great debating chamber in the sky, at the ripe age of 91.

During the referendum campaign, Lord Barnett resurfaced briefly to denounce the funding mechanism which he fathered in 1978 as “a national embarrassment and personally embarrassing to me as well.”

Rarely in modern democratic politics has a policy lasted so long and through governments of so many different hues. Why then was its intellectual father so disdainful? And while many have denounced the Barnett formula for being unfair, no-one has come up with anything specific to replace it that commands even a smidgen of unanimity. The dirty secret that lies behind the Barnett formula and its close predecessor, the Goschen formula of 1888, is that they were political fixes designed by London administrations to pacify the Celtic fringes. Fairness and democratic accountability had nothing to do with it. Joel Barnett’s legendary animus at being associated with the funding mechanism has a lot to do with the fact that he and his Treasury officials concocted it in secret to get Jim Callaghan’s disintegrating administration out of a hole. And to ensure that any move to devolution would leave the Treasury still tightly in control of the purse strings.

Barnett works by giving “automatic” spending bungs to the three devolved parliaments in line with what England gets. This provides the British establishment (especially the Labour and Tory front-benches) with a stick to fend off the nationalists on the Celtic Fringes. Which, of course, is why no-one has tried very hard to replace Barnett in 35 years. But with Scotland about to get something approaching fiscal autonomy – fingers crossed – it looks as if they have no choice but to consign the Barnett formula to the rubbish bin.

Of course, politicians in all four home nations argue that the Barnett settlement disadvantages their electorates. The Welsh in particular are determined to use any transfer of tax-raising powers to Scotland to renegotiate Barnett. However, the truth is that under Barnett, Scotland, Wales and Northern Ireland have higher public spending per head than England. In 2010, Scottish identifiable public spending per head was 14 per cent above the UK average. In Wales it was 13 per cent and 20 per cent in Northern Ireland.

We can certainly quibble about the size of the spending advantage for the three Celtic nations. Because the Treasury makes up the Barnett rules without reference to parliament, it has substantial room to fiddle them as it goes along. It does so frequently, to reduce the cash for the devolved administrations. One scam is to (re)classify responsibilities of English spending departments as UK-wide. That removes any Barnett consequential as it did when the Department of Trade and Industry increased research funding for universities in the South-east.

The whole point of Barnett is that it was a political compromise designed to head off a nationalist threat. The British establishment has always been prepared to offer concessions to buy time and demobilise popular revolt. The original Goschen formula was just such a political feint and is worth remembering if we get a hung parliament next year.

In 1886, the ruling Liberal Party split over Irish Home Rule. The new (minority) Tory government was loosely supported by anti-Home Rule Liberals, one of whom – the maverick George Goschen – ended up as chancellor. To keep Ireland from exploding, Goschen came up with his eponymous formula. This guaranteed the Irish a fixed proportion of UK tax revenues. It was a major concession but there were 88 Irish nationalist MPs to placate. Enter five independent Liberals in Scotland who took advantage of the hung parliament to create a radical Highland Crofters’ Party. Frightened that the Home Rule agitation would spread across the Irish Sea, Goschen included Scotland in his funding mechanism. This episode shows that the Goschen and Barnett mechanisms are about power, not fairness.

Joel Barnett’s formula was a bribe designed to head off the SNP upsurge in the 1970s. Mrs Thatcher kept the Barnett formula to pacify Scottish public opinion after she ditched devolution. Labour continues to hide behind Barnett, despite mounting criticism from its Welsh supporters. It does so out of self-interest: North of the Border, Labour can pose as the defender of higher public spending.

The sad thing is that, as bribes go, it is a pathetic one. Yes, we get a notional 14 per cent higher spend per capita. But because of Scotland’s lack of fiscal powers to boost its economy, Scottish GDP has grown at a fraction of both the British and European level since Barnett was invented. Had we grown at the same rate as equivalent small European nations, our spending per head would be much higher today. It is also the case that the “excess” spending we get does not fund a higher standard of living. Much of it is accounted for by having relatively more public sector employment than England – a legacy of the massive deindustrialisation under Gordon Brown. And low paid at that.

My worry now is that Scotland will get control over income tax but have little latitude to influence business investment. Meanwhile, the next wave of austerity will cut public spending savagely in real terms. Scotland will be told to use its new income tax powers if it wants to protect public services.

I don’t want Scotland getting more than its fair share of UK public spending. After all, I and 45 per cent of Scots voted in September to rely on our own resources. I’ve also spent a political lifetime arguing that Scotland should get the fiscal powers it needs – inside or outside the Union – to grow the economy. The success or failure of the Smith Commission rests on its ability to deliver just those powers. Otherwise the abolition of Barnett will unleash the political whirlwind.