Scotland benefits by £1bn due to Barnett formula flaw - IFS

Scotland has benefited from £1bn of extra funding due to a flaw in the Barnett formula, a new study from the Institute for Fiscal Studies (IFS) has revealed.

The report says that the treatment of business rates by the formula, which calculates changes in the block grant based on UK government spending decisions, “might be considered unfair to England and Wales”.

According to the IFS, because the Treasury views English business rates as part-funding the Department for Communities and Local Government’s local government budget, most of the large spending review cutbacks imposed in England were not factored in when officials calculated block grants for Scotland and Northern Ireland.

This has led to Holyrood and Stormont seeing their budgets cut by £600m and £200m less as a result of the 2010 and 2013 spending reviews, the institute has estimated.

In addition, Scotland enjoyed about £400m of funding hikes as a result of spending reviews throughout the 2000s that it would not have received under a corrected Barnett formula.

The IFS said it was crucial to adjust the block grant correctly to take account of devolved taxes.

“Seemingly technical issues over adjustments which make little difference in the first year of devolution can have profound effects on how money is allocated across the UK in the longer run,” the IFS said.

The IFS added that a better way of accounting for devolved business rates would be to treat English business rates as part-funding all Whitehall departments largely serving England.

The report's author, David Phillips, a senior research economist at the IFS, said the glitch could be fixed.

"The Barnett formula looks set to remain in place for some years to come but that makes it more important than ever to examine the Barnett formula to see if it is working in the way intended, and if flaws are found, to fix them,” he said.

"Problems with the way the Barnett formula treats business rates mean that Scotland and Northern Ireland have avoided hundreds of millions of pounds of cuts that they would have faced under a corrected formula – cuts that England and Wales have faced. It is important to get the interaction between devolved taxes and the Barnett formula right."

A Treasury spokesperson said: "The arrangements for business rates in Scotland and Northern Ireland have been in place since devolution in the late 1990s. Like all other areas of spending, the treatment of local government spending in the Barnett formula is based on the level of devolution of services, not on individual revenue streams like business rates.

“The leaders of all three main UK parties have been clear that the Barnett formula will continue. As the report suggests, we will therefore need to put in place arrangements to ensure that neither the UK government or devolved administrations gain or lose from further devolution."

A Scottish government spokesperson added that they would agree with the findings in the IFS report that further devolution of fiscal powers should be accompanied by a block grant adjustment, which ensured that new Scottish government tax receipts were not exposed to risks which the Scottish government did not have power over.

Tell us what you think – have your say below or email [email protected]


H Spikes   17/11/2014 at 13:40

and UK has benefited by countless billions from Scotland's natural resources!!!!!!!!

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