10/12/2014 14:45 GMT | Updated 09/02/2015 05:59 GMT

A Formula for Change? The Future of the Barnett Formula

The Barnett formula has always created winners and losers, but it has survived 36 years because it balances some difficult political considerations. But greater devolution across the UK is placing increasing strain on the formula, and reform is very much on the agenda.

Created in 1978 as a temporary political expedient, the formula determines how public spending should be adjusted in Scotland, Wales and Northern Ireland to reflect annual changes in English spending. The Scottish independence referendum, and the three main Westminster parties' promise to see the "continuation of the Barnett allocation" has intensified English criticism of the formula that, according to Treasury figures, gives Scotland over £1,600 more per head compared to England.

The recent Institute for Fiscal Studies report will fuel these flames. Labelling aspects of the formula 'flawed', the IFS found that Scotland has been shielded from Coalition cuts by as much as £600 million. A YouGov poll over the summer found 56% of English voters would support levels of public spending in Scotland to be reduced to the UK average.

With devolution continuing to be unevenly implemented across the UK, we are seeing an increasingly complicated patchwork of city, local government and national responsibilities and revenue raising powers. The current flaws in the formula are likely to be further exposed and calls for a 'fairer deal' for English regions will intensify.

As the prospect of further devolution gains traction, any new method of funding allocation will have to find a compromise. The Barnett formula may be pragmatically eroded over time by salami-slicing the central block grant to correspond to devolved revenue-raising powers, but political pressure from the English and Welsh for a 'fairer deal' may mean reform will have to be addressed as part of any Scottish devolution package.

If there is reform, it will have to answer some difficult questions, not least as the Welsh First Minister, Carwyn Jones notes, "how much does each nation actually need to spend in order to deliver its public services?" Of course this in turn raises the question, what is need? Does Scotland's geographically dispersed population create additional need? While London generates significant wealth, it contains areas of significant deprivation, and the demands on its transport network are significant, as is its value to the wider UK economy.

However a needs-based formula is calculated, and whether it complements a population-based model, any reform should also weigh up the risks and benefits of change and meet a number of important political and financial criteria. First, given how close the Scottish independence vote actually was, and the controversy it stirred up - "English votes for English laws" - any reform will have to be fair, and, as importantly, seen to be fair. Cohesion within the UK could be seriously undermined by a system that delivers clear winners and losers. Those who have lost out would have no reason not to push for further reforms to the system, thereby baking in further instability - a real risk and concern for public authorities.

Second, it should provide stability over time, considering both the baseline and any increment in funds. Barnett created a system that delivered a simple and predictable distribution settlement. If a social needs formula can be exploited, or the calculation is subject to regular political contestation, unpredictable fluctuation in block grants could seriously impact on devolved nations' and authorities' ability to meet their public service commitments and force cuts to a wide range of non-governmental public service providers who rely on public monies.

Finally, central funding, as opposed to total devolution of revenue-raising powers, is likely to continue to play an important role in any formula. Areas of greatest need will often be those with a limited tax base which will not always be able to raise sufficient revenue to meet demands on their services. It is vital that any devolved authority is able to deliver the services it is statutorily required to.

The Barnett formula has survived because it provided a workable solution to a difficult challenge - which has no perfect solution. Those calling for an overhaul of the system must be aware that reform opens up some challenging questions about what constitutes need and must carefully consider the benefits and risks of change. Will the next distribution mechanism still be around in 36 years?