Scotland politics

Report claims Scotland avoids £600m in cuts due to Barnett formula 'flaw'

HM Treasury sign
Image caption The Treasury said the Barnett formula was broadly fair

Scotland avoided spending cuts of £600m between 2010 and 2013 because of a "flaw" in the central government funding formula, a report has said.

The Institute for Fiscal Studies said that the way the Barnett formula dealt with business rates unfairly benefited Scotland and Northern Ireland.

It said it was important to examine the formula to make sure it was working in the way it was intended.

The Treasury said the Barnett formula was broadly fair.

The Scottish government said it had no control over the Barnett formula, adding: "Even with the current Barnett formula, Scotland will continue to face cuts to its budget of 10% over the five years to 2015/16."

The majority of the money spent by the devolved governments of Scotland, Wales and Northern Ireland comes in the form of block grants from the UK Treasury, calculated according to the Barnett formula, which was created in the 1970s with the aim of ensuring that changes in funding for devolved services are the same - in pounds-per-person - as in England.

Image copyright PA

In its report, the IFS said that while the Conservative/Liberal Democrat coalition government imposed an austerity regime across the UK in the spending reviews of 2010 and 2013, a technical detail of the Barnett formula meant that Scotland and Northern Ireland were spared millions in cuts compared with England and Wales.

The institute said that the financial advantage was equivalent to about £113 for every man, woman and child in Scotland and followed on from budget increases worth £400m during the 2000s.

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

He added: "The Barnett formula looks set to remain in place for some years to come.

It is important to get the interaction between devolved taxes and the Barnett formula right

David Phillips, IFS economist

"But it 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.

"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."

The Treasury insisted that the Barnett formula produced results that were "broadly fair, transparent and consistent" and said the IFS report concentrated on short-term results in one area of spending.

A Treasury spokesman 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 spokeswoman said: "Scotland has generated more tax per head than the UK as a whole in each of the last 33 years.

"The Scottish government 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."

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