Introduction

The accommodation of territorial diversity is one of the greatest challenges that complex societies must face. Today, many federal systems are encountering a loss of solidarity and an upsurge of interregional disparities. These have exacerbated dormant tensions and intergovernmental conflicts that in certain cases also spark secessionist movements. Funding arrangements are a vital component of any system of shared government, as the lack of resources to finance constitutionally assigned competences would render them inoperable, thus reducing autonomy to an empty vessel. Equalization mechanisms play a key role in managing diversity within a multilevel state, because they are designed to achieve a certain degree of horizontal redistribution among territorial subunits. This chapter explores the internal architecture of the United Kingdom’s territorial funding arrangement from a legal perspective, with the aim of investigating its integrative and disintegrative effects in relation to Scotland (and to a minor extent, also to Wales). This is done to determine the impact of fiscal arrangements on diversity management, and if such arrangements can function as tools to hold a country together and discourage secessionist attempts.

Although the United Kingdom lacks a specific equalization program due to the territorial configuration of the country—which is a strongly centralized state in which devolution has a history of fewer than twenty-five years—this does not mean that there is not a mechanism that partially fulfills this function, specifically, the Barnett formula.Footnote 1 This mechanism, introduced by the Chief Secretary of the Treasury Joel Barnett, is the method of calculation of UK public spending for the different nations that make up the UK (Rutherford, 2013, 39). It was intended to bring convergence in per capita spending across the UK, and thus featured an equalizing rationale. Consequently, for the purposes of this chapter, the Barnett formula will be viewed as an equalization mechanism since, in addition to revenue sharing, it also performs an interterritorial redistributive function.

This analysis will be predominantly legal, focusing on all sources of law, including secondary legislation, soft law, and political agreements. The final aim is to evaluate if and to what extent the “Barnett system,” due to its equalizing function, can be conceived as an instrument of nation building that contributes to reducing territorial tensions and accommodating diversity, thereby reversing disintegrative trends. This analysis evaluates the integrative and disintegrative potentials of the elements of the internal architecture of equalization mechanisms. In particular, the main hypotheses are that equalization mechanisms:

  • raise the cost of secession in subunits that are net receivers of funds;

  • have an integrating function as they promote economic development and cohesion;

  • tend to enhance a sense of belonging and solidarity among constituent units by fostering national unity.

The concepts of integration and disintegration used in this analysis are borrowed from the literature of European integration and applied to the internal dynamics that occur in multilevel systems between the central government and the territorial subunits, as well as among the subunits themselves.

One of the most influential definitions of integration was coined by Wallace (1990, 9), who characterized this phenomenon as “the creation and maintenance of intense and diversified patterns of interaction among previously autonomous units.” This definition, although originally intended for sovereign states joining into a supranational organization, is nevertheless useful for studying the dynamics that affect the relationship between center and periphery within a multilevel state.

Applying this definition, the territorial participation in the governance of the equalization compact will be described as an integrative force, since it contributes to strengthening the ties between the national government and the territorial subunit(s) by promoting dialogue and cooperation while respecting and protecting the political autonomy of the subunit(s).

The political dimension is also relevant when studying equalization mechanisms or describing their internal architecture. For this reason, the role of political actors will be considered following Haas’ (1968, 16) vision of integration as a process “whereby political actors in several, distinct national settings are persuaded to shift their loyalties, expectations and political activities toward a new political center.” Although this concept refers to the creation of a new political center—that of the European institutions—in this case the political center in question is represented by the central institutions and thus the parent state itself. Therefore, those elements of equalization that contribute to reinforcing the loyalty of territorial subunits toward the center are considered a step toward further integration.

In contrast to integration, disintegration has not attracted as much interest, and the elaboration of a definition has not been pursued in depth. Only Scheller and Eppler (2014, 26) have attempted to fill the vacuum—conceptualizing this phenomenon by defining disintegration as those “erosion processes promoted by individual or collective actors […] which lower the legal, economic, territorial, socio-cultural and/or legitimating integration level” undermining “the unity of the internal market, the Monetary Union and the European legal area.” Within nation-states, these processes lower territorial integration, undermine the unity of the state, fuel internal tensions, and encourage opportunistic and divisive behaviors that hinder cooperation between the different parts of a multilevel state. Applying Scheller and Eppler’s rationale, those aspects of equalization that weaken the ties between a territorial subunit and the national level, thus hindering dialogue and cooperation, will be considered disintegrative. Similarly, lack of participation by the territorial subunits will also be understood as promoting disintegration, since this may result in isolation or opportunistic behavior that undermines the principle of horizontal solidarity.

In sum, integration and disintegration are dynamic processes that can happen at the same time at the institutional, territorial, economic, or even socio-cultural levels (Scheller & Eppler, 2014, 26). The article will analyze the integrative and disintegrative potential of the different elements of equalization mechanisms in terms of diversity accommodation, by focusing on the territorial dimension of integration. The other dimensions (economic, institutional, etc.) will also be considered, as far as they are instrumental for territorial (dis)integration. The aim is to identify the aspects that may increase the allegiance to the state by promoting dialogue and cooperation among the different components of a multilevel state, thus contributing to accommodating diversity, as well as those factors that may hinder these values by fostering disintegration and increasing contestations of the current political settlement which could in turn fuel secessionist movements.

The choice of the United Kingdom as a case study is not trivial. In fact, among Western countries, the United Kingdom is the most recent state to experience a secessionist challenge following the Scottish independence referendum in 2014.Footnote 2 This challenge is still potent, particularly considering the will of the Scottish National Party (SNP) to hold a second consultation after leaving the European Union.

Territorial Diversity in the United Kingdom and Scotland’s Secessionist Aspirations

The origins of the territorial configuration of the United Kingdom date back to the union of the parliaments of England and Scotland in 1707, with the passing of the Acts of Union that led to the creation of the United Kingdom of Great Britain. The independence of Ireland in 1916 after the failure of Home Rule and the progressive loss of the colonial empire have shaped the current model (Kendle, 1997), which was decisively transformed after the approval of devolution for Scotland, Wales, and Northern Ireland in 1999. However, the establishment of self-government through the Scotland Act did not stop the secessionist aspirations of the Scottish National Party (SNP). After an initial failed attempt in 2010, in 2012 the Scottish government agreed with Prime Minister David Cameron to hold a referendum on Scottish independence.

Although the Scottish electorate voted “no” by 55.36% to 44.70% with a high turnout of 84.59%, support for independence was higher than London had expected when it authorized the referendum. This result demonstrated the need to extend Scottish self-government to counter the secessionist bid. The support for independence was evidence of the failure of the British government’s strategy of excluding devo-max (the devolving of all powers to Holyrood other than defense and foreign affairs) as an alternative in the referendum, which, instead of weakening the SNP’s aspirations, had ended up boosting them.

The extension of self-government was granted by the Scotland Act of 2016. This Act recognizes the permanent nature of the Scottish government and parliament—granting the latter powers to reform the electoral system subject to a reinforced two-thirds majority. Additionally, the Sewel Convention was codified, whereby the Westminster parliament agrees not to legislate on those matters devolved to the Edinburgh parliament without the express consent of the latter. On the fiscal and taxation front, Scotland’s financial autonomy was strengthened—giving the territory greater powers over income tax, VAT, and air tax. Finally, Scotland also assumes powers in areas such as social services, employment, transport, abortion, and Crown property located in Scotland (Page, 2019, 127–138).

The reform of Scottish self-government was the culmination of the process initiated in 2010 which intended to ease the tensions between London and Edinburgh, and left behind the question of independence as the referendum was characterized by both parties as a decision for a generation. However, the United Kingdom’s exit from the European Union following the 2016 referendum, in which the majority of the Scottish population opted to remain, substantially altered the starting conditions. In fact, remaining in the European Union was one of the main arguments against independence, as it would mean leaving the common market and significantly weakening the Scottish economy. The frustration generated by Brexit against the will of the Scottish electorate is coupled with a growing sense of grievance on the part of the regional executive as it believes that the withdrawal from the EU has led to an incipient process of recentralization. For example, the London government refuses to return to Scotland part of the competences repatriated from Brussels, notably those in areas such as agriculture or fisheries (McEwen, 2019). These factors have provoked a revitalization of the pro-independence option, with the Scottish government led by the SNP demanding a second referendum after Brexit is fully completed. The British government’s refusal to authorize a second referendum prompted the SNP to appeal to the UK Supreme Court (UKSC) with the intention of validating the passage of a law calling for a new consultation on Scottish independence, set for October 2023. However, this possibility was unanimously rejected by the UKSC, which deemed that a referendum on independence relates to a matter reserved to the UK parliament as it concerns the Union of the Kingdoms of Scotland and England.Footnote 3 In response to this rejection, the SNP plans to approach the next general election as if it were a plebiscite on the issue, with the intention of obtaining a resounding mandate with which to pressure London into accepting a second referendum.

Exploring the Features of the UK Territorial Funding Arrangement: The Barnett Formula

As this analysis will be framed following a legal perspective, it will focus on those components that are related to the notion of fiscal constitution in the broader sense, hence not only paying attention to those elements “formally incorporated in some legally binding and explicitly constitutional document,” but also “customary, traditional, and widely accepted precepts” (Buchanan & Wagner, 1977, 24). This includes sources of law without formal constitutional status and political facts that influence the interpretation and implementation of the rules and determine the way in which a system functions and evolves, as in this case theory cannot be separated from practice. Thus, the components that make up the internal architecture of equalization mechanisms will be investigated with the aim of identifying the integrative and disintegrative effects that these elements have in the territorial accommodation of diversity and, in particular, of national minorities in the UK. A brief description of them is presented below, before delving into the analysis of their (dis) integrative potential in relation to subunits facing secessionist challenges. These components include:

The legal entrenchment of the program, i.e., the legal foundations of equalization programs that can be classified into three main models: constitutional entrenchment, legal enactment, and an informal consensus on the goals of fiscal equalization via intergovernmental cooperation (Shah, 2007a, 294).

The nature of the redistribution refers to the determination of the overall funding of equalization with a particular emphasis on the origin of the funds (vertical and/or horizontal dimension). Additionally, it is also possible to draw a distinction between open-ended systems, i.e., those in which there is no upper limit to the total pool of equalization, and close-end models wherein the total pool of money is exogenous as it is generally linked to the revenue raised by a certain tax which depends on the economic cycle (Ahmad & Brosio, 2018, 179–180). Lastly, there are integrated programs in which all subunits receive transfers and stand-alone programs that only envisage transfers to those subunits that qualify for equalization if they fail to meet the general standard.

The level and components of equalization. In this regard, it is possible to distinguish between the level of equalization and the components that the system would try to equalize. The level of equalization alludes to how much equalization would be pursued, taking into consideration the potential tradeoffs with respect to economic growth, financial stability, or political incentives (Ahmad & Brosio, 2018, 171–174). Additionally, equalization can be on gross or net terms. Gross equalization is directed toward bringing relatively poorer subunits in line with the national average or to another standard, leaving the fiscal capacity of the richer subunits unaffected. In contrast, a net equalization program aims to elevate the fiscal capacity of the relatively poorer subunits at the expense of the fiscal capacity of the richer. The second element, the component of equalization, refers to the economic magnitude that the mechanism aims to equalize, i.e., revenue capacities or expenditure needs.

The degree of conditionality. Conditional or earmarked transfers are a common feature in multilevel states, in which the central government imposes a series of requirements upon the transferred funds which must be satisfied by the territorial subunits in order to receive them (Shah, 2007b, 5–6). In most of the cases, these conditions are input-based, with the national level conditioning the transfers to a specific and exclusive type of expenditures (e.g., health, education, infrastructure, social services, etc.). A second possibility is to establish output-based transfers, by conditioning the funds on the accomplishment of a certain result but without imposing any obligation on how to achieve that goal. Furthermore, conditionality can vary in scope—resulting in either soft or hard conditionality. The strings attached to a transfer can be classified as soft when they require only adherence to broad and generally undisputed principles, such as accessibility to public services or the prohibition of interterritorial discrimination. In contrast, hard conditionality is prescriptive, as the territorial subunits need to meet specific criteria such as balanced budgets, a given degree of spending allocated to a program, or a minimum level of taxation.

The institutional administering of the program. Equalization compacts are complex financial schemes that require an institutional framework to manage their implementation and functioning. Although different institutional arrangements can be used, such as a central government agency, the dominant pattern in comparative perspective is to allocate this function either to an independent arm’s length agency or to an intergovernmental forum.

The length of the program. Equalization mechanisms can include sunset clauses. These establish the maximum length of the program in place, which will expire after its completion if it is not renewed. Such renewal can extend the program either in its current form, or in a revised fashion. Another possibility is to let the program expire and then establish a new one, although this new program would be similar in nature, especially if the main principles governing equalization were entrenched in a norm such as the constitution or a national law.

Dispute resolution. First, a distinction must be made between mere political criticism and legal disputes. While political criticism of the equalization compact can be channeled through the institutional (frequently also intergovernmental or technical in nature) framework responsible for managing the program, legal disputes may end in court. Since the latter may require the interpretation of constitutional and legal provisions as the result of an intergovernmental conflict that generally involves one or more territorial subunits and the national level, the issue is normally adjudicated to the highest court in the land.

Legal Entrenchment of the Program

The distribution of financial resources among the different nations that make up the United Kingdom has been a controversial issue since the nineteenth century. The first precedent of a formula to allocate spending dates to 1888, when the Chancellor of the Exchequer George Goschen implemented a mechanism to calculate funding for services in Scotland and Ireland compared with England and Wales. The Goschen formula allocated the funds on a population ratio of 80-11-9 to England and Wales, Scotland and Ireland, respectively (House of Lords, 2009, 19).

The Barnett formula, a sophisticated update of Goschen, is an allocation mechanism of the tax revenues from the UK government to be spent by the devolved administrations of Scotland, Wales, and Northern Ireland. Although it was introduced as a temporary solution in 1978 as a tool for assigning block grants to the executive departments that ran the administrations of the three territories (Brown et al., 2018), the formula has continued in place and gained importance with devolution. Due to the formula’s nature and the peculiarities of the British system, the Barnett formula is not legally entrenched. Thus, it is neither enshrined in a statute nor given any legal or constitutional form. As a result, the Barnett formula is simply a policy of the British government, set out in an internal document of the Treasury; the Statement of Funding Policy (Keep, 2022, 12).

The origins of the Barnett formula are not entirely clear because the decision to adopt this scheme was not publicized by the British government. In fact, the decision was only made public in 1980 during a Select Committee hearing by the Scottish Secretary George Younger (Heald, 1980, 12). This informal consensus was agreed within the Labour government of Callaghan in the run-up to the failed first attempt at devolution and was meant to be a temporary solution for allocating government spending to Scotland. It was conceived as an automatic mechanism to territorially distribute public spending and avoid internal disputes between government ministers on how much the changes in public expenditure should be allocated between England and the rest of the country (Barnett, 2000, 70). Initially designed for Scotland, the formula was later extended to Northern Ireland in 1979 and to Wales in 1980.

Although the devolution plans of the Callaghan government faded after the adverse referendum results in Wales and Scotland (Bogdanor, 1999, 188–200), the Barnett formula was kept and continued in place after the Conservative victory in 1979 as a convenient mechanism to allocate spending to the Scottish, Welsh, and Northern Ireland Offices. Hence, despite the Barnett formula not being a product of devolution per se, it has been precisely this process of territorial distribution of power that has highlighted its importance while at the same time questioning the need for legal entrenchment. In fact, devolution posed an opportunity to settle the legal entrenchment of the formula and constrain the power of the Treasury over its amendment, which is unlimited in its current form (Keep, 2021, 9). However, despite some calls made at the time for the Barnett formula to be enshrined in the devolution legislation (it was included in the White papers as Mclean, 2005, 86 notes), the system did not change and remains in force today with only minor modifications from its original design.

Consequently, the Barnett formula rests on an informal decision by the Treasury, as if it were a matter of internal policy within this branch of government and not a matter of law (Bell & Vaillancourt, 2018, 85). Thus, the British government is free to change the allocation system at any time, without consulting the devolved administrations or securing an approval in parliament (Keep, 2022, 12). This lack of legal entrenchment can be conceived as a disintegrative force, as it results in transfer payments depending exclusively on political actors, thus limiting the degree of certainty about the territorial financial arrangements in the long term and hindering the financial planning of the devolved administrations. This issue was highlighted as one of the weaknesses of the devolution system since it leaves the Scottish and Welsh executives “at the mercy of the goodwill” of the government of the day in order to secure their funding.Footnote 4 This is particularly noticeable in light of the limited initial fiscal powers of these administrations, which were later enlarged in the case of Scotland and, to a lesser extent, Wales.

Despite the lack of solid legal foundations for the Barnett formula, the threat of repeal or substantial alteration by the national government without the consent of the devolved parliaments seems low. Although as a matter of law this would be within the prerogatives of the British Cabinet due to the absence of any legal entrenchment, in practice, such a decision would shake the foundations of devolution and would lead to direct confrontation between London and the executives of Edinburgh, Cardiff, and Belfast. Thus, it should come as no surprise that the Treasury normally consults the devolved administrations on any changes to the Statement of Funding Policy. In fact, a substantial alteration of the Barnett formula that would decrease the funding of the devolved governments adopted without their consent would not only jeopardize the system of devolution, but also boost support for secession. Moreover, such a decision does not seem plausible because of the internal dynamics of the British system of government, which is characterized by a high degree of mutual trust and respect for unwritten rules and conventions. Furthermore, considering the formula’s long-standing precedent—the formula has lasted for more than half century without substantial changes—it could be argued that the devolved administrations have a de facto guarantee that the Barnett formula is not going to be substantially changed or repealed by the British government without prior consultations with the affected devolved administrations (Bogdanor, 1999, 249–250). This informal guarantee is based on the existing high levels of mutual trust in the UK’s political practice, substantially reducing the disintegrative potential that could be embedded in a system without any legal or constitutional safeguards.

Notwithstanding the expectations at the time of its creation that the Barnett formula would be a transitional system to be replaced by a more complex allocation model, this did not happen with the implementation of devolution in 1999 or the significant extension of taxation powers to Scotland following the approval of the Scotland Act of 2016, which only led to minor changes to the formula. The core of the system is unlikely to change in the near future, as the simplicity and informality of the system are considered two of its strengths. Even more so if one considers that opening a complex debate about a hypothetical reform would probably require a negotiation process with the devolved governments and the inclusion of the compact in a legal statute, thereby reducing the current unlimited powers that the British executive enjoys over the allocation of spending.

Nature of the Redistribution

The funding of devolution by the UK government is based on a block grant system. These grants are adjusted annually by the Barnett formula according to the population size of each nation and a comparability index that captures the extent to which a policy area is devolved (Heald, 2020, 522). The formula is designed to give each devolved government the same pounds per capita adjustment in funding, following the subsequent logic: any change made by the UK government to public spending in England on devolved functions leads automatically to a change in the budget of the devolved administration in reference to their relative population. The formula is defined as follows:

$$\begin{aligned} {\text{Change}}\;{\text{in}}\;{\text{the}}\;{\text{devolved}}\;{\text{budget}} & = {\text{Change}}\;{\text{in}}\;{\text{UK}}\;{\text{government}}\;{\text{spending}} \\ & \times \;{\text{Comparability}}\;{\text{percentage}} \\ & \quad \times {\text{Population}}\;{\text{share}} \\ \end{aligned}$$

The comparability percentage refers to the extent to which a policy area is devolved, which is set by the Treasury in the Statement of Funding Policy (HM Treasury, 2021, 44–70). These percentages range from 100% for those areas that are fully devolved—such as health or education—to 0% for matters that are the sole responsibility of the UK executive such as defense, foreign affairs, or international trade. In the case of policy areas where the British government stills retains some competences, the percentage is set accordingly between 0 and 100. It is also important to note that the comparability percentages also vary from nation to nation as the scope of devolution differs. For instance, justice is devolved in Scotland and Northern Ireland but not Wales, while the powers over work and pensions are almost fully devolved in Northern Ireland but to a much smaller extent in Scotland and Wales. For its part, the population share of the four nations is determined yearly by the Office for National Statistics in relation to that of England, with the most recent data being 9.67% for Scotland, 5.60% for Wales, and 3.35% for Northern Ireland (HM Treasury, 2021, 43).Footnote 5

The total pool of resources allocated by the British government to the funding of the devolved administrations is determined on an ad hoc basis in the national budget as a result of the spending assigned to England (Edmonds, 2001, 9–12). Consequently, increases to the spending in England will lead to larger transfers to the devolved governments, while cuts in spending in England will result in a decrease in the funding of the devolved administrations. These changes to the devolved administration’s block grant are commonly denominated “Barnett consequentials” (Keep, 2022, 10). Such a model gives a wide margin of flexibility to the British executive to adapt to economic shocks and achieve macroeconomic stability at the expense of the finances of subnational governments. However, the formula-driven nature of the model reduces the uncertainty embedded in the system, as the devolved administrations can predict the changes that will be applied to the block grant once the budget is released by Whitehall.

The block grant system that finances devolution is a vertical grant paid solely by the British government from its general revenue. Additional funds transferred to the devolved administrations fall outside of the Barnett formula, as this mechanism does not consider spending in other areas such as welfare (Bell, 2015, 211). Although vertical models can be interpreted as an integrating force that reduces secessionist claims in those subunits that are receivers of funds—i.e., the three devolved nations—this argument is obscured in the British case because of the existing trade-off between transfers and autonomy. In this case, seceding would imply losing the block grant but also a significant gain of financial autonomy as this is quite low in a centralist system like that of the United Kingdom. For this reason, the integrative potential of the block grant system should be understood as essentially neutral. However, it is also potentially unifying if the British executive presents itself as a benevolent benefactor that increases the funding of the devolved administrations by deciding to allocate more spending to England, because this decision would result in the “Barnett consequential” of transferring more resources to the devolved governments. In this way, the British executive could try to use the system to increase loyalty toward London, cultivating a sense of belonging to the common polity of the UK; a strategy that would only work in case of increased spending and that could easily backfire if the “Barnett consequential” results in a decrease in funding for the territorial administrations.

The financing system of the devolved governments by the British executive is, in essence, an integrated revenue sharing mechanism in which subunits receive funds from the British government to cover the costs of the devolved powers. Because the block grant is financed from general revenue, the system is open-ended with no limit to the total amount of funds, as these are determined by the application of the Barnett formula to the previous block grant. This system avoids the perverse incentives of zero-sum game programs, as the devolved nations do not compete for increased funding, since funding is dependent on the level of spending in England. Thus, the combination of these two characteristics—an integrated open-ended system in which all subunits receive funding without competition—results in a low potential for conflict and can be considered to be an integrative force.

Level and Component of Equalization

The Barnett formula determines the significance of the changes to the expenditure of Scotland and Wales in relation to the previous block grant. The size of the block grant and starting levels in per capita spending were initially set in 1979 and have evolved with time alongside the increase or decrease of English spending. Additionally, some block grant adjustments have been introduced to reflect the devolution of new tax powers or welfare responsibilities to the devolved nations (Keep, 2022, 21–22).

For various reasons, such as the economic backlog of Scotland and Wales with respect to England, the original block grant allocated a greater level of public spending to Scotland and Wales than their population figures justified (Barnett, 2000, 70), resulting in a spending per capita significantly higher than in England. For instance, the overall spending level per capita in Scotland in 1979 was 22% higher than in England (House of Lords, 2009, 21). These differences in per capita spending were intended to be transitory, because the formula was planned to cause spending per capita on comparable devolved spending to converge across the four nations (Bell, 2015, 210). As the devolved nations have higher level of per capita spending, equal increases of funds represent a smaller increase in percentage, reducing the gap and progressively achieving convergence in per capita spending—a phenomenon commonly known as the “Barnett squeeze”. Consequently, the Barnett formula should lead to full equalization of revenue on comparable devolved services in the long run, allocating yearly public spending equally across the four nations (Montes-Nebreda, 2021, 337). In a certain sense, the Barnett formula should result in a process of reverse gross equalization, progressively achieving the convergence in the spending per capita of the devolved nations without affecting those of England.

However, practice has proven this convergence to be much slower than expected. There are several factors that explain this slow progress. The first is that the formula does not consider the different rates of population growth (Heald, 2020, 523). Although the formula indexes the variations in spending by the population share of each devolved nation, the base line—the block grant—remains unchanged. As the initial block grant accounted for surplus per capita spending in the regional administrations, these higher levels of spending in Scotland and Northern Ireland—and to a lesser extent in Wales—with respect to England were locked in the system. Further, with the population in England growing steadily, Scotland’s population share has declined, slowing down the process of convergence (Cuthbert, 2020, 435–437). A second reason is that convergence only takes place when the spending in England is increased. If it decreases, as is the case during periods of austerity, the convergence effect of the Barnett formula is reversed—widening the gap in per capita spending between England and the devolved nations (Paun et al., 2021, 15). Additionally, formula-bypasses also work against convergence. These are changes to the block grant that are made outside of the scope of the Barnett formula, and that consequently do not result in a “Barnett consequential”. This was the case of the spending on the Olympics in London, or the increase in funding to Northern Ireland as part of a 2017 Confidence and Supply agreement between the Conservative Party and the Democratic Unionist Party.

The UK system of territorial funding is based exclusively on revenue capacity without taking into account any assessment of expenditure needs. As Lord Barnett himself has acknowledged, focusing only on the variations in expenditure was a deliberate decision in pursuit of simplicity as the system was intended to be a “stopgap until a needs-based system came into operation” (Barnett, 2000, 69). However, the formula has survived the passage of time and the implementation of several rounds of devolution without paying attention to the actual needs of these territories. As a result, the Barnett system has allowed the spending per capita in the devolved nations to remain higher than in England, generating discontent among English politicians that see it as unfair—including Lord Barnett himself (Heald & Mcleod, 2005, 100).Footnote 6 This is particularly pronounced in the case of Scotland, which enjoys markedly higher public spending than England despite being close to the UK average in terms of economic output per person (Paun et al., 2021, 20). The reasons for this dissatisfaction, which can be considered a disintegrative force, come not from the fact that Scotland receives a higher amount of funding per capita, but from the general perception that this allocation exceeds the needs of that territory. This argument is based on several assessments carried out by the Treasury over the years. Although these reports recognized that the devolved nations had greater needs than England due to geographical and socio-economic factors, they also found that the three devolved nations were overfunded when compared to similar needs in England (Paun et al., 2021, 17). In fact, a report by the House of Lords in 2009 concluded that Scotland presented the greatest difference (18 percentage points), followed by Wales (10 points) and finally Northern Ireland (5 points) (House of Lords, 2009).

This perception of unfairness has generated recurrent debate about the need to reform the Barnett formula to include some sort of needs base criteria—or to replace it if this proves impossible. One of the most comprehensive reform proposals was put forward by the Holtham Commission in 2019. Established by the Government of Wales to study the funding of devolution, this commission delivered a report which called for replacing Barnett with a needs-based formula, because the current system fails to recognize the greater public service funding needs of Wales relative to England (Independent Commission on Funding & Finance for Wales, 2010, 16–29). More precisely, the Holtham Commission suggested the adoption of a needs-based formula that would take into account six different variables relating to demographics, deprivation, and costs, which would then be used to identify the need for public services and therefore greater fundingFootnote 7 (Independent Commission on Funding & Finance for Wales, 2010, 20).

Although the proposal to replace the Barnett formula was rejected by the British government, the UK executive agreed to include a needs-based factor, known as “funding floor,” to address the concerns of future underfunding due to convergence.Footnote 8 This floor has a clear integrative potential for Wales as it guarantees that the devolved spending allocations that result from the Barnett formula will not fall below 115% of per capita spending on similar services in England, limiting the convergence effect at that rate.Footnote 9 This integrative force also applies to Scotland because of the expectation that this solution could be applied to that territory in the future in the event of a similar scenario, since Scotland stands to lose the most if a strictly needs-based system were introduced, as its per capita funding is greater than its needs (Mclean, 2012, 647).

Scotland, Wales, and Northern Ireland have enjoyed public expenditure levels above those of England since the middle of the twentieth century, a situation that has been preserved under Barnett. Although theoretically designed to achieve full equalization with England in the long term, the expected “Barnett squeeze” has not materialized in practice for the aforementioned reasons. Therefore, the practical application of the Barnett formula can be considered as an integrative force in relation to the devolved nations, as this mechanism has allowed subunits to maintain higher levels of per capita spending than in England, without fearing a budget “squeeze.” Moreover, this integrative potential has been reinforced by the “funding floor” approved for Wales, which will guarantee a minimum funding level of 115% with respect to England despite any reform to the system currently into force. Conversely, the maintenance of the gap in expenditure per head between England and the devolved nations can paradoxically be understood as a disintegrative force with respect to England. Not only because the system has not delivered the expected convergence and thus has kept England underfunded, but also because it has failed to address the diverse spending needs that exist among English regions. A study conducted by the Institute for Government concluded that there are significative differences in spending among English regions—with the regions in northern England and the Midlands appearing to be relatively underfunded, and London appearing to benefit from a disproportionately high spending per person (Paun et al., 2021, 20). This imbalance, combined with the lack of convergence—which is most pronounced in the most deprived areas of England—has the potential to increase territorial tensions and create backlash toward Barnett, promoting disintegration. In fact, fear of an English backlash about expenditure inequalities is not new, as this was identified as a risk in the late 1970s during the first devolution debates (Heald, 1980, 11). A possible solution to this conundrum would be the implementation of a needs-based model and the division of England into regions following the path initiated by London in 1998. However, the first seems politically impossible given the likely negative reaction of the devolved nations—particularly in Scotland where it could be used as a casus belli by the secessionist movement—while the second seems to have been discarded after the devolution plans to North East England were rejected in a 2004 referendum.

Conditionality

The grants that the devolved administrations in Scotland, Wales, and Northern Ireland receive to fund their spending are not subject to any degree of conditionality—a situation that contrasts with the tight control exercised by the British government over spending carried out in the regions in England by local and health authorities, which are largely obliged to closely adhere to the UK government’s priorities (McLean & McMillan, 2003, 47). Hence, the devolved governments are free to decide if and how they want to spend those funds without any obligation to meet minimum standards of service provision (Bell, 2015, 211). This means that officials in Edinburgh, Cardiff, or Belfast are not bound by the spending decisions of Whitehall. They are affected by the “Barnett consequentials,” as the increase or decrease in spending in England leads to changes in the block grant due to the operation of the Barnett formula, but they can allocate the additional money (or the necessary cuts) however they wish. In other words, these administrations are free to allocate the block grant among different departments without any interference or scrutiny from the Treasury. This freedom is one of the Barnett formula’s greatest advantages (Edmonds, 2001, 13). If the block grant increases due to higher spending in England in, for instance, health, the devolved administrations are not required to spend the additional funds in health. In fact, technically, there is no obligation to spend the money from the block grant on devolved functions, and the funds could also be used to cut taxes or to increase the savings and create a budgetary surplus. However, this is difficult in practice because much public spending is guided by demand, thereby limiting the scope for discretion (Edmonds, 2001, 10).

In any case, the absence of conditionality in legal terms does not imply that it does not exist from a political point of view (Bell & Vaillancourt, 2018, 85). For instance, it would be difficult to justify to the electorate the underfunding of public services if transfers from London were not reduced. On the other hand, in the event of a spending cutback in England, the devolved administrations could shift the blame to the central executive for any cuts they would be forced to make, and frame the inconvenience as a consequence of the Barnett formula.

The block grant allocations to devolved administrations work as substitute of own revenue without carrying any limitations or constrains, and consequently embed a strong integrative potential that could be used to discourage secession. This is a particularly relevant factor in the case of Scotland, particularly considering that this territory is overfinanced in relation to its needs and that the system grants Scotland a comparatively better financial position in relation to the other nations—without any strings attached. Thus, the unconditional overfinancing of Scotland that results from Barnett can be portrayed by the UK as a benefit of the Union, in order to foster a sense of loyalty to the UK common project and to persuade Scots to strengthen their allegiance toward the center and reject the path to independence.

Institutional Administering of the Program

The administering of the UK block grant is the exclusive right of the British government as part of its economic and budgetary policy. A central government agency, the British Treasury, determines the allocation criteria—presently the Barnett formula—and oversees the transferal of funds to the devolved nations for the funding of devolved functions. Therefore, due to the design of the system, the devolved nations’ expenditure depends upon the success of English ministers in defending their programs against the Treasury with the size of the grant being updated yearly as a result of the “Barnett consequentials” (Heald, 1980, 16). This leaves the regional institutions exposed to the budgetary policy of the British government in relation to England, a policy over which they have no direct control. However, this lack of decision-making power does not mean that the devolved administrations have refrained from expressing their opinion on the matter, since there is a long tradition, even before devolution, of Scottish politicians lobbying the Treasury in order secure higher funding for Scotland (McLean & McMillan, 2003, 54–55).

The centralized nature of the transfer scheme in which the national level institutions are solely responsible for the management of the Barnett formula entails the risk of generating a centrifugal force, precisely because of the lack of territorial participation in the administration of the system. However, this potential for disintegration is attenuated by the established practice of the British Treasury of consulting with devolved administrations on the Statement of Funding Policy. Moreover, the Treasury also commits to consult with these bodies on any proposed changes to the Statement (Keep, 2022, 12). The custom of consulting the devolved administrations increases the predictability of the system, facilitating the work of these governments in preparing their budgets. This cooperation is the result of the high degree of mutual trust that exists within the UK, and is not limited to devolution-related transfers but also encompasses other grants provided by the UK government not covered by the Barnett formula. These include welfare or public sector pensions, which are negotiated between London and the devolved administrations (Keep, 2022, 5–7).

The main forum for consultation and debate between the UK government and the devolved administrations in financial matters has traditionally been the Finance Ministers Quadrilateral, an intergovernmental forum where the Chief Secretary to the Treasury and devolved finance ministers meet to discuss the funding of devolution (Gallagher, 2012, 201). However, the quadrilateral suffered many of the common shortcomings of the weak system of intergovernmental relations in the United Kingdom; because of this lack of institutionalization the forum did not meet regularly, as it was subject to the political situation and will of the British government. Some of these flaws have been addressed during the revamping process that the British system of intergovernmental relations underwent (Anderson & Schnabel, 2022), with the creation of the Finance: Interministerial Standing Committee (F:ISC). The F:ISC should typically meet each quarter with the aim of considering the impact of economic and finance matters affecting the UKFootnote 10. Although it is still too early to gauge its effects in practice, all indications are that the Treasury will maintain its lead role, consolidating the centralized nature of the management of devolution financing (McEwen, 2022) despite the complaints from the devolved administrations—notably Scotland—about their demands to the Treasury falling on deaf ears.

A possible solution to this deficit in intergovernmental cooperation, as a 2009 report of the House Lords suggested, would be the creation of an arm-lengths agency following the Australian model (House of Lords, 2009, paras. 72–76). This independent body would be charged with the oversight and scrutiny of the decisions taken by the Treasury regarding the application of the Barnett formula, including whether certain spending programs result in “Barnett consequentials” for the devolved nations. However, despite the integrative potential that this solution would provide by eliminating a large part of the political component in these decisions, this is unlikely to happen in practice due to the reluctance within the UK government to relinquish control of the system. A more feasible option, according to the Institute for Government, would be tasking the National Audit Office or Office for Budget Responsibility with the duty to “report annually on how changes in the devolved budgets have been calculated, drawing particular attention to any subjective decisions about whether certain programmes should incur in “Barnett consequentials” or other disagreements about how the rules should be applied” (Paun et al., 2021, 38). However, no progress has been made so far in this regard, and it is unlikely in the near future.

Despite the weak and mostly informal nature of intergovernmental cooperation in the UK, there are signs of change in financial matters in the wake of the pandemic, with the number of meetings and the flow of information continuing to increase. Due to the health crisis, the devolved administrations demanded additional funding to implement their pandemic response packages without having to wait for the “Barnett consequentials” after the money was spent in England first. The main argument behind this claim was the lack of certainty over additional allocations that complicated the task of efficiently planning, as the British government was often uncertain how to proceed. In fact, some “Barnett consequentials” that were initially allocated were later subsequently withdrawn when the UK government decided to fund several programs by moving money within existing budgets, rather than using additional funding (Hudson, 2020). These sudden changes in the funding meant that some “Barnett consequentials” did not materialize and consequently the devolved administrations did not receive the expected funds. In fact, the Barnett formula only applies to increases or decreases in spending and not to redirections of funds as the total spending does not change. In order to respond to the claims of the devolved nations, the Treasury came up with an innovative solution, an “unprecedented upfront guarantee” (HM Treasury, 2020). This decision was aimed at giving the devolved administrations certainty and financial flexibility for their budget planning by guaranteeing a minimum coronavirus-related funding to these administrations, regardless of the effective spending allocated by the British government in England (HM Treasury, 2020). Although this decision was an exception to the general rule, it is an example of the increasingly common cooperative initiatives in the British system thanks to the high levels of mutual trust, which work effectively to mitigate the disintegrative potential of a centralized system in which the Treasury is growing more sensitive to the demands of the nations.

Another element that deserves attention is the process of adjusting the block grant to reflect the devolution of new tax powers or welfare responsibilities, as it is one of the most complex and controversial aspects of managing the system. These block grant adjustments (BGA) are intended to ensure that neither the UK government nor the devolved administration is left worse off as a result of the devolution of fiscal powers (Keep, 2022, 21). For this purpose, the block grant is revised upwards in case of the transfer of powers over welfare (as this translates into greater spending requirements), or revised downwards in the event of the transfer of tax powers to adjust for the increased revenue raising powers of the devolved administration. In addition to these changes to the block grant in the base year, the BGA must be indexed in the subsequent years to account for factors such as economic growth or inflation to avoid imbalances that could hinder the financial situation of the UK government or the devolved administration. The methodology used to carry these technical adjustments is agreed upon between the UK executive and the corresponding nation in the so-called fiscal frameworks.Footnote 11

The BGA has been particularly relevant to the Scottish case after the partial devolution of income tax in 2017, with some guarantees being introduced in the Fiscal Framework to ensure that the Scottish government’s overall level of funding would be unaffected if Scotland’s population were to grow differently from the rest of the UK.Footnote 12 In the Fiscal Framework, the UK and Scottish governments agreed on a method for making the necessary adjustments for taxation and welfare to the block grant as a result of the devolution of powers on these matters. These negotiations are not often easy, given not only the technical complexity of the calculations, but also the significant political repercussions of the outcome. For this reason, the agreed methodology was only valid for a transitory period and was due to be reviewed by an independent commission following the UK and Scottish parliament elections in 2020 and 2021.Footnote 13 The results of this report will serve as basis for a joint agreement between the UK and Scottish governments,Footnote 14 with this being another example of devolved nations’ participation in shaping financial relations with the UK government via intergovernmental negotiations.

Length of the Program

The Barnett formula was introduced in 1978 as an easy and straight forward solution to allocate spending among England and the other three nations. As Barnett himself admitted, he assumed that it would be temporary until a more sophisticated method could be devised (Barnett, 2000, 69). Nevertheless, its success has far exceeded the expectations of its creator—who has ended up repudiating the formula—and has remained in force to the present day with minimal modifications.

As a mechanism designed to allocate spending, the formula is not time-bound and therefore its validity should be understood as indefinite. In fact, it will theoretically continue in force even if convergence in spending per capita between England and the other nations were achieved. It is simply part of the Treasury’s internal policy and thus it could be changed at any time without previous announcement or consultation with the devolved governments. Consequently, it is not possible to determine any positive or negative effects of Barnett’s indefinite nature in relation to territorial integration. Thus, the formula is configured as a given, with all the governments involved assuming its long-term continuity since there are no political incentives for reform.

The absence of sunset clauses or formal obligations for review does not mean that the British system lacks periodic evaluation and assessment of how the funds are distributed. As stated earlier, this is done by HM Treasury in the Statement of Funding Policy, which is updated periodically during the spending reviews. Spending reviews are the processes by which the UK government divides the total spending between departments (Keep, 2022, 6). These reviews are usually done on a multiannual basis, without any established schedule. For instance, the review carried out in 2021 set the department budgets up to 2024/2025, and was the first multi-year spending review since 2015 (Harari et al., 2021, 4). Spending reviews have a decisive impact on the budgets of devolved administrations, as the Barnett formula takes the changes in the UK government department’s spending to calculate the annual change in the devolved administrations’ block grants. Thus, the timing of these is crucial because the decision made by the UK government directly affects the elaboration process of the budgets of the devolved administrations, which need to know the “Barnett consequentials” to set their spending limits.

The fact that spending reviews usually cover periods from two to four years is welcomed by the devolved administrations as it gives them some level of certainty with which to plan their spending in the medium term. However, despite the multiannual character of the spending reviews, it is not uncommon for the UK government to change the amount allocated to certain departments—known as departmental expenditure limits—at other fiscal events such as the annual budget or subsequent budget revisions. This leaves the devolved governments in a difficult position, as their budget planning is dependent on these changes which impact their overall spending envelope. Additionally, the lack of transparency by the UK government as to when these spending programs will be announced further complicates the budget planning of the devolved governments, because it is not possible to identify what “Barnett consequentials” will result from these announcements since Barnett calculations made internally by the Treasury are unlikely to see the light of day until the next UK budget (Hudson, 2020). For this reason, the devolved administrations usually need to postpone their budget until the UK government has set its own in order to be certain of the funding they will get from London for that fiscal year.

Dispute Resolution

Despite the Barnett formula being conceived as an easy and straightforward solution to allocate spending between England and the other three nations, this has not prevented conflicts from arising. There are two main sources of disputes in the UK system of devolved financing. The first comes from how certain spending decisions are territorially allocated by the Treasury as this allocation determines the application of Barnett. For instance, if a certain spending program is defined as “UK wide,” it will not result in any “Barnett consequentials.” If that spending is perceived by the devolved administrations as territorially concentrated in a particular area, it would most probably create discontent and, consequently, encourage disintegration. The same situation applies when certain spending decisions are defined as “related to England and Wales” when, in reality, all the spending will be carried in England as they concern a matter not devolved to Wales. The Welsh government views these situations as unfair, since that spending will result in “Barnett consequentials” for Scotland and Northern Ireland but not for Wales.

As a result, there have been disagreements about the way in which the Treasury interprets and operates the Barnett formula. In such cases, the Treasury outlines the procedure to be followed in the Statement of Funding Policy, committing itself to consider the issue and respond to the devolved administration in the event of a dispute over “whether it is believed the principles [outlined in the Statement] have been broken” (HM Treasury, 2021, 8). However, this consideration will be in a way that “mirrors the arrangements between HM Treasury and United Kingdom departments” (HM Treasury, 2021, 8), meaning that the Treasury will retain the final say—essentially acting as judge and jury. This is because, as the Treasury notes, funding policy and public expenditure allocation across the UK are non-devolved matters and remain the responsibility of the UK government (HM Treasury, 2021, 8).

Probably, the most notorious conflict was the one that arose following the Treasury’s decision to classify all the spending for the London 2012 Olympic Games as UK-wide expenditure. This decision meant that the spending related to the Olympics—including that for regenerating and connecting East London—was outside of the scope of the Barnett formula and consequently would not result in any “Barnett consequentials.” The devolved nations argued that this spending would have resulted in “Barnett consequentials” if it had been carried out independently from the Olympics (Keep, 2022, 12) and decided to raise a formal dispute within the framework of the Memorandum of Understanding and Supplementary Agreements signed between the UK government, the Scottish Ministers, the Welsh Ministers, and the Northern Ireland Executive Committee in October 2013. The MoU created a Joint Ministerial Committee tasked with the job of considering disputes between the administrations if these could not be resolved bilaterally.Footnote 15 The process of settling intergovernmental disputes that cannot be resolved directly between the responsible department and its devolved counterpart involves a meeting of ministers from the different governments, which is chaired by a UK government minister from a non-involved department (Paun et al., 2021, 22). The devolved ministers can make their case with the possibility of asking for independent analysis to help find an acceptable middle ground.

After several meetings, the devolved administrations and the UK government reached an agreement to solve the dispute concerning the application of the Barnett formula to funds for regeneration and transport within the budget for the Olympics Games of 2012. The agreement provided the devolved administrations with “Barnett consequentials” worth 30.2 million pounds (16 for Scotland, 8.9 for Wales, and 5.4 for Northern Ireland) for the Olympics-related spending carried out after 2010 (Cabinet Office, 2011).

A complaint made in 2020 by the Welsh government about the Treasury’s decision to classify the construction of a high-speed rail line as “expenditure in England and Wales” had a different outcome. Cardiff complained that this spending would result in “Barnett consequentials” for Scotland and Northern Ireland but not for Wales. Despite the joint designation, the line would not benefit Welsh citizens as it would lie entirely within England. However, the Treasury declined to change its policy, arguing that heavy railway infrastructure is not devolved to Wales and thus the spending could not be classified as strictly English. This decision infuriated the Welsh government, as it contrasted with a 2015 decision where a similar project was considered as spending in England only. These seemingly contradictory decisions reinforce Alan Trench’s characterization of the Treasury’s power over the block grant and formula system as arbitrary, because it “acts as both judge and jury in its own cause” (Trench, 2010).

A second source of disputes has recently surfaced in Scotland as a consequence of the devolution of tax powers over income taxation. These discrepancies are normally a result of the application of the fiscal framework. The dispute resolution mechanism embedded in the fiscal framework applies to the BGA, but not to other disputes arising from the interpretation made by the Treasury about whether certain spending decisions made by the UK government result in “Barnett consequentials.” The framework envisions a first stage where differences can be settled at working level by the government officials.Footnote 16 If this proves impossible, concerns are escalated to the ministers who would then discuss the issue in a meeting. If the conflict persists, the disputed finance would be paused, meaning that no decisions or actions can be taken by either government in relation to the disputed amount until the dispute is resolved.Footnote 17 Both governments would then seek technical advice and use that input to solve the dispute.Footnote 18 If it is not possible to reach an agreement the dispute falls, and the fiscal transfer between governments would not take place—again reinforcing the Treasury’s dominant position by compelling the Scottish government to accept a middle ground solution.Footnote 19

If either government wishes to pursue the dispute further, it could be referred to the F:ISC as this body has replaced the “Protocol on the Resolution and Avoidance of Disputes” attached to the Memorandum of Understanding between the UK government and the devolved administrations. However, it is still too early to judge the effects of the new mechanism, since it has not yet been applied in practice.

At the theoretical level, along with the resolution of disputes through intergovernmental negotiations there is the option of launching a court challenge. However, it is very unlikely that disputes over the Barnett formula could lead to a challenge before the UK Supreme Court due to the formula’s lack of legal entrenchment. It is doubtful that the UK Supreme Court would accept hearing a challenge on the application of the formula referred by the devolved administrations, since the issue would not be enforceable as a matter of law. For these reasons, and despite the Court being considered as impartial—or even slightly pro-devolution during its short history—it is not surprising that no cases have been brought before the UKSC. This is also the general trend in similar models, such as Canada or Australia.

Although the British system has developed different dispute resolution mechanisms through intergovernmental cooperation, the integrative potential of these mechanisms depends on the Treasury’s willingness to find a common ground solution. This is because the current dispute resolution mechanism allows the UK government to determine the outcome of disputes of which it is a party, and to do so without having to give a full account of its decisions such as whether a certain spending announcement produces extra funding for the devolved bodies (Paun et al., 2021, 38). The Treasury has demonstrated some sensitivity to the interests of devolved nations, as illustrated by the example of the Olympics. Similarly, intergovernmental cooperation within the fiscal framework has helped to resolve BGA disputes related to side effects of the UK government’s decision to raise the personal allowance that would result in lower tax revenues for the Scottish government. If this cooperative trend continues, the disintegrative effects will be kept to a minimum, bringing the devolved nations closer to the center and allowing them to channel their demands. Nevertheless, there remains latent potential for disintegration subject to the political situation—because as the dispute over the high-speed train in Wales demonstrates, the Treasury retains the power of unilateral decision.

Concluding Remarks

The territorial question has been a recurring debate in the United Kingdom’s history. Despite its traditional unitary character, the different nations that make up the UK have expressed, in different degrees, the desire for self-government throughout their history. Conflicts around the territorial distribution of financial resources predate devolution, with the first precedent—the Goshen formula—going back to 1888. Although initially designed as a temporary solution to allocate spending among the executive departments that ran the administrations of the three territories, the Barnett formula has continued in place, gaining extraordinary importance within devolution. The Barnett formula was conceived as an automatic mechanism that would avoid internal disputes between government ministers over how changes in public expenditure should be allocated between England and the rest of the country. This would reinforce a sense of unity, solidarity, and equality among the nations, in line with the traditional unitary ideal of the United Kingdom. The lasting fortune of Barnett, despite its lack of legal entrenchment, lies in its simplicity and in a common understanding of the need to guarantee enough funding to the devolved administrations, as the contrary would provoke disintegrative trends—particularly in Scotland. Table 1 provides a graphic summary of the analysis carried on in this article.

Table 1 Summary table
Full size table

The United Kingdom’s territorial funding arrangement can overall be seen as a holding together tool as since its inception it has allowed for a greater level of public spending in Scotland, Wales, and Northern Ireland than that which would be justified by their population. Although per capita spending was intended to converge over time, the process has been much slower than expected—to the benefit of the devolved administrations, which have maintained higher levels of per capita spending than in England. Furthermore, it must be noted that the so-called “Barnett consequentials” translate into unconditional funding, over which the devolved administrations have full spending autonomy. Thus, the Barnett system allows room for the UK government to strengthen loyalties toward London, as shown by the different formula-bypasses carried out in recent years or the introduction of a funding floor in relation to Wales. The flexibility that Barnett entails has cultivated a sense of belonging to the common polity of the UK, at the expense of creating some resentment in England. This holds particularly true in Scotland, where the United Kingdom’s government tries to display the overfunding of that territory as one of the benefits of the union that would vanish with secession, leaving Scotland in a precarious financial situation. Indeed, it is no surprise that the Scottish government has never been in favor of replacing the Barnett formula with a needs-based system, as this would lead to a reduction in Scotland’s per capita funding.

The Barnett system also features some disintegrative trends in relation to the devolved nations, although these have had little effect in practice. The dreaded “Barnett squeeze” that could result in a reverse full equalization to the English average has not materialized in practice due to the different rates of population growth and the different formula-bypasses. The latter show the bargaining power that the devolved governments have, especially in the event of hung parliaments or weak executives. Surprisingly, the disintegrative potential of Barnett may be greater in England’s case than in the other three nations. Not only because it fails to address the different spending needs that exist among English regions, but also because it perpetuates higher levels of spending per capita in the devolved nations than in England. The fact that Scotland benefits the most has only increased discontent in some regions of England, where the threat of secession is perceived as a leverage wielded to maintain these higher levels of per capita spending.

The administering of the funding arrangement by the British Treasury is one of the most controversial elements of the system, as this body acts as judge and jury in case of any disputes. However, conflicts have been kept to a minimum thanks to a consolidated tradition of consulting with the devolved administrations on any issues related to the Statement of Funding Policy. Furthermore, cooperation has been recently strengthened with the creation of new intergovernmental bodies such as the F:ISC. The pandemic has proven to be a catalyst that has increased cooperation in financial matters with the creation of new mechanisms to guarantee the funding of the devolved administrations. Increased cooperation has also extended to the block grant adjustments that result from the further transfer of fiscal powers to Scotland, with its government effectively lobbying the UK government to avoid any potential negative effect to its public finances.

The success of the Barnett formula has far exceeded the initial expectations and has lost its temporary nature as a mechanism simply for allocating funding among the nations. The gradual development of a system of territorial autonomy has underpinned the Barnett formula as one of the core elements of devolution, making financial relations a tool to accommodate diversity and hold the country together by guaranteeing a higher per capita level of spending in the devolved nations than within England, while also keeping conflicts over funding manageable. In any case, the system—beyond the particularities of the Westminster model—has room for improvement, especially with regard to the participation of devolved governments in the management of the system. The new UK system of intergovernmental relations is an opportunity to address these shortcomings, although it is still uncertain if the Treasury is willing to relinquish its privileged position and engage in a more cooperative approach with the devolved administrations.