Institute of Welsh Affairs

Funding Formula Benefits London, Scotland ... Wales Loses Out

Public spending in London, the South East, Scotland and Northern Ireland is well above the level that would be expected given their relative prosperity, according to a new study for the IWA.

The Search for Balance: Taxing and Spending Across the United Kingdom by Professor Ross MacKay, of the University of Wales Bangor Business School, analyses the operation of the Barnett Formula which distributes government spending between Wales, England, Scotland and Northern Ireland. It concludes that the formula works to the disadvantage of Wales and North East England and in favour of Scotland. At 95.5 per cent of UK GDP per head, Scotland has a level of prosperity close to the East Midlands, but public expenditure levels are vastly different (1997-99 figures):

	GDP per head	Expenditure per head
East Midlands	95.9	£4,770
Scotland	95.5	£6,006
Wales	82.2	£5,625

As Professor MacKay says:

"Generous treatment is possible because the Scottish people are only a fraction of the UK. The Scots ... draw benefit from the importance of being unimportant."

In a preface to the report Brian Morgan, of the Cardiff Business School, comments: "On this rationale the transfer to Wales should have been even more generous." Spending per head for London was £6,711, the high figure reflecting congestion and high housing and transport costs in the capital.

The Barnett Formula is based on population ratios for Wales, Scotland and England in the proportion 5:10:85. This meant that for every £85 increase in expenditure in England, spending would rise by £10 in Scotland and £5 in Wales. The actual population figures in the mid 1970s meant that the figures should have been set out in the ratio 5.12:9.57:85.31 but it was decided to round up Scotland's figure to 10 and to round down Wales's ratio to 5. Professor MacKay says that as a result the Formula "favoured Scotland when introduced ... The division was less than generous to Wales." Brian Morgan notes: "The imbalance in treatment continued until 1992 when new population ratios were calculated and the Formula was readjusted to reflect current population shares. Even then, however, it was still unfavourable because it made no attempt to assess the 'needs gap' between the three countries."

For further information contact John Osmond, IWA Director, on 029 2057 5511.