The Impact of the Barnett Formula on the Scottish Economy: Endogenous Population and Variable Formula Proportions

Abstract

The Barnett formula is the official basis upon which increments to public funds are allocated to the devolved regions of the UK for those parts of the budget that are administered locally.There is considerable controversy surrounding the implications of its strict application for the relevant regions. The existing literature focuses primarily on the equity of the spatial changes to government per capita expenditure that would accompany such a change. In contrast, this paper attempts to quantify the system-wide economic consequences -the real, relative resource squeeze that accompanies the financial relative squeeze -on one devolved region, Scotland.The analysis uses a multi-sectoral regional computable general equilibrium modelling approach.We highlight the importance of population endogeneity, particularly since the population proportions used in the formula are now regularly up-dated.3

‘Policy Scepticism’ and the Impact of Scottish Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints under Devolution

“…For details of the initiative see: http://ewds.strath.ac.uk/Default.aspx?alias=ewds.strath.ac.uk/impact xi The precise way the formula works is given in more detail in Ferguson et al (2003Ferguson et al ( , 2007, though its operation in practice is thought to be rather more flexible, so that what is known as formula bypass can occur (Christie and Swales, 2010;Heald, 1994).This would be additional funding that extends the binding budget constraint and does not trigger the expenditure shifting discussed here. However, such formula bypass is typically linked to the funding implications of decisions taken by the central UK government on devolved budgets rather than funding outwith the block grant for additional expenditure decisions made by the devolved governments.…”

“…vi The nature of the regional economy naturally governs the acceptability of such assumptions. For example, in the island economy of Jersey the institutional framework restricts migration so that supplyside crowding out can be expected even in the long run (Learmonth et al 2007). …”

How serious is a devolved data deficit? A Welsh perspective

“…Scotland has a long history of more detailed economic accounts (IO tables recognised until recently as an 'Official Statistic' and produced by a dedicated team in Scottish Government). To this is added more complex models regularly used in Scotland to inform business and government decisions (for example, see Ferguson et al, 2007). Undoubtedly the better quality economic accounts available in Scotland has enabled greater levels of economic modeling work, and developed macroeconomic models for Scotland have seen numerous uses over the years.…”