IFS - Flaws in the Barnett Formula make it unsuitable for allocating funding to the devolved administrations after Brexit

26 Apr 2018 09:09 AM

The Scottish Parliament's Finance and Constitution Committee is seeking views on how EU funding for agriculture, economic development and innovation may be replaced after Brexit. IFS researchers Nicolo Bird and David Phillips have submitted evidence.

They argue that:

• The Barnett Formula would not be a suitable way to allocate this replacement funding to the Scottish or other devolved governments. It takes no account of differences in funding needs or population growth between nations. It does not account for the outcomes achieved by funding either.

•  A key consideration is how often funding allocations are updated. Frequent and fuller updates can help target regional development funding at the most disadvantaged areas. On the other hand, they can reduce the fiscal incentives for devolved and local governments to encourage economic growth and tackle deprivation.

• Rather than allocating all replacement funding to the Scottish Government to distribute to specific projects, there may be benefits to making decisions at a UK-wide level or seeking to remain in EU-wide schemes. An example could be funding for research and innovation, where existing EU programmes aim to invest in the best projects across the EU. In recent years, Scottish institutions have won funding that is significantly greater than a population-based share.

David Phillips, Associate Director at the Institute for Fiscal Studies, said:

"The UK is set to receive around €8 billion a year from the EU budget over the next 3 years. But big choices loom about how much to spend on programmes to replace the EU's agriculture, regional development and research and innovation funding after 2020, and how that spending should be allocated and managed.

The Scottish Parliament's Finance and Constitution Committee has asked whether the Barnett Formula would be an appropriate way to allocate funding to the devolved governments. We don't think it would. It's also not clear that funding decisions are always best taken at a devolved level. In science and innovation, for instance, remaining in EU-wide programmes or integrating funding with existing UK-wide schemes would help ensure the best projects – with the biggest gains to society – receive support. This would be good for the UK and for Scotland – which has historically punched well above its weight when competing for science and innovation funds."

Response to the Scottish Parliament call for views on funding of EU competences