Belfast Telegraph

Financing the Olympics

With the Olympic Games 2012 in London taking £100m from Northern Ireland, how will funding allocations be justified?

By John Simpson

The Barnett formula can be deceptive. The Treasury has made the rules for financing the Olympic Games in 2012 so that at least £100m that might have been allocated to Northern Ireland as a ‘Barnett consequential’ will not arrive.

Any increase in public spending on devolved topics applied in England becomes a baseline for a proportionate share in the devolved administrations unless the spending is for the benefit of all of the UK.

The Treasury, despite objections from Belfast and Cardiff, decided that the complete spending on the Olympic Games was a UK-wide benefit. Therefore, no Barnett consequential was allowed.

This decision flew in the face of the justification of the Games budget as, if only in part, a contribution to the regeneration of east London.

A strong case can be made that from a budget of over £10bn about (say) £3bn was a contribution to regeneration in London.

Northern Ireland officials are on record as saying that with that acknowledgement a Barnett consequential allocation to Northern Ireland would have been over £100m.

The argument between Northern Ireland officials and the Treasury, in an unusual disclosure, was outlined to the House of Lords Committee when it visited Northern Ireland.

Welsh officials also outlined the same debate as it affected Wales in the recent Holtham report on how the Barnett allocations have worked for Wales.

On the basis of this example, there is little surprise that the ‘judge and jury’ role of the Treasury in implementing the Barnett allocations is now being questioned.

An independent commission to advise on the formula has been commended.

Scotland, Wales and Northern Ireland have all been given a warning that the working of the formula is seen by some influential politicians as unfair.

Some care is needed before the formula is scrapped. Only when the alternative is decided and assessed should there be any agreement to tear it up.

There are alternatives in the offing that could be operationally perverse.

The formula is simple. Areas such as Scotland, Wales and Northern Ireland receive an allocation of changes in funding for devolved public services in proportion to their population based on an English baseline.

If spending on devolved aspects of health, for example, goes up in England by £100, then Northern Ireland will be allocated an extra £3.43, on the population ratio of England to Northern Ireland.

The first caution is that only the changes in the allocation of funds enter into the arithmetic.

Even if Northern Ireland starts with a higher level of spend than based on population (as is frequently the case) the allocation will be restricted to today’s population ratio.

This, theoretically, means that Barnett should gradually narrow any comparative advantage. The Welsh studies have shown that Barnett has a sharp convergence bias over the years.

Whilst the Barnett formula is easily understood for comparable current spending allocations, it is less functionally logical for capital spending.

Capital spending programmes vary from year to year.

There is no necessary symmetry in capital spending profiles and a year ago Northern Ireland felt the consequences (more than marginally) of a downward revision in the capital spending on health in England.

The Northern Ireland strategic investment programmes are inadequately supported if tied to the Barnett mechanisms.

Arguably the UK system of public finance ought to allow for the lumpiness of capital spending by some form of averaging technique, year on year. For the future, the Barnett genie is out of the bottle.

Whilst the flaws are identifiable, the remedies will be politically contentious.

The Northern Ireland Executive should start work to be better equipped to take an active part in the debate.

Belfast Telegraph

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