The House of Commons Library explains the Barnett formula as follows:
The devolved administrations in Scotland, Wales and Northern Ireland receive grants from the UK Government that fund most of their spending. The largest such grant is the ‘block grant’.
The Barnett formula calculates the annual change in the block grant. The formula doesn’t determine the total size of the block grant just the yearly change. For devolved services, the Barnett formula aims to give each country the same pounds-per-person change in funding.
The Barnett formula takes the annual change in a UK Government department’s budget and applies two figures that take into account the relative population of the devolved administration (population proportion) and the extent to which the UK department’s services are devolved (comparability percentage). The calculation is carried out for each UK department and the amount reached is added to the devolved administrations’ block grant.
The Barnett formula has long been controversial. It was devised in 1978 by Joel Barnett who was then Chief Secretary to the Treasury. It uses a baseline agreed at the time and which has never subsequently been reviewed and is adjusted year-by-year by an amount determined by the Treasury and divided according to the relative proportions of the population in the various devolved nations.
On this basis, Wales gets about 6% and Scotland 10% of each adjustment. The total allocated according to this formula varies according to the budgetary priorities set each year by the UK’s Chancellor of the Exchequer in the Comprehensive Spending Review.
In 2015, following the Holtham Commission review of devolved funding, a ‘funding floor’ was introduced a ‘needs-based’ factor to the Barnett calculation of Welsh funding. This ensures funding for Wales never falls below a needs-related level.
Not surprisingly, there is scope for endless wrangling about the justice of the outcome, and whether it bears enough relation to current needs. This is a matter of interest not just in Wales – the whole population of the UK can take a view on how ‘their’ money is being used and make comparisons with what is happening in other nations.
Politicians in Wales (and Scotland) will often meet spending announcements for England and Wales with calls for this money to be ‘Barnett-ised’ or ‘subject to Barnett consequentials’ – in short, that there should be a dividend for the nations. HM Treasury does not always agree.