Using the Barnett Formula to allocate replacement funding for EU schemes could cost Wales dear

The Welsh Assembly’s Finance Committee has begun taking oral evidence in its inquiry on preparations for the replacement of EU funding programmes after Brexit. IFS researchers Nicolo Bird and David Phillips recently submitted written evidence to the inquiry, focusing on the options and issues for the allocation of funding to different parts of the UK and different projects.

One option they examine is rolling the replacement funding into the block grant the Welsh and other devolved governments receive from Westminster and using the Barnett formula to update it each year – an approach the Scottish Parliament asked about in its own recent consultation.

The rural nature of much of Wales, and low GDP per capita of West Wales and the Valleys (the poorest region of the UK), mean that Wales currently receives more funding for agriculture and especially economic development than England: around 3.5 times as much per person in total.

But using the Barnett formula to update funding levels post-Brexit would mean increasing funding each year by the same cash amount per person as in England. This would be a much smaller percentage increase than in England given Wales’ initial higher levels of spending. And after accounting for inflation, it would represent a real-terms decrease unless funding in England were rising very rapidly.

This ‘Barnett squeeze’ would take place irrespective of what was happening to funding needs in Wales compared to England. Nicolo and David argue that because it takes no account of funding needs or outcomes achieved from funding, the Barnett Formula would therefore be unsuitable for allocating funding designed to replace current EU schemes.

Wales could also lose out if the new funding schemes do not replicate a peculiar feature of the existing EU schemes: areas with GDP per capita of less than 75% of the EU average are entitled to much more funding per person than areas with 75% or above. There is not a clear rationale for this funding ‘cliff edge’ but removing it could see substantial cuts to development funding for the poorest regions that qualify for the highest level of support currently – including West Wales and the Valleys. It is therefore important to prepare for how these regions could adapt to funding cuts.

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

"Big choices loom on how much to spend on programmes to replace the EU's agriculture, regional development and research innovation funding after 2020, and how that spending should be allocated and managed.

Wales currently benefits from much higher levels of funding per person than in England, but new arrangements post Brexit could narrow this gap, pushing down funding, especially in West Wales and the Valleys."