The effect of relative population growth on the Barnett squeeze

This note is concerned with the Barnett squeeze as narrowly defined, (that is leaving aside the impact of local sources of funding like non-domestic rates and council tax outwith the Scottish Executive's DEL) and considers the implications of relative population growth in England compared to Scotland. It appears intuitively plausible that, if the population of England is growing relative to Scotland, then this will tend to dampen the rate of convergence of per capita spending levels in Scotland and England. It is difficult, however, without going into the algebra, to assess whether this statement is a truism which is likely to have little practical impact, or whether it is likely to have a significant impact on convergence rates in the real world. To investigate this question further, an idealised model of how Barnett works has been set up. As will become apparent this model represents a simplified description of the public expenditure planning process and the application of the Barnett formula. Nevertheless this model captures the key aspects of the system, and enables some useful, and perhaps surprising, conclusions to be drawn.