Current arguments in Australia concerning horizontal fiscal equalisation may help inform the debate in the United Kingdom concerning possible changes to the Barnett formula and the establishment of financial relations with any regional governments in England. Although Australia is a long-established federation, with mature institutions for managing the financial aspects of intergovernmental relations, the most populous states are now pushing for a per-capita-based system to replace the existing formula—based on needs and costs—overseen by the independent Commonwealth Grants Commission. This has important implications for the United Kingdom, where the Barnett formula—a per capita system for deciding annual changes in the funding for the devolved administrations—has been increasingly challenged. In particular, the Barnett system has been vulnerable to nontransparent ‘formula-bypass’ agreements. We argue that the status quo in the United Kingdom appears secure as long as England remains a single entity and the UK Treasury sees the financial implications of larger per capita expenditure in Scotland, Wales, and Northern Ireland as relatively small. However, we speculate that regionalisation of government in England would be likely to increase the pressure: to abandon the Barnett system; to look more systematically at need and cost, rather than population, as criteria for allocating funds between governments; and to move towards an Australian-type system. However, the recent experience of Australia also shows that larger states prefer a per-capita-based system allied to more political, less transparent, arrangements to deal with ‘special circumstances’. It may be that a Barnett-type formula would suit the new ‘dominant states’ in a fully federalised United Kingdom which would, ironically, create an alliance of interests between Scotland and London.
