Public Spending: Barnett Formula
(1 year, 9 months ago)
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Lord Shipley
To ask His Majesty’s Government what assessment they have made of the relevance of the Barnett Formula in the distribution of public spending across the United Kingdom.
Lord Shipley (LD)
My Lords, I am very grateful for the opportunity to debate the relevance of the Barnett formula in the allocation of public funding in the UK. I am grateful to those colleagues who have put their names down to speak, and I am looking forward immensely to hearing the noble Lord, Lord Hendy of Richmond Hill, make his maiden speech. In passing, I thank the Library for the excellence of its briefing.
The formula was introduced by the late Lord Barnett, Chief Secretary to the Treasury, in 1978 to prevent annual funding arguments with Scotland, Wales and Northern Ireland. It was introduced in Scotland in 1978, into Northern Ireland in 1979, and into Wales in 1980. The formula was used for allocating public spending until 1999, when it became the mechanism for the allocation of block grant. The Barnett formula calculates the yearly change in the block grant to the devolved Administrations from the UK Government. It calculates not the size of the block grant but rather the annual change in per-person funding, and in that sense it is clearly related to population. The nations can decide how to reallocate spending to other services from that block grant, and of course the block grant applies only to devolved public services.
Lord Barnett and others believed that spending in each part of the UK would converge over time. This was because devolved nations had a higher base of public spending and, when a fixed cash sum increase per head was allocated annually across the UK, the percentage rise to the nations would be lower than in England. There would then be gradual convergence because standard cash increase per capita should lead to a lower percentage increase. However, since then, formula bypass has become a factor—that is, additional money for a range of purposes not directly connected with the Barnett formula. The formula calculation is based on the historical amount that is devolved, but population rather than need has been a key factor—and has proved too large a factor.
The Barnett formula is still with us 45 years later. It has not eroded historical differences in spending between the regions and nations, as was expected. I do not think that the word “formula” is justifiable today, when it was a short-term fix driven by short-term funding needs in the nations and can be bypassed in the way that it has been. As Lord Barnett said in 2014 in his last speech on the subject, the formula was drawn up on the back of an envelope, and was not based on need. He called it “a national embarrassment”. He believed in a UK-wide needs-based system for allocating public funding, and he regularly asked Governments to cease calling it the Barnett formula when it was not his formula. He was right to do so. It may be a simple and predictable process for the Treasury but, because it can be bypassed by extra funding streams, it is not as transparent as it should be.
In 2009, a Select Committee of this House agreed with Lord Barnett; it urged replacing the formula with a needs-based system. The Calman commission in 2009 urged an assessment of need as a factor in the formula and, since then, the Institute for Government and the Institute for Fiscal Studies have both urged reform of the Barnett formula. The Constitution Committee in this House has three times, in 2015, 2016 and 2022, said that the Barnett formula should be reformed to achieve a fairer allocation of funding among the four nations. The Independent Commission on the Constitutional Future of Wales, in its interim report, said that a needs-based system could be agreed and phased in.
We have ended up with a block grant system to the nations which can be flexibly used, but centralised control of the regions in England by the UK Government out of London. In today’s Budget, there seems to be some scope for further decentralisation through a block grant system into some mayoral combined authorities in England. I welcome that, but it should be on the same terms as the nations have. As it is today, government spending is higher per head in Northern Ireland, Scotland and Wales than in England. That may be justified, particularly when sparsity of population is considered, but we need to know the evidence, and a needs analysis is the way to find out. Indeed, the more the Government decentralise into England, as today’s Budget will demonstrate, the more challenge there will be for the Government to show that the allocations into England are fair.
The current figures, published by the Government in December 2022—their figures covering 2021-22—show that the lowest per capita public spending in the nations and regions is the East Midlands at £10,528 per head. In Northern Ireland, that figure compares to £14,062 per capita. In Scotland, it is £13,881 per capita; in Wales, it is £13,401 per capita; and London has £13,719 per capita. I want to ask the Minister why the share of UK public spending in the East Midlands is so comparatively low. I do not expect her to answer now, but I would appreciate something in writing which explains why there is such a profound difference in public spending in regions such as the East Midlands, compared to some others at the top of the list. As I said earlier, there may be reasons which are easy to understand and justify, but I would like to see what they are. I think—but do not know—that Treasury officials must know the answer to that question. In the context of today’s Budget, we are going to have to be much more open about it. If the Minister is able to write something down and supply it to all those taking part in this debate, that is the way to take a first step in understanding how it is justifiable that a region like the East Midlands has such a low figure.
Can we create a needs-based analysis? I am sort of waiting for the Minister to tell us that it is a complex task to undertake a needs analysis. Should that be the answer, I want to say in advance that, of course, it is not a complex task at all, and the reason is that the Government are already doing it as part of the Levelling-up and Regeneration Bill. In February 2022, the Government produced a document called Levelling Up the United Kingdom: Missions and Metrics Technical Annex, and, at the back of that, all the indices that the Government are working on to level up England—and many of those metrics relate to the United Kingdom—can be used to undertake a needs analysis across the United Kingdom. If any Members have not seen that set of metrics produced as part of the Bill, I strongly advise that it is worthwhile read.
I really hope that the Minister’s reply will show some flexibility. In the last couple of hours, we had a debate on the Levelling-up and Regeneration Bill about the need for constituent parts of England to have fiscal powers. It just will not do for Wales, Scotland and Northern Ireland to have substantial fiscal powers and for the constituent parts of England not to have those. We must have that debate, but I sincerely hope that the Minister will take seriously the point that I am trying to make tonight and that, in the context of what Lord Barnett established back in the late 1970s, there will be some better understanding of the need to move on from what is now an out-of-date formula.
Lord Greenhalgh (Con)
My Lords, I chose to spend my evening talking about the Barnett formula in large part because of the arrival of the noble Lord, Lord Hendy of Richmond Hill. I watched him be an absolute supremo of London’s transport system, whether it was on the surface—he loves his buses—or underneath the ground on something called the Underground, and he ran that with brilliance over many years, serving different masters equally well.
I am also a huge fan of the noble Lord, Lord Shipley, despite our being on opposing Benches, because we are both ex-Procter & Gamble people. We like to keep our comments brief and have some data, so I will leave all the data to him and give some emotion on the Barnett formula: it is a bit of a challenge. Some of the changes we have seen to the formula over 45 years have been changes in the way that taxes have been devolved, which has meant that there has been some compensation in the size of block grants, because there are greater tax-raising powers for the devolved Administrations, and also welfare was devolved so, again, we saw some increases. However, the noble Lord, Lord Shipley, makes the point that the Government have essentially bypassed the formula and focused on population rather than need. The great clarion call from the noble Lord is to focus on fairness. I will make a case that the Government should focus not on a needs- based analysis but on an opportunity-based analysis.
One of the things I discovered being responsible for a small part of west London in an area of extreme deprivation is that the more an area presented itself as being needy, the more government would spend on the area and nothing would get better. White City had initiative after initiative, for instance, based on its need, because its index of multiple deprivation being in the top 5% in the country, with the White City estate being a particularly poor area, and nothing worked. However, when we focused, as the previous Labour Administration started to do, on opportunity, and brought the jobs, with the opening of such things as Westfield and by encouraging Imperial College to come and have its “lung to the west” in White City, when we focused on growth, the jobs arrived and people had the opportunity to get on in life.
I think the agenda around this needs to be not around how we cut the cake to be fair, but how we create greater opportunities. I disagree fundamentally with the thinking that local government should be just about resource equalisation, so we all have equal resources. I actually think we will get better civic leadership if we start life as a race. Yes, we should ensure that people start equally, so resource equalisation should be around making sure that the starting line is equal; that, I understand. But when it comes to civic leaders, if we want the Joe Chamberlains and the big civic titans who transformed Birmingham, if we want the leaders who will make the north-east as competitive as London, we need people who have the vision to do that. They need to do more than just worry about how needy the area is so that they can get more money from Whitehall.
Where I am sure I will get agreement from the Liberal Democrats, if not perhaps from the Opposition, is around the need, in this case, for some change in policy. At the moment, all the policy from successive Governments is around devolution, with a mindset that Whitehall is there to tell the rest of government, above the level of the United Kingdom, how to govern: they should act as an agency of Whitehall. I think that is entirely wrong. What we need to see, if we want grown-up civic leadership, is a decentralisation of government, a letting go from No. 10 and No. 11, and then we will unleash those areas.
I wrote about this when I was perhaps in my political prime, in 2010. This is a great book, I will give it to the first person who wants to read it, A Magna Carta for Localism written by myself, Steven Greenhalgh, now Lord Greenhalgh; Sir Edward Lister, now my noble friend Lord Udny-Lister; and Colin Barrow—I do not know what happened to him, perhaps he will arrive shortly. The argument is around localism: how do we ensure that we break down the command state, the inspection industry, the service silos and financial dependency, so that local areas, now that we have left the EU, can do this? How do we ensure that local areas have the power to raise the taxes that they spend locally? I am not expecting the Minister to give an answer to any of that, because it is a pipe dream, potentially, but it is the right way forward.
We need to change things. We need to think about opportunity. I have served at every level of government, in the town hall for 16 years, in City Hall for four years—alongside the noble Baroness, Lady Jones, who was my biggest fan, let me tell you—and in national government for two and a half years, on that Bench where my noble friend the Minister is sitting. I sat there for nearly two and a half years and I enjoyed every second of it. I have to say that what I discovered is that there are great opportunities, even today, in local government. If we create an environment where you have genuine civic leadership, where you are responsible for your destiny, where you can spend the money you raise and think about how to attract investment to your local area without the dead hand of Whitehall, I think we would get a far better leadership, whether it is from the Labour Party, the Liberal Democrats or the Conservatives. That is what I believe needs to happen.
We need to ensure that the NHS focuses on health but that local authorities deliver care, which they do anyway. They know about that: they have contracted and commissioned care for at least 10, 15 or 20 years— I do not know how long, but the noble Lord, Lord Shipley, will. We need to get the DWP focusing on benefits policy rather than unemployment, because the initiatives happen closer to home. Local government knows how to get people back on to pathways for work better than the dead hand of Whitehall. The police need to focus on cutting crime rather than on social care.
These are the things that need to happen to avoid multiple levels of bureaucracy, where we have a national strategy for violence against women and girls, a city or mayoral strategy that does the opposite of the national strategy, and a local strategy that does something different. We need a focus that avoids these overlapping bureaucracies and sets our town halls, our city halls in our great cities and local government absolutely free to drive a pathway towards opportunity and growth. Where I agree with the noble Lord, Lord Shipley, is that the start point needs to be equal, but then set them free. I believe that is the way forward. Then we will see a great era of municipal leadership.
With that call for financial independence, which I can see everyone agrees with wholeheartedly, I hope my noble friend Lady Penn can pick something up from my thoughts.
Lord Hendy of Richmond Hill (CB) (Maiden Speech)
My Lords, first, I am grateful to the Lord Speaker, the Clerk of the Parliaments, Black Rod, the doorkeepers and all the staff of the House for making me so welcome. The noble and learned Lord, Lord Judge, the Convenor of the Cross-Bench Peers, has been particularly welcoming. I am so sorry to hear of his incapacity and I wish him a speedy recovery.
I also thank my noble kinsman Lord Hendy and the noble Lord, Lord Faulkner of Worcester, for supporting my introduction. I was not in the least surprised to see my elder brother elevated here, but never in my career in public transport, particularly when I conducted and later drove my number 11 bus around Parliament Square, would I have believed that I might one day be here too. I think we are one of only two pairs of siblings in your Lordships’ House.
I have managed bus operations in both the public and private sectors in London, elsewhere in England and in Hong Kong. I led a successful management-employee buyout when London Transport privatised the company I ran, and later returned to the public sector when the mayoralty and Transport for London were created in 2000. I managed London’s buses, major roads, Thames piers, and taxi and private hire licensing, including during and after the terrible terrorist bombings of July 2005. Then, in 2006, for nearly 10 years I became commissioner of transport, serving two mayors, Livingstone and Johnson, and I had the privilege of leading through the Olympic and Paralympic Games of 2012. For the avoidance of doubt, the credit for all the things that went well through all that time is to the staff, the management and contractors rather than simply to me.
In any event, I would never have equalled the achievements, nor the length of service, of my illustrious predecessor, the late Lord Ashfield, who ran London’s transport for nearly 30 years. The noble Lord, Lord Tunnicliffe, is a more recent and worthy successor in that role, but he had the misfortune to be at the inception of the ill-fated Tube public/private partnership. I do not blame him at all for the results of that, but I did take great pleasure in dismantling those flawed and expensive arrangements.
In July 2015, the then Secretary of State for Transport, now the noble Lord, Lord McLoughlin, abruptly summoned me to be appointed chair of Network Rail, then recently brought back into the public sector from the pretence of being outside it, despite government guaranteeing all its very substantial debts. I think I am grateful to him for that, although I still miss the comprehensive structure of TfL, its long-term planning horizon, its focus on passengers and its contribution to London’s economy.
I still chair Network Rail today and, subject always to the decision of the Secretary of State for Transport, I hope to continue for some while longer. I say that because our railway has great challenges to confront, and passengers, freight, the economy and the nation deserve better than we currently achieve. We have less demand and significantly less revenue than we did before Covid, and we must reduce costs.
The structures used to run the railway are not aligned to customers and are convoluted and excessively contractual. Cost is accounted for in a different place from revenue, track and train are divided, and innovation is supressed. Investment plans are seldom entirely fulfilled in practice, and, despite enthusiasm from all political parties for more investment, we do not have a prioritised, costed and long-term plan. Nor do we have as many private sector contributions to those investments as we should or, indeed, as we did at TfL.
This is all because the railway is not managed as a whole system. Passengers, freight, and regional and local stakeholders are all dissatisfied with a network which, when it goes wrong, can be the responsibility only of the Secretary of State for Transport. TfL was different: as the commissioner, quite properly, the failures were mine and the successes belonged to the mayor. I am able to say all that because the Government have the same view, as do, I think, many on all sides of this House. The reform of our railway is essential, because the connectivity it delivers is a major driver of economic growth, jobs, housing, social cohesion and sustainability, and with the right structure, we will do better. Thus, I am looking forward to primary legislation to create Great British Railways. In due course, with my brilliant chief executive at Network Rail, Andrew Haines, we hope to play the most active part we can in implementing the reforms proposed in the recent White Paper. They cannot come too quickly.
Your Lordships may also know that I am the author of a recent report on the connectivity of the United Kingdom, which has featured in recent Oral and Written Questions. I am looking forward to the Government’s response to my recommendations, which I know is in preparation. One of my conclusions in the Union Connectivity Review was that HS2 could make a better contribution than currently planned to transforming journeys to and from England and north Wales, Scotland and Northern Ireland. It is therefore strange that, as a consequence of spending on HS2, Scotland and Northern Ireland received additional funds as part of the block grant but Wales did not. That suggests that something is amiss with the way the Barnett formula is applied.
I also chair the London Legacy Development Corporation, which is building out the Queen Elizabeth Olympic Park in Stratford. It is the most successful Olympic and Paralympic regeneration anywhere in the world, and possible only because of better access by public transport. Connectivity, urban regeneration and economic growth are intimately connected.
Finally, I have an active interest in transport heritage. I own and drive vintage London buses, similar to the ones I drove and conducted over 40 years ago. I suspect that I am the only Member of this House holding a passenger carrying vehicle driving licence. I am a trustee of the Science Museum Group, where I chair the National Railway Museum’s advisory board, and I chair the Heritage Railway Association, all of which is particularly relevant to my aim to ensure a successful celebration in 2025 of the 200th anniversary of the first public passenger railway in the world, the Stockton and Darlington Railway. That started the railway revolution which drove transformational economic growth and urbanisation both here and around the world. That seems to be a British achievement worth celebrating nationwide.
I referred earlier to my illustrious predecessor, the late Lord Ashfield. His record at London Transport is never likely to be equalled, and certainly not by me. However, he made but one speech in this House in the 28 years he was a Member. Despite my present, virtually full-time role as the chair of Network Rail, I hope to do better than that, and I look forward to contributing to your Lordships’ debates in the future.
Baroness Grey-Thompson (CB)
My Lords, your Lordships might normally expect me to speak in a debate on the Barnett formula, but when I realised that my noble friend Lord Hendy of Richmond Hill was giving his maiden speech tonight, I immediately put my name down. It is a great privilege to follow my noble friend; I very much enjoyed listening to him speak, and I look forward to his contributions on many areas which I also care about.
It was wonderful to hear about my noble friend’s passion for public transport, which I also share. I am sorry to say that I have never had the chance to drive a London bus, but maybe this is my chance to put in a bid to do so. Due to my board membership of Transport for London, where my noble friend was the commissioner, I have worked on a gate line at London Bridge Tube station and made platform announcements—they let me do it only for a few hours, but I learned a lot along the way.
I would like to go back a little further to when I first met my noble friend. We were both at an event in the lead-up to the 2012 Olympic and Paralympic Games. Fairly quickly, we started talking about accessible transport. He asked me whether I had ever been on a bus. I replied that I had not as I did not think they were accessible. I knew that my noble friend was involved in transport, but I am not sure that at that point I realised he was the commissioner. Once I realised that he was in charge of transport in London, I was more than happy to be proved wrong about access and I have been a bus traveller ever since. His knowledge of bus routes and their numbers is second to none and is better than any website or app I have ever found.
I would also like to echo other noble Lords’ thoughts on the leadership he showed up to and beyond the 2012 Games. The fact the public transport system worked so well in 2012 was one of the things that significantly contributed to the success of the Games. I was also privileged to work with my noble friend at the London Legacy Development Corporation, which is incredible. It shows that Britain can win, design, build and do legacy really well on big projects—as long as it has the vision. He now has a role at Network Rail—I am sure that Network Rail hears from me slightly more than it would often want to. My noble friend’s support for disabled people travelling on public transport is very welcome.
When I first came to your Lordships’ Chamber, I was given some very welcome advice, which was to come into the Chamber and sit and listen. I remember an early debate that I came into; it is fair to say it was quite technical, about the Barnett formula. When I left the Chamber and went through Central Lobby, I met a member of the public who had come to listen. He stopped me and slightly harangued me about one particular Member who had such strong views on it. I am very happy to say that it was Lord Barnett himself, so he was quite within his rights to have strong views.
The noble Lord, Lord Shipley, gave a very eloquent speech. As someone who was born in Wales, works in Wales and lives in the north-east of England—actually, I live on the Stockton and Darlington line in a train station—I believe that maybe it is time that we think differently about what we do.
I am very pleased that my noble friend Lord Hendy raised HS2. It would be remiss of me not to highlight my wish for greater accessibility on trains and other modes of public transport and perhaps some of the missed opportunities we might be seeing to make HS2 step free. I know that it is not necessarily part of this debate, but we need to think about what more we can do with HS2 in terms of opening it up. Modelling from WPI Economics shows that inclusive transport brings significant advantages. A fully accessible network could help some of the 51,000 individuals with work-limiting disabilities to find employment, even more so and more importantly with the Government’s proposal to change the work capability assessment process.
HS2 is not cheap but, through many conversations with my noble friend, he has convinced me that it is the right thing to do. Rethinking how it will work could have a positive, tangible effect on the Treasury’s finances. A step-free rail network could deliver £450 million into the coffers of the Exchequer and produce an economic output boost of around £1.3 billion—all a valuable contribution.
This might be the last time I take part in a debate on the Barnett formula. After listening to the noble Lord, Lord Greenhalgh, maybe in future we could be talking about a Greenhalgh formula.
Lord Wigley (PC)
My Lords, I am delighted to follow the noble Baroness and congratulate the noble Lord, Lord Hendy, on his delightful maiden speech. I warmed very much when he mentioned the Barnett consequences of HS2—I will mention those in a moment. I am sure we all look forward to his future contributions to debates in this Chamber. I also thank the noble Lord, Lord Shipley, for bringing this debate and giving us an opportunity from various angles to address aspects of the Barnett formula.
I am probably the only Member here who spoke in the Commons debate when the Barnett formula was introduced in 1978. I then warned that it would freeze the financial relationships between our four nations and ossify Wales into a dependency relationship in which the consequences of historic industrial and social patterns would place high demands on healthcare and housing budgets.
In opposition, Welsh Labour MPs called for a needs- based formula to replace Barnett, but when in government they failed to deliver. That was partly, I believe, because the Chancellor and then Prime Minister Gordon Brown was a Scottish MP and feared that a needs-based formula might penalise Scotland.
When the Barnett formula was introduced in 1978, Joel Barnett proposed it as a short-term measure. Four decades later, the then Lord Barnett described its continued application as an embarrassment. Its fundamental weakness for Wales is that it takes as its starting point the situation that existed in 1978. The Government have acknowledged that the baseline for Barnett is created by “rolling forward existing spending”. That assumes that the spending in 1978 was appropriate to Wales’s needs and that no fundamental change in the relationships between Wales and England has happened since. But there has been a dramatic differential change arising from the ending of the coal industry and hugely reduced employment in steel. The formula’s other central weakness is that adjustments to the base spending levels were not needs related. Subsequent editions relate to spending levels determined by Westminster as appropriate for England.
It is fair to say that over the period from 2000 until Brexit hit home, Wales benefited from European regional and social funds. We received that aid because the per capita GDP in 15 of Wales’s 22 counties was below 75% of the EU figure. Wales was accorded European funding in 1999 because of the failure of UK economic policy to regenerate the Welsh economy. EU aid was essentially a recognition of need.
The challenge was to raise the economic activity levels, which ran at six percentage points lower than England. There is some irony that the issue of lowered economic activity levels is now being experienced in England as well. I question whether successive Labour-led Governments in Cardiff used those European resources in a strategic manner to put right the underlying weaknesses of our economy. Money was given out to support worthy projects that were welcomed in local communities but often did not address the underlying problem. EU funding was intended to address these needs-based issues. The Barnett formula does not even try to do so.
The Barnett formula was reviewed by a House of Lords Select Committee in 2009 and by the Holtham commission in 2010. Both criticised the formula, principally because it is not needs related. To highlight one aspect of its deficiency, over recent years public expenditure per capita in Wales has been very close to that of London, notwithstanding the greater needs of Wales on a host of indicators. Analysis from 2022 showed that total identifiable public expenditure per capita in 2020-21 was £14,222 in Wales and £15,490 in London. If per capita expenditure had been the same in Wales as in London, Wales would have received an extra £4 billion.
I accept that only half of government expenditure in Wales comes through the Barnett formula and the rest is direct Treasury funding for non-devolved matters. But over the Covid period, London benefited disproportionately from central government spending, despite the costs of Covid being felt all around these islands and the health services being largely devolved.
Another glaring example relates to HS2, as we have heard. Normally, if such a project cost, say, £100 billion in England, the Barnett consequential for Wales would be about £5 billion. Instead, Wales receives nothing because HS2 is defined as an England and Wales project, despite not a single mile of it running through Wales. Will the Minister tell the House who made that decision? Not one mile of HS2 is in Wales; indeed, a KPMG study for HS2 Ltd shows that Wales would lose competitive advantage as a result of it. That report projects Scotland as gaining competitive advantage, yet Scotland gets a Barnett consequential from HS2 and Wales does not. In responding to this debate, the Minister should announce that Wales will get a full Barnett consequential from HS2, as demanded by the Conservative leader in the Senedd. If she fails to indicate government rethinking on this issue, many Tory MPs in Wales will pay the price.
In their response to the Select Committee report, Cm 7772, the Government promised to keep the operation of the Barnett formula under review. In responding to this debate, will the Minister tell the House exactly when it was last reviewed, what material evidence arose from any such review and when it was published?
The noble Lord, Lord Forsyth, at Question Time on 18 January, acknowledged that the Barnett formula was not serving Wales well and called for it to be scrapped and replaced by a needs-based formula. The Minister has repeatedly said, in this Chamber on 18 January and again this afternoon, that the Government have responded to the demands of the Holtham commission that Welsh funding should be decided on a needs basis. I say here, as emphatically as I can, that they have not.
The Holtham report contained three core demands. The first was to establish a Barnett floor to stop the ongoing systematic convergence of the Welsh allocation per capita with that of England. It would, in Holtham’s words, prevent even further underfunding of public services in Wales.
Lord Wigley (PC)
I am winding up now. As I was saying, it does not do anything to put right the level of underfunding that Wales has systematically suffered and that is built into the present settlement. That is why Holtham recommended, crucially, that Barnett be replaced by a “needs-based” methodology to get financial provision in line with Wales’s needs. Please will the Minister confirm that case?
Baroness Chapman of Darlington (Lab)
My Lords, it is a real pleasure to take part in this debate. I too live on the Darlington-Stockton railway line in Darlington. We are very proud of our railway heritage, and we are looking forward to the centenary in 2025, when we will celebrate our fine contribution to the railway infrastructure of the world, all starting in Darlington.
I congratulate the noble Lord, Lord Shipley, on securing this debate, which is timely, given today’s Budget Statement and in the light of other developments, such as the UK internal market Act and the creation of a new UK subsidy control scheme, as well as the distribution and spending of levelling-up funds. We are all very interested in those issues, today especially.
As the helpful Lords Library briefing outlines, the Barnett formula is a long-running Treasury policy. It does not have a statutory underpinning, but it is very well established. I was struck by the noble Lord, Lord Wigley, saying that he spoke in the debate in 1978 in which it was introduced. I doubt whether the Minister was born in 1978, which goes to highlight just how long this has been going on.
As someone who lives in the north-east and is married to a Welsh MP, I am very familiar with the sense of grievance that exists around the current situation. We know that various complaints are levelled against the Barnett formula, and the Government should engage positively with those debates and attempt to move this forward. Of course, the formula is not the only way in which the Government claim to be closing disparities between the nations and regions of the UK. The levelling-up fund is, contrary to initial expectations, allocated by Westminster rather than being devolved. That has raised questions, particularly from the Welsh Government, and I hope that the Minister can address those concerns.
The noble Lord, Lord Greenhalgh, spoke about setting regions and councils free. Obviously, everyone would like to see that, but I gently point out that it is quite difficult to be free when you are tied up in spending thousands of pounds, if not more, which you would like to spend on services, bidding for various funds to help you grow and regenerate your area as you would like to do.
Concerns have been raised about the use of the levelling-up fund, and there have been plenty of accusations of funds being given to certain local authorities for perhaps more political purposes rather than on the basis of need. We on these Benches are deeply concerned about that and support the prioritisation of need in allocation of funds. In recent weeks there have also been reports of significant sums being allocated but not actually being spent, which suggests that the system is not functioning as well as intended and that some funds might have been better spent in other parts of the UK.
Alongside Barnett and levelling-up funding, there is also of course the question of the UK shared prosperity fund, which is coming on stream to replace EU regional development funds—I think the noble Lord, Lord Shipley, referred to this as well. The UK shared prosperity fund has identified geographical areas in Wales, Scotland and Northern Ireland, but the formula used is different to Barnett and the precise forms of support for each part of the UK seem to differ, as does the nature of the interaction between Whitehall and the devolved Administrations.
I also recognise and congratulate the noble Lord, Lord Hendy of Richmond Hill, on his maiden speech. As someone with great experience at the top of FirstGroup, Transport for London and Network Rail, he has a solid track record of overseeing public spending on infrastructure projects, and we all look forward to benefiting for years to come from that insight and experience, and we welcome him here. I especially congratulate him on including Darlington in his maiden speech and encourage him to continue to do so throughout his many years and contributions in this place.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I add my thanks to the noble Lord, Lord Shipley, for the timeliness of this debate and add words of welcome to the noble Lord, Lord Hendy. As we have heard, he brings a plethora of experience to this House, not least through his efforts to increase union connectivity, which, as the noble Lord noted, the Government are considering carefully. I look forward to working with him in the future.
As was reflected in my right honourable friend the Chancellor’s Budget today, the Government are committed to delivering growth and prosperity across all four nations of our United Kingdom and all regions within it. The Budget will rightly be debated in its own right by this House tomorrow, but I want to highlight that it is a Budget that delivers for the union, both through UK government support for all parts of the UK and through providing further additional funding to the devolved Administrations. The Spring Budget ensures that the benefits of economic growth are felt everywhere; promotes the conditions for enterprise to succeed; encourages the inactive back into employment; and continues to provide support with the cost of living to people across the United Kingdom.
As we heard earlier today, the spending review 2021 set the largest annual block grants, in real terms, of any spending review settlement since the devolution Acts. On top of this, the devolved Administrations received £3.4 billion of extra funding at the Autumn Statement and, as a result of decisions at the Spring Budget, are now receiving an extra £630 million in additional funding over the next two years through the Barnett formula, which we are here to discuss today.
The Government’s commitment to investing in our union should be in no doubt. However, it is helpful on Budget Day to reflect on the fiscal settlement that we have across all four nations and on how decisions such as those taken today flow through to the finances of the devolved Governments, including through the use of the Barnett formula.
As many noble Lords noted, the Barnett formula is long-standing, having been introduced in 1978—which is, as the noble Baroness, Lady Chapman, noted, before my time. It is transparent and open to scrutiny. It is consistent with the principles set out in the Statement of Funding Policy document, playing a key role in pooling and sharing resources so all parts of the United Kingdom receive a secure and stable level of funding for public services.
As noble Lords noted, the formula determines changes to devolved Administration funding in relation to changes in UK government funding and works by multiplying the change in UK government funding by two figures: a population share and a comparability factor, which measures the extent to which a UK government service is devolved.
The formula serves to ensure that any changes to funding are, per person, broadly the same across the United Kingdom. These changes are then added to devolved Administrations’ existing funding, which is much higher per person than equivalent UK Government spending, broadly reflecting that needs are higher in Scotland, Wales and Northern Ireland. The outcome is that the devolved Administrations receive more than 20% more per person than equivalent spending in the rest of the United Kingdom.
I understand that there are, on many occasions, calls to replace the Barnett formula. To answer those calls honestly, it is important to acknowledge that the formula is not perfect, but all allocation systems have strengths and weaknesses, and we do not need to replace the Barnett formula to make meaningful improvements in the way in which devolved Administrations are funded. Indeed, that picture has not remained static since the formula was introduced in the 1970s: significant changes have been made since then.
The devolved Administrations have agreed tax powers so they can increase their funding. They have control of local taxation, such as business rates and council tax. They also have agreed borrowing powers, as well as flexibility to move funding between years. The noble Lord, Lord Shipley, raised the question of needs-based funding—not just looking across the nations of the United Kingdom but across our regions as well and how funding is allocated within England. I am sure the noble Lord will know that many different formulas contribute to the distribution of funding within England. Many of them take needs factors into account. To answer him, as he gave me the option to do this, I think it would be best if I wrote out to those who have attended the debate today on the approach to needs-based funding in England.
As for needs-based funding and the Barnett formula, I recognise that it is not directly needs based in Scotland and Northern Ireland. However, the higher levels of funding they get reflect the greater needs in those areas. In Wales, raised specifically by the noble Lord, Lord Wigley, although we did not take forward all the recommendations of the Holtham commission, very importantly, we have introduced a needs-based floor into the Barnett formula to ensure that that is taken into account.
The latest fiscal framework agreed between the UK and the Welsh Government in 2016 added a needs-based factor into the Barnett formula to ensure that Wales receives fair funding. The Welsh Government receive at least 15% more funding per person than the equivalent United Kingdom spending in the rest of the UK, as recommended by the commission. A review of that fiscal framework is triggered when the Welsh Government premium falls below 15%. It is not below 15% at the moment; noble Lords will know that is it at 20%. This is about £1 billion more each year than the Holtham commission indicated, and the Welsh Government agreed, was fair to Wales.
There may be a question of how effectively the Welsh Government have spent their needs-based funding, and the noble Lord, Lord Wigley, raised that question about EU funding that the Welsh Government have received. The United Kingdom Government share the desire to ensure that money is spent effectively across all parts of the UK and that devolved Governments are held to account by their electorate for how effectively they spend their money. When it comes to introducing a needs-based element into the Barnett formula, the reforms we have undertaken since the Holtham commission’s report show that you do not need to abolish the Barnett formula to improve on its work.
My noble friend Lord Greenhalgh provided a different perspective on whether we should look at needs-based funding or opportunity-based funding. He raised an interesting point and I hope he has taken heart from some of the announcements in today’s Budget. Whether it is devolution or decentralisation, there were important announcements in today’s Budget that will give more power to those who are close to their communities and have a better idea of how money should be spent in those areas.
We have agreed, subject to ratification, trail-blazer devolution deals with the Greater Manchester Combined Authority and West Midlands Combined Authority. They will equip those authorities with deeper, additional policy levers to deliver on their priorities, including across local transport, skills, housing, innovation, net zero and employment. They are a big step towards what my noble friend spoke so passionately about: empowering the leaders of local areas and others to take forward the policies that will deliver for those local areas.
The Budget also provided hundreds of millions of pounds more for levelling up, including over £400 million of funding for the rollout of new levelling-up partnerships, bringing the collective power of government to provide bespoke place-based regeneration in 20 of England’s areas most in need of levelling up over 2023-24; and over £200 million for 16 local regeneration projects in places in need across England—from a skills and education campus in Blackburn, to the transformation of Ashington town centre. There have been significant moves in this Budget both to devolve power to local areas and to ensure that areas that need support from levelling-up funds get it.
It would be remiss of me to conclude this debate without addressing the point on High Speed 2. I do not think that what I will say to noble Lords is new information, but the reason why Wales does not receive a Barnett consequential on High Speed 2 spending, unlike Scotland and Northern Ireland, is that rail infrastructure in Wales is a reserved matter. It is based on the devolution settlement we have and the difference in the settlements between Wales, Scotland and Northern Ireland. That is consistent with the funding arrangements for all other policy areas that are reserved in Wales but devolved in Scotland and Northern Ireland, such as policing.
This has been an interesting debate. As we move to further devolution, it is interesting to think about what basis that, and the funding, should be on. I am sorry that I could not more fully answer the question from the noble Lord, Lord Shipley, about funding in England. I hope to write to him with a very full response after this debate.
Lord Shipley (LD)
Can the Minister clarify that her letter will explain—in great detail, I hope—why, for example, the East Midlands has a lower per capita public funding settlement than the rest of the United Kingdom? We need such examples to dig out the reasons for the differences in per capita public funding by nation and region. I hope, secondly, that the letter will also confirm my view that the levelling-up metrics which are part of the Levelling-up and Regeneration Bill could be used as a basis for a needs analysis to allocate public spending in a new system that does not depend on the outdated Barnett formula.
Baroness Penn (Con)
My Lords, I will endeavour to provide as much detail as I can in my written response. I note the noble Lord’s desire that it address the specific points concerning the East Midlands.
When it comes to the levelling-up metrics, we will of course look at the idea put forward by the noble Lord. As someone experienced in looking at reforming funding formulas across a whole range of different public service areas, I can say that this can be extremely complicated. I know the noble Lord said that that was almost no excuse, but it is important to recognise that fact. Any such changes need to be carefully taken forward and thought through, but we will look carefully at his proposition.