Barnett Formula

Baroness Hollis of Heigham Excerpts

Wednesday 15th June 2011 Lords Chamber

[Baroness Hollis of Heigham]

My Lords, the Barnett formula matters because something like half of all public expenditure in Scotland is funded by it. It is distributed on a population basis. However, as the noble Lords, Lord Forsyth and Lord Barnett, have said, if Scotland can distribute its own public finance downwards on a needs basis, as it does and as it should do, it can receive it on a needs basis, as it should but does not.

The House of Lords committee, this House and the other place in its January debate this year all said so, apart from HMT, whose coalition Minister said that the Government,

“do not plan to change the Barnett formula”.—[Official Report, Commons, 18/1/11; col. 206WH.]

Yet since our report was published two years ago, public finances have deteriorated and services have been cut while, as the noble Lord, Lord Forsyth, said, £4.5 billion of unmerited, inherited and unearned money is going to Scotland, allowing the SNP to provide additional services courtesy of the British and English taxpayer.

On the formula, if you assume that England represents £100 per head, Wales gets about £112 per head on population, and should get about £115 per head on needs; it is marginally underfunded. Northern Ireland is about right. Scotland should get about £105 per head but instead gets subsidised to the extent of £120 per head—or a subsidy worth about £1,600 a Scottish citizen or, as the noble Lord said, an overexpenditure of about £4.5 billion. No other public moneys are distributed solely by population in this reckless way. Local government, health and social security are all based on need, as they should be. This is not rocket science. It is not complicated. It is done in all other areas of local government policy. For example, in local government you look at needs, which may be the number of elderly receiving attendance allowance, children with special needs or whatever, and you relate that to resources and the capacity to meet those needs—the revenue support grant is often the difference between those two—so that, rightly, Winchester will get less than Wigan, even if their populations are broadly similar, as their needs and resources are different. That is fair.

I do not have much time in which to attempt further financial forensics, although that needs to be done. However, my second point is a moral point. Consider every teenager in Birmingham who is going to lose their education maintenance allowance; every young person in Cornwall who is discouraged from applying to university by virtue of the increased tuition fees; every large family in inner London who will face cuts in housing benefit and may lose their home; every frail pensioner in Norfolk struggling to meet increased care costs. That teenager, that would-be university student, that large family losing their home, that frail pensioner; they are all subsidising—effectively paying for—Scotland’s handouts of free tuition, free personal care and frozen council tax. I object. This House faces welfare reform bills with many of us pleading with the Government for £75 million here and £100 million there for some of the most vulnerable people in our community, yet £4.5 billion is going to Scotland on no other basis than that it always has done. Where is the Treasury’s much vaunted financial prudence? Where, indeed, is our collective moral compass? It is not fair. It is not right. It is not decent and it should end—gradually, slowly; I accept all that, but it should end.

--- Later in debate ---

[Lord De Mauley]

I was going on to say that the House of Lords report recommended replacing the Barnett formula with a needs-based formula. I will deal later with needs-based issues. The previous Government welcomed the House of Lords report, as noble Lords said, although they remained opposed to replacing the Barnett formula. Following the Holtham and House of Lords reports, the coalition Government said in their programme for government that they recognised the concerns expressed about the system of devolved funding, but that the priority must be to reduce the budget deficit and therefore any decisions to change the current system must await the stabilisation of the public finances. In addition, the Government announced in the spending review that there will be consideration with the Welsh Government of the proposals in the final Holtham report, consistent with work being taken forward in Scotland following the Calman commission.

The Government welcome all views on the future of the Barnett formula. I will ensure that Her Majesty's Treasury is made aware of what has been said this evening. In the past, the formula proved to be a durable and robust method of calculating changes for the devolved Administrations. Even the House of Lords report concluded that the Barnett formula had qualities such as simplicity, stability and the absence of ring-fencing. However, we recognise the concerns that are often expressed about it, and were expressed this evening.

There is perhaps a perception, especially in English regions such as the north-east, that Scotland in particular is overprovided for. Comparisons tend to be made using figures published in public expenditure statistical analyses on identifiable total managed spending per head. My noble friend Lord Shipley mentioned some figures. Those for 2009-10 are £8,531 per head for England, £9,940 for Scotland, £9,709 for Wales and £10,564 for Northern Ireland. On a comparable basis, the north-east has the second highest spending per head in England at £9,433.

The perception in England that the devolved Administrations may be overfunded may be exacerbated because they can afford more generous policies; for example, on university fees and the free provision of services. The noble Lord, Lord Barnett, referred to this. I must emphasise that the devolved Administrations have not received any additional money to fund those policies. They have accommodated them within their existing budgets. One of the purposes of devolution is to allow the devolved Administrations to make these different policy choices. This was set out in 1997 in the previous Government’s statement of principles:

“The key to these arrangements is block budgets which the devolved Administrations ... will be free to deploy ... in response to local priorities”.

I am sure that the devolved Administrations themselves do not regard their spending review settlements as generous.

My noble friend Lord German and the noble Lord, Lord Wigley, were concerned about the Barnett squeeze convergence property of the Barnett formula, whereby the percentage increases in spending tend to be lower than in England. The Holtham commission in Wales, in particular, has called for a floor to be placed under the formula to prevent further convergence with England. The expression “Barnett squeeze” reflects that the Barnett formula provides the same absolute increase per head but a lower percentage increase because of the higher baseline levels of spending in Scotland, Wales and Northern Ireland inherited from the past. Of course, the percentage reductions will tend to be smaller than those for many UK departments when spending is cut, as it was in the last spending review. I will return to the subject of Wales in a moment.

Some have raised concerns about the transparency of the existing system. The House of Lords report itself concluded that the quality of data on public spending has improved since 1999. The Government have provided further information about the allocation of grant to the devolved Administrations, based on data which the Treasury provided to the committee and which was published in the committee’s report.

Several, if not all, noble Lords criticised the Barnett formula because it does not take sufficient account of needs. In a similar discussion in your Lordships' House in 2009, the noble Lord, Lord Davies of Oldham, said for the then Government,

“there is no doubt that the Barnett formula has stood the test of time from its development 20 or so years ago”.—[Official Report, 15/12/09; col. 1392.]

The Barnett formula has indeed provided a simple, stable and robust method for funding the devolved Administrations over the past 30 years. It is, of course, for the devolved Administrations to decide how to allocate their overall budget to individual programmes reflecting their own policies. The Barnett formula allows them the freedom to do this, without being second-guessed by the UK Government or any other body on their needs.

[Baroness Hollis of Heigham]

Nobody tonight has queried the propriety of a block grant that allows the devolved Administrations to determine how they allocate their expenditure within that block grant, nor was it raised during the debate that my noble friend Lord Davies answered. The criticism has been about the size of that block grant, which is based on out-of-date, inappropriate and deeply unfair estimates.

[Lord De Mauley]

Yes, my Lords, but as the noble Lord, Lord Tunnicliffe, highlighted, there are complications in reaching a consensus on a needs-based formula. I understand that in the 1970s a formal interdepartmental needs assessment was carried out by the Treasury in consultation with interested departments. It was published in 1979. The study was extensive, involved a number of experts and a large team of people and took two years to complete yet, despite a great deal of time-consuming work, it was unable to reach an agreed conclusion about the basis for a needs-based assessment, and therefore it was not implemented. Indeed, the Barnett formula was introduced at around that time. There is, of course, no consensus across the UK on how to measure needs at the country level and, as in the 1970s, it would inevitably be a contentious and very time-consuming exercise. The noble Lord, Lord Empey, explained some of the problems. A needs-based system would be highly sensitive to the chosen weightings and indicators, on which there is no generally accepted methodology or consensus. The perception of needs and the understanding of the relevant factors may vary over time. Additionally, as policies change, so may the relative cost of implementing them in different countries. The picture may be very different in, for example, 2015. A number of changes are being progressed, such as the Scotland Bill, discussions on the Holtham report, and Northern Ireland consultation on corporation tax. I am sorry to disappoint noble Lords but the Government’s position remains that the priority is to reduce the budget deficit and that any decision to change the current system must await the stabilisation of the public finances.

The noble Lord, Lord Foulkes, raised the arguments in favour of fiscal autonomy. The union dates from 1707 and is one of the oldest and most successful in the world. It has a single currency, central bank, monetary policy and system of financial regulation, which fosters trade, monetary stability and economic growth. Non-devolved risks are pooled and financed centrally. Fiscal autonomy could mean further spending cuts in Scotland, Wales and Northern Ireland, assuming uniform levels of taxation. Also, as my noble friend Lord Dixon-Smith cautioned, it would not be prudent to rely on volatile and uncertain future North Sea oil receipts. However, we believe that financial accountability can be improved in Scotland through greater devolution of taxation, as proposed by the Calman commission.

I spoke earlier about Scotland and I said that I would return to Wales. I know that some consider Wales to be underfunded, which was raised by the noble Baroness, Lady Morgan, among others. In fact, spending per head in Wales is 12 per cent above England and, furthermore, spending has more than doubled in cash terms since devolution. Wales also benefits from very large EU structural fund spending, which amounted to £208 million in 2009-10 and is expected to rise to £233 million by 2014-15.

On Northern Ireland, the Government attach priority to improving the security situation, including by confirming the £800 million financial package which accompanied the devolution of policing and justice just before the general election last April. A further £200 million was announced earlier this year for policing in response to the security situation. In addition, the Government believe that it is important to rebalance the Northern Ireland economy from the public sector to the private sector. They published a consultation paper in March, which included examining possible mechanisms for varying corporation tax. No decisions have been made yet.

Some are concerned that insufficient attention is paid to the English regions. The Barnett formula is not used to allocate spending within England. The Government have chosen to prioritise the NHS, schools and early years, security and the capital investment that supports long-term economic growth for reasons of prosperity and fairness. This means tough settlements for some other areas but, because we have chosen to reform welfare, departmental budgets other than health and overseas aid will be cut by an average of 19 per cent over four years, which I emphasise is the same pace as planned by the previous Government.

There are also claims that the Treasury is judge and jury, and that the Barnett formula should be administered by an independent body. The noble Lord, Lord Barnett, and my noble friend Lord Forsyth raised that. It is the Treasury’s core function to control public spending. But the statement of funding policy sets out the dispute resolution procedure under which, if all other avenues have been exhausted, disputes may be remitted to the joint ministerial committee.

The Government have no plans to change the Barnett formula at present but we will continue to keep all aspects of public spending under review. The Government listen to all views and I thank all noble Lords for contributing to the debate today.