Barnett Formula

Lord Forsyth of Drumlean Excerpts

Wednesday 15th June 2011 Lords Chamber

[Lord Forsyth of Drumlean]

My Lords, I believe that we are heading for a real constitutional crisis. The Scotland Bill, which is still in the other place and heading for this Chamber, introduces powers for a separate rate of Scottish income tax. I congratulate the noble Lord, Lord Barnett, on securing this debate, and the Select Committee on which I sat.

As the noble Lord pointed out, the effect of the Barnett formula has been to give Scotland much more than it would have received on a needs basis. The needs basis is firmly established because it is the basis on which the Scottish Parliament distributes money to health authorities and local authorities. There is no magic about this. Professor David Bell of Stirling University has done some work on the size of that amount. Scotland gets around £4.5 billion extra. You cannot change that overnight. It would need to be phased in over a period of years, as the Select Committee indicated.

We need to get on with this. It is the height of stupidity to give a Parliament the power to set income tax rates, but at the same time not deal with the basis on which the baseline funding is achieved. Baseline funding would alter according to policy decisions taken in Westminster rather than in Scotland. That would create opportunities for conflict. Trying to raise £4.5 billion as a Scottish income tax would involve doubling the basic rate of income tax after you allowed for a loss of yield. It is a huge sum of money.

It is therefore imperative that we have a stable, well established basis on which the Scottish Parliament is funded. It should not be open to criticism, and must be seen to be fair to the rest of the United Kingdom for this policy to work. Otherwise, if the Government down here change their policy on health, education or law and order, that will in turn result in a change to the revenue gain to the Scottish Parliament. We now have—contrary to what we were assured would not happen when we had devolution—a nationalist Administration determined to break up the United Kingdom, which will use this as an issue. The noble Lord is right; we cannot have the Treasury deciding how the formula is created; we need to have an independent commission along the lines of the Australian system, which phases its results over a period of time.

I find it extraordinary that the present Government, whom I support, and the previous Government have both taken the same line in saying that it is too difficult to tackle this issue. It should never be too difficult to do what is necessary to maintain the unity of the United Kingdom and to end the resentment which has been created on both sides of the border because of these anomalies. This marriage that was created, the union between Scotland and England, is the most successful the world has ever seen. It is being put under strain because of a failure to address the policy consequences of constitutional change. Parliaments are about raising resources and voting means of supply. It is essential that this is addressed in the Scotland Bill before it has completed its passage through Parliament.

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[Lord De Mauley]

My Lords, I am most grateful for the opportunity this evening provided by the noble Lord, Lord Barnett, to debate his eponymous formula. It is an important subject that is of great interest to all parts of the United Kingdom. I thank all noble Lords who have participated. I listened carefully to what they said. I congratulate in particular my noble friend Lord Stephen on his maiden speech, and look forward to many more of the quality that he showed us this evening.

It might help if I explain briefly the background. Changes in the departmental expenditure limit block budgets of the devolved Administrations are determined by the Barnett formula. The calculation in outline is the change in provision of the respective United Kingdom departments in the spending review, multiplied by the relevant departmental comparability factor—which, for example, would be 100 per cent for health, as health is fully devolved—multiplied by the appropriate population proportion. The population figures are updated at the spending review to reflect latest ONS estimates of population, and the comparability percentage is also revisited.

The previous Government decided at the time of devolution in 1999 to retain the block and Barnett formula arrangements for determining the budgets of the devolved Administrations. This was the basis on which the devolution referendums were held. It is worth noting that responsibility for allocating spending in England to the English regions and local authorities lies with UK departments. They make these decisions once departmental settlements have been announced in the spending review. There is no single formula for allocating money within England.

Several reports have recently been published that examined the funding of the devolved Administrations. All were referred to by noble Lords this evening. The Calman commission on developing the Scottish devolution settlement, which was commissioned by the previous United Kingdom Government and the Scottish unionist parties, reported in June 2009 and covered funding to Scotland. The Holtham commission on Welsh funding, commissioned by the Welsh Assembly Government, published in the summer of last year its final report on the Barnett formula and on devolving taxation and borrowing in Wales. The House of Lords Select Committee on the Barnett Formula reported in July 2009.

On the subject of the Calman commission, the Scotland Office published a Command Paper in November 2010. It accepted the recommendations that there should be improved financial accountability, including more tax devolution—the noble Lord, Lord Foulkes, referred to this—and that as a consequence the Barnett-determined block should be reduced by the forecast amount of the 10p devolved income tax receipts. It also accepted taking forward the devolution of other taxes, including stamp duty and landfill tax, and introducing new borrowing powers for the Scottish Executive. Implementing the Command Paper will require legislation: a Scotland Bill has been published and is currently going through Parliament. I listened to the comments of my noble friend Lord Forsyth and of other noble Lords, and certainly I will pass them back to Her Majesty's Treasury. The noble Lord will have ample opportunity to make his points on the Bill as it passes through your Lordships' House.

[Lord Forsyth of Drumlean]

Why did my noble friend leave out, in his list of conclusions from the Calman report, the acknowledgement that we would have to move to a needs-based system of funding?

[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.