Barnett Formula

Angus Brendan MacNeil Excerpts

Tuesday 16th December 2014 Westminster Hall

[Iain Stewart (Milton Keynes South) (Con)]

It is a pleasure to serve under your chairmanship, Sir Alan. I am grateful to have this opportunity to discuss the future of the Barnett formula in a little more depth than recent debates have allowed.

My reason for calling for the debate was neither to call for the abolition of Barnett, nor to say that it must stay unchanged for ever more. My motivation was born out of frustration at some of the ill-informed comments made about it. In advance of the draft legislation on further devolution to Scotland, which is due before Burns night next year, I want to put on the record an explanation of what the Barnett formula is and, perhaps more importantly, what it is not. I also put on the record that I absolutely support extra fiscal powers for the Scottish Parliament. That is good for the democratic accountability of Holyrood.

[Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)]

The hon. Gentleman mentioned the Barnett formula and, before he goes too far, I want to highlight its operation. About a fortnight ago, the Treasury gave out money because roads and health in England had a shout for that. Therefore, from that followed Barnett consequentials to Northern Ireland, Wales and Scotland.

However, I notice that, if there is a need in Scotland, Wales or Northern Ireland for money for health or transport, the Treasury does not dip its hands in its pockets in the same way with Barnett consequentials running in the other direction. Barnett consequentials follow on from need in England. It is surely a governance problem when the Treasury responds only to health and transport needs in England and then we get consequentials. Should not the Treasury give money and have consequentials running in the other direction when need arises?

[Sir Alan Meale (in the Chair)]

Order. May I point out to Members that we have only a short time for the debate? If interventions are to be made, can they be questions to the speaker at that time rather than statements? Hopefully everyone will have an opportunity to speak.

--- Later in debate ---

[Mr MacNeil]

Will the hon. Gentleman give way?

[Iain Stewart]

Once more and then I must make some progress.

[Mr MacNeil]

While the hon. Member for Lancaster and Fleetwood (Eric Ollerenshaw) may be correct that England pays more, it pays more only because it is larger; it does not pay more per capita. Unfortunately, that has been Scotland’s preserve: it has paid more tax per capita into the UK each and every year for the past 33 years.

[Iain Stewart]

Again, I shall address those very points in a few moments. I want to shed some light on the issue. Critics of Barnett usually start by quoting Treasury figures that say that public spending per capita in Scotland is £1,600 greater than in England as a consequence of the Barnett formula. For once I may be in agreement with the hon. Gentleman, because that is not correct. The Barnett formula is only one part of the complex fiscal relationship between the different parts of the United Kingdom.

The Barnett formula applies only to certain parts of public spending. Currently, about 40% of public spending in Scotland is not covered by it because that spending is not determined by the Scottish Parliament. That proportion will reduce in time as further taxes are devolved, but that point is important. Nor does Barnett determine the size of the Scottish block grant as a whole. That has built up incrementally over the years and the Barnett formula determines only the annual changes.

In simple terms, Scotland gets a population share of a departmental budget change in England where the equivalent is determined by Holyrood. Each year, the changes for each spending programme are totalled up and an overall adjustment to the previous year’s block grant is made. It is then up to the Scottish Parliament to decide how it spends that grant; it is not hypothecated. If Scotland gets £100 million more for health services because of the change in England, it is not obliged to spend that on health. That partly explains why some public services and other matters in Scotland are different from south of the border.

It is important to note that when the formula was introduced in the late 1970s it was designed as a convergence formula to narrow public spending per capita between Scotland and England. In advance of the devolution legislation proposed by the Wilson and Callaghan Governments, the Treasury carried out a needs-based review to determine the extent to which public spending per capita in Scotland would need to be higher to provide a comparable level of public services to those in England. It was found that because of factors such as Scotland’s proportionally greater landmass, rural population, council housing stock and poor health indicators, spending needed to be 16% per capita higher than in England. It was actually 22% higher, so Barnett was introduced gradually to narrow the gap and avoid the annual round of what was described as table-thumping over agreements between the different spending Departments.

It would seem that convergence has not happened, and it is important to understand why. First, in the initial years of operation, the population share was never adjusted, and that was at a time when Scotland’s population relative to England was falling. For a decade or so, a bias was therefore built in to the formula in Scotland’s favour. In the 1990s, the population share was adjusted, but it helped to sustain the higher levels. Secondly, and more significantly, were the number of deals done outside the Barnett formula. Whatever calculation Barnett produced, there was always pressure, under Governments of all parties, for extra funding arrangements. In his autobiography, the noble Lord Lang notes that when he was Scottish Secretary, between 1990 and 1992, Barnett should have reduced the Scottish Office block grant by £17 million, but, as a result of separate deals agreed with the Treasury, it was increased by £340 million.

[Mr MacNeil]

Will the hon. Gentleman give way?

[Iain Stewart]

I hope that the hon. Gentleman will forgive me, but I must make some progress.

The simple point is that if Barnett were to be ended tomorrow, the issue of comparative spending would not go away. There has not been a needs-based review since the 1970s, in which time many economic, social and demographic changes have taken place, so we do not actually know what the current position is. There are also difficulties in defining exactly what territorial spending is. One example is the building of High Speed 2, a project of which both phases will be entirely within England. One could therefore argue that spending on it should accrue only to England, but there is a benefit to Scotland and Wales—

[Mr MacNeil]

And France.

[Iain Stewart]

I am not quite sure whether the hon. Gentleman’s geography is correct. High Speed 2 will go from London to Birmingham and the north of England.

[Mr MacNeil]

The hon. Gentleman has conceded, as he is right to do, that High Speed 2 will be built in England, and says that it will also bring benefits to Scotland. If there are benefits to Scotland in the north, surely there will also be benefits at the other end, in the south—namely, to France. The benefits will be not only within but outwith the United Kingdom. High Speed 2 is not running in Scotland, but the hon. Gentleman argues that it will benefit Scotland; if it is going to benefit Scotland, it will benefit France in the same way.

[Iain Stewart]

Given the fact that there is currently no straight link between High Speed 2 and High Speed 1, that is a slightly tangential point. I have simply given High Speed 2 as an example of how difficult it is to assign exactly public spending on a territorial basis; I could cite many other examples.

It is worth while to look not only at public spending relationships between Scotland and England and Wales and England, but within each nation and the regions of each nation. There is currently a process of further devolution in England, which is producing more demands for tax and spending powers in the cities and regions. The north of England says quite regularly, “We’re being hard done to because of the Barnett formula.” London says that it pays far more than it receives in public spending—[Interruption.] I am not saying whether that is right or wrong, merely that such comments are made. I have funding issues in Milton Keynes in my constituency: with a rapidly growing population, sometimes the funding formulae do not keep up with the population need. There are also tensions between urban and rural spending—the issue is not only between the component countries of the United Kingdom.

We must start to open up a wider debate about the allocation of public spending right across the UK, bearing in mind the fact that we have a finite pot of money. We must also look at the tax receipts side of the ledger, which is also controversial. We have never definitively established the comparative amount of taxes raised north and south of the border, or, indeed, within England, because we have never had to assign taxes territorially. Many studies have been conducted, but they have been based on controversial assumptions.

It is difficult to assign tax revenues on a territorial basis because we have long had a unitary system. For example, my father was employed by the Civil Aviation Authority. He was based at Prestwick but spent one week in every two working at head office in London. He commuted between the two, so his time was spent equally between Scotland and England, and, to throw another spanner into the works, his tax office was in Cardiff. It would not be impossible to unpick all that, but it would be difficult, for corporation taxes as well as personal taxes. Nevertheless, it is something that we will have to do if more tax powers are devolved to Holyrood. We must also look at the disaggregation of national insurance and pension receipts and liabilities.

Simple calls for the retention or abolition of Barnett are very wide of the mark. If we are going to dismantle what has been a unitary fiscal system, there are many aspects to consider. Without updated figures on the current costs of providing public spending in each nation of the UK and within each region of each nation, we are working in the dark. I gently suggest to my hon. Friend the Minister that the Treasury looks at providing those figures.

My final point echoes the excellent one made by my hon. Friend the Member for Lancaster and Fleetwood (Eric Ollerenshaw). We must look at this matter in the context of the cohesion of the United Kingdom. The hon. Member for Na h-Eileanan an Iar (Mr MacNeil) has left the Chamber, but his party, the SNP, lost the referendum. We must make the Union work better and we need a sense of fairness; as my hon. Friend the Member for Redditch (Karen Lumley) said, every part of the Union must be treated fairly.

A few years ago, I began to do research for a book, and I looked at what is done in places such as Canada, Germany, Spain and the United States with regard to different tax-raising and spending powers in the component parts. Whatever the system, everyone still argued about spending levels and transfers from more to less affluent areas. That will never end—it is part and parcel of political debate—but the important thing is that we have a sense of fairness. I hope that today’s debate has helped to shed some light on matters that are often simplified and on a debate that is often inflamed, and that I have made a useful contribution to a much longer debate that we must have about public spending in the UK.