Barnett Formula

David Gauke Excerpts

Tuesday 16th December 2014 Westminster Hall

[The Financial Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship this afternoon, Sir Alan. I congratulate my hon. Friend the Member for Milton Keynes South (Iain Stewart) on securing this debate and setting out his case in a characteristically thoughtful and analytical way. He brings great knowledge and expertise to the matter. I also thank other hon. Members for their contributions to this short debate, the timing of which is very appropriate. Given the momentous referendum in Scotland not that long ago and the Smith commission’s subsequent report, this subject has never been more topical. Furthermore, hon. Members will have seen that the Government have published a Command Paper today looking at the options for devolution in England. The paper acknowledges that the treatment of tax and spending decisions that impact on funding to the devolved Administrations will need to be considered in any solution.

Since its introduction over three decades ago, the Barnett formula has proved to be a durable and robust method of calculating changes to the block grants for the devolved Administrations, providing population-based shares of comparable UK Departments’ changes in spending. The leaders of the three main UK parties have confirmed that the Barnett formula will continue, and the House of Lords report in 2009, as we heard, recognised advantages such as simplicity, stability and the absence of ring-fencing. However, we also recognise the concerns expressed about the formula and we welcome all views on its continued implementation.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

The vow has been made to the people of Scotland that the Barnett formula will be preserved and that Barnett funding will be preserved at its current level. Does the Minister not agree with my analysis, therefore, that a new benchmark has been set for what we would term fair funding? Whereas before the argument was for some sort of needs-based formula, the argument is now about making sure that the people of Wales, for instance, are not disadvantaged compared with the people of Scotland in terms of public funding per head.

[Mr Gauke]

Let me turn to the issue of fairness for all parts of the United Kingdom, including for Wales—I assure the hon. Gentleman that I will get to that eventually. As my hon. Friend the Member for Milton Keynes South has mentioned, there is a perception, particularly in parts of England, that Scotland is overfunded because it offers generous policies on university tuition fees, for example. However, I must emphasise that devolved Administrations do not receive any additional funding for those policies. They accommodate them within existing budgets by prioritising those policies over others—for example, by not protecting school spending during this Parliament, as we have in England.

One of the purposes of devolution is to allow the devolved Administrations to make different policy choices. That was set out in 1997 in the statement of principles, which states:

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

In contrast, commentators in Scotland, Wales and Northern Ireland tend to be concerned about the Barnett squeeze convergence property of the Barnett formula, whereby the percentage changes in devolved Administration spending are lower than in England. However, the Barnett formula itself does not change the budgets of the devolved Administrations disproportionately to England’s: an extra pound per head in England means an extra pound per head in the rest of the UK. The so-called Barnett squeeze reflects the higher levels of spending per head in Scotland, Wales and Northern Ireland that have existed over many years, before and since devolution in the 1990s.

I know that some hon. Members consider Wales to be relatively underfunded as its spending has converged towards the level in England. In fact, spending per head there is 11% above England’s and has more than doubled in cash terms since devolution. Wales also benefits from large EU structural fund spending, having been awarded £1.9 billion from 2007 to 2013 and a similar amount for 2014 to 2020.

However, we recognise that there are concerns about relative levels of funding for Wales; that is why we have established a bilateral process to consider that in advance of each spending review. The most recent assessment, before the 2013 spending round, determined that convergence was not forecast to occur through to 2015-16 and that the existing level of Welsh funding was within the range suggested by the Holtham commission. The Government have now further agreed with the Welsh Government to review that process in the light of the tax and borrowing powers contained in the Wales Bill.

[Glyn Davies]

The Minister may have just answered the question I was going to ask, but perhaps he might reassure me on the uncertainty about the size of what I call the Barnett deficit in Wales. Everybody thinks it has decreased substantially over the last few years as a result of the change in public spending levels. Are we moving to a position where we will know precisely what that Barnett deficit is, because it is very important for the discussions that we are having about the powers over income tax that the Welsh Government should be taking on?

[Mr Gauke]

My hon. Friend raises an important point. I know that he has been very active in ensuring that the Welsh Government take advantage of the powers that may be available to them, and I know there is an issue of funding there. I hope that I did address his point by saying that the Government have agreed with the Welsh Government to review the process in the light of the tax and borrowing powers in the Wales Bill. I hope that process will satisfy him by shedding light on the issue that he raised.

I turn to the issue of the needs-based formula. I have heard it said that the Barnett formula does not take sufficient account of needs. The most basic issue here is that no one has been able to say how we would agree a needs-based assessment that would suit every part of the United Kingdom. However, far from being a static formula, the Barnett formula is regularly updated to take account of changes in population and levels of devolved responsibility.

The budgets of the devolved Administrations cover a very wide range of devolved spending programmes. It is, of course, for the devolved Administrations to decide how to allocate their overall budget to individual programmes, reflecting their own policies and their own assessment of the needs of each country. The Barnett formula allows them the freedom to do that.

However, we believe that financial accountability can be improved in Scotland, Wales and Northern Ireland as the devolution settlements evolve. The Government’s record on that speaks for itself. Both the Scotland Act 2012 and the Wales Bill currently in Parliament will devolve new tax and borrowing powers. We have also committed to implementing Lord Smith’s heads of agreement in full. As we devolve further powers, Scotland and Wales will be responsible for raising far more of their funding, so their block grants will become less important. The impact of the Barnett formula on overall levels of funding will decline.

Finally, in highlighting today’s debate in The Daily Telegraph, my hon. Friend the Member for Milton Keynes South set out that the debate would be better informed if we had

“detailed and incontestable territorial public accounts”,

which is a point he made earlier. The Government do not disagree, but this is a complex matter. The Office for National Statistics is considering the development of sub-national accounts as part of its implementation of the European system of accounts, and it is also undertaking work on the comparability of official statistics across the United Kingdom.

It is right that a formula that has set out devolved spending for over a third of a century is continually kept under review to make it fit for the needs of the current day. The three main party leaders have stated that the Barnett formula will continue, and that is therefore what will happen. However, we continue to listen to the strong views on the formula from all parts of the United Kingdom, which have been represented in this debate this afternoon. In that spirit, I thank everyone for their contributions today. I particularly thank my hon. Friend the Member for Milton Keynes South, who has brought to this debate careful, thorough and thoughtful analysis. He has succeeded in shedding some light on an important issue and has highlighted some matters that can often be lost in this important debate.

[Sir Alan Meale (in the Chair)]

Mr Stewart, would you like to add anything? We have a short period of time left.