Funding Formula

Justine Greening Excerpts

Tuesday 18th January 2011 Westminster Hall

[The Economic Secretary to the Treasury (Justine Greening)]

It is a pleasure to serve under your chairmanship, Mr Dobbin, particularly given your constituency’s links to the debate today, which became apparent during the discussion. I congratulate my hon. Friend the Member for South West Bedfordshire (Andrew Selous) on initiating an excellent debate. All hon. Members have made some articulate, well-argued points and I will do my best to try to respond to them during the next nine minutes. Given the fact that so many points have been made, if I do not cover all the issues, I will write to my hon. Friend afterwards to amplify them.

I shall start by being frank. As my hon. Friend is aware, the Government’s priority is to tackle the fiscal deficit. Although we do not have any current plans to review the Barnett formula, it is also fair to say that we accept it is not written in stone. Therefore, we look with interest at debates such as this one. The current statement of funding policy that we issued in October 2010 after the spending review was made in consultation with the devolved Administrations. Before I get on to some of my more detailed comments, I shall state a problem and then an observation about the issue. The problem is that, as the former Chief Secretary to the Treasury in the previous Government said, there is no money left. My observation on the debate is that I do not think anyone is arguing for a change in the Barnett formula on the assumption that their local community will come out of it with less money.

Those are the two challenges that we face. Hon. Members are absolutely right to make the case for the funding that their local communities need. The challenge is to ensure that we get the most out of the constrained pot that we have and to ensure in the future that the formula works effectively, whether that is at the Barnett level or at the England local government level, not just in terms of the absolute cash that goes in—there has been much discussion about cash per head and various Government policy areas—but critically in terms of what comes out. Despite today’s debate, we should never lose sight of the importance of discussing the quality of policy alongside the quantity of money that is going in. The cautionary tale is that the Barnett formula, which Lord Barnett said was only ever intended to be a short-term measure, has actually had a longevity that no one anticipated. It is worth while Ministers of today and tomorrow pondering the fact that, even if we think the decisions we take today are short-term, they might ultimately prove to be far more long term than we realise.

[Hywel Williams]

Is the Minister saying that underfunding in Wales will be addressed only when the economy grows and when we can afford to do so in a way that we currently cannot? Does she accept that that is irrelevant to the fact there is unfairness now?

[Justine Greening]

I shall make two points about the hon. Gentleman’s intervention. First, Wales is well funded. Secondly, let us consider how the Government have approached the spending review. It turns out that, because of how the formula works, the decisions we took to protect the NHS budget and the education budget in cash terms and in terms of schools has meant that the Welsh Assembly Government have probably received a more generous settlement out of Barnett than they would have if the previous Administration had stayed in office.

On the points raised today, clearly there have been a number of inquiries and reports on the Barnett formula and the devolution settlement. One such review is the Calman report on Scotland. As we have heard, the Scotland Bill is passing through Parliament and my hon. Friend the Member for Warrington South (David Mowat) is right to say that the legislation will devolve some of the financial management of income tax to the Scottish Government. However, I can assure him that it will not fix the Barnett formula in stone for the future. A further aspect to the Barnett formula is the Holtham commission, the findings of which illustrate the point I made at the start of my speech. The Holtham commission considered how a needs-based formula would work for Wales and said that such a formula would mean Wales got more, which would put more funding pressures on settlements for other areas. That shows that there are no easy answers to the debate.

[David Mowat]

On the point I raised about the Scotland Bill, it does not explicitly say that the Barnett formula can never be changed in future. The point I was making is that, once we link a baseline Barnett assessment to the level of Scottish income tax, it becomes extremely difficult to change. The £4 billion additional money that Scotland gets through Barnett is equivalent to 12p to 15p of income tax. In theory, the Scottish Government could reduce their income tax levels by 12p and go down to a needs-based analysis and it would be hard for us subsequently to change that.

[Justine Greening]

I understand my hon. Friend’s point. However, in many respects, the point of devolution is to allow more local decision making to take place across the different devolved Administrations.

Just to finish off the answer to the question asked by the hon. Member for Arfon (Hywel Williams), clearly there will be a referendum in Wales on whether primary legislative powers should be held by the Welsh Assembly Government. We will wait to see the outcome of that referendum before deciding how to take forward some of the points of the Holtham report.

On some of the specific issues raised by my hon. Friend the Member for South West Bedfordshire about transparency, the chapter and verse of the funding formula is in the current statement of funding policy. I admit that it is not the most riveting read in the world, but it does explain clearly how the various settlements are reached. The funding approach is agreed in consultation with the devolved Administrations of the rest of the United Kingdom.

On my hon. Friend’s suggestion about the needs-based formula, I can absolutely understand why people and hon. Members think that such an approach would be better. A needs-based formula allocates local government spending across English local authorities, but many hon. Members and different communities consider it to have flaws. That illustrates how there are no easy ways in which we can reform local government funding, whether in relation to local government across English local authorities or in relation to devolved Administrations. The common ground we have in the points made is that any changes should absolutely be approached with real caution over a period of time.

Of course, the Treasury has clear control over the process, as it deals with public spending issues. However, there are avenues through which disputes can be remitted to the Joint Ministerial Committee. Therefore, the Treasury is not always judge and jury. There is absolutely a process through which disputes can be resolved if the Treasury cannot do so. On the involvement of the Office for Budget Responsibility, that organisation is a forecasting rather than a policy-making body. My hon. Friend is right to point out that other countries, such as Australia, have a different approach, but they come with pros and cons. Yes, that authority may be independent, but there is no Minister such as me to stand in Parliament, listen to the issues and respond to them democratically and with some sense of accountability; Australia does not have that in the same way. There are still problems with how that authority operates and questions about whether it allocates funding fairly. Such an approach is not without its challenges.

In conclusion, although we do not plan to change the Barnett formula, we will continue to consider all aspects of public spending, how they operate and how effective they are. As I said, the points made today were highly relevant and interesting, and I have no doubt that the debate will continue over the coming years.