Barnett Formula

Lord Newby Excerpts

Tuesday 17th December 2013 Grand Committee

[Lord Newby (LD)]

My Lords, this is an important subject and I am grateful to the noble Lord, Lord Shipley, for giving us the opportunity to debate it this afternoon, and for all the contributions that have been made.

For what is essentially a mathematical equation, the Barnett formula retains the capacity to generate considerable passion and debate, as we have demonstrated today. Clearly, noble Lords are aware of the formula’s origins in the late 1970s. The Government of the day decided at the time of the devolution Acts in 1998 to retain the block grant and Barnett formula arrangements for determining the budgets of the devolved Administrations. The noble Lord, Lord Jones, gave us some gory details of the state of the British economy at the time but also of the extremely civilised way in which the noble Lord, Lord Barnett, grappled with them. I am sorry that there is only water on offer to the Committee this afternoon.

Successive Governments have taken the view that while the Barnett formula may not be perfect, a persuasive case has yet to be put that an obvious alternative exists that would simultaneously satisfy the devolved Administrations in Northern Ireland, Scotland and Wales and all the other bodies competing for funding from the Government—not least Whitehall departments and local authorities. While it clearly is not perfect, the Barnett formula has proven to be a relatively transparent, durable, robust and fair method of calculating changes in budgets for the devolved Administrations since devolution. It operates at a high level, based on population shares and changes to spending by comparable UK departments. Despite a considerable element of transparency, once you look into it in any detail, it does feature certain aspects of the Schleswig-Holstein problem and at the margin gets extremely complicated.

Since today’s debate was prompted by the Local Government Association’s concerns about the formula, I stress that the Government understand the concerns of English local authorities. That is why in the Autumn Statement we recognised concerns about the administration of the new homes bonus by giving that back directly to local authorities, exempted local authorities from any further reductions in annual revenue budgets to assist them in freezing council tax in 2014-15 and 2015-16, and made additional funding available to support housing and other infrastructure development.

I will make a number of general comments now and come back to some of the specific comments under the headings England, Scotland and Wales respectively. The Government are reluctant to join those who call for a rapid demolition of the funding architecture for the devolved Administrations but we recognise that there is a range of valid views on alternatives. Changes to the devolution settlements already legislated for in relation to Scotland and in prospect for Wales are increasing the levels of accountability and flexibility the devolved Administrations will have in future over their own fiscal position.

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[Lord Newby]

My Lords, as I was saying, changes to the devolution settlements already legislated for in relation to Scotland, and in prospect for Wales, are increasing the levels of accountability and flexibility the devolved Administrations there will have in future over their own fiscal position. That has been warmly welcomed in both those parts of the United Kingdom. Similarly, in England, the Government have already initiated an historic shift of power to local areas by removing ring-fences from £7 billion of local government funding and giving councils the ability to retain 50% of the business rates they collect; I will come back to that in a moment.

At least one other noble Lord has referred to the House of Lords Select Committee in 2009, which concluded that, despite some shortcomings,

“the advantages of the Barnett Formula—simplicity, stability and the absence of ring-fencing—are important and should be maintained whatever the future methods of allocating funds to the devolved administrations”.

While we recognise the concerns expressed about the formula, as made clear in our programme for Government, this Government’s priorities remain that we deal with the deficit, bring debt down, and build on the growth we are beginning to see demonstrated right across the UK. There are therefore no plans to review the formula in this Parliament.

I move on to the English, Scottish and Welsh contributions to the debate in turn. The noble Lord, Lord Shipley, made a powerful argument for more devolution within England and greater autonomy for the core cities, and London in particular. I have considerable sympathy with that. I was very much involved in plans for regional government during the previous Administration. My preference would have been to have powerful regions as counterpoints to, to a certain extent, Scotland and Wales. However, that vision of how we might manage affairs in England rather crumbled to dust.

It is interesting to note how the core cities have stepped up to the plate and are coming up with a number of innovative proposals, to some of which the noble Lord referred, to enable greater devolution to them. However, the problem with the core cities approach to devolution goes to the point made by my noble friend Lord Teverson, which is that they have the mass and momentum to take devolution forward, but if you are not careful, that will leave a lot of the rest of the country behind. It is difficult to see how to get some kind of uniformity of approach if the cities themselves take a huge leading role.

I agree completely with the need to develop further the place-based approach to financing local government. Although this may be a little pessimistic, it is one of the relatively rare innovations in public policy which I think has been an unambiguous success. I hope very much that we press on with it because not only does it give the flexibility that enables considerable efficiencies to be driven forward, it also gives local authorities a greater sense of their own destiny, which is important if they are to flourish in the medium term.

As part of his argument, the noble Lord, Lord Shipley, discussed the inequality in per head allocations between England and the devolved Administrations. There are, of course, very considerable differences between the regions of England. As he knows, the north-east has higher public spending per head than, for example, does Wales. There are obvious reasons for that, but it is worth pointing out that England differs considerably in the level of expenditure per head that it enjoys at the moment.

My noble friend Lady Bakewell was one of a number of noble Lords to set out the straightforward English case for a review of the formula as proposed by the LGA. I understand absolutely why she feels so strongly about it. She talked particularly about adult social care. As she will be aware, the Government are making enough funding available to ensure that local authorities do not need to reduce the level of social care services that they are providing through to 2015-16, and the range of reforms we are introducing are all aimed at allowing local authorities to do more in order to deliver better outcomes, including the new £3.8 billion health and social care integration pool. That is another example of taking an integrated approach rather than a silo-based one which, whatever is done with the Barnett formula, is very important.

My noble friend Lord Bradshaw enjoined the Government to start working on how we might replace the Barnett formula and suggested that we might adopt a cross-party attempt to do so. I suspect that that would be quite tricky between now and the next election, and I think that the most he can realistically hope for is a clear statement in each of the manifestos on how the parties plan to deal with this issue in the next Parliament.

The noble Baroness, Lady Eaton, pointed out the extent to which the Government are moving towards at least some of the LGA proposals, not least in terms of long-term indicative financial statements. That is a very welcome move, particularly because it has taken so long to do it. We are sometimes pretty reticent about claiming progress when we make it, but that is something which local authorities have been asking for for a long time, and there is real movement.

The noble Lord, Lord Teverson, as I have mentioned, talked about the rural/urban divide. He basically said that we should not get too obsessed by Barnett, but should worry about the whole raft of issues. I have a lot of sympathy with him on that.

The noble Lord, Lord Kennedy, made a point about the funding in West Oxfordshire. The only thing I would say about funding for any local authority area is that, if the Barnett formula has elements of the Schleswig-Holstein problem, local government funding allocations in England are vastly more complicated than Schleswig-Holstein ever was. Despite there being allegedly objective formulae for determining that, I have always found it difficult to get from the formulae to the actual results; no doubt that is my inability.

The noble Duke, the Duke of Montrose, asked us to confirm a number of figures in relation to Scotland. I believe that they are correct, but if I am wrong I will write to him. He asked whether the Scottish Government’s current block grant absorbed the cuts. The cuts to devolved Administration budgets have tended to be proportionately smaller than those to Whitehall departments, but that is due to the comparability factor built into Barnett: specifically, the protection to English health and school budgets.

The noble Lord, Lord Wigley, discussed the challenges in Wales in this area, and talked not least about the Holtham commission, which was an extremely thorough piece of work and demonstrated one approach to an alternative needs-based formula to Barnett. Clearly, it is not absolutely straightforward to get from where we are now to a needs-based approach which everybody agrees is the optimal way forward, but I pay tribute to the Holtham commission for its work.

Finally, on the complications of making comparisons, several noble Lords, including the noble Lord, Lord Wigley, referred to the public expenditure statistical analysis figures on per capita expenditure. It is worth clarifying that these are not simply devolved Administration budgets. They include some bits of UK-wide expenditure, not least welfare. One must take that into account when looking at the comparability.

I know that I will not have been able to completely satisfy my noble friend Lord Shipley and other noble Lords, but I hope that I have been able to demonstrate that we are alive to the issues and are moving towards greater place-based delivery for England, which will help local authorities deal with the challenges that they face. I am extremely grateful to my noble friend Lord Shipley for initiating the debate.

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[Lord Newby]

My Lords, there is to be a Statement before the Commons rises for Christmas about the funding for the next financial year, which will give the noble Lord’s colleagues in the other place, if not necessarily here, the chance to ask a lot of detailed questions about that. Perhaps it is a subject for another debate in your Lordships’ House.

Committee adjourned at 6.59 pm.