Public Spending: Barnett Formula

Lord Shipley Excerpts

Wednesday 15th March 2023 Lords Chamber

Asked by

[Lord Shipley]

To ask His Majesty’s Government what assessment they have made of the relevance of the Barnett Formula in the distribution of public spending across the United Kingdom.

[Lord Shipley (LD)]

My Lords, I am very grateful for the opportunity to debate the relevance of the Barnett formula in the allocation of public funding in the UK. I am grateful to those colleagues who have put their names down to speak, and I am looking forward immensely to hearing the noble Lord, Lord Hendy of Richmond Hill, make his maiden speech. In passing, I thank the Library for the excellence of its briefing.

The formula was introduced by the late Lord Barnett, Chief Secretary to the Treasury, in 1978 to prevent annual funding arguments with Scotland, Wales and Northern Ireland. It was introduced in Scotland in 1978, into Northern Ireland in 1979, and into Wales in 1980. The formula was used for allocating public spending until 1999, when it became the mechanism for the allocation of block grant. The Barnett formula calculates the yearly change in the block grant to the devolved Administrations from the UK Government. It calculates not the size of the block grant but rather the annual change in per-person funding, and in that sense it is clearly related to population. The nations can decide how to reallocate spending to other services from that block grant, and of course the block grant applies only to devolved public services.

Lord Barnett and others believed that spending in each part of the UK would converge over time. This was because devolved nations had a higher base of public spending and, when a fixed cash sum increase per head was allocated annually across the UK, the percentage rise to the nations would be lower than in England. There would then be gradual convergence because standard cash increase per capita should lead to a lower percentage increase. However, since then, formula bypass has become a factor—that is, additional money for a range of purposes not directly connected with the Barnett formula. The formula calculation is based on the historical amount that is devolved, but population rather than need has been a key factor—and has proved too large a factor.

The Barnett formula is still with us 45 years later. It has not eroded historical differences in spending between the regions and nations, as was expected. I do not think that the word “formula” is justifiable today, when it was a short-term fix driven by short-term funding needs in the nations and can be bypassed in the way that it has been. As Lord Barnett said in 2014 in his last speech on the subject, the formula was drawn up on the back of an envelope, and was not based on need. He called it “a national embarrassment”. He believed in a UK-wide needs-based system for allocating public funding, and he regularly asked Governments to cease calling it the Barnett formula when it was not his formula. He was right to do so. It may be a simple and predictable process for the Treasury but, because it can be bypassed by extra funding streams, it is not as transparent as it should be.

In 2009, a Select Committee of this House agreed with Lord Barnett; it urged replacing the formula with a needs-based system. The Calman commission in 2009 urged an assessment of need as a factor in the formula and, since then, the Institute for Government and the Institute for Fiscal Studies have both urged reform of the Barnett formula. The Constitution Committee in this House has three times, in 2015, 2016 and 2022, said that the Barnett formula should be reformed to achieve a fairer allocation of funding among the four nations. The Independent Commission on the Constitutional Future of Wales, in its interim report, said that a needs-based system could be agreed and phased in.

We have ended up with a block grant system to the nations which can be flexibly used, but centralised control of the regions in England by the UK Government out of London. In today’s Budget, there seems to be some scope for further decentralisation through a block grant system into some mayoral combined authorities in England. I welcome that, but it should be on the same terms as the nations have. As it is today, government spending is higher per head in Northern Ireland, Scotland and Wales than in England. That may be justified, particularly when sparsity of population is considered, but we need to know the evidence, and a needs analysis is the way to find out. Indeed, the more the Government decentralise into England, as today’s Budget will demonstrate, the more challenge there will be for the Government to show that the allocations into England are fair.

The current figures, published by the Government in December 2022—their figures covering 2021-22—show that the lowest per capita public spending in the nations and regions is the East Midlands at £10,528 per head. In Northern Ireland, that figure compares to £14,062 per capita. In Scotland, it is £13,881 per capita; in Wales, it is £13,401 per capita; and London has £13,719 per capita. I want to ask the Minister why the share of UK public spending in the East Midlands is so comparatively low. I do not expect her to answer now, but I would appreciate something in writing which explains why there is such a profound difference in public spending in regions such as the East Midlands, compared to some others at the top of the list. As I said earlier, there may be reasons which are easy to understand and justify, but I would like to see what they are. I think—but do not know—that Treasury officials must know the answer to that question. In the context of today’s Budget, we are going to have to be much more open about it. If the Minister is able to write something down and supply it to all those taking part in this debate, that is the way to take a first step in understanding how it is justifiable that a region like the East Midlands has such a low figure.

Can we create a needs-based analysis? I am sort of waiting for the Minister to tell us that it is a complex task to undertake a needs analysis. Should that be the answer, I want to say in advance that, of course, it is not a complex task at all, and the reason is that the Government are already doing it as part of the Levelling-up and Regeneration Bill. In February 2022, the Government produced a document called Levelling Up the United Kingdom: Missions and Metrics Technical Annex, and, at the back of that, all the indices that the Government are working on to level up England—and many of those metrics relate to the United Kingdom—can be used to undertake a needs analysis across the United Kingdom. If any Members have not seen that set of metrics produced as part of the Bill, I strongly advise that it is worthwhile read.

I really hope that the Minister’s reply will show some flexibility. In the last couple of hours, we had a debate on the Levelling-up and Regeneration Bill about the need for constituent parts of England to have fiscal powers. It just will not do for Wales, Scotland and Northern Ireland to have substantial fiscal powers and for the constituent parts of England not to have those. We must have that debate, but I sincerely hope that the Minister will take seriously the point that I am trying to make tonight and that, in the context of what Lord Barnett established back in the late 1970s, there will be some better understanding of the need to move on from what is now an out-of-date formula.

--- Later in debate ---

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I add my thanks to the noble Lord, Lord Shipley, for the timeliness of this debate and add words of welcome to the noble Lord, Lord Hendy. As we have heard, he brings a plethora of experience to this House, not least through his efforts to increase union connectivity, which, as the noble Lord noted, the Government are considering carefully. I look forward to working with him in the future.

As was reflected in my right honourable friend the Chancellor’s Budget today, the Government are committed to delivering growth and prosperity across all four nations of our United Kingdom and all regions within it. The Budget will rightly be debated in its own right by this House tomorrow, but I want to highlight that it is a Budget that delivers for the union, both through UK government support for all parts of the UK and through providing further additional funding to the devolved Administrations. The Spring Budget ensures that the benefits of economic growth are felt everywhere; promotes the conditions for enterprise to succeed; encourages the inactive back into employment; and continues to provide support with the cost of living to people across the United Kingdom.

As we heard earlier today, the spending review 2021 set the largest annual block grants, in real terms, of any spending review settlement since the devolution Acts. On top of this, the devolved Administrations received £3.4 billion of extra funding at the Autumn Statement and, as a result of decisions at the Spring Budget, are now receiving an extra £630 million in additional funding over the next two years through the Barnett formula, which we are here to discuss today.

The Government’s commitment to investing in our union should be in no doubt. However, it is helpful on Budget Day to reflect on the fiscal settlement that we have across all four nations and on how decisions such as those taken today flow through to the finances of the devolved Governments, including through the use of the Barnett formula.

As many noble Lords noted, the Barnett formula is long-standing, having been introduced in 1978—which is, as the noble Baroness, Lady Chapman, noted, before my time. It is transparent and open to scrutiny. It is consistent with the principles set out in the Statement of Funding Policy document, playing a key role in pooling and sharing resources so all parts of the United Kingdom receive a secure and stable level of funding for public services.

As noble Lords noted, the formula determines changes to devolved Administration funding in relation to changes in UK government funding and works by multiplying the change in UK government funding by two figures: a population share and a comparability factor, which measures the extent to which a UK government service is devolved.

The formula serves to ensure that any changes to funding are, per person, broadly the same across the United Kingdom. These changes are then added to devolved Administrations’ existing funding, which is much higher per person than equivalent UK Government spending, broadly reflecting that needs are higher in Scotland, Wales and Northern Ireland. The outcome is that the devolved Administrations receive more than 20% more per person than equivalent spending in the rest of the United Kingdom.

I understand that there are, on many occasions, calls to replace the Barnett formula. To answer those calls honestly, it is important to acknowledge that the formula is not perfect, but all allocation systems have strengths and weaknesses, and we do not need to replace the Barnett formula to make meaningful improvements in the way in which devolved Administrations are funded. Indeed, that picture has not remained static since the formula was introduced in the 1970s: significant changes have been made since then.

The devolved Administrations have agreed tax powers so they can increase their funding. They have control of local taxation, such as business rates and council tax. They also have agreed borrowing powers, as well as flexibility to move funding between years. The noble Lord, Lord Shipley, raised the question of needs-based funding—not just looking across the nations of the United Kingdom but across our regions as well and how funding is allocated within England. I am sure the noble Lord will know that many different formulas contribute to the distribution of funding within England. Many of them take needs factors into account. To answer him, as he gave me the option to do this, I think it would be best if I wrote out to those who have attended the debate today on the approach to needs-based funding in England.

As for needs-based funding and the Barnett formula, I recognise that it is not directly needs based in Scotland and Northern Ireland. However, the higher levels of funding they get reflect the greater needs in those areas. In Wales, raised specifically by the noble Lord, Lord Wigley, although we did not take forward all the recommendations of the Holtham commission, very importantly, we have introduced a needs-based floor into the Barnett formula to ensure that that is taken into account.

The latest fiscal framework agreed between the UK and the Welsh Government in 2016 added a needs-based factor into the Barnett formula to ensure that Wales receives fair funding. The Welsh Government receive at least 15% more funding per person than the equivalent United Kingdom spending in the rest of the UK, as recommended by the commission. A review of that fiscal framework is triggered when the Welsh Government premium falls below 15%. It is not below 15% at the moment; noble Lords will know that is it at 20%. This is about £1 billion more each year than the Holtham commission indicated, and the Welsh Government agreed, was fair to Wales.

There may be a question of how effectively the Welsh Government have spent their needs-based funding, and the noble Lord, Lord Wigley, raised that question about EU funding that the Welsh Government have received. The United Kingdom Government share the desire to ensure that money is spent effectively across all parts of the UK and that devolved Governments are held to account by their electorate for how effectively they spend their money. When it comes to introducing a needs-based element into the Barnett formula, the reforms we have undertaken since the Holtham commission’s report show that you do not need to abolish the Barnett formula to improve on its work.

My noble friend Lord Greenhalgh provided a different perspective on whether we should look at needs-based funding or opportunity-based funding. He raised an interesting point and I hope he has taken heart from some of the announcements in today’s Budget. Whether it is devolution or decentralisation, there were important announcements in today’s Budget that will give more power to those who are close to their communities and have a better idea of how money should be spent in those areas.

We have agreed, subject to ratification, trail-blazer devolution deals with the Greater Manchester Combined Authority and West Midlands Combined Authority. They will equip those authorities with deeper, additional policy levers to deliver on their priorities, including across local transport, skills, housing, innovation, net zero and employment. They are a big step towards what my noble friend spoke so passionately about: empowering the leaders of local areas and others to take forward the policies that will deliver for those local areas.

The Budget also provided hundreds of millions of pounds more for levelling up, including over £400 million of funding for the rollout of new levelling-up partnerships, bringing the collective power of government to provide bespoke place-based regeneration in 20 of England’s areas most in need of levelling up over 2023-24; and over £200 million for 16 local regeneration projects in places in need across England—from a skills and education campus in Blackburn, to the transformation of Ashington town centre. There have been significant moves in this Budget both to devolve power to local areas and to ensure that areas that need support from levelling-up funds get it.

It would be remiss of me to conclude this debate without addressing the point on High Speed 2. I do not think that what I will say to noble Lords is new information, but the reason why Wales does not receive a Barnett consequential on High Speed 2 spending, unlike Scotland and Northern Ireland, is that rail infrastructure in Wales is a reserved matter. It is based on the devolution settlement we have and the difference in the settlements between Wales, Scotland and Northern Ireland. That is consistent with the funding arrangements for all other policy areas that are reserved in Wales but devolved in Scotland and Northern Ireland, such as policing.

This has been an interesting debate. As we move to further devolution, it is interesting to think about what basis that, and the funding, should be on. I am sorry that I could not more fully answer the question from the noble Lord, Lord Shipley, about funding in England. I hope to write to him with a very full response after this debate.

[Lord Shipley (LD)]

Can the Minister clarify that her letter will explain—in great detail, I hope—why, for example, the East Midlands has a lower per capita public funding settlement than the rest of the United Kingdom? We need such examples to dig out the reasons for the differences in per capita public funding by nation and region. I hope, secondly, that the letter will also confirm my view that the levelling-up metrics which are part of the Levelling-up and Regeneration Bill could be used as a basis for a needs analysis to allocate public spending in a new system that does not depend on the outdated Barnett formula.

[Baroness Penn (Con)]

My Lords, I will endeavour to provide as much detail as I can in my written response. I note the noble Lord’s desire that it address the specific points concerning the East Midlands.

When it comes to the levelling-up metrics, we will of course look at the idea put forward by the noble Lord. As someone experienced in looking at reforming funding formulas across a whole range of different public service areas, I can say that this can be extremely complicated. I know the noble Lord said that that was almost no excuse, but it is important to recognise that fact. Any such changes need to be carefully taken forward and thought through, but we will look carefully at his proposition.