Funding Formula

Mark Lazarowicz Excerpts

Tuesday 18th January 2011 Westminster Hall

[Andrew Selous (South West Bedfordshire) (Con)]

I am grateful to Mr Speaker for allocating me this important debate. It is a particular pleasure to serve under you, Mr Dobbin.

I have wanted to make this speech for a considerable time. As a member of a governing party with a bold and reforming agenda across large parts of Government, I hope that that spirit of boldness will also be applied to this issue and that it will be allied to a keen sense of fairness and justice so that we do the right thing by every part of the United Kingdom.

I speak as a committed Unionist and I want every part of the United Kingdom to be treated absolutely fairly as far as central Government funding is concerned. However, the formula that currently allocates funding between England, Wales, Scotland and Northern Ireland for large parts of public expenditure is broken. Even the man after whom it is named, Lord Barnett, wants to get rid of it and speaks against it. It really is time for us to look at it, as I shall try to show in my remarks.

The formula dates back to 1976. It was decided, across certain parts of Government spending, to allocate 85p in every pound to England, 10p in every pound to Scotland and 5p in every pound to Wales. That was done on the basis of population figures from the mid-1970s. Those figures have never been changed; all that has been changed over the years are the annual increments. We are therefore working on a population baseline from the mid-1970s that bears no relation to the significantly increased population in England or the increased population in Wales. At the same time, the population in Scotland has remained broadly static. In the excellent debate on the Barnett formula in the House of Lords, Lord Sewel, a Labour peer, referred to

“a series of fantasy populations”—[Official Report, House of Lords, 11 March 2010; Vol. 718, c. 381.]

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

I am grateful to the hon. Gentleman for bringing this important subject for debate, but his comments about the starting point for the Barnett formula give the impression that the 85%, 10% and 5% figures reflected the populations of the different parts of the UK at the time. Surely, that was not the case. Even at that stage, the formula reflected the different needs in the different parts of the UK by giving Scotland and Wales a slightly higher allocation per head. Population did not define the breakdown in different parts of the UK at the start.

[Andrew Selous]

The formula was fundamentally on a population basis. If the hon. Gentleman reads the excellent report by the House of Lords Committee on the Barnett formula, which came out in July 2009, he will see the significance of the population issue. I propose that we move to a needs-based formula, and that was the Committee’s unanimous, cross-party conclusion, which was supported by its Conservative, Liberal Democrat, Labour and Cross-Bench members. I think I can assure the hon. Gentleman that I absolutely want to reflect the higher need that is clearly evident in Wales and parts of Scotland so that we are totally fair. The evidence is that we are not doing that now. The situation has become unfair, and that is a danger to the Union.

Let us see what the man after whom the formula is named has said. Speaking of the formula’s creation in 1976, he said:

“I just wanted to get through every day without too much trouble.”

He also said:

“I do not consider it is successful. I do not think it is fair.”

He added:

“I thought it might last a year or two before a government would decide to change it. It never occurred to me for one moment that it would last this long”,

or more than 30 years. Those who pray in aid the Barnett formula should be well aware that its author thinks that it is time we moved on to something that is fairer and that is built on a needs basis.

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[Andrew Selous]

I am glad that the hon. Gentleman is with me in wanting a needs-based formula. He is right that the evidence of the Holtham commission, and the evidence that the House of Lords took, suggests that Wales would benefit from such a formula and that if it is to be applied fairly there should be some reduction in what Scotland currently receives.

I agree with the hon. Gentleman that it is up to the Welsh Assembly Government and the Scottish Government to spend their money as they see fit. What is not fair and right is the allocation of money in a block grant on a bust formula from 1976, whose author no longer thinks that it is fair, when there is clearly in many cases such an imbalance between what the English and the Scottish can be offered. That is an entirely reasonable case.

[Mark Lazarowicz]

Will the hon. Gentleman give way?

[Andrew Selous]

I will, but I want to finish my list—I have not got to the end of it yet—of what we do not get in England. It is really worth listing, because even the Library did not have a comprehensive list. I was adding to it as I went along.

Certain cancer drugs were available earlier in Scotland than in England—we are just catching up. Concessionary bus travel is more generous in Scotland. People can go on long-distance journeys there and take a companion, if they are disabled, which they could not do in England. I think that hon. Members who are fair and who consider the issue dispassionately and want to do the right thing by every part of the United Kingdom will agree that we cannot allow the situation to continue if we are committed Unionists.

[Andrew Selous]

I cannot remember who wanted to intervene earlier; I give way to the hon. Member for Edinburgh North and Leith (Mark Lazarowicz).

[Mark Lazarowicz]

I am grateful to the hon. Gentleman for giving way again, but it is an important debate. I welcome the tone in which he presents his case, even if I disagree with some of the conclusions. Would it not be better if he were to mention not only the areas where residents of Scotland and Wales appear to get a better deal, but those where, because of a choice made under devolution, spending is less? There is now a debate in Scotland and Wales about university funding and the effects of different tuition fee levels on university fee income. In some areas of health and transport, provision is less than in England. It is not right, as my hon. Friend the Member for Pontypridd (Owen Smith) said, just to cherry-pick the areas where Scotland and Wales seem to be doing well, without referring to choices that have resulted in different consequences, which can be easily pointed out as examples of relatively lower levels of service than in England.

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[Owen Smith]

I am grateful to the hon. Gentleman for that intervention and I fully appreciate that point; I heard him say very clearly that Wales would benefit. My point is simply that I fear that in much of the debate on this subject there is a concern that English regions do not benefit where other parts of the UK, particularly the devolved regions, do. Traditionally English Members from both Houses have expressed that view, which underpins and unfortunately colours debate on this subject.

[Mark Lazarowicz]

Is it not the case that moving to a needs-based formula would receive universal support, would be value-free and would not allow any political interference is an illusory hope, because even with a needs-based formula the question arises of how one assesses needs? For example, how much importance should be given to rural diversity and to the length of communications in Scotland? If a high priority were given to ferry links to the Shetland Isles and Western Isles, there would obviously be a high result there. When it comes to funding that depends on age, there are some parts of both Scotland and Wales where unfortunately, because of ill health, some people do not live to an older age, which would not be reflected in the formula. The idea that we can move to a value-free system with a needs-based formula is somewhat illusory. Will my hon. Friend comment on that?

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[Hywel Williams (Arfon) (PC)]

I very much welcome this debate, and I congratulate the hon. Member for South West Bedfordshire (Andrew Selous) on securing it. The issue has been possibly an obsession of my party for many years, and so I am glad to see other people sharing that obsession—or disability.

I should like to focus briefly on the Barnett formula and on Wales, rather than on the English regions, because there are clear implications for the English regions, as I have already said. There are great differences between the funding for the regions within England, and the debate on that can be informed by looking at what has happened in Wales for many years. We have already heard that the Holtham report points out the requirement for Wales now to have a needs-based assessment. In fact, such assessments have been needed in Wales for many years, and they are already carried out in some English regions. The Barnett formula was developed in the ’70s and implemented in 1978—not in 1976, as has been said. It was based on historical spending and the size of the population—basically on the success of Ministers in extracting money from the Treasury pre-1978. It is a converging formula, and we have seen it in operation for many years. Between 1999 and 2007, public spending in England rose by 33%, and in Wales by 28%. That is the nature of convergence: public spending rose, but less quickly in Wales.

[Mark Lazarowicz]

The hon. Gentleman’s point needs to be underlined, because although many people suggest that the Barnett formula gives an unfair bias towards Scotland and Wales, it is in fact designed to level their expenditure down to the English average. It is not in any sense a formula that protects Scotland and Wales.

[Hywel Williams]

The hon. Gentleman makes a good point, but my point is that it is a converging formula, and that Wales is gradually losing out. Jumping forward to one of my later points, Holtham called for a floor to be established, and the right hon. Member for Neath (Mr Hain) referred to that before the election. We have consistently called for public sector funding in Wales to be based on needs, and our calls have been ignored and rejected. I do not know how many times I have heard the right hon. Member for Neath, and current Government Members, saying that the Barnett formula has served Wales well. Joel Barnett himself said, in a statement on 11 January 2009:

“I only meant the Barnett formula to last a year, not 30…One of the problems is that it was not based on need. It determined on the basis of population how much more or less funding Scotland should receive when cuts or increases in public spending were being made across the United Kingdom.”

I note, however, that the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) used his appearance at the Wales Labour pre-election conference last year to call Barnett a needs-based formula. It is, of course, no such thing.

The report produced by Gerry Holtham has received the support of all the main political parties in Wales, and I am glad there is a measure of cross-party consensus this morning. The report calls for a floor to prevent further erosion of Welsh funding, for the reform of the formula to make it a needs-based one, and to at least stop, if not necessarily correct, the historical underspend on Welsh services. It then calls for differential taxation to be considered, to ensure that the Welsh Government take greater responsibility for their own spending. As I have noted many times in speeches in this place, the Welsh Government get a very large amount of money and are responsible for raising not a single penny piece of it, which is, I think, a fundamentally bad situation.

The underspend in Wales has been recently estimated at around £300 million—a significant sum—and there has been a knock-on effect on the private sector, as I am sure the hon. Member for Aberconwy (Guto Bebb) knows. The public sector in Wales is so large and is such a significant purchaser of goods and services, that if it were to have more money there would be a knock-on effect on the private sector. Because the formula reflects an historical position rather than an assessment of need, it has put Wales in a fundamentally weak position. We are funded on the basis of proportional Government spending in England and Wales, or in Great Britain, depending on the circumstances. Spending in Wales has been largely subject to changes in Government priorities on an England, England and Wales or GB basis, so we follow those priorities. We now have a Government in Cardiff who cut the cake as they see fit, but of course the size of that cake always depends on other matters. Hospital parking and prescription charges have been referred to, so I will not pursue those issues given the time.

How to define need has been discussed somewhat. I point hon. Members to the Holtham commission’s report, which suggests six steps based on such considerations as the number of old and young people, rurality and so on. The point was made that that might be complex, but that does not mean that we should not do it. I point hon. Members to an interesting example: the Welsh index of multiple deprivation, which has replaced the Townsend index of poverty. The Welsh index is complicated, but it is very effective. It can be done.

The Government have been clouding the issue by considering Wales’s funding as something that can be postponed until the recession is over. It must be examined now, for good reasons of governance in Wales and to eliminate the reasonable feelings that the hon. Member for South West Bedfordshire mentioned. Will the Minister tell us when the Government intend to start considering the Holtham inquiry’s recommendations for Wales and, more broadly, for the rest of the UK?

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[David Mowat]

What defence of the situation is made in Scotland? I have heard two defences. We have heard the sparsity defence; I have also heard the defence in terms of oil revenues. It is argued that somehow, the £4.5 billion Barnett imbalance roughly compensates Scotland for the additional oil revenue that it has had to give up to the Union or whatever. That is a poor argument.

[Mark Lazarowicz]

Will the hon. Gentleman give way?

[David Mowat]

I will finish my point. Other affluent areas of the United Kingdom are liable for relatively higher levels of income tax, and we do not necessarily expect those areas to have better services.

Finally—I would like the Minister to address this point in her closing remarks—I am concerned that the Scotland Bill, as it is currently configured, will institutionalise the Barnett formula for ever by creating a link between income tax levels in Scotland and current levels of Barnett settlement. In other words, that extra £4 billion will be linked for ever to income tax levels in Scotland. What that means in broad terms is that in order for the Scottish income tax base to make up the £4 billion that Scotland receives over and above a needs basis, additional Scottish income tax of between 12p and 15p in the pound would be required. That will never happen.

For the same reason, it will be difficult to review the formula significantly after the link to income tax has been created. If that is the case, we seem to be stuck with the imbalance, which means that every constituent of mine—my constituency of Warrington, in the north of England, is not overly affluent—receives some £5,000 less over the lifetime of a Parliament than his equivalent in Scotland, which would not be the case if the funding were needs-based. That is not to say that England and Scotland should be the same. Holtham did not say that. The figure that Holtham used and that currently exists is 120% of the English settlement in Scotland, but 107% would probably be a fairer figure. That is not the same, but it is a lot closer than it is now. I am concerned that if the Scotland Bill passes unamended, we will institutionalise the matter for ever, which, frankly, will be bad for the Union.

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[Mark Lazarowicz]

As we have already heard, the Barnett formula is essentially based upon historical levels of spending, which means that the relatively high levels in Scotland and Wales reflect the decades of argument between Government Departments making the case for higher spending in those areas. It has not appeared from nowhere. Does my hon. Friend agree that it is a question not only of having to assess needs, but of the impact of Government spending? For example, there is no doubt whatever that the presence of Government in London is a major boost to the London economy. That does not apply to the Barnett formula, but it means that London benefits from Government spending in a way that other parts of the UK—not just Scotland and Wales—do not.

[Kerry McCarthy]

I agree entirely. Statistics are thrown around about public spending, its impact and who gets the most. It is not just about Government block grants, but about things such as welfare spending and the impact of locally raised funding, such as council tax, which is a separate issue. I think that people sometimes forget that.

The hon. Member for South West Bedfordshire argued that either a separate body or the Office for Budget Responsibility should administer and oversee the introduction of a needs-based allocations system. I agree that, if we are to move towards something like that, now is not the time to introduce radical change overnight. This is a difficult time economically, and the Scotland Bill, which is making its way through Parliament, will have a major impact on the tax-raising powers of the Scottish Parliament. There are decisions to be made about whether it will take up those tax-raising powers and the impact that would have on its spending. The impact of the comprehensive spending review settlements on the devolved nations is also an issue.

I accept—I think that there is cross-party consensus on this—that we need to examine the case for moving towards a needs-based formula. Some of my colleagues have said that, but it has to be done carefully. I do not want to return to line-by-line negotiations with the devolved nations whenever there is a spending round. There has to be a formula of some sort. I think that my hon. Friend the Member for Pontypridd (Owen Smith) said that a needs-based formula would be eminently contestable. It would be difficult to establish which needs should be taken into account and which needs should not.