WEDNESDAY 23 OCTOBER 2002

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Members present:

Mr Michael Fallon, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr David Laws
Mr John McFall
Mr George Mudie
Mr James Plaskitt

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MR NICHOLAS MACPHERSON, Managing Director, Public Services, MRS ROS DUNN, Head of Devolved Countries & Regions Team, MR ALLEN RITCHIE, Head of General Expenditure Statistics Team and MR MARK PARKINSON, Devolved Countries & Regions, HM Treasury, and MR IAN SCOTTER, Head of Regional Policy, Office of the Deputy Prime Minister, examined.

Chairman

Welcome to our inquiry into regional spending. Mr Macpherson, perhaps you could assist the shorthand writer by identifying your team formally.

(Mr Macpherson) On my right is Ian Scotter who is Head of the Regional Assemblies Division in the Office of the Deputy Prime Minister and Mr Allen Ritchie who is Head of General Expenditure Statistics in the Treasury; and on my left is Mrs Ros Dunn who is Head of the Devolved Countries & Regions Team in the Treasury and Mark Parkinson who is a policy advisor in the same team.

In your paper last November, "Productivity in the UK - the regional dimension", you noted and I quote, "There are significant and persistent differences in economic performance between and within UK regions." Do the Government have a coherent strategy for addressing those imbalances?

(Mr Macpherson) Yes, I think they do have a coherent strategy. It may be helpful if I broadly set out what I think it is. It is perhaps best summarised in the spending review document that we published in July which, on page 131, summarises it as promoting growth in all the regions through improving the key drivers of productivity at the regional level, strengthening regional institutions and devolving power to the regions and local communities, and promoting a fair allocation of public spending to encourage fairness across the regions.

Who is responsible for implementing what you have just described?

(Mr Macpherson) Accompanying these broad objectives is a public service agreement and three departments are parties to that agreement: the Treasury, the Office of the Deputy Prime Minister and the Department of Trade and Industry.

So three departments are responsible, but which minister leads on this?

(Mr Macpherson) It is worth focusing on which department has a special interest in what. For example, the ODPM is responsible for the Government offices, it is responsible for regional governments' proposals; the DTI is responsible for economic development and in particular the RDAs, the regional development agencies; and the Treasury has a broader interest in economic growth and public expenditure as a whole.

I understand that and I understand that a number of departments are responsible for the regions, but who is in charge of the regional strategy? Which minister leads on it?

(Mr Macpherson) The regional strategy is a collective strategy of the Government.

But who is in charge? You say there are three main departments involved in this, but which department takes the lead? Which minister is in charge?

(Mr Macpherson) I think it depends on what particular area is in question. For example, when it comes to the regional development agencies, the DTI is in charge; when it comes to proposals for developing regional governments, the ODPM is in charge. As with any area which cuts across a number of departments, this is a collective process but responsibilities and accountabilities are clear for individual policy strands.

I ask because sometimes in cross-cutting reviews, a minister is designated to be in charge, but no particular minister has been designated in charge of all this?

(Mr Macpherson) In terms of the public service agreement, there are three parties to it, as I say.

Is there a Cabinet Committee in charge of this?

(Mr Macpherson) I think I will ask Mrs Dunn to explain how the Cabinet machinery works.

(Mrs Dunn) When it comes to the PSA target that Mr Macpherson was describing, it is not unusual to have a target that is shared by more than one department and I think that, in those cases, it is also not unusual for ministers to retain individual responsibility for their contribution to the delivery of that target and I think that, in this case, our joint target with the ODPM and the DTI is just like that. On the question of whether or not there is a committee that oversees this, there is a Committee for the Nations and the Regions and I think that, within the Government structure, they will probably take the lead interest in this target.

Who chairs that?

(Mrs Dunn) That is chaired by the Deputy Prime Minister.

Given the number of different spending departments involved, how do you attempt to assess regional needs as a whole?

(Mr Macpherson) I think it is worth looking at it from two perspectives. There is the individual service perspective which will inform how you allocate support, say, in relation to education or health or the police or whatever where there are particular formulae which are based on a raft of indicators, in particular population, things like deprivation and things like cost, which informs those particular services. Then there is also special machinery for determining the allocation to the RDAs. I think it is also important from a more macro perspective to focus on what is going on in the regions to keep a good eye on indicators like regional GDP, labour market, unemployment figures, employment data, and the ONS are increasingly refining the data sets relating to the regions and of course the Treasury has a special interest in monitoring the spending allocations to the regions. In many ways, allocations to the regions are bottom up; they are a sort of function of a sum of individual services. Focusing on the aggregate picture allows you to keep an eye on whether the aggregate allocations are moving in a sensible direction.

So a region's share of public spending therefore is more the sum of its share of individual spending programmes.

(Mr Macpherson) I would not say it is more than ...

Or is it just that you are keeping an eye on what it is?

(Mr Macpherson) We do have an interest in what it is because we have an interest in improving regional growth rates, not just in the more successful regions but, across the regions, we do have an objective of narrowing the growth rates. So, we are interested in the global arithmetic. If you are asking, is the allocation to the regions determined by some regional formula, the answer is, "no".

So there is no mechanism that assesses regional needs across the departments?

(Mr Macpherson) No, there is not because individual services are determined usually by formulae which are determined at a subregional level, either in relation to local authorities or some other area based calculation. So, I think the view is that, within England in particular, that is a sensible way of determining the allocation of expenditure.

Your document also noted that in 1998 we had the highest variation in GDP per capita at the regional level than any country in the EU. Why do you think these regional imbalances are so much more marked here than in other countries in Europe?

(Mr Macpherson) You are quite right, it is a very interesting fact and it reflects, I suspect, hundreds of years of history. It is clear that regional variations are greater here.

Has Italy not had 100 years or so more of history? Why is it so much more marked here?

(Mr Macpherson) What some of the historical analysis suggests is that quite a lot of these imbalances have been persistent over a long period; they date back to the 1920s or even earlier and, historically, it probably reflects the pattern of industrial developments in the UK. We industrialised early; probably some industries entered into a difficult period than in other countries. If you go back to the 1920s and consider the effects of returning to the gold standard of pre-war parity and effect that had on the coalfields and so on and, similarly, shipbuilding in areas like the North East and the Clyde. In recent times, the evidence does not suggest that industrial composition is necessarily the main driver. I think what the paper which the DTI and the Treasury put out last year actually suggests is that, if you have a perfectly functioning market, you should not be having big regional imbalances. Migration would generally insure that income levels and employment levels reached some sort of common plateau. This paper attempts to set out what the market failures might be which are causing these regional imbalances. In particular, it draws attention to issues like skills, enterprise, competition, innovation and investment. Re-reading it again recently, I was struck by how powerful some of the statistics in this paper are. Things like the level of business start-ups: that per 10,000 of the population are six times higher in London than in the North East and that the number of graduates in London are three times those in the North East and yet, in a number of areas in terms of primary and secondary education, the North East does not lag behind the rest of the country necessarily. So, there are big migrations of skills out of some of these regions which is an issue. We can go into considerable detail about some of these drivers and what the Government are doing to put them right.

(Mrs Dunn) I wonder if I might add something to that. I think in answer to your question at the start, the truth is that this is not a perfectly understood position, but the direction that policy has been taking is very much driving us towards improving and deepening our understanding of what makes these regional differences occur and developing policy to deal with that. I think one point to mention to the Committee is that there is in train a study - I will have to get my colleagues to help me on this - on regional productivity drivers that is being part-funded by the Treasury and part-funded by the Office of the Deputy Prime Minister and is expected to report - and I think Mr Scotter may know the answer to this - some time next year. It has been run by the University of Southampton. The point about that is that there is an acknowledgement that we need to get a much better understanding of exactly how to understand why regional differentials have been as persistent as they have been and what policy measures we should adopt.

(Mr Parkinson) It is a DTI project. Another factor to bear in mind is that the regional differences are different in different variables. For example, unemployment is not so regionally skewed as GDP. There has been more of a balancing of unemployment rates over recent years and in fact there are bigger variations within regions in many cases and between regions. So, when we are talking about imbalances, it is important to define what are the variables in question and GDP is probably more unbalanced than some other variances.

Mr McFall

Mr Macpherson, would it be fair to sum up what you have said by saying that you really do not have much of a clue as to why these things are happening?

(Mr Macpherson) I think we do have a clue but we can always learn more and I think that certainly with the greater emphasis on regional policy in Whitehall in recent years, there is a great determination to actually create a great debate both with the academic community and so on to try and dig deeper.

Can I come back to the Chairman's original question to you. He was asking about the regional economic imbalances and you said in response that you have an interest in narrowing the growth rates, and rightly so, but how does this take place in Whitehall? Say Area A has a real imbalance in growth rates and you identify this area, how do you go about and how are you going about presently ensuring that the balance is maintained in that? So, what is the strategy and who is in charge of it?

(Mrs Dunn) Two of the witnesses here are the officials - I am one and Mr Scotter is another - in two of the departments that are co-signatories to the public service agreement target, which includes the long-term ambition to reduce the difference in growth rates. This is a rather bureaucratic answer but, underpinning every public service agreement across Government, there are a number of supporting pieces of documentation that we use to drive the process forward. One of those will be a technical note which explains and defines how a target will be met, what has to happen for a target to be met, but far more important in our view is another piece of document which is called a delivery plan and that sets out very clearly for the individuals in each department exactly what they have to do to meet the target. So, Mr Scotter and I and other officials in the DTI will work closely on this and the process will involve us talking to other Whitehall departments as necessary and the focus is very much on what it is necessary to do to deliver this target.

(Mr Macpherson) I think it is also worth making the point that you cannot run regional policy solely from Whitehall. This is why devolution is important and why strengthening the regional bodies is important because if you have decision makers in the actual regions involved in the regions, the chances are that they will make economic decisions there which reflect more clearly the needs of the regions and that is why the institutional agenda is very important.

If I could just sum up. Is it fair to say that there is no driver at Whitehall, the driver is at regional level, and that at Whitehall you are co-ordinating, you are working at local level?

(Mr Macpherson) The tricky thing here is that a lot of the allocation mechanisms are service specific, so how much a particular city, say the North East, gets in terms of its standard spending assessment will be driven by some formula which will be ultimately determined in Whitehall. In terms of developing regional strategies, that increasingly is the regional institutions.

(Mrs Dunn) I wonder if I might also mention the role of the regional co-ordination unit which is part of the Office of the Deputy Prime Minister that actually has a much wider responsibility.

(Mr Scotter) The regional co-ordination unit is responsible for ensuring that those Government policies which are delivered through the Government offices for the regions are delivered effectively. I would like to add to what Mr Macpherson has said by saying that there are existing policies that are tackling the issues, the five drivers that are identified in the Treasury document. The most obvious one of those is the regional development agencies which are the Government's main drivers of economic development in the regions. They have been given a lot of flexibility in the use of their budgets. They determine the regional economic strategies for their regions. Similarly, the learning and skills councils working in the regions tackling the skills issues and, in my own department, there are issues like planning and housing which can contribute planning strategies which can contribute to reducing the gap in growth to promoting economic growth in all of the regions. I think there are a number of policies which are in many ways decentralised to the regions, but which have ministers who are responsible for driving that activity and putting them forward. So, I think it is more than a co-ordination activity at the centre in Whitehall, it is making sure that all those things are moving in the right direction in the regions.

Chairman

Professor McLean has written a paper called The Fiscal Crisis of the United Kingdom. His conclusion, as you may know, is that the only way to address the unfairness in the current arrangements for allocating resources is to use the same formula to distribute grant to both the devolved and the non-devolved parts of the UK; do you agree with that?

(Mr Macpherson) I think it is fair to say that the allocation mechanisms for Scotland, Wales and Northern Ireland reflect a whole lot of historical factors. They also reflect the fact that they have devolved administrations. The fact is that, in England, the structure of England is such that individual services have their allocations of expenditure determined by individual formulae and I think that, as far as the present state of play is concerned, that is a reasonable way to do it. It reflects the historical relationship between London and the regions. The McLean proposals reflect a very different constitution than we have in the United Kingdom.

Do you accept that the current system you are defending has actually led to unfairness in terms of resource share allocated to different parts of the United Kingdom? Do you accept that or not?

(Mr Macpherson) No, I do not accept it.

You do not think it has been unfair?

(Mr Macpherson) Unfair is a loaded term! I would argue that the way public service provision is allocated is fair. It is on the basis of reasonable formulae.

Mr Cousins: I wonder, Mr Macpherson, just to follow that on directly, if you look at the Government's figures on spending per head, let us look first at England and its regions. If we look at spending per head, the last year for which we have figures, the North East of England, which has the worst educational achievement in performance on any indicator you choose, has, I think the figure is, £19 more per head spent on it than the English average. Does that seem to you to be fair?

Chairman: "Reasonable" was the word he used.

Mr Cousins

Reasonable? Let us try reasonable. Reasonable in the sense that it will deliver the Government's educational targets?

(Mr Macpherson) I would highlight that the standard spending assessment formula which clearly is critical for education spending in terms of schools at least is under review at the moment and a revised formula will be published in due course.

So, the fact that the North East of England, which has the worst educational experience in the country, has education expenditure per head virtually no different from the English average ... Well, that is under review in the SSA formula, so perhaps that will get taken care of. Could I try something else out on you, again looking at England. If we look at the Government's figures, do you agree with me that virtually all the difference between spending per head in the three northern regions of England and the English average is accounted for by social security spending which on no measure is a measure of positive input? Do you accept that?

(Mr Macpherson) I would have to make the calculations.

You would, yes, and I think you would find that, in the case of the North East of England, if you look at all Government spending that can be identified apart from social security, it is £100 higher than the English average. In the case of Yorkshire, if you take out social security, it is the same as the English average and, in the North West, it is about the same as the English average.

(Mr Macpherson) It is quite interesting.

This is interesting, is it not?

(Mr Macpherson) Looking at education -

Are we back to education now?

(Mr Macpherson) I am sorry, I have found your line now. I notice the difference with the average but, for example, the North East gets £746 per head, the South East gets £668 per head. So that is a £78 difference which is about 10/12 per cent, something like that.

Could you try the English average which is the figure I gave to you.

(Mr Macpherson) England is £719 but you also have to factor in ... There are cost issues.

I understand. I must apologise, I was £8 out, it is actually £27 higher than the English average. My mistake.

(Mr Macpherson) You are right.

On any test of reasonability, back to education if you want to go there, back to total identifiable spending per head if you want to go there.

(Mr Macpherson) I think these are issues which have to be reviewed regularly, which is why at the moment there is a review taking place and local authority grant distribution formulae. I think the results of those are going to be published fairly shortly because they have to come into effect, I think, in 2003/2004. Clearly issues like deprivation are important and they need to be given the right weight. As you say, this data is important.

Sticking to education and looking now at expenditure between countries in the regions, taking the years for which we have figures in the last public expenditure assessment, am I right in thinking that, at the present rate, it will take about 300 years for English spending on education to reach Scottish?

(Mr Macpherson) I think that depends on two things: firstly, how the Barnett formula works itself out and I think what is known by some as the 'Barnett squeeze' tends to happen more quickly when spending is growing faster. One reason why the Barnett formula had less of an effect during the course of the 1980s was that spending was not growing very fast at all.

Mr Macpherson, I am with you.

(Mr Macpherson) The second reason obviously - and this is a matter for Scotland - is how it allocates its spending. It may choose to spend more on education, say, than something else.

Sure, but, in its analysis of regional productivity performance, the Government have identified education particularly as being a key test skills and, against that background, 300 years to close the gap between English spending per head on education and Scotts does seem a little long.

(Mr Macpherson) I cannot comment on the 300 years because I have not done the calculation. I do not know if Mrs Dunn or Mr Parkinson wish to add anything.

(Mr Parkinson) There is no convergence factor built into the Barnett formula that will enable us to say that it will converge after 10, 20 or 30 years because it depends -

Mr Macpherson was talking about the 'Barnett squeeze' but there is no convergence factor.

(Mr Parkinson) ... that will enable us to say exactly when they will converge because it depends on the rate of growth of public spending. The Barnett conversion was centred or was founded in terms of rapid growth and in terms of slower growth, but there is some degree of convergence built into existing factors because of the -

I am sorry, there is no convergence factor but there is some degree of convergence?

(Mr Parkinson) There is no convergence factor which will enable us to say that it will converge in 10 years or 20 years or 300 years because it depends on future spending decisions as to how fast public spending will grow in England, but what we can say is that, with growth in spending, there will be a gradual convergence.

That is a little disappointing actually because I was going to go on to say, because it was cheering me up, that it would only take about 25 years for the gap between the North East spending per head on education and Scotts to close compared to 300 years if you compare England and Scotland, but that is not actually something we can rely on.

(Mr Parkinson) Because it depends on future spending reviews and future growth of spending in England.

(Mr Macpherson) I think it is fair to say that if education remains the Government's number one priority and we can lock in a successful economic management so that expenditure on public services continues to grow, there will be convergence.

Sure and I agree with you because the trends I have identified are looking at three years of this Government, three years in which education is a priority and three years in which public expenditure was growing and, on those trends, it would be 25 years before the gap in spending per head between the North East and Scotland is closed and 300 years before the gap between England and Scotland is closed. Is the Barnett formula under review along with all the other reviews?

(Mr Macpherson) The statement of funding policy was published in July and there are no plans to review the Barnett formula.

You have identified lots of reviews but that does not include the Barnett formula?

(Mr Macpherson) The Barnett formula is updated to reflect population factors and the latest statement was set out in July.

Do you think as part of the productivity raising agenda across the whole of Britain which involves skills and spending on education that the Government will be reviewing education spending per head across the devolved countries and the regions of England? Is that under review?

(Mr Macpherson) Education spending in Scotland is a matter for the Scottish Executive.

So we have no guarantee that these gaps in spending per head and the rather slower pace of closing them under this Government with rising expenditure will speed up the process? It still might be 300 years or longer, or 25 years in the case of the North East or longer, and this is not under review?

(Mr Macpherson) The allocation to local Government is under review. The Barnett arrangements were confirmed in July.

(Mrs Dunn) Can I just add to that. Even if the Barnett formula were to be reviewed, it need not necessarily have that impact because I think that the key point here is that, as Mr Macpherson said, it is for the Scottish Executive to decide how much to spend on education. So, whatever you did to determine the overall quantum, it would not necessarily have any impact at all on the policy choices that were made in Scotland about how much resource to put into education. So, whatever you did about how much funding went to Scotland, you would not be able to make that shift.

Sure, but of course there is no mechanism for the regions of England to make those policy choices, is there?

(Mrs Dunn) Because education policy is not devolved in that sense, it is just on England basis.

Mr Mudie

I am still struggling with this because even if you go off on the Barnett formula, you lose the overall perspective that Scotland is as depressed as the North East and so, although there is more money going in, if you look at certain parts, if you look at the Barnett formula, it is a depressed country that suffers all the low GDP et cetera, et cetera. I am just stepping back... Why is that amusing? This business of the Barnett formula is an argument but, if that were resolved, and we were lining up the country, London is the objective in terms of good GDP, employment et cetera and the others all lag behind. I am just amazed that you come before us and it seems to be a bit of fun. Mr Macpherson, give me three initiatives that the Treasury are pushing in this review to meet the objectives in terms of equalising GDP in the regions. There you are. Never mind the Barnett formula. We will not fall out with the Scots. London would love us to fall out with the Scots because that would take it away from the establishment and the grip London has on GDP and money and resources. You are doing a review you tell us. Surely the Treasury must have tabled things in the review to say, "Our objective is to reverse this 300 year trend of inequality." Come on, put the three big ideas that you must have and you must be arguing with the DTI about in this review. Mr Cousins is right, we would like to see a massive change in terms and we are going to have to do something with skills and we are going to have to do something with education. Is there an argument behind the scenes and are the Treasury pushing in that massive investment, additional investment, going into the regions to help us catch up? Tell me. It is no joke. Why do you smile at me?

(Mr Macpherson) I do not think it is a joke at all. I would say that London is a difficult subject in the sense that it is -

Step aside from London, the South East if you wish, but let us just take Yorkshire, there is the North West, there is Scotland, and they are all areas where the GDP is low and you have as an objective equalising the GDP. If you have that objective and the political masses have given you that objective, I would expect a good civil servant to be working on a brief that has a series of policies, palatable or non-palatable, to put before the Minister, "If you really want us to meet these objectives, these are the things we have to do." Can you enlighten this Committee. Do we have any policies being argued in this review that actually starts that move?

(Mr Macpherson) I have mentioned the issue of how money is allocated to local government and to health. I would just mention in passing that we had a special cross-cutting review of health inequalities and the Department of Health has already mentioned that, in revising its formula for health allocation, inequalities -

Can I stop you there. Health is fine but on the social end in terms of skill and education and actually dealing with the growth aspect, if we actually want the North East to start earning brass, to starting having high income, what is the Treasury's view on how that must be done?

(Mr Macpherson) I can go through a list of measures in the spending review, so I will try and mention a few.

The big ones.

(Mr Macpherson) The first one which comes to mind is the further strengthening of the RDAs. We have provided for real growth in the RDA budgets of 4.5 per cent real of the year, so the so-called single pot rises to £2 billion by 2005/2006. In co-operation with the ODPM and others, we are seeking to actually strengthen the role of the RDAs.

But you are not pushing it into regional government. In the White Paper, you are keeping it separate from regional government. The RDAs are going to be independent as will the learning and skill councils.

(Mr Macpherson) Alongside that, I would also mention how the review committed the Government to ensuring greater working between the RDAs and learning and skills councils to give the RDAs greater role in how the money is allocated to improve skills. Similarly, with regard to the role of the RDAs, we are piloting measures to strengthen their role in relation to the provision of local services to business, small business and so on, so again to give this greater strategic focus to the RDAs. I would also like to mention housing where the spending review committed the Government to creating greater strengthened regional bodies in relation to -

Can I just stop you and ask you my last question. In terms of the RDAs, they have been going three years. Can you point to any of those areas that we have mentioned where we can see specific increases - and we can see the difference between the South East RDA allocation and the North East RDA allocation - in those three areas, so that we can see that there is a natural policy of putting in resources in specific areas in greater numbers than are going in the South East RDA, and will you be able to back this up with a paper that we can see as part of our deliberations?

(Mrs Dunn) What we can provide you with is details of how the allocative mechanism for the RDAs' expenditure is calculated. I think it is worth making the point that although the decision to pool all the various funding streams together was taken a couple of years ago at the last spending review, in fact the allocation on the new basis has only started from this year. So, the funding mechanism that we use is only in effect from the beginning of this financial year, but we can let you have a note that explains both what the factors in the formula are and what impact that has had upon the allocations.

Behind the scenes, the Treasury is arguing for greater amounts of money going into those to back up this policy and it will be done and it will be demonstrated in the figures?

(Mr Macpherson) I think the Government are agreed that the formula should reflect the sort of key factors which generally are going to result in the North East getting more money than the South East.

(Mr Scotter) I think that when you see the figures - and I do not have them with me - you will see that the amounts per head going into regions like the North East or the North West are substantially greater than the amounts per head going into the South East of England. On another point, it is the Government's proposals that regional development agencies will become a responsibility of elected regional assemblies when the elected regional assemblies are set up. The RDA for a region will no longer report to ministers, it will report to -

It will stay independent of the authority?

(Mr Scotter) It will be an executive arm of the elected regional assembly.

Mr Cousins

The Southern(?) regional development agencies are not to be dismissed or decried, but if we look at Government expenditure as a whole, taking out social security and looking at it across the board, not just at RDAs but at trade and industry and all the employment spends, all those spends are about three per cent expenditure per head that can be identified. They are a tiny chunk of expenditure. Even if you look at that sector, there is virtually no difference in spending between the English regions. The North East has £3 per head more than the English average across that sector. That is right, is it not?

(Mr Scotter) You are looking at the line for trade and industry and employment in the table where the figures are £113 for the North East and £110 for England?

Yes, £110 for the North East and £110 for England. I have to mention that it is £196 in Scotland.

(Mr Macpherson) That is what the table says, yes.

So we should not make too much of all this stuff about RDAs because that is a small component of a sector of spending which is three per cent of the total spending per head outside social security and, when we look at that sector, the North East gets £3 more per head.

(Mr Macpherson) That relates to 2000 and 2001.

Exactly.

(Mr Macpherson) The RDAs will have come a long way by the end of these spending review periods.

Can you update those figures then?

(Mr Macpherson) We do not at this stage publish plans on a regional basis because, in many cases, that is not how spending is actually planned, so you can only work out in retrospect what it was.

(Mrs Dunn) I wonder if I can just add a point about that. I think it is slightly misleading simply to look at the total budget that the RDAs have available, which admittedly in terms of public spending is not great, but the question is what we expect them to do with that and one of the things that I think would also be quite helpful for the Committee to see is actually what the RDAs are able to do in terms of the way in which they are able to exert a strategic influence in their region and the way in which the decisions that they make are actually going to improve regional productivity through, for example, the preparation of regional economic strategies which then enable all the partners working in the regions to focus their activities and to focus their delivery. It may be that because regional development agencies are not large organisations they do not spend terribly much on themselves, but the impact they have in a region is not necessarily simply related to, if you like, input. If you think about the output as opposed to the input, you may be getting quite significant benefits from that spending.

Chairman: This is a huge subject and I have to tell you that we are only one-quarter through our agenda, so we must move on.

Mr Beard

Moving to the data and statistics on which the original policy is based, I have a quotation here from the Statistics Commission which is charged with ensuring that national statistics are really up to the job. Let me quote this. This is a report of 2002. "There is an increasing need for an emphasis on data below national leverage. Production of such data is one of the most important issues for national statistics at the moment. As well as pointing to production of more disaggregate estimates, this raises the question about the fitness for purpose of existing estimates such as regional level gross domestic product whose original uses may have been less demanding than current needs. Regional GDP estimates are now used in a wide range of contexts including allocation of EC structural funds and public service agreement targets for regional growth as well as being important for devolved administrations." When you are determining allocations and working on regional policies, do you have a better basis of GDP estimates than is being commented on there?

(Mr Ritchie) I think the short answer is "no". Those are national statistics; those are the official estimates of regional GDP. The Government produce a lot of regional data and the Office of National Statistics do, but with the way that regional policy is, the regional agenda becomes more important. You are quoting from ...?

I was quoting from the Statistics Commission's annual report and they are commenting, as they are required to do, on the adequacy of national statistics.

(Mr Ritchie) I think the Statistics Commission were commenting on the annual report on national statistics which is produced -

They are commenting here on the adequacy of regional and subnational GDP estimates.

(Mr Ritchie) It is a technical question that I think you are probably best to -

It is not a technical question.

(Mr Ritchie) It is a technical question.

My question is about whether you have a better foundation for regional policy than is being reflected in the national statistics. The other question that arises is, if you do not have, what impact do these apparent shortcomings of the national statistics on GPD at regional level have on your ability to properly make regional policy?

(Mr Ritchie) I am not sure that I accept that they are inadequate. They are the best we have.

I have quoted to you the opinion of the Statistics Commission who are charged with judging the adequacy or otherwise of this sort of information, and they are saying essentially in the passage which I have just quoted that they are inadequate.

(Mr Macpherson) I would argue that they are policy assured, but clearly there is always scope for improving them. The emphasis on regional policy within the Government means that the quality and quantity of statistics has improved and we and ODPM are working on a number of projects to facilitate that.

(Mr Parkinson) There has been a delay this year in the production of the regional GDP figures because the ONS have been taking on board new data sources. They are actively improving figures, so that I would imagine that the figures which will be produced later in the year will be of better quality than the figures now.

But that answer is not consistent with what is being said here. It says here that the original estimates for GDP figures were used for purposes quite different to what they are being used for now and that the present purposes mean that the accuracy of the present GDP regional estimates are not up to the job. That is what this quotation means.

(Mr Parkinson) As I say, the ONS are putting more resources in and are improving the regional GDP figures because they realise -

I accept that if that is the case, but what I am asking you is, what impact is the fact that they are inaccurate to a degree having on your ability to formulate regional policy?

(Mr Ritchie) To a degree, this is a review -

It is not the view of somebody coming in from the street but the official watchdog.

(Mr Macpherson) I would argue that we are always seeking to improve statistics and we are keen, in order to perform an analysis we were talking about earlier, that we have the best possible data and we are working with the ONS and others in academia to ensure .that that data is available, but I think it is also worth being clear that we are not in a situation where, for example, education spending is being determined by regional GDP. I recognise that this is now far more important in terms of policy making than it was in the past, but a lot of the key formulae do not hinge on regional GDP data.

That may be partly true, but one of the objectives that you have in regional policy now is to bring up regional productivity to nearer the national average. The accuracy of the GDP figures is central to estimating that.

(Mr Macpherson) It is. We will be sending out a technical note underpining our original PSA in the near future. As you say, data is very important, it concentrates the mind for all of us and it certainly concentrated our minds as we talked to the ONS.

Can I move from GDP to estimates of how much public expenditure goes to the different regions. I quote your own memorandum, which says, "The Office of the Deputy Prime Minister is currently leading a feasibility study aimed at identifying the forward level of public expenditure, domestic and European, flowing to individual English regions and for each expenditure flow what determines the level of that expenditure flow". Plainly, if there is an exercise going on to estimate it you do not really know much public expenditure is flowing into the different regions, is that a fair interpretation?

(Mr Scotter) I think the answer to that is we have an estimate of the amount of money which is going into each region which gives us a good, broad picture of the amount going in, it may not be right to the individual pound per head. What we are about to do is improve the quality of those estimates so that we can make policy better. We are trying to get better evidence on which to base policy. I think it would be wrong to think that there is no value in the existing estimate, they have a substantial value but we want to refine them to make sure we have them right. There are some areas of public expenditure which are quite difficult to estimate their regional effects, some are very straightforward, social security spending has been mentioned, that goes to individuals, you know where the individuals live and you can count it for the region. Others bits of expenditure, let us say, the West Coast mainline, improvements on that, it is a bit more difficult to see who benefits from that development, whether it is spread evenly along the length, or whether it is London or Scotland. What our study is trying to do is see what we can do to improve those estimates of the difficult parts.

The upshot of this discussion is that on the information on the amount of public expansion going into regions it is probably inaccurate or you would not be having this review, and so is the estimate of the GDP, two basic parameters that must lie behind the formulation of regional policy. Is it not fair to say that your attempts to make regional policy in these circumstances is like making a brick with no straw.

(Mr Macpherson) You can exaggerate the problems. I think with things like regional GDP or spending you would not get very precise estimates. Okay, there may be margins of error. I think it is pretty clear, for example, when we are talking about London versus the North East there are quite big differences. That should inform policy. The fact is that the ONS are working very hard to extend and develop their data. I know that they have very good neighbourhood statistics which are due to go live in the near future, which will enable you to drill down to ward level, I think, in terms of a whole lot of indicators,. They are working very hard to develop their data. We are happy with the quality of the data as it is but but we recognise that the world is moving on and we need more of it and we need it to be better and more accurate.

On that ONS study I understand that the study that was being done by the ONS to look more carefully at regionalising government accounts, the pilot study, was due to be produced in June.

(Mr Macpherson) It was a pilot study on one small area.

What messages have come out of that pilot study?

(Mr Macpherson) It is due to be published now on 31 October.

Could we have your conclusions on the significance of it when it is published.

(Mr Macpherson) Yes.

Mr Cousins

Tomorrow in this building lots of my colleagues - sadly I will not be jointing them - will be debating the local government finance centre and I dare say this dreaded matter, the Area Cost Adjustment, will haunt the occasion. The Statistics Commission has told us, indeed everyone else that is interested, that ONS do not have the recourses to do a proper analysis of the different cost and price variations between regions to inform the regional GDP figures with some accuracy about price variations across regions. What is the Treasury doing about that?

(Mr Macpherson) The Treasury's view is that ONS is funded to do the very important job that it is required to do. I do not accept that the ONS funding situation is affecting the policy of statistics.

That is not what the Statistic Commission say, let me read it to you, "ONS was reluctant to examine the need for producing regional GDP deflators because of resource constraints". Yet that difference in price factors between the regions underpins a proper sense of all of these regional spending allocation systems. People will be discussing here, in this building tomorrow, at enormous length and in huge complexity the Area Cost Adjustment and the fact of the matter is we are not at first base in understanding that, are we?

(Mr Macpherson) I agree with you that the Area Cost Adjustment is important. I think that we can always seek to improve the quality of price data.

(Mr Scotter) Specifically on the Area Cost Adjustment, of course the figures for that are derived from the new earnings survey. Clearly there is a matter of debate now about whether that is the right source, but there is actually some very good data about employment costs, which the Area Cost Adjustment is mainly intended to reflect in its current form, which the Office of the Deputy Prime Minister is able to analyse and produce the figures of our costs. I am not sure that the comments made by the Statistics Commission are actually making it more difficult to do that sort of analysis in that particular context.

Have you asked ONS to improve the work on regional GDP deflators - it is crucial to understanding the reality of regional GDP - have you asked them to do that?

(Mr Scotter) There is work which is being undertaken jointly by my Department and by DTI to look at that to see whether there is anything that one can derive from the existing data to look at deflators in regional GDP in order to have some price adjustment. I am not sure it goes to the extent that it is an absolutely perfect piece of work. It will give a very good ---

When is it due?

(Mr Scotter) We hope to publish the figures early in the New Year. I am sure that the ONS has been revising its methodology for calculating nominal GDP in the regions and our piece of work will need to follow on after that.

What really concerns me was Mr Macpherson's earlier comment that regional GDP, which is such a crucial baseline if we are looking at growth, productivity and economic reforms between regions, it does not underpin all of the government's resource allocation formulas. That is what you said.

(Mr Macpherson) I did say that.

Is that something that Treasury is doing something about?

(Mr Macpherson) I think with some service specific allocation it may well make sense to consider allocations that are more at a subregional level, so, for example, considering from a local authority perspective information around local authorities, population or deprivation or, indeed, the Area Cost Adjustment should feed into those allocations. I do not think it is self-evident that applying a regional factor on top of that for local allocations is the best way forward.

(Mr Parkinson) It is one of the factors for the RDA allocations, which is the main regional allocation.

It is true that the RDA allocation is the main regional allocation but that is only true because there are virtually no other regional spending allocations.

(Mr Parkinson) Most of them are locally based.

We do not have, with great respect, GDP, which is the record of the performance on productivity and growth, for local authority areas, do we?

(Mr Macpherson) No.

Are we ever likely to have?

(Mr Macpherson) I do not know.

(Mr Scotter) May I say something about the GDP deflator, most public expenditure is on specific services like health, local education, law and order and the price factors that affect those across the country are different. The GDP deflator is a general measure of the measure of price changes in the whole economy and that may not actually be the right indicator because it takes account of all private sector plus all of the activity of industry and business and that may not be the right set of figures to use for each of these allocation formulas. It is the cost to the Health Service that matters for the allocation of Health Service expenditure if there is a price factor to be taken into account. Similarly it is the cost for local government that matters when one is looking at the Area Cost Adjustment. I am not entirely convinced the regional GDP inflator would improve those because you would want to look at the specific factors that are affecting those particular activities.

Is the government trying to analyse expenditure by region that is not presently identified by region, the principle one being defence?

(Mr Macpherson) There is almost a question of principle here round defence and/or for that matter things like the Foreign and Commonwealth Office and the Department for International Development.

Stick to defence. Defence is strong on employment, it has a strong connection with manufacturing and industry.

(Mr Macpherson) The key question is, who benefits from a particular service. I think defence is a public good of a sort which if you are focusing on the outputs of defence we all benefit equally. I do not think you can argue that somehow the benefits of defence are greater in the north east say compared to the south west. I think that is one reason for not allocating it across the regions.

(Mr Ritchie) The figures that we published in public expenditure analysis for something like 15 years now have always tried to measure public expenditure both by territory and region according to who benefits. According to benefit that is one way - and there is a lot of theology about this - in which you can measure the impact of public expenditure on that criteria. Expenditure that provides services for collective consumption at a national level, things likes defence, expenditure in the Foreign Office, even things like scientific research are non-identifiable and it does not make sense to say that the north east gets more or less benefit from expenditure on defending the country than any other region.

Chairman

Forgive me a moment, there may be a general collective benefit from defence but there is also, presumably, a specific economic benefit, from regimental headquarters or a naval base, or whatever?

(Mr Ritchie) There are different ways in which you can measure the impact of public spending by territory, by region. The way we always presented numbers in here is on a "for basis", expenditure for the benefit of a region. You can do it differently, you could measure public expenditure on an "in basis" which is where economic activity associated with the spending took place. You will measure defence capital spending by where the actual project took place. You will measure allocated pay by location of the staff, the people. That is a different way of measuring spending. These are just two different ways of measuring the impact of public spending by area, it is not a case of one is right and one is wrong.

Mr Cousins

Which way would you adopt if your concern was closing the gap in terms of regional productivity and economic performance?

(Mr Ritchie) They both give you information.

You would need to have the input figures on something like defence spending, would you not? We do not have them, do we?

(Mr Macpherson) One of the areas Professor McLean is looking at is indeed this. We can always seek to improve. That is an issue which should be considered.

(Mr Ritchie) This is something that Professor McLean's project is looking into.

Is there a Treasury project?

(Mr Ritchie) The Treasury is partly funding the ODM Project out of the Evidence Base Policy Fund. The reason we are doing this is the output we expect from this project is a better evidence base, it is a better understanding of the allocation funding expenditure by region, partly a quality check on our own numbers. Professor McLean is specifically looking at defence expenditure. Professor McLean is well aware of the fact that there are different ways, two basic ways, which you can allocate public expenditure by region, what he refers to as the "for" and "in" methods, and defence you can only do by the "in" method. Part of the project will be looking at defence and seeing what kind of numbers are out there. It is partly a feasibility study.

(Mr Macpherson) There are, presumably, also operational issues round defence which will recognise an economic argument for putting defence installation into certain areas.

Mr Laws

Can I very briefly ask for clarification on this defence issue, to take an extreme case where we decided the only threat to our security was from France, or something like that, and we wanted to put our entire Armed Forces into Kent or the southeast, or something like that, we do all of the recruitment and we evacuate the whole of the rest of country would it be the case, in the way that you look at things, that you would say, we are still not going to allocate that expenditure and "benefit" to the southeast as a region because they are in the southeast to defend the whole country. That is how you do it at present, is it?

(Mr Macpherson) That is how we do it at the moment. It is far from clear that evacuating Kent and putting all of the Armed Forces in it is necessarily to the benefit of the current Kent population.

Chairman: It is not. I can help you on that.

Mr Laws

To follow that on with a very brief supplement, surely it would only be relevant if the composition of those Armed Forces and their pay, for example, was way out of line with the rest of the country. If they were the lowest paid profession then the people living in that part of the country might not think it a benefit, if they were getting five times the amount of a Treasury civil servant then it might be regarded as being relevant. Would you accept that it could be relevant if there were a marked difference in characteristics between the Armed Forces and the rest of the working population?

(Mr Macpherson) These will all inform income in a particular area. Clearly if you populated a region solely with low paid public servants that might have an effect on regional GDP.

Mr Mudie

Yes, of course it would. That is exactly the point, if you put the Army in Scotland, Scotland's GDP would go up and it would have a side effect that all that money would be spent in Scotland, business would be set up and you would get economic activity that would keep it moving. That is the whole point. The Treasury do not see that of interest in underpinning this strategy. That is what we find absolutely unbelievable.

(Mr Ritchie) We never said this was not of interest.

I am glad you think it might be of interest. When is this regional policy going to deliver, next century? If you do not think it is of interest now when the hell are we going to get a policy that works? That is what is coming across.

(Mr Macpherson) History does suggests --

History!

(Mr Macpherson) -- that a lot of regional policies through the 50s, 60s, 70s and 80s would try, and a lot of them failed, freezing industrial structures, trying to run regional policy from Whitehall.

Who suggested that? I suggested if you took a few thousand people and based them in Scotland Scotland's GDP would go up. We are sitting here saying we are trying to equalise and move it, and you say I am running it from Whitehall. What has that got to do with it?

(Mr Macpherson) All departments are under pressure to deliver services in a more cost-effective way. If you think it is more cost-effective putting all of your relevant employees in Scotland then clearly departments should be pursuing that strategy.

Chairman: Right.

Mr Plaskitt

In paragraph 1.8 of the regional dimension you say a lack of convergence in the medium and long term is a likely indicator of serious market failure and this suggests there may be unrealised economic gains in large parts of the UK economy. I want to look at the "serious market failure" comment for a moment or two. You then go on to say that you have five key drivers to tackle the productivity problem, skills, investment, innovation, enterprise and

competition. Let us take enterprise, what are the key policies in place to push the enterprise button?

(Mr Macpherson) One thing which was identified in this paper was the whole issue of venture capital and how venture capital is very much skewed in favour of London. One policy I would identify is the creation of regional venture capital funds. There have been a lot of other policies designed to encourage enterprise in the deprived areas, such as the Phoenix Fund and also policies to do with university, designed to encourage activities in the regions.

(Mr Parkinson) Community investment tax credit schemes, stamp duty relief.

What results have we had from those so far?

(Mr Macpherson) It is fair to say that ---

What have they contributed to get convergence?

(Mr Macpherson) It is very early days.

It is early days. When should we expect to see them make a significant contribution to the convergence we are hoping to see?

(Mr Macpherson) There are certainly aspects of this which are fairly imperfect science. What is clear is that in some market failures it is easier to tackle from government. I would particularly highlight the whole skills agenda, where it is reasonable to expect government to make progress and education skills. Employment services and areas like that, areas round housing and planning, it is reasonable to expect government to make progress. Enterprise clearly is an important issue but the scope for government to influence it on a massive scale is inevitably limited.

You have identified it as one of the five key drivers, presumably you think you can do something?

(Mr Macpherson) Clearly policy needs to be implemented with the ground of an enterprising economy and a lot of measures have been taken through, the small business service and other agencies, to try and encourage enterprise.

The business start off figures tell a potent story when you look at the regional distribution of those.

(Mr Macpherson) They certainly underline that there is a big challenge.

That is why we are looking for devices to help us address that challenge. Is there a role for regional selective assistance?

(Mr Macpherson) Regional selective assistance clearly has a role in regional development otherwise we would not have it.

Is it working?

(Mr Macpherson) I think a lot of analysis has been done about the whole system. We talked earlier about approaches, some approaches are more successful than others in economic policy terms.

How much money is going into the regional selective system programmes?

(Mr Macpherson) It is something like 100m a year, something like that.

How many jobs is that supporting as a result of that investment?

(Mr Macpherson) I do not have that information, we can get the DTI to provide a note.

We have had a paper from Dr Colin Wren's from the University of Newcastle who thinks that that £100 million is supporting 7,000 jobs. Do you think that is probably right?

(Mr Macpherson) As I say I would like to get the DTI to provide some figures.

Would it suggest good value for money if the 7,000 figure is right?

(Mr Macpherson) I am not sufficiently close to the data to give you an answer on that.

How do you measure whether regional selective assistance was effective or not?

(Mr Macpherson) Yes, it is. That should inform the allocation in the spending review and I am quite certain it has informed the allocation in the spending review just finished.

How are you measuring the effectiveness of RSA?

(Mr Macpherson) There are a whole raft of different indicators which can measure it. Jobs is an issue, but it is only one issue. One reason for that, which comes out in this Treasury/DTI published last year, is this issue of clusters, it is not only the jobs in the relevant enterprise which are being supported but it is also whether there are externalities in terms of promoting a sort of cluster of related economic activity. Evaluation of RSA is very important. History suggests that with an ill-thought out policy of regional selective assistance you can end up spending a great deal and not get very much in return. It is important the policy should be framed in a way that is cost effective.

Are you not afraid it might be in precisely that situation.

(Mr Macpherson) I am not afraid of that because I know that these issues were looked at closely in the spending review and my colleagues in that particular part of Treasury which deals with RSA would have subjected this area of spending to considerable scrutiny.

It sounds like you doubt Dr Wren's analysis?

(Mr Macpherson) I have to look at his analysis. Would it be helpful if we provided a note on this issue.

I think it might be.

(Mrs Dunn) May I make a general observation just in case you are going to go on and ask us about the other drivers and what the measures are.

You will be relieved to know I am not.

(Mrs Dunn) It is possibly a point that is worth making anyway. I have been trying to look through the Spending Review White Paper and turned to the DTI chapter to look at what that said about enterprise. There is a more general point, which is throughout this I think what you would see if you were to look at each individual departmental programme you would find evidence of policies that are being persued in support of the five productivity drivers. In the chapter on regional policy we set out there how we think some of the other mechanisms will be used to take forward our spending plans in the way that allocates resources to the regions. The other thing we say, as we said before, is we have signed up to a PSA target about improving economics and making sustainable improvements in all English regions, and so on. Part of the process of signing up to that is we now have to commit ourselves to actually having performance against that target monitored in a very public way, so a lot of your questions were about what we could tell you now about what success these policies have and the answer to that is partly that because we are talking about a range of policy, some of which have a very long run effect, some of which have a more immediate impact, some which have a broad coverage, some of which are much more targeted, it is quite difficult to come up with a single answer to that question. The great advantage of having a target that we are developing is that we will be able to come up with some sort of mechanism for monitoring our progress against that target. Your task will become easier because we will be able to explain how we are performing against that.

You will have targets for say 5 and 10 years out?

(Mr Macpherson) The great thing about Public Service Agreements is that we are getting a report regularly on progress against them. I think we plan to have a website up and running in the near future which will set out what is going on.

If I want to find the answer to my question about how we are progressing on enterprise at some point there are going to be clear targets and measurable performances against those targets?

(Mrs Dunn) There are. In fact the PSA target for enterprise is to help to build an enterprise society in which small firms of all kinds -

That is an aspiration. The question is, how will we know whether we are getting it?

(Mr Macpherson) On the regional target we will know as the regional data comes out through time when the ONS publish it.

Within that data what are you looking at to see whether we are making progress on the enterprise?

(Mr Parkinson) An increase in the number of people going into business, improvement in the overall productivity and more enterprise in disadvantaged communities.

Are their targets linked to those variables?

(Mr Macpherson) No.

Chairman

You said that the target will be monitored. It is the Treasury that is monitoring targets? You are monitoring yourself?

(Mrs Dunn) This a DTI target.

(Mr Macpherson) Departments are required to publish progress and they are required to get independent assurance through the NAO of the data systems which underpin it. I think they will be pretty robust.

Mr Beard

In your memo you say that the 2002 Spending Review will reflect the government's emphasis on regional agenda build, what new policies were brought in directly to do with regional agenda?

(Mr Macpherson) As I mentioned earlier, first there was an increase in resource for the RDAs. I would identify three areas where I think there was a step forward in the Spending Review, one is in relation to housing, where there is a commitment to creating strong regional bodies. Secondly, in relation to the relationship between RDA and Learning and Skills Councils, where we are running pilots for creating forward budgets. Finally, in relation to the small business service and how that interacts with the RDA. In those three areas, skills, small business support and housing I am hopeful that we will make important steps forward.

Taking the first of those, which was the resource allocation, since April you have been having a single lump sum allocated to regions according to the formula, you also incorporated into that a flaw so that no one suffers too much reduction. If you have introduced a flaw it is going to take ages and ages to equalise the amount of money going to the different regions, is it not?

(Mr Macpherson) This is always one of the issues which arises when you introduce new formula, there is a trade off between getting the revised approach in place quickly and not creating dislocations in the areas you are going to end up transferring the money.

(Mrs Dunn) I think the flaw could be regarded as a transitional arrangement for exactly the reason that Nick says. I think it would be fair to add that the formula used for allocative purposes is one that is agreed by the Regional Development Agencies themselves and their perception is that it delivers an allocation they feel is consistent with what they want.

That does not make it right if the objective policy is to try to equalise the productivity or the GDP of the different regions. First of all, they do not have much statistical information to go on and, secondly, their objectives may not be the same as the central purpose. The central purpose is saying, yes, we are going to re-allocate the funds if there is a problem there but not very much. It could take a long time.

(Mr Scotter) Our PSA has two parts, one is to improve the economic performance of all regions and the other is to reduce the persistent gap between regions. It goes back partly to Mr Cousins question earlier, some of them, the south east for instance needs resources from government to help to continue its economic performance which is of benefit to the United Kingdom as a whole. We are not actually about trying to hold back the south east, government is not about trying hold back the south east or London in any way it is about trying to give the regions that are not at that level of performance the ability to move forward and catch up. It is right that there is a balance here and that one gradually may focus resources more towards particular regions while continuing to keep up support. For instance there are skills gaps in the south east and in the east of England which are growing very quickly and it is right that government through the RDAs and the Learning and Skills Councils should be doing things to address that. I do not think the fact that money will continue to go into the south east or the east of England is a flaw in the process, it is because we are trying to tackle two things at the same time, one is the growth everywhere and the other is tackling the gap.

I accept that. I am not really talking about that, I am talking about the disparity between what has been declared, which is the process of differentiating between regions so that you allow regions to catch up in productivity and GDP per head, and the fact that one of the policies that proclaims itself as trying to do that has a brake on so that it is not really doing it at all in any measurable time scale.

(Mr Macpherson) I think it is doing something. The direction of travel is clear, it is just a question of how much dislocation you have in getting there. As I said earlier there is a trade off here as, no doubt, there will be a trade off when a new SSA formula is introduced. Inevitably you cannot please everybody.

Do you have any feeling for how long it will take to get any reasonable equity between regions if you follow the present arrangements?

(Mrs Dunn) Do you mean just in respect of the allocations to the RDAs?

Yes.

(Mrs Dunn) I think it would depend on how you defined equity. The regions have different sizes, and so on.

(Mr Macpherson) I suspect what you are asking is if you have a formula without floors and ceilings that is where you are going to end up, it is how long it will take, given the current floors and ceilings.

(Mrs Dunn) Probably one spending review period.

That is how long?

(Mrs Dunn) Three years. I would like to check that I think.

Mr Laws

Mr Scotter, we obviously have this SSA Review underway at the moment, could you explain in a very short and concise way for an average constiuent of mine - not going into vast detail, I know you can but I do not need you to - what the defects are that this Review is seeking to remedy in terms that my constiuents would understand and who the winners and losers are in areas in terms that my constituents would understand?

(Mr Scotter) One of the defects which the Review is trying to address is that your constituents will probably not understand how the money is allocated, and the aim is make this more understandable to people who actually have an interest in it and are engaged, the informed constituent who wants to know about this. Another issue is the way that SSAs have been used and portrayed in the past as an estimate of the needs of the local authority, rather than the way of distributing grants between local authorities. You will know that the past capping has been based on spending assessments. A third element is the fact - these are all set out in the White Paper which was published last December - that this is very much based on looking at past patterns of expenditure. Of course to some extent that is self-fulfilling. If you look at what people spent last year and base your estimates of needs on what they spent last year you may come up with what they spent last year ---

You are beginning to lose my constituent. Would you be able to say to my constituent, this is a fairer system than we had before.

(Mr Scotter) What the government is looking for is something which is simple, more straightforward, more stable and fairer.

The previous system was unfair in what respect?

(Mr Scotter) The point I was obviously not explaining very well was it tended to perpetuate the pattern of expenditure that has existed in the past rather than looking independently.

From your detailed study it had that aspect of unfairness that perpetuated these things that it should not be perpetuating, who was losing out in broad terms in terms of areas of the country?

(Mr Scotter) I think the formula is very complex and naturally particular features may have an effect in all areas of the country if you are asking me about regions. There is a clear issue which has already been raised about the Area Cost Adjustments, where there are people in some local authorities who think it is excessive and others in local authorities who think it is inadequate.

Before you lose my constituents entirely, if my constituents said, Mr Scotter was there a part of the country that appeared to be losing out under the previous unfair system rather than it being randomly distributed throughout every local authority area is the answer there was or there was not?

(Mr Scotter) The answer is ---

(Mr Macpherson) I think the answer is that the Deputy Prime Minister will be announcing the new proposals very soon and your constituent should hang on.

That is why I did not ask you the question. Are you telling us that after all this work you have done, and you already developmed various options, and so forth for this, that you do not know, you cannot actually say to us there was any area that was dealt with unfairly?

(Mr Scotter) I think I would have to ---

I would rather have your answer than Mr Macpherson's, his answers are not helpful to my constituents.

(Mr Scotter) The position is that the government has looked at a range of options. We are consulting with local government and other people and we have consulted with local government about the choice between those optionss. When ministers take those decisions we will reflect those.

I thought you said this was going to be a simpler system! If only we had more time to follow it up. I want to deal with another area and I want to put this to Mrs Dunn - I think it is her area - we discussed earlier and Mr Macpherson mentioned how we had a bottom-up system, we arrived regionally at this system and it came to expenditure per head. It is not done in a coherent way that tries to get money into regions from the top. When you look at the distribution we have across the various regions - and Mr Cousins has drawn your attention to the situation in the north east, I come from the south west - when you look at all of the detailed figures in your area do you believe that it is a satisfactory distribution we have ended up with as a consequence of a bottom-up process or do you think that the kind of concerns you have heard from Jim Cousins are quite legitimate?

(Mrs Dunn) I think it goes back to what you are trying to do. I think that if we had a situation where we looked at health, we looked at local authority spending, we look at regional development spending and so on and if in each of those areas - criminal justice would be another - we felt we were able to devise an allocative formula that we thought was fair for that particular area of expenditure then I think it would be correct to say that if you aggregated that up to a regional level and added in things like social security, and so on, that we would have the right allocation. It is worth thinking about the way in which we distribute money to Scotland, Wales and Northern Ireland because in effect that is what we are doing there, we are saying if you add all of that up it is then up to devolved administrations to determine the allocative mechanism.

Mr Cousins encouraged you to go to the north east and if you turned up on the doorstep of one of his constituents and they said, "It is somebody from the Treasury, we know we have been short-changed for years, this area is losing out compared to other areas of the country", would you able to answer, "no, you are not losing out", to that person at the moment?

(Mr Macpherson) I think -

I was asking Mrs Dunn. I am keen to get Mrs Dunn's view, this is her area of expertise.

(Mr Macpherson) I am quite happy to give a collective answer.

My question was to Mrs Dunn. I would like an answer to it.

(Mrs Dunn) I may not be able to answer without losing your constituent in the way Mr Scotter might have.

Could you answer to Mr Cousins' constituent, "no, you are not being short changed".

(Mr Macpherson) I would say ---

I do not understand why you are cutting across your officials, Mrs Dunn is a very senior official, this is her area of speciality and frankly I would like an answer from her.

(Mrs Dunn) I would say that I thought that the systems we had were fair but that does not mean that they cannot be subject to the sort of review that enables them to be refined.

If we move to a situation where the south west or the north east has a regional assembly and they end up in situation that looks a bit more like the situation that Scotland and Wales would it make sense to have a situation where we look at the whole thing again and the north east or the south west gets a regional block allocation in the same way as Scotland and Wales do?

(Mrs Dunn) I think that if you look at the detail of the regional government White Paper it sets out quite clear proposals for elected regional assemblies and it does not talk about giving a block grant in the way that you are suggesting. What it does talk about is looking at the functions that are to be devolved, allocating expenditure to those regions in the normal way and then, rather in the way that we have done for the Regional Development Agency, creating a single pot giving the regional assembly freedom over distribution.

(Mr Scotter) I do not think I have anything to add to that.

Chairman

Moving towards the end now can I just ask you one question on a technical point, on this Standard Spending Assessment there is an area of cost adjustment included but in your own memorandum you draw attention to the fact that the NHS resource allocation includes what is called a market forces factor, which is a premium paid for recruiting staff in different wards and parts of the country, how do you reconile those two?

(Mr Macpherson) The answer is that I would need to go back and provide you with a note. These allocation mechanisms evolve for different purposes in different ways. Clearly within the Treasury we are keen for them to be broadly consistent, and the health one reflects the special needs of the Health Service. I am happy to provide you with a note on how precisely those aspects of the formula work.

Okay. You said it was early days on the Regional Venture Capital Funds, have they actually started, they had trouble getting clearance from Brussels? Have they now kicked in?

(Mrs Dunn) They are starting in England, yes. I think they have. We will check that.

Thank you. You promised us some information on how the allocations are done amongst RDAs. You also promised to get back on RSA, on the jobs issue and the total amount. There are a number of other studies floating round, the ONS study on regional GDP you are going to comment on when it comes out.

(Mr Parkinson) Regionalisation of accounts.

(Mr Macpherson) The 31 October.

You promised to forward your comments on that. The Office of the Deputy Prime Minister study on Regional Output Analysis.

(Mr Scotter) That is a joint Treasury/DTI study.

When does that come out?

(Mr Macpherson) Another 18 months or so.

(Mr Parkinson) 21 months.

We will hear about that in due course, will we. Fine. Finally, the Department of Health allocation on formula, the formula basis for that. You are going to let us have a note on that, are you?

(Mr Macpherson) Yes.

Chairman: Good. Thank you very much indeed.