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Lord Sewel: I should like to deal with many of the points that have been raised in this wide-ranging debate on an extremely important issue that affects the devolution project. I start with a comment of the noble Lord, Lord Mackay of Ardbrecknish. He was gracious enough to draw the attention of the Committee to the work of my former colleague Professor David Heald (as he is now). I let the Committee into a little secret. About 10 to 15 years ago Mr. David Heald (as he was then) and I published various articles on public expenditure in Scotland. He came up with the bright idea of describing this as the Barnett formula. Some years later, when I was responsible for social sciences at the University of Aberdeen, the department of accountancy was looking for someone to head the public expenditure branch. David Heald was a formidable candidate for that post and was successful in obtaining his chair. Since that time it has been recognised on all sides that he has made a significant contribution to the whole debate about public expenditure; in particular the implications for public expenditure raised by devolution. He is always constructive and helpful. He is a professor, unlike my other valued colleague Dr. Michael Dyer, whose comments and insight are not always as helpful to Her Majesty's Government. He is a lecturer at the University of Aberdeen.

The noble Lord, Lord Mackay of Ardbrecknish, explained well the nature of the Barnett formula and what it did; and, perhaps more importantly, what it did not do. I believe that the undergrowth has been cleared. It is important to remember that it is about incremental change and only that. In response to the noble Baroness, Lady Carnegy of Lour, I am a great advocate of incremental change. It is something that is manageable. I am very suspicious of people who say that they carry out zero-based budgeting every year. For complex organisations I believe that that is more rhetoric than reality, but never mind.

The noble Lord, Lord Mackay of Ardbrecknish, said that one of the purposes of the Barnett formula was to bring about convergence of public expenditure levels on a per head basis as between Scotland and predominantly England. The extent to which convergence takes place is a function of basically two factors: inflation and the real increase in public expenditure from year to year. If inflation and real public expenditure increases are low, convergence takes a long time. If inflation is let rip because one is dealing with incremental change, convergence takes place that much more quickly.

Further, the Barnett formula element is population-driven and, as such, it is re-calibrated from year to year. That is always a problem for those who have to think of the number on the spur of the moment. The noble Lord, Lord Mackay of Ardbrecknish, came up with 10.66 per cent. I believe that the mid-year estimates have driven it down to 10.45 per cent. this year. It is a dynamic formula which is responsive to population change. In the field of public expenditure one of the annoying factors is that as soon as one thinks

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one understands it, one or other aspect is changed. The concept of the block is now out of date and has been replaced by the idea of departmental expenditure limits as opposed to annually managed expenditure. That difference may help the noble Duke, the Duke of Montrose. Domestic agriculture, fisheries and food expenditure will in future form part of the DEL. CAP expenditure in Scotland will count as part of annually managed expenditure, but it will not be within the block. CAP expenditure was never part of the block and it will not be part of the DEL.

A specific point was raised on why Scottish spending was £16 million lower than previous totals. That is a statistical quirk and arises from a definitional problem. Because one moves from the block concept to the concept of departmental expenditure limits more than £16 million of non-domestic rates expenditure goes out. That adjustment arises for that reason. Domestic agriculture will also be included within the DEL.

A number of points have been raised about need and attempts to produce various formulae. The noble Lord, Lord Dixon-Smith, and the noble Earl, Lord Mar and Kellie, spoke to this. How does one measure need? That is an extremely difficult challenge. We know enough about the drivers of public expenditure to understand that in Scotland factors like sparsity, population loss, multiple deprivation and morbidity are all factors that produce higher levels of spending need than in other parts of the United Kingdom. Another complicating factor in Scotland is that in education there is a much higher percentage of the school population in the public sector than in the private sector. Those factors are identifiable by virtue of various heavy correlative number-crunching exercises.

Lord Dixon-Smith: I entirely accept the point that has just been made about numbers, but that would not affect the cost per head. I made reference to the cost per head which is not affected by numbers.

7 p.m.

Lord Sewel: In Scottish education one can arrive at a cost per head figure which is driven up. If one is providing primary education in the Highlands and Islands, because of the sparsity factor inevitably one has a large number of very small schools which are comparatively very expensive to provide. Those kinds of factors help to explain the higher expenditure needs in Scotland than elsewhere.

The amendments before the Committee focus in different ways on the funding arrangements for the Scottish parliament. Amendments Nos. 272, 274 and 279 aim to give, at least for an interim period, some statutory force to the funding arrangements that currently exist for Scotland which will be largely carried forward following devolution. They also make provision for a review of those arrangements aimed at moving the funding of the parliament closer to a system of assigned revenues.

I listened carefully to the proposed arrangements advanced by noble Lords. I fully appreciate the sentiments behind this set of amendments. I therefore

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intend to respond primarily on the basis of principle rather than on the practical effect of the amendments. Before doing so, I am bound to point out that Amendment No. 274 would, as it is phrased at the moment, in effect freeze future grants to the parliament at the 2000-2001 level for all time. I appreciate that that is most likely to be a drafting slip but that is what it would actually do as it stands. That cannot have been the noble Lord's intention. Let us turn to the wider picture, however.

I believe that these amendments are misdirected in principle. I therefore hope that I will be able to persuade the noble Lords who have proposed the amendments to withdraw them. As has been pointed out on many occasions, the funding arrangements proposed by the Government in the White Paper, essentially the continuation of the Barnett formula, have a long history. They go back 20 years. There has been a cross-party acceptance from government to government that they have worked well. The Barnett formula is well understood among the broad cognoscenti in the public expenditure world and has delivered fair settlements for Scotland for the last two decades. That is important. I do not believe that there is anybody--or very few--who would challenge the idea that successive governments in distributing the total have delivered Scotland a fair settlement. No Secretary of State for Scotland in my memory has ever claimed that the formula has worked to adverse effect in Scotland, because it has worked; it is fair; it has reflected the country's relative need for public resources. We may have some dispute and some disagreements among us on absolute need but, in terms of the relative need, the relative share, the formula dishes out the given total fairly and equitably.

As a Government we are firmly committed to this arrangement and we made this clear in the White Paper. The formula will provide stability and predictability at a time of major change and transition and will establish a firm basis for the longer-term funding of the parliament. It is absolutely vital that, as we change the political institutions of the United Kingdom, there is an underpinning of financial stability to see us through that period of political change. That is exactly what we intend. That is what the comprehensive spending review which my noble friend Lord Dean of Beswick asked us to examine does, by giving us that three-year period of actual figures which is a product of the application of the Barnett formula.

Of course nothing lasts for ever and I have to recognise that. "Never" is a word that a politician should never use. We made it clear in the White Paper that if circumstances changed some reassessment of relative need could be agreed between the Scottish parliament and the UK Government. I think that is a sensible and pragmatic position to adopt: seeking to start with an arrangement which is familiar and works well but not ruling out for the future the possibility of change. Clearly any change would have to be made on the basis of an extremely thorough assessment at some time in the future of the relative expenditure needs of Scotland vis-a-vis other parts of the United Kingdom.

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I do not believe that there is benefit in enshrining the Barnett formula in statute. We have a clear commitment from the Government that Barnett will be used certainly in the period of transition; that we see it as a sound basis of allocation. If circumstances change, however, there is the opportunity to revisit the area but on the basis of agreement between the two parliaments and, I would strongly suggest and support, on the basis of a thorough and proper means assessment at some time in the future. I am almost getting into the area of speculation, however. What we are faced with at the moment is a clear statement by the Government of how they intend to handle the present and the near future.

Turning to Amendments Nos. 273, 271U and 275A, these are concerned with relating the size of grant which Scotland gets from the UK Government to the country's needs. Amendment No. 273 would in effect replace the current funding arrangements with a new statutory formula. This would use population density and relative GDP per head as measures of Scotland's relative need.

Once again I understand the sentiments behind the amendments but I think they are wrong. What we have at present is a system whereby relative need across the spectrum of government spending in Scotland is built into the public expenditure baselines. The historic baseline is part of the building block of the settlement. It is an arrangement which properly captures relative need and that is why we are proposing to continue with it.

Amendment No. 273 has two particular difficulties. First, I am by no means clear that it is possible to attach a specific and accurate level of uplift purely to the effects of lower population density. I think the noble Lord will recognise that himself. Secondly, relative GDP per head is, at very best, only a partial indicator of relative need and could in practice create distortions. Most of the need indicators lag behind GDP. Health expenditure is a good example. The noble Lord, Lord Dixon-Smith, made the point that Scotland's GDP has increased to almost parity with the rest of the United Kingdom but it is clear that our health record remains very much worse. The level of morbidity in Scotland is much worse than in the rest of the United Kingdom. I hope that it will change. There can be an increase in GDP over a relatively short period of time. It takes so much longer to bring about changes in the cultural aspects of health--the diet of west central Scotland being but one of them.

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