PAYMENTS OUTSIDE THE SCOPE OF THE
BARNETT FORMULA
96. We have already noted that payments made as Annually
Managed Expenditure (AME) fall outside the scope of the Barnett
formula. This does not raise any matters for us to consider from
a constitutional point of view. However, we are concerned about
other payments made outside the scope of the formula.
97. Two of these particularly attract our attention.
First are claims made by the devolved administration on the UK
DEL Reserve. While the devolved administrations maintain their
own reserves, these are small (both in comparison with the devolved
administrations' budgets and with the size of the UK Reserve).
In the event of a devolved administration suffering a major financial
shock outside its control, it is unlikely that it would have adequate
resources to cope with such costs itself and it would therefore
need to make a claim on the UK Reserve. The Treasury's Statement
of Funding Policy provides that such claims will be considered:
(a) where a UK Department is granted access to the
Reserve to meet exceptional pressures on a spending programme,
and the devolved administration has a similar programme and faces
similar pressures; or
(b) where a devolved administration faces exceptional
and unforeseen domestic costs which cannot reasonably be absorbed
within existing budgets without a major dislocation of existing
services.[83]
98. The important point about the determining whether
to grant such claims or not is that it is entirely in the hands
of the Treasury. Not only does the Treasury determine how such
funds will be paid, but it retains control of the criteria by
which it makes such decisions. Moreover, the Treasury does not
publish these criteria.[84]
A UK Government department therefore determines both whether a
particular event occurring in relation to a devolved administration
is a crisis and what the appropriate payment to make is. The
present state of relations has been such that no serious dispute
appears to have materialised as a result, and claims on the Reserve
have been paid by the Treasury, for example, in relation to the
consequential effects for tourism of Foot and Mouth Disease.
Such claims were paid for Scotland and Wales on a similar basis
to that for England. We received no satisfactory answer to the
question of whether claims would have been paid by the Treasury
had Foot and Mouth Disease been a Welsh and Scottish but not an
English disease. It would have been entirely a matter for the
Treasury to determine, however serious its financial implications
for the devolved administrations.
99. A similar issue arises in relation to EU funding.
Northern Ireland, Scotland and Wales are all in receipt of funding
from the European Union under Objective One of the Structural
Funds. Scotland still receives transitional funding for the Objective
One programme for the Highlands and Islands. Northern Ireland
receives Objective One funding under two headings: the PEACE TWO
programme (a cross-border initiative administered by the North-South
Ministerial Council in one of its sectoral forms) and a 'mainstream'
package of funding. Wales receives Objective One funding for
West Wales and the Valleys. There has been considerable debate
about 'additionality' in relation to this money - meaning not
whether the UK Government makes extra public spending available
to match the EU funding, but whether the UK Government passes
on the extra funding to the relevant administration at all. Historically,
it often has not, employing what one witness called 'a consistent
scam'.[85]
The PEACE TWO funding for Northern Ireland has been one exception
to this, however. The funding for Wales has been another. The
circumstances in which this occurred - being withheld by the Treasury,
leading to a vote of no confidence by the National Assembly in
Mr Alun Michael as First Secretary, and later being made available
after Mr Rhodri Morgan had become First Minister - are well known.
We do not propose to consider whether the judgement to make the
funding available was right.[86]
We must however note that this was a matter of high political
controversy in Wales, which had profoundly serious effects for
politics within the National Assembly, and that the key decisions
were all taken by HM Treasury.
100. In this context, we must note what the Statement
of Funding Policy says about the resolution of financial matters
in general. Disagreements between the Treasury and a devolved
administration must be pursued with Treasury Ministers by the
Secretary of State (a member of a different administration, and
in the future possibly of a different party). While the matter
can be raised at the Joint Ministerial Committee, the Statement
of Funding Policy notes that the issue remains the responsibility
of the UK Government and that the final decision will be taken
by the UK Cabinet, if raised there by the Secretary of State.[87]
101. We have no objection to this way of dealing
with financial matters in the first instance. However, we have
concerns about this as a way of reaching a final resolution of
disputes raising financial issues. This appears to us to be
an appropriate way to deal with a department of the same government,
but we do not think it is appropriate for dealing with a separate
administration. The difficulties that might arise where the administrations
are of different political complexions, or where the interests
of the UK Government and devolved administration conflict, are
immense.
102. We recommend that where
discrete disputes arise, they should be referred to an independent
body, such as a Devolution Finance Commission, with that body
then making a recommendation to the Cabinet. To the extent that
macro-economic management requires control by the Treasury of
the aggregate amounts of funding involved, such amounts could
be set as the total value of a settlement to be allocated by the
same body without the Treasury being able to determine the way
in which it is allocated.
REVIEWING THE BARNETT FORMULA?
103. It will be apparent from the above that there
are serious difficulties presented by the long-term continuation
of the Barnett formula. We do not think that it will be a sustainable
basis for allocating funds to the devolved administrations in
the long term. Many of those in Wales and Northern Ireland, as
well as those in parts of England, consider that the formula is
unfair in its allocation of funds to them in comparison to its
allocation of funds to other areas, and does not provide them
with the resources they need. Even if it does provide those resources,
it does not do so in a manner that convincingly demonstrates that.[88]
This is largely because so much control remains in the Treasury's
hands.
104. This will inevitably become a major source of
tension in the devolution settlement. It may only become a matter
of open dispute when the parties in office in the devolved administrations
have profound disagreements with the UK Government, but that is
likely to happen sooner or later.
105. We do not have a neat ready-made alternative
to Barnett to propose. We do not believe that full fiscal autonomy
would be the answer, not least because it would threaten the economic
and fiscal integrity of the United Kingdom. However ,we would
envisage that any alternative would incorporate the following
elements:
(a) an assessment of the needs of the devolved administrations,
and the different regions of England, taking into account the
nature of their responsibilities and the demographic characteristics
of the relevant population;
(b) that needs assessment would not be repeated every
year but only at periodic intervals. Adjustments to the funds
available, whether annually or in-year, would be made by means
of a formula;
(c) however calculated, funds made available to the
devolved administrations would remain in the form of a block grant
which the administration could allocate as it wished;
(d) funds for the devolved administrations should
be payable solely to them. The present arrangement by which the
offices of the Secretaries of State are 'top-sliced' from the
devolved administration's block grant should be ended and payments
for those offices made separately and directly by the Treasury;
and
(e) the transition to a new arrangement should be
phased over a number of years, to minimise the effects of it for
those parts of the UK which lose out relatively in terms of funding.
106. We are conscious that the carrying out of that
needs assessment would not be straightforward. We were told of
the difficulties arising from the Standard Spending Assessment
used for allocating funding to local government in Great Britain,
which is highly complicated, highly contentious, and (however
the formulae involved are adjusted) always produces substantially
the same outcome.[89]
It would inevitably involve considerable tensions between the
devolved administrations. Concerns about the present over-provision
of funding to Scotland, and the unequal distribution of funding
across England, would also emerge if a needs assessment were carried
out. The impartiality of those undertaking the review will be
of prime importance. Our attention has been drawn to a number
of models used in other countries, and we are struck by the relative
success of the Australian Commonwealth Grants Commission compared
with other such bodies.[90]
107. We recommend that, when the Barnett formula
is reviewed or a needs assessment is carried out, it be done by
an independent and impartial body. This body should include persons
nominated by the devolved administrations and by the UK Government,
and should include people who reflect the views of all parts of
the United Kingdom, including the English regions.
108. More generally, we note that management of the
United Kingdom's economy, on both the macro-economic and micro-economic
levels, remains wholly in the hands of the UK Government. While
we do not consider that this should be changed, such decisions
can have a major impact on the devolved administrations. Conversely,
the devolved administrations may well be able to help the UK Government
achieve its macro-economic objectives more effectively. For the
UK Government to persist in making such decisions unilaterally
seems to us to be inconsistent with the spirit of devolution.
109. We recommend that there should be consultations
with the devolved administrations about macro-economic and fiscal
policy before decisions about such matters are taken by the UK
Government.
70 HL Debates, 7 November 2001, cols 225-64 (L. Barnett's
view is expressed at cols 225-29). Back
71
Details are set out in HM Treasury Funding the Scottish Parliament,
National Assembly for Wales and Northern Ireland Assembly: A Statement
of Funding Policy (second edition, July 2000; third edition,
July 2002). Back
72
Referred to by Professor D. Heald in his Memorandum to us; paragraph
12. Evidence volume, p. 146. Back
73
Following the 2000 review, the proportions were 10.34% for Scotland,
5.93% for Wales and 3.41% for Northern Ireland; following the
2002 review, they are respectively 10.23%, 5.89% and 3.40%. Back
74
See Memorandum of Professor D. Heald; evidence volume, pp. 144-47;
evidence of Professor D. Heald and Professor D. Bell, 16
May 2002, QQ 499-526; Memorandum of Professor I. McLean, evidence
volume, pp. 422-27. Support for it was however expressed by Professor
V. Bogdanor in his Memorandum, para. 4 (evidence volume, p. 1)
and his evidence of 20 February 2002, QQ 10-12. See also the
evidence of Professor R. Hazell, 10 July 2002, QQ 1419-22. Back
75
Evidence of Mr A Kerr MSP, Minister for Finance, Scottish Executive,
16 May 2002, Q. 528; evidence of Mrs E. Hart AM, Minister for
Finance, Local Government and Communities, National Assembly for
Wales, 27 May 2002, Q. 873. Back
76
Evidence of Professor D. Bell, 16 May 2002, Q. 499, QQ 511-12.
Back
77
Evidence of Mrs E. Hart AM, Minister for Finance, Local Government
and Communities, National Assembly for Wales, 27 May 2002, Q.
875, Q. 902 and Q. 910; evidence of Mr A Kerr MSP, Minister for
Finance, Scottish Executive, 16 May 2002, Q. 529. Back
78
Evidence of Professor D. Heald, 16 May 2002, Q. 503. Back
79
For example, in Scotland "the core of the office headquarters
department has gone up by about one sixth, that is 600 on 3,600
over three years" (evidence of Sir Muir Russell KCB, 15 May
2002, Q. 465). Seventeen per cent of the National Assembly for
Wales's staff are entirely new (evidence of the permanent secretary,
Mr J. Shortridge, 28 May 2002, Q. 1038). Back
80
Evidence of Professor D. Heald, 16 May 2002, Q. 504. Back
81
Memorandum of Professor D. Heald, para. 10, evidence volume p.
145; evidence of Professor D. Heald, 16 May 2002, Q. 499. Back
82
Memorandum by Plaid Cymru - the Party of Wales Group, National
Assembly for Wales 'The Case for Replacing the Barnett formula',
evidence volume 436-42; Memorandum by Professor I. McLean, evidence
volume 422-27. Back
83
Summarised from Funding the Scottish Parliament, National
Assembly for Wales and Northern Ireland Assembly, para. 9.2.
Back
84
Evidence of Ms R. Dunn and Mr M. Parkinson, 26 June 2002, QQ
1268-71. Back
85
Evidence of Professor D. Heald, 16 May 2002, Q. 503. Back
86
They have been investigated by the House of Commons Welsh Affairs
Select Committee. Seeits Second Report for the Session 2001-02,
Objective 1 European Funding for Wales, 22 May 2002. HC
520. Back
87
See Funding the Scottish Parliament, National Assembly for
Wales and Northern Ireland Assembly, para. 11.2. Back
88
See for example the Memorandum by Plaid Cymru, evidence volume
pp. 436-42, or the Memorandum by Professor I. McLean, evidence
volume pp. 422-27. Back
89
Evidence of Mr A. Kerr MSP, Minister for Finance, Scottish Executive,
Q. 529; Memorandum by Professor I. McLean, evidence volume pp.
422-27. Back
90
See the evidence of Professor D. Heald and Professor D. Bell,
16 May 2002, QQ 504-05 and Q. 522; evidence of Professor R. Hazell,
10 July 2002, Q. 1420; Memorandum by Professor I. McLean, evidence
volume pp. 422-27. Back
