CHAPTER 7: THE PRINCIPLES OF A NEW
APPROACH
A needs based approach
79. The Chairman, in summing up Lord Barnett's
evidence, said: "you devised a mechanism which you hoped
would last for a few years. You did not expect it to last for
as long as it has lasted. You are not sure now whether it is based
on the right criteria and you lean towards having, among other
things, a needs-based assessment". Lord Barnett agreed (Q 77).
The first assessment of relative needs across England, Scotland,
Wales and Northern Ireland was conducted between 1976 and 1979.
That study was confined to the main services which were to have
been devolved under the Scotland and Wales Acts 1978.[52]
The Government's White Paper of November 1975, Our Changing Democracy,
stated that, although a neat formula could not be devised to produce
fair shares for the devolved administrations from year to year
"objective information on standards and needs would help
the Scottish [and Welsh] administration[s], the Government and
parliament to make their judgments".[53]
80. The idea of an assessment of relative needs
was developed in the July 1977 White Paper, Devolution: Financing
the Devolved Services, which stated: "it is clearly desirable
that discussion of the appropriate level of devolved expenditure
should be informed to the greatest possible extent by objective
data and a mutual understanding of needs and problems".[54]
81. We find the argument that devolution funding
should be based on relative need to be a compelling one. Public
spending per head of population should be allocated across the
United Kingdom on the basis of relative need, so that those parts
of the United Kingdom which have a greater need receive more public
funds to help them pay for the additional levels of public services
they require as a result. Those levels of need—and those
parts of the United Kingdom which require them—may well
change over time. Historically, they have certainly done so.
Achieving substantive fairness
82. The territorial Secretaries of State told
us that the Formula was 'fair' (Q 878).The Chief Secretary
to the Treasury said that he considered the Formula to be "fair
enough" and "It does a pretty good job. There is a minefield
of issues involved in moving away from it which produce new risks
to good public administration" (QQ 979, 988, 993). On
the other hand most witnesses thought that the allocation of public
expenditure under the Barnett system produced results that were
not fair or equitable, though the reasons for their opinions differed.
Lord Barnett said of the Formula, "The latest figures ...
show that in England the average public expenditure is some £1,600
per head less than in Scotland ... I do not think it is fair.
It cannot be fair with this kind of gap" (QQ 4-6). This
was a view shared by the TaxPayers' Alliance: "The Formula
has failed to deliver the more equitable and fair allocation of
spending originally envisaged ... In an era of devolved government,
such spending gaps are impossible to justify to English taxpayers.
They ask why they should subsidise higher Scottish, Welsh and
Irish spending" (p 353). Many witnesses argued that
the Barnett system produced unfair and inequitable results because
it took no account of need (pp 132-3, 222, 344).
83. At present the annual adjustments in funding
are calculated by reference to population figures. We heard evidence
that this fails to recognise the particular needs in Wales and
Northern Ireland. The Northern Ireland Confederation for Health
and Social Services pointed out that because it is purely based
on population, the Formula "places Northern Ireland at a
disadvantage trapping the region within an ongoing cycle of underinvestment"
because it fails to recognise the higher levels of deprivation
in Northern Ireland (p 222). Plaid Cymru argued that the
Formula disadvantages Wales because it "takes no account
of the disproportionate impact that [the relative economic decline
for much of the twentieth century] has had on Wales compared with
the rest of the UK" (p 130). It could also be argued
that the Formula fails to take account of the increased relative
economic prosperity Scotland enjoyed over much of the past two
decades.
84. The Chief Secretary to the Treasury, when
asked about the Calman Commission report, indicated to us that
his concern was not with the principle of a needs-based distribution
but its practice: "I think it should be justified by need.
I would agree with that, but my concern would remain that we would
still need to devise a way of moving towards that position"
(Q 1001). He argued that it might not be possible to agree
on a new formula—to achieve what he described as 'consent'—"I
wonder whether you could come up … with a UK-wide formula
which was able to command the consent of political parties and
politicians in different parts of the UK"(Q 984).
85. He also said that he was open to suggestions:
"if there is an alternative which is better, which is capable
of commanding political consent, which can be delivered with satisfactory
transitional arrangements which do not disturb too much the predictability
which good public servants need in their finances, then I am all
ears!" (Q 988).
86. John Swinney MSP told us that it would be
very difficult to undertake an assessment of relative need (Q 192)
and that in any event such an assessment should not be undertaken
because it could not be 'objective'. Others said that financial
arrangements should only be changed as part of a much more comprehensive
review of devolution as a whole (or indeed of the whole constitution
and governmental structure of the United Kingdom) (Q 741).
We reject these views.
87. The 1979 Needs Assessment drew the conclusion
that a simplified method of assessing need produced a very similar
outcome to the more comprehensive and time-consuming approach
which was the main focus of the study. This supports the view
that a small number of broad-brush, proxy indicators may be a
viable way to assess the relative needs of the devolved administrations.
88. Any new system of allocating funds should
retain the clarity of the Barnett Formula and the stability over
time which it affords. But unlike Barnett, it should also be related
explicitly to an assessment of need. To do that it should be based
on the following principles:
- The new system should consider both the baseline
and any increment in funds. The entire
block grant for each devolved administration should be subject
to regular review to ensure that it continues to be appropriate
for the needs of each administration and fair in relation to the
needs of the other administrations.
- The new system should be fair and seen to
be fair. By relating resources to current
relative needs the system should help distribute funding to those
areas of particular need across the United Kingdom as a whole
and avoid the anomalies which arise from the present arrangements.
Consequently it should ensure a substantial degree of territorial
justice—something that is not achieved presently.
- The new system should be comprehensible.
Although the Formula is clear in its method of calculating the
proportion of incremental changes in the block grant, the basis
on which the baseline—and therefore the block grant as a
whole—rests is not. The statistics on which each allocation
is made and the details of the allocations themselves should be
placed on record and published. There should also be an audit
process to ensure that the system is being appropriately administered.
- The new system should respect territorial
autonomy. The new system must leave the
devolved administrations free to decide what to do with their
block grant. There should be no ring-fencing. Neither should the
new system attempt to duplicate the detailed assessments of local
needs that the devolved administrations must themselves necessarily
make.
- The new system should be stable and predictable.
Each administration must be able to make budgetary decisions in
advance and to plan their spending as they see fit. The new system
needs to reconcile flexibility (so resources change when relative
needs change), with consistency of funding over budgeting periods
to enable planning for both financial matters and service provision
by the devolved administrations.
A SYSTEM FOR DETERMINING THE BASELINE
89. Any assessment of need involves both technical
expertise and judgement. Many of these judgements will actually
be made by technical experts (for example, the choice of precisely
which version of any particular measure to use). If such an assessment
is to command respect, it must be conducted by a body that is
seen to be impartial. This is vital since any needs assessment
is bound to be confronted with conflicting interests, not just
between England and the devolved administrations but among the
devolved administrations themselves. Scrutiny can be expected
from all quarters. It is for this reason among others that we
recommend that the work be carried out by an independent Commission.
An explanation of that conclusion was set out in Chapter 6. But
while independence is essential, it is not on its own enough to
meet the vital condition that the results of the assessment must
be capable of being clearly explained to the public. That depends
on the method for assessing relative need adopted.
90. On the basis of our earlier consideration
of specific needs across the four countries, we believe that a
method capable of providing comprehensible answers is feasible.
Its key features should be:
- a top-down approach;[55]
- the use of only a small number of specific measures
of need, restricted to national statistics and, ideally, measured
by the number of people having that particular need; and
- combined into a single measure for each country
using weights that are consistent with the actual level of UK
public expenditure.
A TOP-DOWN APPROACH
91. Our argument in favour of a top-down approach,
using a small number of aggregate statistics, is based on the
following considerations:
- given the priority we accord to comprehensibility,
a simple approach is a high priority. While it may reasonably
be countered that the cost of simplicity is a certain rough justice,
we would expect that cost to be lower at the national level than
locally since differences between countries are much smaller
than differences between localities within countries;
- we also favour a top-down approach because of
the inherently top-down nature of the exercise itself. The opposite
approach, that the formula should be built up from a detailed
assessment of a full range of needs locality by locality, would
mean trespassing on the domains of the devolved administrations;
and
- finally, although we are not recommending the
Big Lottery Fund formula should be adopted, its formula shows
that such an approach is viable.
SELECTION OF MEASURES OF SPECIFIC
ASPECTS OF NEED
92. The first step is to choose measures of particular
aspects of need which are deemed to be important. We can illustrate
our approach with a few underlying points:
- First, we want indicators that measure the number
of people with particular need X as a proportion of the total
population of the country in question. This approach has a number
of features. As a principle, it reflects the view that needs are
inherent to people and that any two people with the same need
should be treated equally. In practical terms, once the particular
needs indicators are agreed what is then required is to count
the number of people with that need.
- Second, each of the measures of need chosen should
be a national statistic. While there will always be room to challenge
the choice of measures, we believe that the measures themselves
should be beyond reproach. The creation of the UK Statistics Authority
(UKSA) in 2008 strengthens the capacity of the United Kingdom
to take decisions about sensitive matters such as these on sound
evidence. A way should be found to involve the UKSA in the process
of needs assessment, not just in a quality assurance role but
also in the construction of new measures of need where necessary.
For example, the absence of any housing measure reflects the lack
of a UK-wide measure of housing need (quantity and/or quality)
and likewise, the absence of any sparsity measure.
- Third, the indicators should not be capable of
being affected by the policy choices of the devolved administrations.
It would be inappropriate to create incentives which could be
seen to encourage the devolved administrations to make policy
choices which might increase their need.
93. Our starting point is that funding should
reflect the size of population. If that were all there was to
it, an allocation would be one in which the amount of grant per
head was uniform.[56]
But needs also vary according to other factors. Children have
very different needs from pensioners; and we would expect that
both groups would have a higher overall level of need per head
than working-age adults. It will be up to the Commission to decide
on the factors used to build up the specific needs assessments
but we expect it to take account of the age profile of the population—which
therefore serves to modify the starting point of a uniform allocation
per head. We also envisage other factors that might affect the
territorial distribution of need. As with children and pensioners,
there are groups of people whose overall level of need could be
expected to be above the average such as: those with low incomes;
those with disabilities or suffering from ill-health; and those
with needs that may arise from a country's economic weakness.
Some of these needs are met to a greater or lesser extent by social
security.
94. However, these indicators matter only insofar
as there are differences between the four countries and regions.
Figure 2 shows a small selection of what we regard as some of
the key measures of relative need. It suggests that there are
indeed differences between the needs of the devolved administrations
and England, in some cases to a considerable extent. We do not
regard this selection as complete or definitive; other factors
might be chosen with equal validity. However, we consider that
any needs assessment should take these aspects into account, the
four aspects shown here being represented by eight measures of
relative need, as follows:
- The age structure of the population is
represented by the number of a) children aged under 5; b) children
aged 5 to 16; and c) adults aged over 65.
- Low income is represented
by the number of children in poverty as conventionally defined
(that is, belonging to households with an income below 60 per
cent of the UK median; and per capita household income). This
is a measure of a very different kind from all the others. It
is expressed as an inverse so as to preserve the rule that a high
number (low income per head) indicates high need and vice versa.
Since poverty tends to be associated with other aspects of deprivation,
child poverty may also be seen as a more general measure of need.[57]
- Ill-health and disability
are represented by the mortality rate (the number of deaths in
each country, standardised for the age profile of the population)
and work-limiting disability (the number of people of working-age
in each country with a work-limiting disability).
- Economic weakness
is represented here by unemployment (the number of people of working-age
in each country without a job and actively seeking one). Along
with work-limiting disability, this may be seen as capturing aspects
of additional need among the working-age population.
FIGURE 2
Measures contributing to relative need:[58]
95. Figure 2 shows each country's level of need
for each measure relative to that of the United Kingdom. So for
example, a value of 105 per cent indicates a level of need 5 per
cent above that average. The further away from the centre a country
is on any particular dimension, the higher its level of relative
need on that measure. An appropriately coloured line then joins
each country's eight points. All the measures used here come from
official statistics for each of the four parts of the United Kingdom.
96. The main points of note here are as follows:
- On most measures, the levels of relative need
in England and Scotland are quite similar (that is, the blue and
the white lines are usually quite close to one-another). England
has slightly higher levels in matters to do with children and
poverty and Scotland has much higher levels regarding disability
and mortality.[59]
- With the main exception of mortality, need in
Wales is usually higher than in Scotland (that is, the red line
is usually outside the blue one).
- Reflecting its young population, need in Northern
Ireland is high on the children measures and low on the pensioner
measure. In this combination of highest need on some measures
and lowest need on others, Northern Ireland is unique.
97. This diagram does not produce a single overall
estimate of relative need for each country because to do so requires
that the individual measures be brought together in a weighted
combination. On the other hand, provided that any two countries'
lines in this diagram do not cross one-another too often, a robust
conclusion can be drawn about which of the devolved administrations
or England have the higher overall level of relative need irrespective
of the precise weights chosen. On that basis, we could conclude
that any well-based combination of the measures would show that
England and Scotland have lower overall needs than Wales or Northern
Ireland. But while overall need in England is almost certainly
lower than that in Scotland, the relative positions of Wales and
Northern Ireland could reasonably differ depending on precisely
how the different measures end up being combined.
98. Figure 3 is an extended version of Figure
2 that includes four extra measures. Two of these are possible
alternatives to those shown in Figure 2 (to do with disability
and employment) while two are additions or elaborations (to do
with poverty and the age profile). Choosing different indicators
obviously produces a slightly different picture. On this analysis
there is some uncertainty about precisely how need in Northern
Ireland relates to the others. The conclusion regarding England,
Scotland and Wales remains undisturbed. This highlights the need
to ensure that the choice of indicators is made by the independent
Commission, as with the choice of weights that go with the chosen
indicators.
FIGURE 3
An extended selection of measures contributing to relative
need[60]
99. Neither of our lists is definitive nor complete.
The absence of any measure of housing need is the single most
obvious gap, arising from the fact that there is no UK-wide standard
(at least later than the 2001 Census) on which to base a measure.
Another such gap is the lack of any measure of sparsity, which
is usually seen as raising the cost (and therefore the need for
resources) in remote areas. In acknowledging this last point,
we would draw attention to the effect of sparsity in the latest
resource allocation formula for the NHS in Scotland. This shows
that while taking account of sparsity is vital for several remote
areas (adding more than 15 per cent to the allocations for the
Northern and Western Isles, and around 6 per cent to that for
Highland), the overall resource effect is slight (between 1 per
cent and 2 per cent for Scotland as a whole). This reflects the
very small proportion of the total population actually living
in such areas.[61]
100. The order of relative need among the four
devolved administrations and England shown here (with England
and Scotland quite close to one another, and both clearly lower
than Wales and Northern Ireland) in no way corresponds to the
pattern followed by the current allocation of public expenditure
per head which is shown in Table 4.
101. While we are not in a position to reach
a conclusion about precise relative needs in the four countries
and regions, on the basis of our initial analysis, we believe
that Scotland now has markedly lower overall need than Wales and
Northern Ireland in comparison to England. The current allocation
of spending does not properly reflect this basic pattern across
the devolved administrations.
102. We recommend that an alternative system
on the broad lines suggested above be created to establish a new
baseline grant for the devolved administrations and to review
needs on a regular basis so that allocations of funds to the devolved
administrations reflect the changing patterns of relative need.
COMBINING THE SPECIFIC MEASURES
INTO A SINGLE OVERALL MEASURE
103. Our examination of relative need in the
devolved administrations has stopped short of taking the next
step of combining the individual elements of need into a single
overall measure for each country. To do this, weights are required
to be attached to each individual measure of need, based on an
analysis how much public expenditure each type of need gives rise
to. In some cases, the public expenditure statistics provide the
information required: for example, the division of educational
spending between different age groups (under fives, other children,
young working-age adults etc). In others, a crucial judgement
has to be made as to what causes or drives cost: for example,
although health spending per head can be broken down according
to age, age may not be the critical factor driving spending. As
for a need like child poverty, the question of how much spending
(beyond social security benefits) this gives rise to (or ought
to give rise to) is more uncertain.
104. Such a task is not for us to undertake.
Clearly, the weights used to combine the specific measures of
need into a single measure should yield results which in aggregate
correspond to the actual level of public expenditure at the United
Kingdom level. The aim is that the overall level or relative need
in a country or region can be explained as the combination of
(a) the number of people with various types of need (such as in
the measures above) multiplied by (b) the United Kingdom average
amount of public expenditure per head devoted to meeting that
need at the moment.
105. In a sense, this is the precise opposite
of the kind of approach (which has been suggested to us by some)
that relative need should be measured by a single, simple proxy.
If such a proxy were to be used (the inverse of household income
per head seems the most suitable because it reflects the dampening
effects of social security payments), it would lack any basis
in how public expenditure is actually deployed to defend
it.
106. The task envisaged for the Commission
is to select indicators of the type illustrated above and to combine
them in the way suggested. It is a feature of this approach that
there can be choice in which, and how many, of the indicators
are used for the ultimate formula. All of them will be brought
into the analysis.
107. Within this overall approach, other issues
will need addressing. One which we suspect may be quite important
concerns capital expenditure and whether it should be treated
equivalently to current expenditure. While a case can certainly
be made to base current spending on current needs, capital may
need to move more slowly—or indeed be adjusted for a period
to reflect past over- or under-investment. Exactly how this might
fit into the overall framework would need to be determined.
ANNUAL INCREMENTS AND TRANSITION
108. Although we suggest that the baseline will
require investigation and re-ordering on a needs-basis every five
years, it will be for the Commission to determine changes made
to the block grant on an annual basis. Two features of the current
Formula should be retained for this annual up-rating. One is the
degree of predictability over the aggregate grant which the devolved
administrations currently enjoy. The other is the way that, by
relating increases in each devolved administration to that in
England, the Treasury is able to retain control over the aggregate
increase in public expenditure.
109. The Chief Secretary to the Treasury told
us that "there are big administrative and political risks
associated with fundamentally restructuring some of these arrangements
in a way which is contested. So given the complexities …
which I think would be involved in coming up with this formula,
I think it would be inevitable that the dimensions, the mechanics
of that formula, would be contested. I think the result of that
would be quite complicated change arrangements" (Q 1004).
110. We recognise the need for a carefully-handled
transition to implement the new arrangements. We anticipate a
transitional period of between three and five years, preferably
no more than seven, before the new arrangements are brought
wholly into effect. Smoothing mechanisms would need to be put
in place to manage the change from present levels of funding to
those that the new arrangements would supply. If the pattern
of grant per head related to need is indeed a long way removed
from the current pattern, then these smoothing mechanisms will
be a very important element of the new system. Since relative
need can be expected to continue to evolve in the future (not
least due to the continued divergence in population trends that
is currently expected), these mechanisms will be a permanent part
of the new system. It may be appropriate to manage the transition
to reflect the needs of the devolved administrations so that those
who are shown to need more funding should receive additional funds
more quickly than those who are shown to need less funding to
achieve their new level of block grant. An asymmetric answer may
be appropriate when applied to an asymmetric problem. Both
the length of the transition period before the new system is brought
wholly into effect and the pace at which the actual levels of
grant per head converge with the needs-based levels are issues
upon which the new Commission should advise the United Kingdom
Government.
Other matters
REVIEW
111. A system of the sort we recommend would
minimise the likelihood of any disputes between governments about
grants or related matters. However, if there were such a dispute,
we regard the JMC as the appropriate forum for its resolution.
STATUS OF THE NEW ARRANGEMENTS
112. We acknowledge that there are other detailed
administrative decisions which are for the new Commission to determine.
The new arrangements we propose will need to be embodied in
statute, at least in general outline. That legislation should
contain provisions to ensure that the quinquennial reviews indeed
take place.
52 See Chapter 3. Back
53
Cm 6348, paras 99, 100 and 222. Back
54
Cm 6890, para 71. Back
55
That is, top-down rather than the bottom-up very lengthy approach
used by HM Treasury in the 1979 Needs Assessment exercise. Back
56
It should be stressed that this is not just a statement about
the increment added to last year's grant (which is, under Barnett,
allocated on a uniform per head basis) but about the grant as
a whole, that is, the baseline amount inherited from last year
plus this year's increment. Back
57
Note that both these income measures include the offsetting effects
of the transfer payments made via Social Security and tax credits.
Back
58
A full description of the data used here, their sources and the
numerical values, are contained in Appendix 5. Back
59
One point to note is that the lower level of need on the dimension
of child poverty in Scotland is a very recent phenomena dating
only from the middle years of this decade. Back
60
A full description of the data used here, their sources and the
numerical values, are contained in Appendix 5. Back
61
Source for the 2009/10 formula:
http://www.isdscotland.org/isd/servlet/FileBuffer?namedFile=2009-10analysis-HB
Summary.xls&pContentDispositionType=attachment Back
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