The Barnett Formula - Select Committee on the Barnett Formula Contents


Examination of Witnesses (Questions 40 - 59)

WEDNESDAY 28 JANUARY 2009

Lord Barnett

  Q40  Lord Sewel: In effect at some stages, at some times, you had to deal with the type of problem that Lord Forsyth has indicated where, if you had a large public sector wage settlement, you had to go outside the formula or else you would decimate everything that was in the formula.

  Lord Barnett: Maybe Lord Forsyth as the Secretary of State for Scotland at that time went to the chief secretary and said he wanted more money. I am sure he did, as any good secretary of state would. Whether he got it or not is an entirely different matter and it has nothing to do with the formula.

  Q41  Lord Sewel: Although it starts off determining it, what happens in the light of reality is that you have negotiations round it when the shoe starts pinching?

  Lord Barnett: If the Secretary of State came to me after the allocation was made on the basis of the system that the Cabinet had accepted, I would very likely have told the Secretary of State what to do. There was no point in coming and discussing it with me. Indeed, lots of secretaries of state used to come and have discussions with me about more money. I usually gave them a gin and tonic and off they went. They did not get anything else.

  Q42  Baroness Hollis of Heigham: If you had envisaged that your formula might well have been in place three to five years down the road and had you been in a position still as chief secretary, would you then have expected that the formula would not have been robust enough to carry the sort of pressures we have been talking about? In other words, is the difficulty in our discussion simply that you thought you were doing and intended to do a one, maximum two, year devise and thereafter people might or might not develop from that, start again, replace it or whatever?

  Lord Barnett: That is precisely it. I never for one moment thought it would continue for very long. It did not seem to be done on a fair basis.

  Q43  Chairman: In the last answer you gave, you talked about the formula or the mechanism—whatever you like to call it—applying to increases or decreases. Is that increases or decreases in the block as well as other expenditure?

  Lord Barnett: Other expenditure would be based on needs or entitlement, benefits, unemployment benefits, child benefits. That would not be part of the formula. That would be quite separate, although it is included in the overall figures in this document.

  Q44  Chairman: Your mechanism clearly was only concerned with the block because at that stage you did not have this problem of up and down expenditure.

  Lord Barnett: Yes. It was quite separate from the expenditure that went in benefits.

  Q45  Lord Forsyth of Drumlean: Lord Sewel's point is a very important one about this idea of whether it determined or informed. Would you accept, albeit you saw the formula as a temporary thing and you have been very kind in suggesting that Lord Lang and I did our bit in arguing our corner, that the thing depends very much on the old pre-devolution system where you have a secretary of state in Cabinet who can say when the chief secretary is being difficult with the Chancellor and you need to sort this out, and you have the opportunity for a continuing dialogue? If you do not have that opportunity for a continuing dialogue, is it not a weaker system for funding the devolved administration?

  Lord Barnett: On the question of whether it is weaker or stronger, in some ways you have a better idea than me because you used it for longer than I did. I only used it for a year or two. Cabinet would have had an opportunity to say to you as secretary of state, "You should have more money or less money". You would presumably argue your corner in Cabinet, but under this system Cabinet looked at the total level of public expenditure and what was decided for the whole of the UK within it. Scotland, Wales and Northern Ireland got their share on a population basis, other than those on needs and entitlements.

  Q46  Baroness Hollis of Heigham: Had this formula still been in place some three years down the road under your supervision, had there been the example just quoted of the NHS and had you agreed that in all decency the outcome had to be an increased resource to Scotland, would you have gone back and expected to have adjusted your base line or would you have regarded that as continuing to be an area of negotiation which you would expect to crop up each and every year which might, each and every year, take up a larger and larger proportion of the total allocation going to Scotland?

  Lord Barnett: You have to understand that if you change the base line with regard to Scotland in the total level of public expenditure that has been agreed by Cabinet, then somebody else is going to get less. That is why it would be so difficult to get it through Cabinet, to change the base line figure.

  Q47  Lord Lawson of Blaby: There are two ways of looking at public expenditure. As I understand it, when the Labour Government first came in, they had a brick by brick approach, spending so much on this and so much on that. Then you had the total at the end of the day. Then times got a little more rigorous and you had to have instead the envelope approach, saying, "This is the envelope. Everything has to fit in the envelope." That was what I continued as Chancellor in the successive government. It is always the case, if you have the envelope approach, if you are going to give more for one, there is less for others. There is no way around that. This is not peculiar to the system of allocating funds to Scotland. It is a general feature of public expenditure control.

  Lord Barnett: I am not clear what you are trying to make me say.

  Lord Lawson of Blaby: Just say, "Yes".

  Lord Sewel: Or, "Very wise".

  Q48  Earl of Mar and Kellie: Can I bring you up to the operation of the Barnett Formula today and in particular I suppose in Scotland? All three of the devolved administrations have some other sources of revenue. They strike me as being council tax and business rates which have largely stayed the same. Also, there is the possibility of the Scottish variable rate of basic rate of income tax. Do you have any ideas as to why the Scottish variable rate has not been used?

  Lord Barnett: You would have to ask the present leader of the government in Scotland. It is not a matter for me and it is not a matter for this Committee, I would have thought with great respect, under the very tight terms of reference that were eventually agreed.

  Q49  Earl of Mar and Kellie: I might like to challenge you gently on that.

  Lord Barnett: Do not challenge it with me, please. It is a matter for the Committee.

  Q50  Earl of Mar and Kellie: We are still talking about a system which is basically a block grant system with possibilities of some small changes using the other means which were legislated for.

  Lord Barnett: Are you talking about taxation?

  Q51  Earl of Mar and Kellie: Yes.

  Lord Barnett: Taxation is specifically excluded under the terms of reference of this Committee.

  Q52  Lord Lawson of Blaby: Reading the summary that you gave us, Lord Chairman, of the terms of reference, we cannot consider whether greater tax raising power should be accorded or presumably whether less tax raising power should be granted but we can investigate how the current system operates.

  Lord Barnett: It is not for me to interpret the terms of reference. That is for the Committee. As I read it, it says, "These terms of reference are intended to exclude consideration of the overall system of funding the devolved administrations." The Committee may want to change those terms of reference. I can only say that is what they are now and that is what I agreed with the Liaison Committee in the setting up of this Committee.

  Q53  Lord Forsyth of Drumlean: I think Lord Mar and Kellie's question, which is a perfectly reasonable question, is nothing to do with taxation and how the Scottish Parliament might be funded or any of that. What he was getting at is, if you are just giving a population related share of the increase—we have examples like health and others—how do you deal with that gap? You can have the Secretary of State going along to see the Chancellor saying, "Houston, we have a problem" and doing a side deal outwith the formula. What Lord Mar and Kellie was suggesting is it is the tartan tax, the variable tax mechanism. Did you envisage something of that kind as being the least mechanism which would fill the gap? It is equivalent to the position of local government which gets revenue on a needs assessment basis, but they have the ability to levy a local rate or community charge or whatever it is in order to fill that gap. Was that in your mind?

  Lord Barnett: No, it was not. I was talking simply about the allocation of public expenditure, nothing else.

  Q54  Lord Forsyth of Drumlean: Lord Mar and Kellie's question is about this problem even with a needs based system. Is there a role for some kind of —?

  Lord Barnett: Even with the existing system, it is still open to a secretary of state, as you would have done, to go to the Chief Secretary or the Chancellor and say, "I want more money."

  Baroness Hollis of Heigham: Conventionally in other areas of finance—and this might have included House authorities that have funding raising powers and certainly local authorities—it is a double calculation. It is needs which include not just population obviously but sparsity, density and deprivation as the classic ones, and then the capacity of that community to meet its own needs by virtue of its own growth. You test that by proxies like have they increased school dinners, what is the taxable information we have going into the Treasury about the ability to pay and so forth; and therefore, the degree to which it is appropriate for other people from other areas to make good that deficit, that gap, if any or indeed whether the surplus gets to be redistributed. It is quite hard in some ways to envisage a needs based formula that I think we all feel would be more appropriate as a longer term basis for finance, I would guess, certainly from your remarks which I would share. On the other hand, we need to find the capacity of that community, territory or whatever to meet its own needs by taxing its own local people. I suppose that is the wider question. Is it appropriate to look at needs without also looking at resources? Your response has been that you do resources by getting the Secretary of State to argue for more money, but there is also the question of whether it would be appropriate, given that perception of how you approach public finance, to regard the capacity of the local community to raise money as being part of the consideration.

  Q55  Chairman: We are straying a little outside the terms of reference.

  Lord Barnett: Could I try to answer the question? The resources element in the whole of the devolution question is quite separate from this allocation of public expenditure. The resources element is something that was given when the assemblies were set up in Scotland in particular. That is quite separate from whether public expenditure allocation should be done under this system or any other system. That is now what this Committee, I assume, is going to look at. It is not for me to say how the Committee proceeds in this way. The resources element is not relevant.

  Q56  Lord Sewel: We have to focus on the fact that what we are looking at is really how you apply a formula based allocation in the context of devolved government. Prior to devolution, you could get by if things got difficult because the Secretary of State would come knocking at your door and say, "We have trouble. We need a bit of a formula bypass here" and they would get it or they would not get it. That type of adjustment is virtually impossible under a devolved system so the formula becomes absolutely rigid. Is that an appropriate way of funding devolved governments?

  Lord Barnett: That is a big, big question. It is not relevant, it seems to me, to the whole question of whether this method of allocating public expenditure is the right one. You may want to change the method of allocation.

  Q57  Lord Trimble: In talking about alternatives so far, you have used the terms "fair" and "need". Do you regard a fair system as being a needs based system?

  Lord Barnett: I would have thought it would be but of course it would need to be a flexible one. It need not be fixed in stone, but you would need to have a leading economist of some kind to devise or define how much of this total is including higher levels of unemployment, lower levels of unemployment, more children or whatever. When that is decided, then you would have to look at what would be a fair way of a needs basis. For example, it may well be in Scotland that, because of the large areas with small populations, you need to allocate more expenditure. It may be fairer that they get it. I am not saying that could not be the case.

  Q58  Lord Trimble: This is where we have to work out what strategy to use. If you start to look at local, particular circumstances, does that not draw you on to doing a detailed examination of virtually every service to see what is the need with regard to education, how many children are there of particular ages, what expenditure or increased cost of delivering service will there be because of sparse populations, doing that the whole way in detail across the board; or could it be done by using some limited factors which would be proxies for need? For example, looking at GDP per head of the population in that particular region? Which route would you think of going down?

  Lord Barnett: There could be a whole variety of ways of defining "need" for these purposes. I would have thought one element would need to be income per head for example in the various parts of the UK. That may mean that some parts like Scotland or Wales deserve to have a greater share of public expenditure. There would be some special cases of the kind Lord Forsyth mentioned that may need to be taken into account.

  Q59  Lord Trimble: By saying "income per head", you are using something that I would think of as being a proxy, something that you are using as a substitute for indicating need, simply, and then you are adding to that possible special circumstances. Are you shying away from doing a detailed examination of every service in the way that this needs assessment published in 1979 does? I see a disadvantage of going into a detailed examination because that might open up the block grant for detailed Treasury control.

  Lord Barnett: The method of looking at it may well want to exclude going into that kind of detail. That would be for you, Lord Chairman, not for me. If you are going to look at this to try and see whether there is an alternative to the existing system, I do not see how you can avoid looking at various areas. The police, for example. In the past, Northern Ireland got more money for police, for obvious reasons, which would be included in these figures, which were quite separate from the formula. There may be other areas in different devolved areas of the UK deserving special needs and I do not see how you can avoid looking at that.


 
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