The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 80 - 99)


Professor Iain McLean

  Q80  Chairman: Perhaps I can sum up by looking at the development of the formula as it seems to have developed in the 1970s. What do you see as the purpose of the Barnett Formula? What do you think the purpose of the Barnett Formula was when it was first introduced and has the purpose changed over time?

  Professor McLean: My understanding from talking to civil servants involved in the early years and from listening to and reading the evidence of Lord Barnett himself, notably to the Treasury Committee some years ago, is that there were two purposes at the beginning: the first was to get precisely a single block of expenditure so that the Chief Secretary would not be arguing with the three territorial departments programme by programme; and the second was the convergence purpose of Barnett. As members likely know, at the same time as developing what we now know as the Barnett Formula the Treasury was working with the territorial departments on a needs assessment. I say "with the territorial departments" rather tentatively because it is now well established that some of the territorial departments were more resistant to this than others. That was intended to assess the relative need for expenditure on the services that would have been devolved under the Scotland and Wales Acts 1978 which, as members know, were never brought into operation. The Treasury calculations from this needs assessment were that Scotland and Northern Ireland were receiving relatively more expenditure than their relative need seemed to indicate and Wales was not; Wales was getting less. However, the second purpose of Barnett, as I understand it, was to bring about convergence until such time as the expenditure in each of the three territories was brought down to the level of their relative needs, whereupon, as Lord Barnett told the Commons Treasury Committee some years ago, he envisaged that a needs formula would replace it; instead, as members know, that has never happened and Barnett is still in place.

  Q81  Lord Lawson of Blaby: What evidence do you have that convergence was the purpose? So far as I am aware, and I was only responsible for the Treasury for six and a half years, convergence was never a purpose and when Lord Barnett gave evidence to us he said that in his opinion that was not the purpose. What evidence do you have to contradict all that?

  Professor McLean: I have two sources of evidence: one is the mathematics of the formula which bring about convergence and as the formula was devised in the Treasury, and the Treasury is populated by very clever people, I am sure that it was not an accident that its mathematical effect is to bring about convergence.

  Q82  Chairman: It was to Lord Barnett. That is what he told us anyway. Clever people in the Treasury may have thought it was going to happen but I do not think he did.

  Professor McLean: I can only repeat that it is the mathematical effect. The second source for my evidence is talking to successive officials in the devolved countries and regions' team and other public spending teams at the Treasury who have put on record that this was the purpose. I say two pieces of evidence but I should say a third, which is that the records of the needs assessment 1979 were released to me under a Freedom of Information request in 2005 and further records have been since put into the public domain of discussions between the Treasury and the territorial departments in 1984. These are my three pieces of evidence.

  Q83  Baroness Hollis of Heigham: Are you confident that you are not aligning or running together what appears from Lord Barnett two completely parallel but unconnected pieces work, which is the work going into the needs assessment which you referred to which you had released and was available, in which there clearly was some consideration of needs resources and so on, and what went into Lord Barnett's Formula which was entirely temporary? As far as he was concerned he told us it was entirely and simply based on population without even any obvious way of adjusting for population pluses and minuses because he did not expect it to last for 12 months. As far as he was concerned he seemed to suggest to the Committee that convergence, if it happened, was an abstract appliquéd onto it by academics looking for elegance which was not there or intended. I wonder whether the evidence you are getting from your civil servants, from the devolved territories and so on, are related to the other piece of work which was the needs assessment which came out in December 1979 as opposed to the Barnett Formula itself. Again, Lord Barnett seemed to indicate to us very clearly that he knew virtually nothing about that piece of work which was going on and that the one, as far as he was concerned, did not inform the other.

  Professor McLean: You are right that the needs assessment was an entirely separate exercise although done at the Treasury end by, as I understand, the same people in the Treasury, but the needs assessment gave a static picture of the relative needs as they were judged to stand at the time of the 1978 Acts. The convergence properties of the formula are dynamic. If you start from a constant base line and you add a population proportion to that base line each year then its effects are convergent. This is not the first time I have been put on the spot of trying to give a full explanation which would involve a white board and showing you the differential equation system which lies at the root of it. I would imagine that is not what you want but I could submit it in written evidence subsequently.

  Q84  Lord Lang of Monkton: I am surprised that Professor McLean has not been put on the spot before and memorised a simple answer. I do not profess to know precisely how convergence works but when I was at the Scottish Office the CFO, perceiving my mathematical shortcomings, made it easy for me. What she wanted pointed out was that Goschen had applied a per capita percentage increase to the block each year at the same percentage level as the increase in England but as the Scottish block was larger than the English expenditure base line divergence took place. The Barnett Formula allegedly, although I have had no confirmation of this from any other source other than the CFO of the Scottish Office at the time, changed from a percentage increase to a pounds and pence increase per head. In other words, if England got a 4 per cent increase, Scotland would get the cash product of that 4 per cent increase which, because of the higher Scottish base line, would produce a lower percentage increase figure thus creating vary gradual convergence.

  Professor McLean: That is exactly correct and is clearer than what I have just said so thank you very much.

  Q85  Chairman: There is one problem about your theory, if I may call it that, that convergence was at the heart of the Barnett Formula when people brought it up and that is by the time the report on needs was finished he had ceased to be in the government because the government had changed. We find no evidence at all to show that convergence was in Lord Barnett's mind nor anybody else's mind at the time it was done.

  Professor McLean: Firstly, as to the name members are probably aware it was an entirely unofficial nickname conferred by David Heald, the public finance economist, after a Commons hearing in 1980. Secondly, you are quite right that Lord Barnett's accounts in the early days and going up to when he gave evidence to the Commons Committee some years ago concentrated on the first of the two rationales for Barnett. As he has frequently said, it made his life as Chief Secretary easier to be dealing with a single block rather than programme by programme amounts, but the convergence property is exactly the one which Lord Lang has just expressed more clearly than I have and that was inbuilt from the start.

  Q86  Lord Lawson of Blaby: May I put it to you that the convergence property which you think the Treasury officials put in from the start is only of significance if the formula is going to be adhered to over a considerable number of years and that was not the intention at the time. Therefore, since it was not intended to last for a long period of time convergence was not a purpose of the formula.

  Professor McLean: My understanding from Treasury officials and from the two lots of FOI releases of 1979 and 1984 was that convergence was indeed in the minds of Treasury officials from the start. I think that was also perceived by the officials of the devolved administration, certainly by those in Scotland. I have talked to civil servants in Northern Ireland also who have given me a similar story. They understood it as being intended from the outset as a convergent formula. I do not know what Lord Barnett said to you at the hearing last week but I have seen him say in other places that he understood that in so far as it was a convergent formula it would run until such time as it would be replaced by a needs assessment but of course he was out of government by the time that was said.

  Q87  Chairman: Can I read to you, if I may, the last question that he answered when he came to us last week. I put to him "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. Is that fair?" and he said "That is fair." It seems to me fairly clear on the evidence we have seen that convergence was not part of the exercise.

  Professor McLean: I do not follow the last bit because it seems to me that what he has said to you implies that he understands that it was intended to converge until such time as a needs formula replaced it.

  Q88  Baroness Hollis of Heigham: It is exactly the opposite. There may have been an accidental and, in the Treasury's eyes, fortuitously happy consequence if this formula were to stay in place over time but it was never intended. It seems to me we are running together consequences and intentions here.

  Professor McLean: On that matter I am with Lord Lang's CFO plus my interviews with Treasury officials. I believe it was entirely intended by Treasury officials to have a convergent effect.

  Lord Lang of Monkton: Even as a short-term deal it had the merit of having a convergent component because it enabled the Chief Secretary, under considerable pressure to cut expenditure, to claim to Cabinet colleagues that he had a formula in place that would gradually create convergence and it gave the Secretary of State for Scotland, Bruce Millan, the opportunity to say that he had protected for the long term expenditure levels in Scotland.

  Chairman: I do not think we will wring any more out of this particular dishcloth.

  Q89  Lord Sewel: Can we have a look at formula by-pass and its effect on the period up to devolution. How regular was formula by-pass? What was the cumulative effect of formula by-pass on the distribution of expenditure? Has the whole concept and idea of formula by-pass changed or indeed disappeared since the devolved settlements came into place?

  Professor McLean: The easiest part of that question to answer is the last because the answer is one word: yes, as I understand it. The details of formula by-pass are very difficult and, if I may say so, somewhat embarrassing for me to attempt to assess from outside with at least three or four former players in the system on your side of the table. I understand that it went in several phases. The first phase ran until, I believe, financial year 1982-83. In that first period the public expenditure was planned on volume terms year to year and, therefore, there was in effect no convergence and the issue of formula by-pass did not arise. From then until 1992 it ran on a cash basis, as it has done ever since, and therefore the potential for convergence was there. It is said in the press, and I am not in a position to confirm or deny it, that there was in the later Conservative years, or the years up to 1992 at any rate, formula by-pass sometimes for pay settlements but I am repeating hearsay when I say that because I do not know. The next phase began in 1992 when Chief Secretary Portillo re-based the population bases which had drifted away in a way which was relatively favourable especially to Scotland, and it may have been relatively unfavourable to Northern Ireland whose relative population was increasing. My impression is that there has been considerably less formula by-pass since 1992 than there may have been before then. I can only say that to the academic community this is hearsay as we have no inside information on this.

  Q90  Lord Trimble: When you say that there was no formula by-pass since devolution I defer to your knowledge of the position in Scotland and Wales, but I had the very distinct impression in my time there was formula by-pass.

  Professor McLean: You are right and I cut my story off a little bit too early. Formula by-pass in more recent years has been in relation to EU programmes including the peace programme in Northern Ireland. My impression is since 1997 there have been relatively modest amounts of formula by-pass in Northern Ireland, modest in relation to public expenditure. There has been modest formula by-pass in Wales because the politics of that were the attempt by First Minister Alun Michael not to concede that which led to his deposition by the National Assembly and therefore it was necessary to concede, from the Treasury's point of view, some formula by-pass in Wales. I believe there has been no formula by-pass in Scotland since 1997 because the Treasury, I believe, has held the line that any EU public expenditure which comes under Objective 1 is to be treated in Scotland as being within the block. That is my understanding although I would hope that you will take evidence from the Treasury on this point.

  Q91  Lord Trimble: My impression on the matter is that with regard to the European programmes only the peace programme was genuinely additional in Northern Ireland and that was at the insistence of the European Union itself. Quite apart from that I think there was formula by-pass in some of the Comprehensive Spending Reviews although I cannot give you hard evidence on that.

  Professor McLean: You, Lord Trimble, are better placed than I am to say. I am not aware of any formula by-pass since the present CSR regime began.

  Q92  Lord Sewel: Let us assume that formula by-pass did take place in the period up to devolution and when it was used it was used predominantly to fund public sector wage settlements, nurses and schoolteachers, because if you did not then it had a disproportionate impact on the rest of Scottish expenditure. Post-devolution, as you say, it has not occurred. How do you think the devolved governments and the UK government would respond to the sorts of financial and political situations that caused formula by-pass in the first place?

  Professor McLean: I think the response of the UK government, or at any rate of UK Treasury civil servants, is easy to say. They would say, "You have a block, you get on with it and it is your problem". The response of devolved administration ministers now I suppose would be if they had a complaint they would be invited to take it to the Joint Ministerial Committee. This mechanism which was set up at devolution and has been barely been used. It was, I think, never used during the period in which Wales and Scotland had labour-led governments and for a lot of the same period Northern Ireland was under direct rule. We can expect that we will see more of it in the next few years.

  Q93  Baroness Hollis of Heigham: What I want to follow up is in your very interesting paper when you explain despite this why convergence did not occur. You gave a couple of reasons why you felt that convergence despite what you regard as the intent behind the original Barnett Formula nonetheless did not occur in Scotland. I was wondering whether you could enlarge on that.

  Professor McLean: The first reason is the one that you have just mentioned in passing, which is that social security is outside the Barnett block entirely and until recently agriculture was. Therefore, as these are entitlement programmes, the spending on them is a straightforward function of the relative proportions of claimants in the four territories. The second reason I think is that the population re-basing introduced by Chief Secretary Portillo operates in arrears. If the relative population of Scotland is continuously declining then Scotland does well until the next re-basing at which point there is a step downward change which is painfully noticed in Scotland. If the population proportions continue to diverge, so that Scotland's relative and sometimes absolute population is declining, the effect is that expenditure per head does not converge as fast as the formula would have it do.

  Q94  Lord Lawson of Blaby: May I ask a supplementary to that? What you have said about the failure to have a population adjustment when the trends of population in England and Scotland were in different directions is obviously of central importance. Was there not a greater mischief or a greater inequity than you have implied in the sense that although the population was adjusted in 1992 after more than ten years of the Barnett Formula there was no retrospective adjustment? In other words, if the expenditure per head had been increasing relatively in Scotland during that period because of the failure of the population adjustment and all that happened with the population adjustment, leaving aside the point you make correctly that adjustments are belated and there is always this catch up, the new base line in 1992 was inevitably a better base line from Scotland's point of view than the one in 1979?

  Professor McLean: I am almost sure that is correct. People outside government are not in a position to confirm that because the relevant papers are not yet publicly available but I have a strong hunch that that is correct.

  Q95  Baroness Hollis of Heigham: Could you help me on your first point, the growth in social security expenditure, of which you say the expenditure in Scotland is higher has served to protect Scotland from any effect of convergence by going from percentage to cash? Actually I do not think I really understand that because social security is cash but, secondly, all of the stats I have seen on what is happening to the pattern of social security expenditure, given that pension expenditure accounts for 40 per cent if not 50 per cent of social security expenditure and given the difference in mortality rates in Scotland, this seems to suggest to me that actually Scottish expenditure on social security while possibly increasing should not have been increasing at the same rate certainly as in England. I do not actually understand how this works. It may be that if I saw your stats I could have a go at them but from reading it again it actually puzzles me because it should have, at best, a neutral effect and possibly even, given what we know has been happening to social security expenditure in Scotland, added to the convergence effect not the other way around.

  Professor McLean: I am afraid our stats do not help on this matter because throughout the IPPR report, which I think was the one you were looking at, we have excluded social security and agriculture for the reason I gave in an earlier answer. We do not have a table of social protection expenditure per head in the four countries or the 12 territories of the United Kingdom, however the Treasury does produce this every year in PESA. If it was helpful I could supply a note to the Committee attempting to answer the question about the per head trends in social protection expenditure.

  Q96  Baroness Hollis of Heigham: The only reason I am pressing it is a large part of your argument as to why convergence was built into the formula has not happened is because of the way the social security stats have gone and you have excluded them from your workings and I find that counterintuitive or against what I would assume to be the case.

  Professor McLean: We simply have no information from outside government. The only information that we have is the information which is provided in the PESA, about which I am willing to speak if members wish me to. I am afraid I cannot improve on my previous answer.

  Q97  Chairman: If you could let us have a note on that.

  Professor McLean: I will do my best.

  Q98  Lord Moser: I have another supplementary on convergence. I have been trying to understand not so much what the original intentions were, you have discussed that with my colleagues, to what extent convergence was the intention or was not the intention, what I am interested in is are you surprised to what extent convergence has or has not worked out? To put it statistically, could you answer an examination question, not now, on just what was expected and what has actually happened? I still do not understand that.

  Professor McLean: I hope that I never have to answer an examination question on that subject because the basic information which will be required to give a statistically acceptable answer to that question is missing, and that basic information is planned expenditure in England on the programmes which form the base line.

  Q99  Lord Moser: When you say it is missing, which is what all the papers say, it is not actually missing but it is not being made available, is that not right? Surely the data exists on what was spent by whom for whom?

  Professor McLean: The data is collected retrospectively in the PESA exercise. The planning data is considerably harder to come by for people outside government. The only public documents that people like me have are the annual PESA numbers and the statement of funding policy which comes out with each spending review. I am sorry, that made me forget the first part of your question if you would kindly ask it again.

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