The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 100 - 119)


Professor Iain McLean

  Q100  Lord Moser: We do need to understand not just what the intelligence was but was has actually happened. Some papers say there has been much less convergence than was expected; some say it has worked out roughly what was expected. One answer is we do not really know because we do not have the data and then we do not have the data publicly but I am sure the data is available.

  Professor McLean: On the data that is publicly available I would refer members who have it to figure 4.1 on page 16 of my IPPR pamphlet. That seems to show that on the basis that we are using, which is public expenditure excluding social protection and agriculture, and done with the retrospective out-turn data supplied by PESA, that in the period since financial year 2002 to 2003 there has been considerable convergence in Northern Ireland, some convergence in Wales (which is green for those looking at the diagram, Northern Ireland is the orange) and no trend in Scotland. If it helps, I could supply colour versions. I hope the clerks have a colour version. Northern Ireland is the descending line marked with diagonal crosses; Scotland is the up and down line marked with squares; and Wales is the gently descending line marked with triangles.

  Q101  Lord Lawson of Blaby: You very modestly said you could not answer Lord Moser's question but it seems to me to a considerable extent you answered it earlier this afternoon. Convergence is convergence of spending per head of population. As you pointed out, this does not apply to Wales and Northern Ireland and that is why there has not been this difference but the population trends in Scotland and England have been very different. Population adjustment has been belated and always lagging, therefore it would be quite astonishing if there were convergence, in fact almost impossible.

  Professor McLean: That could well be correct. I am at a loss because I do not have continuous population figures which one would need to have in order to test that hypothesis but I agree it is a very plausible hypothesis.

  Q102  Lord Lang of Monkton: We have to move on to the alternative to the existing formula because we can talk about convergence all night. It was refreshing, if I may say so, to read an academic's paper that not only covered the issues but actually expressed views, sometimes sweeping and strongly expressed, and we would like to explore that with you. Before we go on to what the alternatives that you would favour for the existing formula might be, and that will no doubt emerge, I would like to ask you about your criteria you set down: equity, efficiency, accountability and procedural fairness. First of all, that seems to me to strike a very rigid formulaic approach which may be damaging to the ultimate outcome and difficult to sustain as it has to be regularly renewed. Secondly, they are rather subjective criteria and how would you define them, particularly equity and fairness?

  Professor McLean: We did not intend equity and fairness to be two different things; we intended them to be synonyms. I think the best equity formula of which I am aware in this area is that used in Australia by the Commonwealth Grants Commission which I have quoted if not in the pamphlet then certainly in the book that I mentioned at the outset. I do not have their exact words on the tip of my tongue but it is to the effect that a similarly positioned citizen living in any of the States with an averagely efficient State government should have access to the same level of public services. That would be the Australian version of an equity criterion or a fairness criterion. Back at home both the NHS and the local government formula as used by what is now the DCLG and also by the Health Department to assign spending to units within England, local authorities and health trusts are intended to achieve something of that nature although I am not aware of an official statement of the equity formula. I think all ideas of equity and fairness are based on the idea of treating similarly situated citizens equally irrespective of the territory within the country that they live in.

  Q103  Lord Lang of Monkton: Would the basis of that appraisal of equity and fairness be a needs-based assessment?

  Professor McLean: It could be. It could be needs based or resources based or both needs and resources based. The first option would be to have some assessment of relative need, and I think since the 1970s there have been attempts to do that in the NHS within England, and then to fund for that relative need and so deliver more NHS funds per head to areas of poor health than to areas of good health. That would be a needs element. A resources element, which applies to a limited extent in the UK but much more in countries such as Canada, is to look at the tax base and tax-raising capacity of each sub-national government and to accept that some areas have a more robust tax base than others and to compensate those that have a weak tax base. A needs and resources formula, which is what the Australians use, is to do both of those.

  Q104  Chairman: Can I read to you the Australian Grants Commission criteria on page 31 of your pamphlet where you quoted "Its definition of equity is that `each State should be given the capacity to provide the average standard of State-type public services assuming it does so at an average level of operational efficiency and makes an average effort to raise revenue from its own sources'."

  Professor McLean: I should have put a post-it on that point before I came into the room.

  Q105  Lord Lang of Monkton: Can I follow up the needs-based element first? How would you maintain that? Just as population ought to be counted regularly and readjusted into any formula presumably the kind of assessment that you are talking about would need to be regularly updated. How could that be done if it became really detailed or do you favour some kind of proxy?

  Professor McLean: I probably favour some sort of proxy but it could be done, because it is done in Australia, at a fairly detailed level. The Australian operation is not a huge bureau. I visited it last July and it is a modest two-storey office block in Canberra. I believe the Grants Commission has a professional staff of about 50 in the Canberra office and they do not find it enormously burdensome to do a needs assessment. I think the dangers of an excessively fine attempt at needs assessment are shown by the English local government formula, which attempts to do needs at a very fine level and is lobbied by every interest in English local government such that whichever interest, in my cynical view, has the most effective lobby gets the most spending per head. In my view, as I said in the book and I have not changed my view, the English local government formula is a failed attempt at equity of the sort that I am describing. I would prefer a coarser version such as the Australian or an even coarser version where the presumption would be that a grant to each territory would be some sort of function of, for instance, relative GDP per head, or GVA per head, in that territory or, as other researchers have suggested, a function of social security expenditure per head in those territories.

  Q106  Baroness Hollis of Heigham: My difficulty is I have always assumed that a fair distribution of public monies was to make up the shortfall for those who cannot reasonably meet their needs within their own resources given certain assumptions about average expenditure and so on and therefore you need to bring in sparsity, density GVA per head, as you just suggested, which will not actually do it seems to me. What you cannot therefore do is have only one half of that equation which is just needs. It has to be matched by a capacity of a territory or even a region to meet its own needs within its own resources according to its wealth per head. Is this not going to be very difficult to establish any concept of equity, if you accept that, if all you can rely on is a distribution of central funding grant when there is no local capacity to raise the revenue to meet local resources?

  Professor McLean: Yes, it is likely to be very difficult. It is not true that there is no local capacity.

  Q107  Baroness Hollis of Heigham: It is local authorities obviously.

  Professor McLean: In the case of distribution to local authorities there is local capacity in the shape of council tax and there used to be local capacity in the shape of business rates. If you wanted a more responsive needs-based system to be applied in England I believe it would be a good idea to re-localise business rates, although that is not the subject of this Committee and not what I am here to talk about. The devolved administrations have in effect the same tax base: council tax and business rates. Scotland only has the power to vary the standard rate of income tax by 3p in the pound up and down. I agree with you that these are extremely limited tax bases in proportion to the amount which is spent by the three territorial governments.

  Q108  Baroness Hollis of Heigham: You accept, therefore, that you cannot have equity simply and solely on a needs-based formula because it cannot take account thereby of resource capacity.

  Professor McLean: I agree with that.

  Q109  Chairman: Can you produce a more equitable system, not a totally equitable one but a more equitable one?

  Professor McLean: I would, as I have said a number of times in print, try to bring the UK as close as possible to the Australian model which seems to me to be the best one out there of a more equitable system.

  Q110  Lord Lawson of Blaby: Why, in your opinion, has the Scottish ability to change, albeit modestly, the level of income tax never been used?

  Professor McLean: In my opinion it has never been used because the Scottish government has never had to. It has found that funding under the block and formula arrangement has been sufficiently generous for it to spend what it has chosen to spend. As members will be well aware, there are some areas where policy has diverged, where the Scottish government is spending more generously on some provisions than is the UK government in relation to England. They have not used the tax power because they have not needed to and politicians faced with re-election who do not need to tax, in my experience, do not tax.

  Q111  Lord Lawson of Blaby: There is a perceived inequity, certainly this is why Lord Barnett has been agitating for some time for a change, that Scotland, in terms of expenditure per head, has been treated far too generously relative to England, indeed relative to the rest of the United Kingdom, and ideally he seeks a change to that. How much of that mischief, if it is a mischief, or that inequity, if it is an inequity, do you think would be remedied by having a clean-up of the base line in terms of spending per head of population and then use the Barnett Formula and the conventions that have developed alongside the Barnett Formula for by-pass from time to time as the annual adjustment for uplift, or it could be down-lift in some cases?

  Professor McLean: I think that would likely achieve what one might want, however it is much easier to say "Clean up the base line" than to do it since I believe it would be impossible to clean up the base line without a comprehensive needs assessment. I know simply as a contemporary historian, but some people around the table will have more intimate knowledge than I do, that the needs assessment of 1979 was quite bloody, that the unilateral needs assessment conducted by HM Treasury in 1984 was also quite bloody because documents relating to it have recently been released, and I would foresee that any needs assessment of the sort Lord Lawson has just mentioned which would be required to clean up the base line would be very bloody indeed because what is a need is what philosophers call an essentially contested concept. Therefore, I think one would need new institutions which were not part of the UK government and not part of any of the devolved administrations in order to, as Lord Lawson put it, clean up the base line.

  Q112  Lord Lawson of Blaby: Clearly we are getting to the heart of this. The problem is a very simple one and the solution is not all that difficult but the politics are bloody. That is in effect what you are saying and I would accept that. In the circumstances we are now thinking of in terms of if it is considered desirable to achieve this, however bloody it may be, do you feel that if you have a rough and ready assessment of need—I think this is what you are saying but I would like to get your clarification—this would be like an inverse GDP or social security spending per head, or whatever, and this would be somewhat less bloody and more practical than having a detailed needs assessment or do you think actually worse because people would feel since it was not a detailed needs assessment it had no real justification?

  Professor McLean: The way I put it in my book was that either one of these admittedly rough and ready formulae might have the effect of bringing people to the table, that territory which was aggrieved by, as it might be, a Grants Commission or a Chief Secretary saying "In the next period your grant will be an inverse function of your GVA per head unless you can come up with a better idea" this would have the effect of persuading people to get into a serious discussion which I would imagine would involve the territorial administrations, the UK government and, as I said in my last answer, it would have to have some sort of neutral referee as to what the relative needs of the territories were.

  Q113  Lord Lawson of Blaby: Finally on this question, have you, in the great amount of work you have done, spelt out and shown what precisely would be the practical consequences of moving from the existing system with a corrupt base line to a system with a cleaned-up base line? What would that actually mean on the ground? Have you done that? Secondly, how long a transition period would you recommend from getting to the present state of affairs to the state of affairs which you would like to see?

  Professor McLean: The first exercise is very hard to do from outside government for the reasons that I gave earlier and I will not repeat myself. If one looked at the PESA numbers and the relative GVA numbers one might conclude that unless Scotland in particular can come up with some arguments which convince the neutral ring holder that its relative needs are indeed corresponding to its relative public spending per head, there would need to be a fairly long transition period. I am not in a position to say because I do not have access to the data but perhaps five or ten years.

  Q114  Earl of Mar and Kellie: Clearly expenditure can be allocated according to need, efficiency or effectiveness. Am I right to think this is going to produce three separate answers and which would you regard as being the best?

  Professor McLean: Again, taking those questions in reverse order, I think "best" is essentially a value judgment, a political judgment, and it has to be made by elected politicians and is not really for academics to say. Efficiency and effectiveness it is correct do, in some senses, pull in different directions to need. For instance, you could take as an example expenditure on supporting hi-tech industry. If a government decides to do that, it would make sense to spend the money where it was thought that it would create the most added value. That might in practice turn out to be in Cambridge rather than in Middlesborough because of the location of the people who would be best equipped to do the work. You could make a similar claim for many other programmes of public expenditure. Effectiveness and need would, in those senses, diverge. By efficiency we mean efficiency at various levels. We mean tax efficiency in a narrow interpretation so that if sub-national governments have a certain power to tax they do not get involved in mutually destructive tax competition with one another for instance. We also mean it in a broader sense, and this is moving away from need to an idea of incentive compatible public finance, that sub-national governments should have an incentive to grow the economy on their patch in order to give themselves a more robust tax base. You were right that is in some tension with an entirely needs-based system.

  Q115  Earl of Mar and Kellie: Do you think that this exercise should be primarily carried out by the devolved administrations or by the Treasury?

  Professor McLean: The exercise of "watering", if that is the verb, their tax base is surely for the devolved administrations. They are the right people to see what they can grow on their patches in order to improve their tax base given the present taxation powers they have. I do not think it is a Treasury job because, given we have devolution, it is not for the Treasury to tell the Scots, the Welsh or the Northern Irish how they should grow their tax base. It could be for a neutral ring holder but essentially I would say it is for the devolved administrations.

  Q116  Baroness Hollis of Heigham: Are you really saying that it is not a matter of concern to the Treasury whether a devolved administration may be raising taxes which the Treasury might think might trespass on the taxable basis of the UK as a whole?

  Professor McLean: No, I was not saying that. My empirical experience is that the Treasury concern has been the opposite, namely that it has believed that the devolved administrations have not been making enough tax effort. I do not know whether Lord Trimble is in a position to confirm it but I know that for quite a number of years the Treasury was concerned that Northern Ireland administrations were not changing the domestic rates' burden on Northern Ireland households and Treasury officials thought that the Northern Ireland government could do more in that direction.

  Lord Trimble: They did not just think it; they expressed it vigorously.

  Q117  Lord Rowe-Beddoe: Assuming, from the content of this afternoon, that there will be a change, when who knows, you are on record as saying that you see the only alternative is a needs-based allocation formula. Forget how bloody that might be or not, as the case may be, maybe we have all got a little wiser in the intervening two decades. First of all, is that still your position or is there an alternative or a combination? If we seriously consider replacing this formula what can we be looking at?

  Professor McLean: It is difficult to give a comprehensive answer to that question and stay within the terms of reference of this Committee because a comprehensive answer would have to reflect the degree of devolution which each of the three territories had and also whether England or, as it might be, the nine standard regions of England had some form of sub-national government. It is quite predictable that there will be pressures, perhaps to a different degree, in each of the three territories for more fiscal autonomy. If that happens then any statement that the only possible way to do it is a needs-based one is no longer correct. If I said that, I must have said it in the context of the arrangements that we have at present.

  Q118  Lord Rowe-Beddoe: Why do we not stay with the political picture as we have it and ignore the fact we have nine English regions. We have three devolved administrations, they are what they, and one has tax raising power as it is. We are confronted with a situation which we have to actually try to see as it is today. There is one thing I wonder if you have a comment on. I have heard about resources, and you are talking about the local tax take, but what about the Treasury tax? Has anybody found out exactly what is the Treasury take from Scotland, what is the Treasury take for Northern Ireland and how does that relate to the present funding arrangements?

  Professor McLean: The Treasury itself does not break down its tax receipts by territory but the Scottish government does, in relation to Scotland, in its annual publication GERS, Government Expenditure and Revenue in Scotland. Neither the Welsh nor the Northern Irish governments have yet done that. The GERS estimates are subject to considerable scope for argument because it is very difficult in the case of some taxes to determine where the tax take comes from, most obviously in the case of corporation tax. I think a more detailed answer on this would have to come from the civil servants who produce GERS but I would say that their publication is National Statistics and therefore it has to meet the required standards. On the expenditure side it interlocks with PESA and on the revenue side, which you asked about, the numbers interlock with those in the budget red book in the budget statement of the yield to each tax. A more detailed answer would have to come from one of the officials who are in this than from an outside academic.

  Q119  Baroness Hollis of Heigham: Could I press you on that? I am trying to think back to the appendices and my memory fails me. The Layfield Report on local income tax had to do detailed work as to what this would raise by obviously much smaller units which could then be subsequently aggregated by anybody for these purposes in order to see the disparity in the need for any equalisation grants and so on. That would be five years, or perhaps eight years, out of date but nonetheless those stats were there.

  Professor McLean: If you mean Layfield, that was much longer than eight years ago.

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