Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 4 FEBRUARY 2009
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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