The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 120 - 134)


Professor Iain McLean

  Q120  Baroness Hollis of Heigham: NIT was based on an income tax as opposed to a property base. The whole of the Layfield Report was what happens if you substitute local income tax for rates.

  Professor McLean: Do you mean Lyons? Again this is a question which is rather for the Treasury than for me. My understanding is that the Treasury certainly does calculations of what the yield of the Scottish variable rate would be. It has done some preparatory work, because the recent Lyons Committee on English local government considered the matter, on what would be involved in setting a local income tax rate for each of some rather large number of local authorities. I believe the Treasury view is that is an administrative nightmare but that is for the Treasury to say.

  Q121  Lord Rowe-Beddoe: We have looked at needs, resources and needs and resources. Are there any other alternatives that you might consider?

  Professor McLean: Given the asymmetrical devolution that we have in the UK, and assuming that neither a government of England nor governments of the nine regions of England come into existence in the near future, it is difficult to come up with a UK-wide system which is not one of those. A system of greater fiscal autonomy could work in a different way but I do not in the near future see, for instance, even Wales or Northern Ireland having the degree of fiscal autonomy for which the Scottish government is now pressing, which the Calman Commission may recommend although we do not know whether it will, therefore I would predict that we continue to have differential degrees of fiscal autonomy across the four territories for the foreseeable future.

  Q122  Lord Moser: The question I want to ask relates to data. All the stuff I have read talks about two problems in terms of data gaps: one relates to gaps that would emerge if one went in the needs direction. That is quite a big issue and probably one should discuss that on another occasion because that relates to the whole needs question. I have no doubt myself that if one wanted to go in the direction of needs-based there is plenty of information. There are plenty of ways developed over the years for linking indicators, et cetera, but that is a big subject so I leave that to one side. What is much more serious is how little we seem to know about what we are actually talking about, namely the working of the formula. I distinguish between what is published and what is not published. I know a lot of stuff that is not published is available in the Treasury vaults. Surely this Committee ought to be fully aware and fully knowledgeable about the way public expenditure works between the four parts of the UK and to what extent different bits of expenditure relate to the Barnett Formula otherwise how can we monitor or analyse the working of the formula? What are your thoughts about what we should, come what may, try to get out of the masters of the Treasury?

  Professor McLean: I will leave your first question aside as you invited me to and concentrate only on the second. The Treasury does now publish, and has done since the current spending review regime began in 1998, its statement of funding policy which will probably be familiar to all members of this Committee. That statement contains an appendix which breaks down to sub-programme level—I am hesitating because the jargon has changed as it used to be a SPROG but it is now something else—the extent to which each programme which is or is not devolved is devolved to each of the three territories. You can get an array of "100 per cents" and "0 per cents" at sub-programme level because a sub-programme either is or is not devolved. That then adds up to an overall percentage for each Whitehall department and the Barnett Formula is run off that. That is all public. If you were to use powers that you have and I do not to summon officials of the Treasury, I am not sure you would get much further on that front. It is not for me to say but what you might find helpful is to ask the Treasury representatives how they categorise any individual sub-programme, how they decide that the territorial extent of a certain sub-programme is England only or England and Wales or any of the possible combinations of the four nations of the UK. That is not revealed in the statement of funding policy. The procedure, by which the Treasury determines that each sub-programme is or is not devolved, so far as I know, is not public. It would have been easier if I had remembered to bring along a copy of the public funding policy but I think your advisers have one. It is appendix C.

  Q123  Lord Moser: Are you saying that, from the point of view of this Committee analysing and monitoring what has happened to public expenditure through the Barnett Formula and not through the Barnett Formula because different things have devolved, we should have no difficulty? Are you saying that? I am surprised if you are. At the very first meeting of this Committee I said can we get data on this and the answer was we will see whether the Treasury would. Perhaps Lord Lawson will have all the data in his head.

  Lord Lawson of Blaby: I do not have the data in my head but I am not sure this has a great deal to do with the real world. May I put a question to Professor McLean explaining where I am coming from? In the real world of politics and government nothing is going to be decided by precise formulae that are extremely detailed, that you then factor into a computer and the computer tell you what the answer is and everybody agrees. That is not how the real world works. What seems to me is more likely is it is helpful to have a formula and that formula is going to have some regard to need. In a way the main fashion in which need is factored into this whole arrangement is by the things that are outside it: social security and, as you pointed out, taxation, so that the prosperous territory pays more in taxation and requires less social security, a less prosperous territory gets more in social security and does not pay so much in taxation. That is the first cut, if you like, of need. For the public expenditure outside social security you do not need to be so worried about the detailed assessment of need. You want to have it on a population basis clearly because the purpose of public expenditure is to help people not territories, therefore you have to have accurate and up-to-date population. That is what we have not had so, therefore, that is clearly a need but beyond that the refinements are likely to be based on political judgment and negotiation. That was how it would appear to me and I would be grateful if you would comment.

  Professor McLean: That is an entirely defensible point of view that a political party might take or a government might take and it is not for an academic to say yes or no. That would be an example of relatively coarse needs assessment where needs were driven by population. Of course arguments would be made by those who would benefit from them that aside from population certain things made it expensive to deliver public services, such as sparsity, conversely density, or ethnic diversity. I think I am right in saying that both sparsity and density have a weighting in the English local government formula and, therefore, the worst thing to be is an area of medium population density. Those arguments will be made in any forum by those who would prefer a finer assessment of needs than the one which you, Lord Lawson, have just suggested.

  Q124  Baroness Hollis of Heigham: I am puzzling through some of the charts in your paper. What you actually show I think, if figure 5.5 represents an integration of needs and resources, on nearly all these tables London is doing better simply because London has more distribution away from the mean, in other words very, very minimal poor people so social security expenditure will come in high. Unless you have some sophisticated measure of reaching wealth, it has huge capacity and resource, the City of London et cetera, which is not being tapped and looped back in to meet that need particularly with the nationalisation of business rate in a sense. One of my difficulties is that given your very interesting tables here, unless one can actually get not just needs and resources but the distribution of both needs and resources to see the degree of scatter only then can one actually produce something. Your version of what counts as cost, like social security, would seem to be only a tiny fragment of what would be needed to do and would simply substitute one set of unfairness perhaps for another.

  Professor McLean: The position of London, to which we draw attention in that figure and surrounding text, is exactly as you have described. It is the richest area of the UK by GVA per head but it also has, as we all know, extreme concentrations of poverty and so it has unusually high social protection expenditure. Exactly how much of an outlier London is depends on whether you talk about need before or after housing costs since London housing costs are very high. That is an open question which I have no expertise to pronounce on. It is also the case that if, let us say, London is a region but it had an equivalent degree of devolution to Scotland or that which Calman or the Scottish government's National Conversation might propose for Scotland, then we might see London having a more direct incentive than it does at present to solve its poverty and worklessness problems on its own patch, to make its tax base more robust and to use its own tax proceeds to deal with its own social problems. This is moving away to a world which we do not inhabit in which there are elected governments in all 12 regions.

  Q125  Baroness Hollis of Heigham: There are more poor people in the richest regions than there are in the poorest regions. That is a social security stat.

  Professor McLean: That is because the richest regions are the most populous.

  Q126  Baroness Hollis of Heigham: That suggests, therefore, that the only reasonable way of expenditure is actually not through devolved expenditure but actually through UK expenditure, for example the social security system. It goes back to what you are interested in: people not territories. If that assumption is correct, given the problems of movement away from the mean, it is going to be very difficult on a territorial basis, simply because it is too broad, to come up with any needs assessment that would pick up all of these considerations.

  Professor McLean: It would certainly be difficult to come up with a needs assessment that would pick up all these considerations but bear in mind that our figure 5.5, like all the other data in our pamphlet, is after excluding social protection and, therefore, public expenditure in London, even on services not including social protection, is extremely high because the largest sub-service is health and the second largest is education. To an approximation this comes down to saying that NHS expenditure per head is very high in London and educational expenditure per head is very high in London.

  Q127  Lord Lang of Monkton: I would like to ask Professor McLean about his hybrid model looking at his recommendation for an alternative to Barnett. He said "This combines the efficiency gains of greater fiscal autonomy with the equity of a needs-based grant" and then he talks about a combination of devolved and assigned taxes and a needs-based top-up block grant. I do not want to open all that up now but those of us who opposed devolution for many years did so because we were concerned that it would lead to the slippery slope and ultimately the possibility of the break up or fragmentation of the United Kingdom. I would add that coming to this Committee one sets that baggage aside and we are all genuinely keen to find a better system if there is a better system to be found. Certainly in my own case I would be concerned with any solution which took us further down that slippery slope. I want to know to what extent you have taken the broader picture into account in developing your own recommendations. It may be that you favour complete separation of Scotland, Wales and Northern Ireland but it may not.

  Professor McLean: I am taking no position whatever on whether separation of Scotland, Wales and Northern Ireland is good or bad. I am taking devolution as it asymmetrically is, and it is clear, as I said a moment ago, from Calman and from the Scottish government's National Conversation that there is a mood in Scotland for more fiscal autonomy and that would have some good consequences irrespective of whether one is a unionist or a nationalist. Unionists and nationalists could agree, in the non-partisan spirit that you just referred to, that greater fiscal autonomy would have some good consequences for Scotland. The National Assembly for Wales's Commission on Public Finance and Funding has not, as far as I know, held any public hearings yet so it is difficult for me to second guess it. I would be surprised if its recommendations were in favour of as extensive fiscal autonomy as are likely to emanate from Calman or the Constitutional Convention. Northern Ireland I would guess to be intermediate between those two cases but I am not aware of any recent public statements on that. Lord Trimble may be able to advise us. Taking the asymmetrical devolution that we have and refusing to take a position on whether independence is good or bad because that is not the role of a political scientist, I would say it is likely that we will get some kind of hybrid anyhow and we will, in the foreseeable future, have a somewhat different funding system for Scotland to that which we have for Wales for instance. I do not know if that helps.

  Q128  Lord Moser: I have a very quick follow-up on the statistical side. The reason why I am anxious that the Committee should be fully equipped to monitor the way the thing works is very straightforward. We are being asked whether there is an alternative method. There is an alternative method which is needs based which takes one in a totally different direction and I do not want to start on that now but I am still interested to understand what is wrong with the formula as such. When I started reading about it I thought it was a very straightforward operation but then as you start reading you come into convergence, then you come into squeeze, then you come into by-pass and it all goes rather mysterious. I simply think we should press the Treasury, now that we hear from you that most of the stuff is there, to see just how it has worked over the years on convergence, squeeze and on by-pass so we know what we are trying to improve. It is as simple as that.

  Professor McLean: I have nothing to add to that.

  Q129  Lord Sewel: Can I say that on page 35 of your IPPR paper there is an absolute gem as far as I am concerned. You say "It was said by Ron Davies that devolution is `a process not an event'." I am enormously pleased to see that because some people, particularly Mr Henry McLeish, have been trying to pin that quote on Mr Donald Dewar and I never thought Mr Donald Dewar said it. I could never remember or find him saying it. If you have the precise reference I would be very grateful. On need, how would it work and what is an expenditure need and what is not? One of the reasons why expenditure in Scotland may be higher than expenditure in England is that in Scotland we have many, many more denominational schools. Is denominational education an expenditure need in itself or is it a policy choice?

  Professor McLean: You have put your finger on a very painful point. Australians and also Canadians have had to argue that point over many years because there is no clear answer. I would be inclined to say that having separate denominational schools is a policy choice not a need but I know what will be said on the other side. I know that it will be said that the settlement in Scotland dates back to the Education Act 1918, that was the choice made a very long time ago and it is embedded. Similar things could be said about Northern Ireland. Those choices are so deeply embedded, it will be said, that they should be treated as needs. I incline to the view that separate educational systems are a choice not a need.

  Q130  Lord Sewel: Around this table, from what I hear of the mutterings, the English take one view and the Scots take another view. I am not going to argue one case or the other but it does show the difficulty of even identifying what an expenditure need is.

  Professor McLean: One could say at one extreme nobody would doubt that an indented coastline and a lot of your population on islands gives rise to a need.

  Q131  Lord Sewel: You can make the choice of living there. The extreme argument is difficult.

  Professor McLean: You could say that. In fairness, the government of Newfoundland, for instance, does tend to say that to its own outlying population. You could take a line so hard that even the existence of the Isle of Mull does not generate a need but that is a political argument I would rather not get into. It is very much in the day-to-day bargaining which goes on so much in the English, and I believe also in the Scottish, local government formula that rival parties will say that such and such is a need; indeed each lobby group will say whatever they happen to have a lot of is a need. That will be well known to some members of this Committee.

  Q132  Lord Sewel: In your Fair Shares paper you say "While the Barnett formula itself is reasonably straightforward ... what seems more arbitrary is the process by which the Treasury determines whether spending is subject to Barnett or not ... the process through which such a clarification is made is unclear, and is not underpinned by any published criteria." What information should be published or other processes adopted to improve procedural transparency?

  Professor McLean: This was what I was getting at in my earlier answer to Lord Moser. I would like to know on what basis some of the controversial calls are made. For instance, some of the ones to which attention has been drawn relate to transport expenditure. Is the Channel Tunnel rail link expenditure on behalf of England or London, the South East of England or the United Kingdom, or the Olympics expenditure and so on? In the jargon which has been used there is expenditure for, and expenditure in, a territory and those are not the same. Of course there is a judgment call in any of these controversial cases but once a block of expenditure, as it might be the Channel Tunnel, is called in one direction then it either has a Barnett consequential or it does not depending on which direction it is called. That is the process, as I said in my earlier answer to Lord Moser, that your Committee might find helpful to ask the Treasury about.

  Q133  Chairman: Can I go back to Australia for a minute because that is a very interesting example of a way of doing it? I think you were telling us that the Australians had a very crude but robust assessment of need which they apply to all the different territories. Here we have got an asymmetrical devolution but Australia does not. Does the fact of the asymmetry make it more difficult to do a similar exercise here and, if so, how and what can we do about it?

  Professor McLean: I am not sure. I have heard the Chair of the Australian Grants Commission, who was recently in the UK giving evidence to Calman—and I think it would be possible for your clerks to get that evidence he addressed that very point. My recollection of what he said is they publish their assessments once a year and for 24 hours every one of the 8 territories rises up in revolt and says how terrible the Commonwealth Grants Commission is and then goes quiet for the next 364 days. His words were to that effect. He did that in a witness session to Calman. The fact that it is asymmetrical would make some difference because at present there is no government of regions of England to which a block could be handed and which could be told to get on with it in the way that the three territorial administrations are told, but it would be possible to have a system in which you did your needs assessment, the resulting block grants were made to the three territories and the rest was what was available for the UK government to spend in England on the functional service in question.

  Q134  Chairman: Thank you very much for giving us so much of your time, your experience and one hopes your wisdom which we will be delighted to consider in detail. It was very good of you to have come and it has been very useful. Thank you. Are you going to produce a piece of paper for us?

  Professor McLean: I will attempt to and if I fail I will let your clerks know.

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