Examination of Witnesses (Questions 120
- 134)
WEDNESDAY 4 FEBRUARY 2009
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 levelI am hesitating because the jargon
has changed as it used to be a SPROG but it is now something elsethe
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 Calmanand 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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