Supplementary memorandum by Professor
Iain McLean
As I promised during my oral evidence, I have
pleasure in sending you this supplementary note. Part A of this
note has been agreed with my colleague on the (Muscatelli) Independent
Expert Group reporting to the Calman Commission, Professor D N
F Bell. The calculations in Part B were done by my coauthor Katie
Schmuecker of ippr north.
A. THE BARNETT
FORMULA AND
CONVERGENCE
1. Three members of your Committee, all
with experience of government, expressed opposing views as to
whether the Formula was designed to converge towards equal public
expenditure per head in all four nations of the UK; and whether,
regardless of intention, it actually has led to convergence. I
hope the following may help.
2. All researchers in the field[1]
believe that the intention to bring about convergence (perhaps
until "excess" spending per head in Scotland and maybe
Northern Ireland had been brought down to the level implied by
the 1979 Needs Assessment) was in the minds of some Treasury officials
involved in the design and early implementation of the Formula.
There is substantial oral evidence on this point, but little written
evidence has surfaced.
3. However, the territorial departments
in (at least) Scotland and Northern Ireland were very reluctant
partners. The service-by-service details underlying the Needs
Assessment were released to me in 2005 under a Freedom of Information
request. They make it clear that the Scottish Office and HMT did
not reach agreement as to the relative needs of Scotland.
4. The Treasury told me, in the letter accompanying
that release, that there had been no subsequent "interdepartmental"
needs assessment. However, a further FOI release at the insistence
of the Information Commissioner in summer 2008 has shown that
the Treasury conducted an in-house update of the Needs Assessment
in 1984. Again, its conclusions were vigorously resisted by officials
in the Scottish Office. It appears that pressure from the Secretary
of State for Scotland led Treasury Ministers to agree to pursue
the matter no further. That is my précis of the files released
to the National Archives of Scotland at West Register House, Edinburgh,
read in June 2008.[2]
5. Therefore I believe that I was correct
to state in evidence that, whatever may have been the intentions
of Treasury Ministers (of both parties) over the period in question,
it was the intention of Treasury officials to bring about some
convergence to what the Needs Assessment had persuaded them were
relative needs.
6. As to whether the Formula actually (regardless
of intentions) brings about convergence, there are two relevant
factors. One is whether public expenditure is planned on a volume
or a cash basis; the other is the change in relative population
among the four nations of the UK.
7. In a world of constant relative populations,
the mathematics of the formula entail that whenever expenditure
in England increases, the Barnett block grant to the three Devolved
Administrations (DAs) increases by a smaller amount per head.
Some experts have described this as a differential equation system,
a label I used in my oral evidence. However, others disagree,
and there is no need to argue the point in this note, since there
are two large and opposing effects: the convergence effect of
the Formula; and the declining relative population of Scotland.
These come close to cancelling out, as will be shown below.
8. Public expenditure was planned on a volume
basis from the inception of the Formula until 1982. Barnett consequentials
(ie changes in the block grant to each DA) are a function of increases
in corresponding planned expenditure in England. If expenditure
per head in volume terms was constant, then block grant per head,
in volume terms, would also remain constant.
9. Since 1982, with public expenditure planned
on a cash basis, there has always been an annual cash (ie nominal)
increase in planned expenditure in England. In a world of constant
relative populations, this should have led to convergence towards
equal cash per head to spend on devolved functions in each of
the four nations of the UK. The convergence would not have been
linear (the downward slope would gradually flatten out); but one
would expect it to have been close to complete by now.
10. The above ignores changes in relative
population. However the relative population of Scotland has been
declining since the inception of the Formula (and indeed for longer
than that, back into the days of the Goschen Proportion). Until
1992 population relativities for England: Scotland: Wales were
fixed at 85:10:5, ratios which were over-generous to Scotland
and insufficiently generous to Wales. In 1992 Chief Secretary
Portillo first rebased the consequentials on up-to-date relative
populations, but did not change the then-current baseline. Since
then population relativities have been updated from time to time.
The current practice is that the relativities are restated, from
the latest available ONS population data, with each new edition
of HMT's Statement of Funding Policy, which is available
to members of your Committee. These relativities then apply for
the period of the ensuing Comprehensive Spending Review (CSR).
11. Scotland therefore gets favourable treatment
per head of population for two reasons: (a) the historic baseline
was not adjusted for the relative populations of Scotland and
England in 1992; (b) if its relative population is declining through
the period of a CSR, as has been the case for each CSR since 1998,
this is not reflected in Barnett consequentials during the lifetime
of that CSR.
12. The graphs from McLean et al, Fair
Shares... (ippr 2008), which were discussed during my oral
evidence, show that since 2001-02 the convergence effect and the
population effect for Scotland have roughly cancelled out, so
that resources per head available to the Scottish Government to
spend on devolved services are roughly constant. Because of deficiencies
in earlier versions of HMT's PESA database (Public Expenditure
Statistical Analysis), the numbers are not reliable for years
before 2002-03.
B. THE EFFECT
OF SOCIAL
PROTECTION EXPENDITURE
13. Public expenditure may be grouped into
three classes: non-identifiable; identifiable but not devolved;
and identifiable and devolved.
14. Non-identifiable expenditure is to fund
public goods such as national defence, foreign policy, UK debt
interest, and the operation of central UK departments such as
the Chancellor's departments. It is not apportioned to the population
of the UK.
15. Some public expenditure is identifiable
but not devolved. By far the largest component of this is what
international statistical conventions group as "social protection".
Until recently, agricultural support was also treated in the public
expenditure system as if it were not devolved. This has recently
changed, but for reasons of consistency over time the data in
McLean et al, Fair shares..., on expenditure per head in
the four nations of the UK excluded both of these functions of
government. The purpose of this was to capture, as closely as
the publicly available data permit, the "Barnett effect"
of changes driven by the Formula on expenditure on devolved functions
of government.
16. At my oral evidence session I was asked
what would be the effect of adding social protection (and agriculture)
back in to our data. This is done in the chart below. It is labelled
"Figure 4.2 (Revised)" because it corresponds to Figure
4.2 in McLean et al., Fair Shares, with social protection
and agriculture added back in.
17. On regional comparisons between public
expenditure per head and GVA per head, our pamphlet already contained
the data your Members requested. I apologise for failing to point
that out to you at the time. The comparison with social protection
and agriculture included is our Figure 5.2. The comparison with
them excluded is our Figure 5.3. As your Members already have
these charts I do not reproduce them again.
18. Comparing McLean et al Fig 4.2
with the attached Fig 4.2 (Revised), we observe:
18.1. Fig 4.2 (Revised) is somewhat more
compressed. Regions with low relative spending (eg, Eastern and
South East) and the region with highest relative spending (Northern
Ireland) are closer to the UK average when social protection expenditure
is included in the comparison than when it is excluded.
18.2. In Fig 4.2 (Revised), London does
not overtake Northern Ireland, so it appears less of an anomaly
than in McLean et al., Fig 4.2.
18.3. However, the ranking of the nations
and regions stays roughly the same. In particular, Scotland has
notably higher public expenditure per head than Wales on both
measures, although it has substantially higher GVA per head.
19. Comparing McLean et al Fig 5.2
(including social protection and agriculture) with our Fig 5.3
(excluding them) we observe:
19.1. London is a less extreme outlier when
social protection is included than when it is excluded. But on
both measures it is by far the region with the highest public
expenditure per head in comparison to GVA per head.
19.2. The relative position of Scotland
is essentially the same on both measures.
20. The two sets of data serve different
purposes. The data with social protection stripped out arise from
an attempt to isolate the "Barnett effect" for the three
devolved administrations. The "Barnett consequentials"
described in the Statement of Funding Policy cannot be
measured directly; identifiable public spending per head excluding
social protection is a proxy for measuring "Barnett consequentials".
For the regions of England, the same data series is a proxy for
the effects of the distribution formulae used for health and local
government services. Health and local government expenditure is
devolved to subnational authorities in England; social protection
expenditure, essentially, is not.
21. The data with social protection included
may be used to measure the performance of the United Kingdom as
a social citizenship network, in which poor people and poor regions
are protected from adverse shocks.
22. On both sets of data, Members may feel
that the position of London (and perhaps Scotland) appears anomalous.
Iain McLean FBA
Official Fellow in Politics
Professor of Politics, Oxford University
13 March 2009

1 Eg, I. McLean, the Fiscal Crisis of the United
Kingdom (Basingstoke: Palgrave 2005); D Bell and A Christie,
"Funding devolution: the power of money" in A Trench
ed, Devolution and Power in the United Kingdom (Manchester:
Manchester University Press 2007), 73-85; J Mitchell, "Spectators
and Audiences: The Politics of UK Territorial Finance", Regional
and Federal Studies, Vol 13 (2003) Winter, 7-21; D Heald and
A Macleod, "Revenue-raising by UK Devolved Administrations
in the Context of an Expenditure-based Financing System",
Regional and Federal Studies, Vol 13 (2003) Winter, 67-90. Back
2
D Fraser, "Thatcher told her ministers to slash the Scottish
budget", [Glasgow] Herald 06.06.2008, p 6;
McLean et al., Fair Shares..., p 14; National Archives
of Scotland, SOE6/1/1708-9, Sep-Oct 1984. Back
|