The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 140 - 159)


Mr John Swinney

  Q140  Chairman: By whom?

  Mr Swinney: By the Treasury.

  Q141  Chairman: In other words you are talking about the consequentials?

  Mr Swinney: Yes.

  Q142  Chairman: So that is the element of subjectivity you are talking about?

  Mr Swinney: Of course, yes.

  Q143  Chairman: Otherwise it is not a particularly subjective mechanism?

  Mr Swinney: Other than the fact that there will be judgments applying about the population mechanism for example. You can ask why is it population; why is it not density of population, or all sorts of other indicators that one could consider. If I look at the distribution formula that we deploy within the Scottish Government in relation to Health Service expenditure in Scotland, or I look at the distribution formula we apply for local authority expenditure, it is a multiplicity of different indicators that we utilise for the distribution of resources. Population base is at the heart of the Barnett Formula, but there will also be other judgments. In our experience, I think one of the other deficiencies of the Barnett Formula is the fact that there is the ability for the formula to be essentially the product of subjective judgment about how it should be applied. I give the Committee an example of that. Just after we came to office in 2007 we went through a Spending Review with the United Kingdom Government. It was announced by the Chancellor somewhere round about the first or second week in October, and in about December 2007 the then Justice Secretary accepted a report from Lord Carter about prisons in England. The conclusion of that was that there needed to be an extra £1.2 billion expended in the English prison estate because of the fact that there was over-crowding and there was a need for investment in the prisons estate. The UK Government took the view that this was essentially a piece of emergency expenditure and that it would be funded out of the contingency, and therefore there were no Barnett consequentials because it was funded out of the contingency. The only reason it was an emergency was that it happened in December 2007 and not during the summer of 2007 when the Carter Review reported. If the Carter Review had reported in the summer and this had been part of the calculation underpinning the formulation of the Comprehensive Spending Review, and £1.2 billion had been allocated to the English Prison Service to deal with the overcrowding and investment required, we would have had £120 million-worth of consequentials which we could have deployed on whatever we fancied. However, as it happened, we were using resources out of the Comprehensive Spending Review in any case to address the fact that we have virtually the same problems of prison overcrowding that exist in England and Wales. That is another perspective on subjectivity—that essentially the Barnett Formula can be bypassed and other devices for distribution of public expenditure can be found which ensure that some of what we might expect coming under the Barnett Formula is not what we actually realise.

  Q144  Lord Forsyth of Drumlean: The bypass issue is important but surely it works both ways and is a bit of a red herring? I am just trying to understand what you are saying here. Are you saying that you would prefer to have a needs-based rather than a population-based means of assessing what the resources should be for Scotland?

  Mr Swinney: Two points, Lord Forsyth. The first is that I do not understand how the bypass issue is a disregard. If the Barnett Formula is to be a robust and reliable mechanism of distributing public funds, then we have to have the confidence that it is going to be applied effectively and fairly and squarely in all circumstances. I am citing to the Committee that there are ways of bypassing the Barnett Formula which therefore undermine its credibility.

  Q145  Lord Forsyth of Drumlean: Yes, but to give you an example in the other way, if we take the Health Service, where the baseline in Scotland is about 22 per cent higher than in England, and where more than three-quarters of the expenditure goes on pay, and where pay is subject to national agreements, if there is a huge increase in pay in the Health Service the formula consequences for Scotland will be grossly inadequate in terms of actually meeting the cost of that pay bill because you have a higher baseline and you have more people in the Health Service. Certainly in my day the formula was bypassed and we would get an extra very considerable slug of expenditure in order to compensate us for the fact that the baseline was higher. You are saying for example where the contingency fund is being used, where you have lost out and where the contingency fund is not there, but if you look at the main thrust of Barnett, there is nothing subjective about it, you get the proportion that relates to the population formula on top of the baseline, and then you have the ability to vire between different budgets. When you were talking about you wanted to have something that took account of population density and so on, that is an argument for having a formula which is based on some kind of needs assessment like the local authority grant formula. Is that what you are advocating?

  Mr Swinney: No, I am not. What I am advocating falls into my first answer to the Chairman, that the Scottish Government takes the view that the Barnett Formula is a product of the existing devolved arrangements and our preference is to move to a system of financing the Parliament which allows us to exercise greater financial responsibility for the revenue that is raised in Scotland and distributed in Scotland.

  Q146  Lord Forsyth of Drumlean: I understand that but we are where we are and we have a system now, but we are looking at how that system could be made fairer. You made the point that you thought in the case of the prisons issue that it was not fair because you did not get the formula consequences and that it should not be subjective. That seems to me something of an own goal when it comes to something like for example the Health Service, if there was a big increase in pay or other matters. Is this not rather thin ice?

  Mr Swinney: I do not follow the logic of the argument, Lord Forsyth, about how we somehow get compensated for an increase in health expenditure, because essentially what we get is the population share of the change in English public expenditure across programmes. That is a population share of the change in the public expenditure that is deployed in England and that is the basis of the mechanism. I do not see where there is anything additional that we get beyond that.

  Q147  Lord Sewel: Could we explore this one because it is an interesting one. If you start off with Health Service expenditure per head of the population in Scotland being higher than Health Service expenditure per head of population in the rest of the United Kingdom, and the vast majority of that expenditure being accounted for by staff costs, then if there is a wage settlement effectively at a UK level, and that goes up by, say, 10 per cent, and if you apply the Barnett Formula figures to the Scottish share, you will get a figure which does not enable you to have a 10 per cent increase in wage costs in Scotland.

  Mr Swinney: I accept that point, Lord Sewel.

  Q148  Lord Sewel: That is the point.

  Mr Swinney: That point contradicts Lord Forsyth.

  Chairman: It does not contradict it.

  Q149  Lord Forsyth of Drumlean: It is the point I am making.

  Mr Swinney: Let me explain what happens in relation to health expenditure. We have a baseline in Scotland, there is a baseline in England, and when there is a certain level of increase in health expenditure in England, essentially we get a population share of that increase and that flows into the Scottish block. There is no additional element taken into account as to whether or not that is adequate for a pay settlement based on the number of Health Service workers we happen to have, that is a cash sum. If there is a nationally negotiated health deal which is essentially able to be afforded in England but is more challenging in Scotland, we have to find the resources to fund that by viring, as Lord Forsyth correctly says, between the different elements of the public expenditure we have at our disposal.

  Q150  Chairman: That is exactly where you would want the Barnett Formula to be bypassed, would it not? You do not get enough money to do what they are doing in England, the consequentials are not enough so presumably you then try ad bypass the strict operation of the Barnett Formula and go and negotiate with the Treasury.

  Mr Swinney: It may have been different when Lord Forsyth was a minister in the Scottish Office, but I can assure the Committee now that there is a strict application of the Barnett Formula, so it is a population share increase.

  Q151  Lord Sewel: What we are asking is whether that is an aspect of the formula that you are dissatisfied with now, the fact that bypassing does not take place to enable the sort of accommodation that Lord Forsyth indicated being applied?

  Mr Swinney: I think that justifies the argument that the Scottish Government makes that we need to have a different mechanism in place that allows us as a government to exercise a greater degree of financial responsibility by having greater control over our resources. That is why we argue as we do in our paper for fiscal independence.

  Q152  Lord Forsyth of Drumlean: I am trying to help you here because when I was Secretary of State—and bear in mind we have had a period of unprecedented growth in public expenditure with lots of money sloshing around, but that is going to change—if there was a big pay increase in the Health Service, I would go along to see the Chief Secretary and say, "Look, there is no way that the formula consequences of the health budget increase in order to meet a pay increase is going to enable us to meet the pay bill in Scotland." The Chief Secretary would say, "You can vire from other budgets," and I would say, "Things are very tight, there is no scope to do that, so we need to have a sum over and above that which relates to the population because our baseline is higher," and the Chief Secretary would say, "Your baseline is higher because of what was agreed in 1979 and you need to demonstrate need," and we would then talk about morbidity and mortality and the particular problems of the Health Service in Scotland, and we would have a very long argument, and in the end we would get the money. That meant that it was a workable situation. Where you are now, as I understand it, there is no mechanism whereby you can get that bypass and therefore the effect of the Barnett Formula as it is operating is to squeeze expenditure, and when you make an argument like you have just made on prisons and on the big stuff like health, it seems to me that is going to result in a squeeze on the Scottish budget which does not actually take account of need, which is why I thought you might be arguing that it would be better to have some kind of needs-based assessment rather than a population-based assessment, which would then look at the health budget in the context of the fact that Scotland has particular problems in health. That is where I am coming from.

  Mr Swinney: I take a different view. I think we both accept that there are problems with the formula, which is why the Government in Scotland takes the view that we need to have a different system of funding of the Scottish Parliament, which is to have greater financial responsibility and control over both the ability to raise taxation and to control public expenditure. That is the rationale behind our argument. You have talked quite a bit about the baselines—

  Q153  Chairman: I am sorry to interrupt again but I understand the argument which says we are not overly interested in Barnett because we want fiscal autonomy but, on the other hand, there is bound to be an interim period within which the Barnett Formula continues to operate even if on the most optimistic view you get fiscal autonomy. What do you want to do in the interim? Do you want to go on with the present system as it is or do you want to change it?

  Mr Swinney: I do want to change it; I want to move to a system of fiscal autonomy. That is where the dynamic of the debate is going from the Government's perspective.

  Q154  Chairman: But what happens in the interim? Do you go on operating Barnett as it is?

  Mr Swinney: I want to advance the argument why we need to move towards a system of fiscal autonomy because I think the Barnett Formula and the existing financial arrangements do not serve us well.

  Q155  Chairman: Tell us about that.

  Mr Swinney: Let me give you another example. You have talked about baselines, and again as we prepared for the Spending Review last year the United Kingdom Government took a decision that, because of the performance of health expenditure in England, they would reduce the baseline of the Department of Health in England by about £3 billion, and they consequentially visited that change of baseline on the Scottish Government, so essentially we had our baseline health component of what was calculated in the implications of the Barnett Formula reduced by about £300 million a month before the publication of the Spending Review. That in my experience was quite unprecedented

  Q156  Lord Forsyth of Drumlean: How much had it gone up by year-on-year?

  Mr Swinney: It would have gone up by the Barnett consequences of the increase in public expenditure in England.

  Q157  Lord Forsyth of Drumlean: Which was?

  Mr Swinney: In some years it would—

  Q158  Lord Forsyth of Drumlean: No, in the year where you say there was this £300 million reduction?

  Mr Swinney: The overall Scottish Government grant increased by 0.5 per cent above inflation.

  Q159  Lord Forsyth of Drumlean: The health budget in England went up, it did not go down. There may have been an adjustment but I am just asking what was the net increase?

  Mr Swinney: The point I am making is that the baseline was reduced in England by £3 billion and therefore the increase was applied to that reduced baseline. I cannot give you the specific number of what the percentage increase was in the English Department of Health expenditure at that particular time.

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