Examination of Witnesses (Questions 140
- 159)
FRIDAY 27 FEBRUARY 2009
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
subjectivitythat 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 Stateand
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 changeif 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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