The Barnett Formula - Select Committee on the Barnett Formula Contents


Examination of Witnesses (Questions 160 - 179)

FRIDAY 27 FEBRUARY 2009

Mr John Swinney

  Q160  Lord Forsyth of Drumlean: You are saying the net baseline for England was reduced, there was a cut?

  Mr Swinney: Correct.

  Q161  Lord Forsyth of Drumlean: In health expenditure?

  Mr Swinney: There was a cut in the baseline, a cut of £3 billion less than was expected to come into the baseline in 2008-09.

  Q162  Lord Forsyth of Drumlean: That is not the same thing as a cut in expenditure. The overall amount went up. What you may have been anticipating went down but you still got an increase, just for the sake of clarity.

  Mr Swinney: The overall increase above inflation in the Scottish Government's budget in that year was half a per cent.

  Q163  Chairman: On health you got an increase, not as much as you expected but you got an increase?

  Mr Swinney: I am saying that we got an increase of half a per cent above inflation, but one of the decisions that was arrived at was a reduction in the comparative baseline that the Scottish Government took because of a reduction in the expected baseline of the budget in the Department of Health in England.

  Lord Forsyth of Drumlean: There was still an increase in the baseline, just in case people thought there had been a cut.

  Q164  Lord Rowe-Beddoe: Mr Swinney, from this discussion, am I right to infer that what Lord Forsyth described as past practice with Secretaries of State for Wales and Scotland negotiating with Chief Secretaries and so on has stopped in recent years?

  Mr Swinney: I only have 20 months of experience of all of this so I cannot really speak in detail before May 2007, but what I would say is that we now have, for example, in place—and I assume this is a different set of rules to the ones that existed prior to devolution—a Statement of Funding Policy which is a product of the establishment of the Scottish Parliament and the other devolved administrations. That effectively polices the financial relationship between the Scottish Government and the United Kingdom Government. When I came to office, the Treasury were reviewing the Statement of Funding Policy and essentially took that discussion forward with the Finance Ministers of the devolved administrations of Scotland, Wales and Northern Ireland. When we come to the conclusion of that process, the Statement of Funding Policy is not actually signed off by the Chief Secretary and myself in a mutual agreement. It is signed off between the Chief Secretary and the Secretary of State for Scotland, so I get consulted about it but I do not have to sign it off and I do not have to reach an agreement about the Statement of Funding Policy. I think it would be a much healthier situation if I did have the opportunity to sign off that Statement of Funding Policy and agree the basis of the rules upon which the funding arrangements were to be had. I think that would be by far a healthier process. In terms of the other discussions, of course on a day-to-day basis, my officials are in regular communication with the Treasury on a whole variety of different questions and, periodically, I will be in touch with the Treasury ministers in different ways and on different subjects. We will do that either by correspondence or we will do it by face-to-face meetings. In case of the run-up to the Spending Review, for example, it is fair to say that we had to kick start the process of a quadrilateral meeting between the finance ministers of Scotland, Wales and Northern Ireland and the Chief Secretary, if my memory serves me right, probably in July 2007, and subsequent to that I had two face-to-face meetings with the Chief Secretary prior to the publication of the Spending Review to essentially advance some of the arguments and issues about which we were concerned.

  Q165  Lord Forsyth of Drumlean: What sort of issues were these?

  Mr Swinney: They would be about a number of things, the scale of the resources available, some of the elements of the Statement of Funding Policy, some of the issues that were proposed to be changed in that, and some of the questions such as judgments that were arrived at about individual financial decisions where for example the devolved administrations expressed their concerns about the fact that in relation to the regeneration aspects of the London Olympics funding it was proposed there would be no consequentials, whereas if it was regeneration activity in the east end of London we would expect to have consequentials from that factor, so a mixture of essentially procedural questions, headline financial numbers, and specific issues of concern.

  Q166  Lord Rowe-Beddoe: So under current practice then, it would still be the territorial Secretary of State who would be the interface, if you like, on your behalf with the Treasury with regard to additional funding?

  Mr Swinney: No.

  Q167  Lord Rowe-Beddoe: No?

  Mr Swinney: No, the Secretary of State for Scotland has the responsibility to sign off the Statement of Funding Policy. The Secretary of State for Scotland essentially receives the resources—that is not quite the right way to characterise it. The Secretary of State for Scotland has the first call on the contents of the Scottish Consolidated Fund to fund the offices of the Scotland Office and then the resources are controlled by the Scottish Government as part of the Scottish Consolidated Fund, but if there were to be a discussion about the size of the budget and any relevant financial issues, we would conduct those discussions directly with the Treasury. My frustration in relation to the Statement of Funding Policy is that I might have concerns about it, I might argue about it, I might want to have alterations to the Statement of Funding Policy, but ultimately the Chief Secretary has no obligation to secure my agreement to the Statement of Funding Policy. I think that is a weakness in the system because essentially I am the person who has the responsibility for controlling the absolutely enormous proportion of the Scottish Consolidated Fund, but I do not have access to securing the agreement of the procedures that underpin the interaction upon those questions.

  Q168  Lord Forsyth of Drumlean: May I just pursue this issue of the administrative arrangements surrounding the working of the formula to which Lord Rowe-Beddoe has just alluded. Perhaps I was too interventionalist, but I find it extremely difficult to understand how it is possible to run the Scottish budget if you are just getting the population consequences under the crude Barnett Formula and there is not a dialogue about all kinds of issues. We have mentioned health for example—and I think you might have stopped council house sales—but the treatment of capital and all kinds of issues would come up where the formula as it operates would be fair or unfair. You have cited the example of the London Olympics, which is a separate issue which, if I may, I will come on to in a moment. I also do not understand how the Secretary of State for Scotland can sign off on the Scottish budget if he has not got the resources of the Executive behind him saying, "This is going to work," "That is not going to work," "This is needed." I am finding it difficult to understand how this can actually work in practice.

  Mr Swinney: Let me make the distinction about where the Secretary of State for Scotland fits into this. The Secretary of State for Scotland fits into this in only two respects. Firstly, he has first call to decide how much of the Scottish Consolidated Fund he intends to utilise to fund the Scotland Office, and the Scotland Act provides for that, and he decides that and then it gets passed to the Scottish Government, and then we have responsibility for deploying that expenditure. The second aspect is that the Secretary of State for Scotland signs off the Statement of Funding Policy which is a set of rules. Indeed it is published and available through the Treasury information channels. He signs that off in agreement with the Chief Secretary to the Treasury, but it is about the rules that we have to operate under within the Scottish Government. I find that an absurd way of operating. To give you an example, one of the issues I was troubled by in the Statement of Funding Policy last year, when the Scotland Act was agreed by the United Kingdom Parliament, there was a mechanism within the original Statement for Funding Policy which dealt with the pattern of increases in council tax benefit which is of course paid by the United Kingdom Government. Essentially the mechanism was in place and it was designed to make sure that if council tax benefit rose disproportionately faster in Scotland than it did England there would be a claw-back from the Scottish budget to the UK Government. That was the mechanism that was in place and what happened over the years, if my memory serves me right, 2001 to 2004, was there was a payment from the United Kingdom Government to the Scottish Executive then because council tax benefit rose disproportionately slower in Scotland than it did in England, so the mechanism that was there to claw the money back actually resulted in a rebate coming from the UK Government to Scotland. This went on for a few years and the UK Government paid the money to the then Scottish Executive and then somewhere round about 2004 began to get a bit sticky about this payment. My predecessors agreed a one-off settlement which resulted in a payment of around about £50 million from the UK Government to the Scottish Executive in about 2005 and 2006, on condition of the agreement that the mechanism was suspended and it did not apply. If that mechanism had continued to apply we would be entitled to a rebate year on year on year because of the performance of relative council tax benefit. I inherited a suspended mechanism. I tried to reactivate that in terms of the Statement of Funding Policy and the Treasury amended the Statement of Funding Policy essentially to entrench the suspension of that mechanism, against my view, because obviously it was a financial benefit to Scotland to have that mechanism in place at that particular time. I accept that at some stage in the future it might not have been a benefit to us because the pattern of council tax expenditure could have shifted, but it was suspended, and I disagreed with that and I made that point to the Chief Secretary, I argued about it, I wrote, I spoke, but it was done and we do not have a mechanism. I use that to illustrate the frustration of how the arrangements can actually be deployed in practice. You then have a wider question—

  Q169  Chairman: You did not get the real money and that is frustrating, but that is politics, is it not?

  Mr Swinney: Yes, but there was a mechanism in place which was suspended because it was not producing the result that was originally envisaged for it to produce. If the mechanism was there that would have said to me this was a part of the funding arrangements.

  Q170  Chairman: You had about five or six years' benefit out of it. I do not know the details.

  Mr Swinney: That is a view, Lord Richard to take, but that is not a view I take. I happen to think that if there is an arrangement in place we should operate by it.

  Q171  Lord Forsyth of Drumlean: You are talking about the Barnett Formula on a statutory basis?

  Mr Swinney: What I do not think has happened, Lord Forsyth, is I do not think that the funding arrangements have caught up with the change in constitutional arrangements that have taken place in the United Kingdom. I think what happens currently is that the Treasury continues to deal with the Scottish Government as if it were a department of Whitehall, and I think the devolved arrangements change fundamentally the balance of responsibility within the United Kingdom, and the idea that somehow if I disagreed with the Treasury about something, and, with the greatest of respect, Lord Forsyth knows there is no inference in what I am about to say, as a territorial Secretary of State in the old Scottish Office days, the Chief Secretary if he went to the Prime Minister could just say, "The Secretary of State for Scotland is not getting it, and that is it," that was the workings of the United Kingdom finances. I think the workings have changed in the nature of devolution because we are a distinctively elected legislator within Scotland but the aspirations that we may have for some of the routine operation of financial arrangements are handled in a fashion that Whitehall departments would experience, and I do not think that is particularly credible.

  Q172  Lord Forsyth of Drumlean: On that point, you are quite wrong about the Chief Secretary being able to say, "You are not getting it." If the Chief Secretary said to the Secretary of State, "You are not getting it," the Secretary of State would take it to the Chancellor and if the Chancellor said no, the Secretary of State could take it to Cabinet, it was a Cabinet decision, and in our circumstances we would invariably deploy arguments like, "Mr Swinney and his colleagues will make hay," and usually we got our way, which is one of the reasons why convergence has not actually happened!

  Mr Swinney: I am glad that we were so useful to you, Lord Forsyth. I did not quite know we were so influential but that has reassured me enormously this morning! My point though is that the Secretary of State for Scotland may have had that ability to argue that point. My reflection on the funding arrangements that currently exist is that when the Treasury says no it is essentially dealing with the Scottish Government as if it were a Whitehall department, and I do not think that is the right representation of the fact that there is now in Scotland and Wales and Northern Ireland an elected legislator which has specific entrenched responsibilities allocated to each institution through legislation passed by the United Kingdom Parliament.

  Q173  Lord Sewel: I think we have got to recognise that in all devolved regimes, and I think also all federal regimes, there is an element of grant support to expenditure. No matter what other elements of funding are available, grant is a common feature of those regimes. What I am trying to do is get the essential difference between what was pre-devolution and post-devolution, and it does seem to me that the real distinctive thing is that pre-devolution you had the Barnett Formula, and if the Barnett Formula consequentials came up with an answer which the Secretary of State did not feel was essential, they had another route through bypass, as Lord Forsyth has argued. Now to all intents and purposes you have the Barnett Formula, you have the consequentials, but that bypass opportunity effectively no longer exists, and if you have a problem in a particular area, say the Health Service national wage awards, you are told you have got to vire, or you can use the element of fiscal autonomy that you already have which is the Scottish variable rate which at the moment, until now, you have not felt the need to use. Is that the essential difference?

  Mr Swinney: I suspect that probably does capture the essential difference, other than the fact that the United Kingdom Government still has the ability to bypass the Barnett Formula, as in the example I cited on prisons. I do not at all shirk the responsibility to vire within the overall pot of money that is allocated to us.

  Q174  Lord Sewel: That is what it is about, is it not?

  Mr Swinney: The foundation of the Barnett Formula is that essentially it creates a pot. It is the fundamental principle of the Scottish Government now, but there would also be the way in which The Scottish Office would have operated in the past, that there was an ability to not follow the spending patterns in England.

  Q175  Lord Sewel: But the difference is now, is it not—

  Mr Swinney: The fundamental distinction that I am making is that there is still the ability to bypass the Barnett Formula but that exists for the United Kingdom Government.

  Q176  Lord Sewel: Whereas previously if the Barnett consequentials came up with an "unacceptable figure" there was the opportunity of, let us call it, positive bypassing through the Secretary of State and the Treasury, and ultimately the Prime Minister if need be. Now the only way in which you can compensate for the same sort of unacceptable outcome is to use the Scottish variable rate?

  Mr Swinney: Yes, but the Scottish variable rate essentially reduces one's ability to spend money because of the ceiling of the departmental expenditure limit within which we have to operate, so I cannot use the Scottish variable rate tomorrow to raise an extra three pence in the pound in taxation, which would be of the order of about £1.2 billion, and be able to spend that because that would break the departmental expenditure limit set by the Treasury. I would have to reduce public expenditure programmes by £1.2 billion to ensure that money could be spent, so there is a real restriction and limitation in any sense on the effectiveness of the Scottish variable rate if we wish to cut taxation in that respect.

  Q177  Lord Sewel: I am not talking about cutting taxes, no, I am talking about compensating for a shortfall in the formula; you could use the variable rate to do that.

  Mr Swinney: Yes.

  Q178  Lord Forsyth of Drumlean: This cannot be right. Are you saying that if you were to levy the Tartan Tax you would put three pence on income tax—and I am not advocating this I hasten to add—which will bring in £1.2 billion, the Treasury would then reduce your budget by £1.2 billion?

  Mr Swinney: No, I am talking about tax reduction. The answer I was giving to Lord Sewel was about tax reduction.

  Q179  Lord Forsyth of Drumlean: But the question was not about tax reduction, the question was if you needed resources over and above the formula consequences, the Tartan Tax is the only mechanism?

  Mr Swinney: Yes.


 
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