Examination of Witnesses (Questions 240
- 259)
FRIDAY 27 FEBRUARY 2009
Professor David Bell, Professor David King and Professor
Kim Swales
Q240 Chairman:
Good morning, gentlemen, and thank you very much for coming. We
are very grateful to you for giving your time and expertise. I
think expertise is something that we will certainly be in need
of at some stage of our deliberations. I do not know whether you
want to make brief opening statements or launch straight into
the questions. Shall we launch straight into the questions and
can I start off then with a faintly historic look at this. What
do you understand was the purpose of the Barnett Formula? We have
heard lots of people on the purpose, including Lord Barnett himself,
who does not elevate the purpose of the Barnett Formula too high.
His view was that it was a short-term mechanism designed to be
short term and he is very surprised that it went on quite so long.
Do you think its purpose has changed over time? Do you think,
for example, it was designed to reduce tensions arising from disparities
in public spending per head of population? Do you think it has
succeeded in resolving such disparities? In other words, can you
give us a rounded look at the context within which the Barnett
Formula emerged and the way in which it has been operating?
Professor Swales: Could I just say something
to begin with. As I understand it, income tax was introduced as
a temporary measure as well!
Q241 Chairman:
And it was abolished at one time, was it not, and then came back.
I do not know in what order you want to go.
Professor King: My main interest is in what
you might do instead of the Barnett Formula with needs assessment.
Professor Bell: I guess I was around in 1979
when it was introduced and I also understood it to be a fairly
temporary expedient. It is simple; it is easy for the Treasury
to administer; it makes life much less complex around the time
of Spending Reviews because the Spending Reviews essentially become
bilaterals between the Treasury and spending ministries in Whitehall,
Scotland, Ireland and Wales take the consequences of these negotiations.
I wrote a paper with which Alan Trench will be familiar which
implies that it is a convergent formula.
Q242 Chairman:
I think we have the paper.
Professor Bell: And other people have argued
similarly. There has been relatively little convergence through
time. I guess, stepping back, that is an argument why it might
really have been seen as a temporary expedient in so far as presumably
it was understood at the time in the end to lead to convergence.
Through time it has gradually been tightened up, it seems to me.
Scotland managed, I suspect, to pull one or two tricks throughout
the period.
Q243 Lord Forsyth of Drumlean:
More than one or two!
Professor Bell: And then really starting from
1992 in particular it was tightened up, became more formalised,
the question of what was in, what was out, what the levels of
comparability were, were made more formal retaining the characteristics
of simplicity and ease of use, I think convergence is starting
to happen. Where it is leading is not necessarily a good place
to be.
Q244 Chairman:
It was very interesting talking to Lord Barnett about it all because
he told us that he did not know the needs assessment was being
carried out until told about it. And, secondly, convergence was
not really mentioned and it certainly was not in his mind. Thirdly,
it was designed to avoid the annual haggle between the Treasury
and the spending departments and territorial departments. He did
not expect it to last more than a few years, he is very, very
surprised that it has gone on quite so long, and he now thinks
it should be replaced by something which is based more on an assessment
of need rather than a mathematical formula. It is rather like
Topsy; it has grown.
Professor Bell: It is incumbency; once something
is in place it is very difficult to move, so rather like income
tax it is difficult to change.
Professor King: There is a point that if you
found some other system of allocation, clearly the different countries
are going to be either gainers or losers and you have this transitional
period. We have got at the moment a rather ad hoc formula.
We know how we have got here but how long is the transition going
to last and how easily will it be to defend what is going to happen
halfway through this transition? It seems to me one of the issues
which has not been thought about very much is how you would get
from one position to another one, and that causes problems. I
would just mention this: I was working for the Department for
the Environment when it introduced the poll tax—
Q245 Chairman:
And you still bear the scars!
Professor King: Without wishing to defend it,
if they had done the transition better it might have been rather
less unpopular than it was. My lesson from that was that a lot
of thought has to be given to transitional arrangements.
Professor Swales: As I understand it, it never
has been stated as part of Government policy that there should
be convergence. Although that might be implied by the mathematical
formula, I do not think this has ever been stated as part of Government
policy. A second thing is our take on this is that the Barnett
Formula is just part of a bigger set of institutional arrangements,
one of which is the fact that first when we had decentralised
government from the Scottish Office and now in devolution you
will have Scottish ministers who are arguing for the Scotland
case, so that although you might have a formula which might appear
to lead to convergence, then you have a one-way level of influence
which is attempting to maintain the position of Scotland and maybe
even the resources of Scotland. I disagree slightly with David
about this. For Scotland there is a remarkable consistency in
the Scottish expenditure per head over the UK expenditure per
head over a long period of time. It is difficult to explain this
except as being part of some kind of equilibrating system, I guess,
where the formula gives you a baseline over the top of which you
have special Scottish influence.
Q246 Lord Forsyth of Drumlean:
Just on that point, when I was Secretary of State I cannot imagine
how the system could have worked if it had just been based on
the formula. The reason, as you say, that the advantage in terms
of expenditure per head has been retained, which was inherent
in the baseline at the time the formula was set up, is because
we fixed it for that to happen, and there has been quite a lot
of comment on that that this was for political reasons and, yes,
there were some politics in it of course but also very practical
reasons. For example, if you have a baseline which is 22 per cent,
23 per cent, 24 per cent higher on health, and if three-quarters
of your expenditure goes on salaries, and if salary increases
are negotiated nationally, then you are going to have a huge gap
between the formula consequences of that pay increase and the
bill you have got in the Health Service. In my day I would go
along to the Chief Secretary and say, "You have got to give
me the money," and if he said no I would go and see the Chancellor,
and if he said no I would go and see the Prime Minister, and ultimately
the Secretary of State could say, "If you do not give me
this money I am sorry, I am off because this is not a workable
position," and that is how it worked. What concerns me in
the current position—and we have just been taking evidence
from Mr Swinney—is that that mechanism, partly because you
have different parties in power and partly because you have different
constitutional arrangements, has gone, so now we just have a straight
arithmetic means of determination. I have given the example of
health but there are hundreds of other examples, for example housing
capital, where all kinds of deals were done and every year we
had two or three months of absolutely bloody negotiations with
the Treasury, so the notion that this simplified everything is
wrong. It gave you a kind of starting position from which the
negotiations happened. From what I see in the evidence we have
heard that is absent now, and therefore the convergence which
the Chairman is talking about will happen, in terms of the practical
administration of government, I am amazed, and I think the only
thing that has allowed this to continue has been the fact that
there has been lots of money sloshing around and the budget is
now twice what it was. However, we are now going to go into a
period where that is going to go very much into reverse gear.
To my mind, a mathematical way of determining expenditure, as
opposed to one where there is some discussion about need, will
result in convergence and will result in real injustices and difficulty.
I do not know what you think about that?
Professor Bell: Your example is very interesting.
David and I talked beforehand and we agreed that, if necessary,
he would talk about local government and I would talk about health.
What is happening now is exactly as you say. I wrote a short note
on this where I point out the issue about the fact that of all
of the major sectors that involve public servants in Scotland,
health is the one where pay is agreed on a UK basis more than
any other, more so than teachers for example. So Scotland has
to fall behind whatever agreement is reached by the BMA, by the
Colleges of Nursing, and so on. Health is also interesting because
since devolution—and I communicated with John Aldridge about
this—it is one area where there has been almost strict follow
through on consequentials since devolution, so rather than second-guessing
the amount of spending on health after a Spending Review has taken
place, Scotland has applied effectively the Barnett consequentials
to its health budget which are consequent on changes to the Department
of Health's budget, so in a sense it is a pure application of
the Barnett Formula. Other types of spending will have been affected
by policy decisions that have been made by the Scottish Executive.
It does look, when one compares the latest Comprehensive Spending
Review, with 2002-03 when spending per head in Scotland would
have been around 22 per cent above the UK average, as if spend
per head will be under 10 per cent above the UK average by 2010-11,
indicating fairly rapid convergence. There is no mechanism, as
you say, to reflect the fact that standardised mortality rates,
say, in Scotland are 16 per cent above the UK average. There is
no mechanism so what would have to happen is that the Scottish
Executive would have to allocate more money to health, which means
less to other services
Q247 Lord Forsyth of Drumlean:
So you think it is unhelpful?
Professor Bell: Well, you know much more about
the bargaining position than I would. Clearly you can have bilaterals
between Scotland and Westminster, that is one way of resolving
it, and the other is to take the whole thing out of the political
arena as they do in Australia and let some quango decide.
Q248 Lord Sewel:
Could I just ask on the health thing, the credible expenditure
driver that is the difference in standardised mortality rates,
have you any evidence that there is awareness of that within the
Executive at official and ministerial level?
Professor Bell: I do not particularly detect
that the issue of the size of the health budget in Scotland has
been prominent over the last year.
Q249 Lord Sewel:
And the need basically to move away from a population-driven figure
to a needs-driven figure for health, that has not been part of
even an internal discourse?
Professor Bell: Not that I am aware of.
Lord Sewel: That is fascinating.
Q250 Lord Forsyth of Drumlean:
Could I just press you on this because it seems to me to be fundamental.
Because this Committee is not concerned with that, leaving aside
all the kind of politics and the arguments about alternative methods
of funding, we are where we are, and every year the Finance Minister
in the Scottish Executive has got to find resources. If I could
just press you on this. I do not believe for a moment that Barnett
was introduced in order to achieve convergence. It is implicit
that if you start with a higher baseline in Scotland which related
to Scotland in the 1970s, that there will be convergence, and
the constitutional changes mean that the kind of safety valves
that were in place are no longer there, and therefore the effect
will be, as you have pointed out—and I had not seen these
numbers and they are very dramatic—that there is actually
convergence taking place, and my question is: do you think that
this is a harmful or a beneficial thing? I do not want to put
words into your mouth, but if I were sat in John Swinney's seat
I would be looking at local government, I would be looking at
sparsity of population, I would be looking at what transport problems
I had got, I would be looking at morbidity and mortality rates
in the Health Service, and I would be wanting to make a case which
was that the moving to convergence in a straight formulaic approach
to this was actually going to damage public services and be unfair.
When we talked to him earlier, he said that he was against any
kind of needs-based system, which rather surprised me, and that
he was content, albeit that he would rather have something completely
different, to reside with where we were. I want to press you on
whether you think that this convergence effect is fair and whether
it is beneficial.
Professor Swales: One of the things is that
the formula works in a very arbitrary way. I remember I was doing
a seminar and trying to explain this to Israeli economists. I
hardly got past the explanation when they said that this could
not possibly happen. I was explaining what the impact would be
of having this and they said, "No, it could not possibly
happen." "This is what we have got." "It does
not make sense," they said, "It seems to be an arbitrary
mechanism." That is one of the things. Obviously the second
one is if it is leading to convergence then we do not have convergence
in expenditure per head in other English regions. We do not want
equality in expenditure per head in other English regions, so
you obviously would have to have concerns about it. If the mechanism
were working just by itself in the way that David is suggesting
it is now, which I think was a concern about when we moved to
devolution, as soon as we move to devolution I think the whole
mechanism had to be more transparent as well. Whereas before the
Barnett Formula had always been extremely opaque, let us put it
that way, as soon as it moved to becoming more transparent I am
surprised that this convergence has not happened faster. Maybe
it did not happen before because you had the same parties in Scotland
and England.
Q251 Lord Forsyth of Drumlean:
Because we stopped it.
Professor Swales: But obviously I think a system
which automatically moved you towards equality with the UK would
be one that we do not want. That would be my observation.
Q252 Lord Sewel:
Is it fair to say that it only worked pre-devolution because you
could do the type of formula bypass that Michael has talked about?
Professor Swales: Yes.
Q253 Lord Sewel:
Now because you have got two different jurisdictions, the opportunity
for positive formula bypass has virtually disappeared, and so
it is a very unstable and potentially dangerous situation. Is
that fair? There is nodding but we cannot get the nodding on the
transcript.
Professor Swales: Yes.
Q254 Chairman:
I am not sure there is nodding.
Professor Bell: In the absence of any other
mechanism, yes.
Professor King: I was just going to come back
to your question about why they are not pressing for needs assessment.
Although you mentioned these problems like sparsity of population,
there is a question of how much they push up the needs to spend
in Scotland. Two or three years ago I did some research. A lot
of the public services in Scotland are actually run by local authorities,
and I asked myself this question: suppose these local authorities'
needs to spend were assessed on the horrendously complicated formula
which Westminster uses to assess English local authorities' needs,
how much higher would the needs of Scottish local authorities
be? That was a question I started off with, with no notion of
what the answer would be. The answer was, in terms of education,
Scotland would have a lower need to spend fractionally than England
per head, and if you looked at all local services taken together
its needs to spend would be roughly 5 to 6 per cent above the
English formulae. I am not saying the English formulae are right
but nevertheless they seem to take account of an enormous amount
of variables, including for example sparsity of population. It
may be that Scotland thinks it is much better off with the present
arrangement than it would be with needs assessment, but insofar
as convergence may take place there could come a time when suddenly
they decide that needs assessment would be a better deal than
Barnett, but my suspicion is that that time has not arrived at
the moment.
Q255 Lord Forsyth of Drumlean:
I am not sure that is right. When I was Secretary of State the
Treasury Secretary always wanted to move to a needs-based assessment
and my officials at one stage told me that they thought the Treasury
thought they could get £2.5 billion to £4 billion back
if they moved to a needs assessment, and that I must at all costs
resist this, which I did. But then we had a system whereby ultimately
I could knock on the Prime Minister's door. John Swinney is not
in that position and from the numbers that you have quoted we
are moving towards convergence, and therefore I do not want to
jump to any conclusions. In my mind, the way to fix this is to
try and find some objective way not determined by politicians,
or the Treasury for that matter, of doing the exercise which you
do for local government and for health and transport and the rest,
and which is seen to be fair, and which gives stability and certainty,
but there does not seem to be much of an appetite for this.
Professor King: One of the problems is that
I think Scotland would lose a lot of money if it went down that
particular route. I would just mention one thing. You say that
you want an objective assessment of needs and I do not think that
is a feasible thing because different people can measure needs
in different ways. I just mention another example of that. Having
applied the English needs formula to Scotland's local authorities,
you could see how the English formula regarded the relative needs
of different Scottish local authorities. Scotland has an equally
complicated formula for assessing the needs of local authorities,
and there were marked differences between those two. For example,
Glasgow would be getting 20 per cent more for personal social
services if they used the English formula than the Scottish formula.
I thought there might be differences of 3, 4 or 5 per cent. On
roads some authorities in Scotland are getting two or three times
as much under the English formula as they get under the Scottish
one. When you mention objective needs assessment, I have no reason
to criticise the integrity of the people who do this at Holyrood
or Westminster but they are very complicated formulae leading
to extraordinarily different results.
Professor Bell: Can I just follow up on that.
In health exactly the same thing happens. You have got this very
simple allocation that is happening through the Barnett Formula
where the consequentials are being taken through to Scotland.
In England the Department of Health has the Advisory Committee
on Resource Allocation which is continuously carrying out a needs
assessment across health trusts in England. It has just published
its sixth edition since 1997, which is 101 pages long. It is not
really all that political, but it is highly complex because it
is trying to take into account a multi-faceted set of health needs.
In Scotland we have got the Arbuthnott Formula which is different
from the English one, and but goes through exactly the same type
of assessment. In between you have got this strangely simple mechanism,
the Barnett Formula, which is determining the total amount that
Scotland is getting. On David's point about objectivity, there
is really a big question mark associated with what that might
be, so you could argue that Scotland's decision to provide free
personal care to the elderly is actually a decision to extend
the boundaries of the NHS because it is free at the point of delivery.
If free personal care is "needed", why should we accept
an English view of what healthcare or a Westminster view of what
healthcare comprises? Even if you could come to some agreement,
there is an issue about information because personal care is not
a category in England so there is no need to record what it is
all about, so how could you bring it into a needs assessment in
any meaningful way at the moment without doing an extensive statistical
exercise. You are going to have to say these are the boundaries,
a minimal set perhaps of services that the public sector will
deliver, and base the needs assessment on those, and so some things
in Wales like free prescriptions might be excluded.
Q256 Lord Forsyth of Drumlean:
I think you are muddling two things, if I may say so. If you look
at the needs of the population in terms of healthcare, leaving
aside the whole issue of productivity of the NHS and how money
is spent, I do not think we should get into the trap of thinking
inputs is the same thing as outputs, but leaving that debate aside,
I got a prescription the other day and I was astonished that it
was only £5 because prescriptions had been cut, and it was
a very welcome subsidy for me but I am not sure that I need it.
That has got nothing whatever to do with the needs of healthcare.
If you look at the overall population and you can take a view
as to what kind of resource that might demand, you can equalise
that between different parts of the United Kingdom, I would have
thought. Then when they get the money, if they decide to spend
that money in a particular way that is up to them, but the argument
is whether you have a system that is fair. Are you saying that
you just cannot devise such a system?
Professor King: Can I just take a very simple
case where the only services involved were, say, police and primary
schools. You might say to make life even simpler the only factor
affecting the need for the police was the number of crimes and
the only factor affecting the needs for primary schools was the
number of children, but one area might say "we are not very
interested in education, we want to spend most of our money on
police" and another area might say "we are not very
interested in police, we want to spend most of our money on education".
Although you agree that what matters is the number of children
and the number of crimes, it is the weight to attach to those
factors which is still a matter of judgment. The UK Government
might say we are not interested in crime, we are only interested
in education, you have got a lot of crooks but we are not going
to give you much money. They might say we are only interested
in crime; we are not interested in education; we have huge needs
for police expenditure so why are you not giving us the right
amount of money?
Q257 Chairman:
How do they do that with local authorities?
Professor King: They do not try and do that
with local authorities. They say to local authorities we are going
to determine what we think is a reasonable level of police services
and primary education, we will give you an amount for that. If
you happen to want to spend a lot more on police or a lot more
on education, that is your tough luck if you have got a lot of
crooks or a lot of children. You might say that that is a reasonable
approach with local government because ultimately Westminster
or Holyrood or whoever is in charge, but Holyrood might not say
that was a reasonable approach if you were trying to sort things
out between the different parts of the UK.
Q258 Lord Sewel:
It has just struck me that the whole basis of devolution must
be to allow different policy priorities to appear in different
territories, but yet the funding relates back to an English profile.
Does there come a time where the policy profile and therefore
the spending profile is so different in the various territories
that to source that expenditure from an English profile becomes
virtually meaningless because there is no connection between the
two.
Professor Bell: I think that is quite possible.
We do see drifting apart in the way that health is organised at
the moment, and England could go towards more and more privatisation
so that people are paying directly for healthcare. That could
happen and it becomes less of a "public" service. That
is true about schooling certainly in England already. Effectively
what it reflects is differences in preferences across the different
parts of the UK and it is therefore difficult, as David was saying,
to get one set of weights associated with different public services
that everyone is going to be happy with.
Professor King: If I can just qualify what I
was saying, you could argue, "Well, you have got a lot of
crooks, if you choose to devote a lot of expenditure to police
we will give you a lot of money because you have got a high need
for a service which you think is important. If you choose to devote
little expenditure to the police we will give you less money."
So you could make some adjustments. Having said the main factors
are the number of primary school children and the number of crooks,
you could subsequently change the amount you give in relation
to those indicators on the basis of how much these recipients
are actually spending on those functions. I am not saying it is
easy but it would not be an impossible thing to do.
Lord Forsyth of Drumlean: I am not sure,
Professor Bell, I understand what you are saying. Let us suppose
that there is a change of Government in the south. Let us suppose
that the Government decides that they are going to do away with
the Health Service and they are going to introduce an insurance-based
scheme. I think this is highly unlikely and I am not suggesting
it but just to put a hypothetical case—
Chairman: It would be a good row!
Q259 Lord Forsyth of Drumlean:
The formula consequences of health would disappear as far as Scotland
was concerned in those circumstances. What would happen then?
If you had a needs-based system which looks at the population
overall and says that this is an appropriate amount of money,
you do not have that problem, and where I am struggling with this
set-up—and, as you know, I was not devolution's greatest
fan, partly because I could not solve these particular problems—is
they have set up this separate Parliament and separate Executive
but they have not actually thought about the consequences in terms
of the funding and Barnett. We have talked about convergence issues,
and, yes, you can decide to have completely different policies
north and south of the border, you can decide to have prescription
charges or tuition fees or whatever, but it does not seem to be
politically possible to do that in circumstances where you are
just getting the numeric formula consequences. If we cannot have
a needs-based system because it is too complicated, what are we
going to do?
Professor Bell: An alternative is to go towards
more accountability and therefore some more local taxation.
Lord Forsyth of Drumlean: We are not
allowed to talk about that.
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