The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 508 - 519)


Rt Hon Lord MacGregor of Pulham Market and Sir Brian Unwin

  Q508  Chairman: Thank you very much for coming and giving us the opportunity to ask a few questions and to listen to what you have to say. The evidence sessions are broadcast live on the internet and a full transcript is going to be taken. You have the opportunity to make relatively small corrections to the transcript, but I do not think you can alter the sense of what was said. Can I also say that if you felt, after you had given evidence today, that you wanted to submit further written evidence we would be delighted to receive it if you felt certain areas had not been covered or not covered in sufficient depth. Perhaps I can start with a fairly general question. We are trying to get a real feel for how this thing actually worked and it would help us to know from both of you how rigorously was the Barnett Formula applied in funding the Scottish, Welsh Offices and Northern Ireland departments when you were at the Treasury. How much negotiation around the Formula took place and how important was that negotiation in making the machinery work? How much did this involve ongoing by-passes of the Formula, how much one-off additions to the territorial block grants and how much of that was pressure from the individual Secretaries of State? How did the Treasury deal with this when it happened?

  Lord MacGregor of Pulham Market: Can I begin by saying it is interesting to be on the other side of the table for so many years in a different position. I would like to draw a distinction between the 1985-87 period when I was in the Treasury, which you do want to talk about and which this question is addressed to, where frankly these issues were comparatively minor in relation to the huge pressures I was facing on public expenditure at the time and the question of the Barnett Formula more generally. I have always been interested and had a view on it, although it has not been on the top of my mind in recent years. I would be happy to go into that as well if that would help. I have been trying to bring myself up-to-date by reading as much of the evidence as I could. On the question that you have asked, I think the answer is very little. The Barnett Formula as such was more or less a given. We did not attempt to deal with the issues that were involved in the base line, the block. There were, of course, discussions about additional bids. There were discussions about what became later known as Formula by-pass issues and there were, therefore, some small additions, I recollect—it was a long time ago—but we did not actually get into the detail of challenging the block. That was left to the Secretary of State to dispose of as he wished and the Formula was applied.

  Q509  Chairman: You did not get into how the Formula was made up, whether it should be changed or stay as it is, it was just a formula.

  Lord MacGregor of Pulham Market: We did have a small issue in the report that Sir Brian Unwin did which was looking a bit at the Formula—and if you like I will go into that in some detail—but the basic position was we accepted the block and then there were discussions in negotiations between us on individual bids and so on, some issues about savings in other English areas and should they be reflected in additional expenditure for Scotland and that sort of thing but these were comparatively marginal. The other important point to take into account when you come to the Unwin Report was that I became Chief Secretary in September 1985, not a good time when the actual departmental negotiations were literally just about to begin, and found it very difficult to achieve the savings we were looking for in expenditure that time. Thereafter I raised certain issues right across the board, one of which was in relation to the Barnett Formula which we were going to look at in preparation for the 1986 Annual Expenditure Review and that is where the Unwin Report came in. In terms of actual negotiation with the Secretary of State for Scotland, it was as I have described.

  Sir Brian Unwin: Can I, my Lord Chairman, just endorse what Lord MacGregor said and, first of all, say what a pleasure it is to be here myself. The last time I was in this committee corridor was before the Public Accounts Committee on many occasions, so this is a much more pleasant occasion. I was in the Cabinet Office, not the Treasury at the time; I was on secondment from the Treasury. I was the Deputy Secretary, as they called it then, in the Cabinet Office in charge of the economic secretariat which was servicing all the economic business of the Cabinet and the economic committees of the Cabinet. My secretariat and I were called on to produce many interdepartmental reports and this was one of them. I have to be frank and say I had not thought of it since 1986 until it was raised again recently. May I make two points? Firstly, I very much agree with Lord MacGregor that the Barnett Formula was taken as given, as it were, and it was a convenient guide each year. We did not go back and renegotiate it and have a look at it. What it did was establish a formula that most people accepted although it only covered between a half and two-thirds of expenditure in the territories. It was the generally agreed basis for carrying forward the public expenditure projections although the Treasury did chip away at it from time to time. Secondly, if I may just add to what Lord MacGregor said, the 1985 public expenditure round was a particularly difficult one because the Treasury and the Chief Secretary were unable to reach agreement on many of the main spending programmes. The Prime Minister set up what was known as the Star Chamber, which was an ad hoc committee of senior ministers, chaired at the time by Lord President Lord Whitelaw and comprising a number of senior Secretaries of State who had either settled their departmental programme with the Treasury or had no major departmental responsibility, ministers with rather exotic titles like Lord Privy Seal and Chancellor of the Duchy of Lancaster and so on. I was in the Cabinet Office then and my job was to organise and run the Star Chamber under Lord Whitelaw. We did have particular difficulties with the Scottish Office that year. It was not the largest public programme by any means, in fact it was rather trivial in comparison with defence, housing and so on, but I do remember it was very difficult to reach agreement. I do actually remember being called to a meeting with the Prime Minister and the Lord President and being sent around to go and do a deal with the then Secretary of State for Scotland at the time, Sir Malcolm Rifkind. The genesis of the report I was asked to chair was partly to search for the truth, as always, but partly to see whether there were respectable arguments to make some adjustment in the Formula and possibly to reduce the allocation to Scotland. As you will have seen from the report, taking expenditure per capita on the block for England as 100, the Scots were around 126 so there was a very much larger proportionate share, for all sorts of reasons, going to Scotland than to England. That is the background to the report I was asked to produce.

  Q510  Chairman: Was there a needs assessment of any kind?

  Lord MacGregor of Pulham Market: Not at all. It was made very clear in the remit that it would not tackle the question of need. This was just one of several follow-ups to the 1985 round that we did with various departments, so the Scots were not unique, but this was one that we did want to tackle because we wanted to see if there were still further savings in the Scottish budget.

  Sir Brian Unwin: Again, as the report makes clear, population was not one of the factors taken into account in producing the so-called Barnett Formula. In fact, our report went on to say that if you are looking for ways or reasons for changing it you could make use of population as well as possibly some other social or economic indicators.

  Lord MacGregor of Pulham Market: It might be useful to go onto the report in due course but that is the background to why the Unwin Report was set up.

  Q511  Lord Forsyth of Drumlean: When I was a minister in the Scottish Office, both as a junior minister and as the Secretary of State, I always had the impression that the view in the Treasury was that there was the need to have some kind of needs-based system for allocation, particularly as regards Scotland, because the feeling was that there was not adequate provision. Was that just paranoia on the part of some of our officials or was there a real cultural need? Looking at the history of this there has been a series of attempts to try and move towards some kind of needs-based assessment which have met a sudden death in a dark corridor for reasons which remain obscure.

  Lord MacGregor of Pulham Market: When I was in the Treasury I was not aware, and I think Lord Barnett said the same, that the needs assessment was undertaken in the late 1970s. I have made clear already that when we were trying to see if there was scope for savings in Scotland through the Unwin Report, needs was excluded. I do not think at that stage, and I explained some of the reasons, that we were looking to tackle the block base line and the needs basis on which that was apparently drawn up. I have views about that which I can express later, but the answer to the question is that was not in the mind. What was in the mind was, as with every other departmental budget, where can we make savings.

  Lord Lawson of Blaby: If I may, Lord MacGregor was Chief Secretary as the time I was Chancellor and I was very fortunate because I could not have had a better Chief Secretary as I could leave all this with total confidence to him, and with Sir Brian Unwin in charge of the Star Chamber that was in such capable hands that it really made my job very much less difficult than it would have been otherwise.

  Baroness Hollis of Heigham: Why did you not sort it?

  Q512  Lord Lawson of Blaby: The answer is, if I may, that if Lord MacGregor said that this was a relatively small issue compared with the much bigger issues he had to deal with, that was true in spades so far as I was concerned. If I may get back to the evidence we have just had, particularly the evidence of Sir Brian, he seems to get absolutely to the heart of this. The great curiosity in all this is that if you read, and I am sure our witnesses have read, the written evidence given by the Treasury they refer to it all the time as the population-based Barnett Formula. All the time it is the population-based Barnett Formula but, of course, on the population basis, which is attended to rigorously so far as the annual changes to the up-rating are concerned, there is no population-based base line and that is the extraordinary anomaly. Obviously population is not the only criterion; it is what you might call the first cut. There are other dimensions that have to be taken into account. It does seem anomalous, and this was the main burden of the Unwin Report, that whereas population is considered to be the most important basis for change, it is not considered to be of any importance at all for the base line. Obviously there are political reasons for this but it is a curious anomaly. It seems to me this is the heart of the problem and that is why Lord Barnett, when he gave evidence to us, was upset about what seemed to be the unfair treatment vis-a-vis Scotland and England. I wonder what was the reaction, either by Sir Brian or Lord MacGregor who was Chief Secretary at the time, to the report that Sir Brian made which actually did focus on this very point.

  Sir Brian Unwin: My recollection, my Lord Chairman, is that no action was taken at all.

  Q513  Lord Lawson of Blaby: Was any reason given?

  Sir Brian Unwin: I simply do not recall. If I may say so, looking at the report again, and it is the first time I have read this since 1986, I am not particularly proud of it. It is a pretty thin report and looking at it now I would say we did not do a great deal more than go through the motions. What we did not tackle, and that was because I was not asked if not actually forbidden to do so, was to look at the needs basis. If we had done that it would have been a very much more profound exercise. If you do the whole thing thoroughly you would not only be taking account of needs but you would be looking at the quality of services, political preferences in the territories and so forth. This was a very quick and clean job which, in essence, said if you want to find some justification for making some changes, and quite honestly the best way of doing that would be just to make a one-off change in the base line, population is your best bet. Lord MacGregor, as Chief Secretary, may remember the follow-up but I do not actually remember any action being taken as a result of this report.

  Lord MacGregor of Pulham Market: It was probably my decision if I remember rightly. I may be wrong but I will tell you why I think it was. It started from the point, and we must always come back to this, we had bigger fish to fry in the whole public expenditure rounds of much bigger sums. I had an instinctive feeling that at some stage the position in relation to the Scottish base line, as well as the Barnett Formula, had to be tackled but I did not really want to take it on that year for two reasons: one was that, as Lord Forsyth knows well and as Lord Lang knows, the Scots always had a very, very strong position politically. Lord Barnett said that governments are against change but actually it was not that, it was the political reaction. At that stage we were not prepared to open up this huge area from the political point of view. The second reason was that if you are going to go into a needs study you do not do it half-way through the Parliament. I think if you are going to do it, as it is such a big thing, it has to be done immediately in a new Parliament. It will take about two years for the study to be completed and then the follow-up action. I did not see there was going to be much political merit in tackling the whole base line in the Barnett Formula. Why did we not pursue the recommendations in the Unwin Report? If you actually look at the Unwin Report they had three recommendations. The first two were different variations of changes in the Formula whereby the territorial blocks were adjusted, and that was for the increase not the blocks themselves, on the basis of the existing Formula but in line with the population changes since 1979, which I think was what Michael Portillo acted on as Chief Secretary. If this had been in force in 1985 the saving in 1986-87 would have been £2 million, that was the change in the total for Scotland, and £2 million and £2 million in the next two years. That was just not worth entering into because it would very quickly have been absorbed in any additional changes in the Formula by-pass. In the other two the saving was £9 million which, again, is pretty small. There was a third and that was to adjust the base line once off to reflect the changes in population since 1979 so that was actually looking at the base line, but adjusting it once off. That would have produced a great debate about whether we were right to change the base line but even that would only have produced a reduction of £109 million going to Scotland, and in terms of all the other figures we were dealing with and the kind of issues we were arguing about off the Barnett Formula it was not worth it. That is why I say I think this period was a fairly minor one and the big issue is where we go now.

  Sir Brian Unwin: In retrospect, I am surprised that we did not somehow latch onto the needs element in the rate support grant. There is a basis of calculation there used for the calculation of rate support grant and, looking back, I am not sure why we did not. We had someone from the Department of the Environment on my group but we did not, for whatever reason, make use of that at the time perhaps because in my terms of reference I was asked or encouraged not to look at the needs element.

  Q514  Chairman: There is no doubt that it is possible to do a proper needs assessment.

  Sir Brian Unwin: I think it would be perfectly possible and would not take an enormous group.

  Q515  Chairman: You could then work out the base line on the basis of that assessment.

  Sir Brian Unwin: There would be a lot of political choices to address.

  Q516  Lord Moser: On your former point, there had been a needs study in 1979 and we are talking about 1986. Was that suppressed? Were you not allowed to look at that? Were you not allowed, by your masters, to find out whether maybe it was worth going back to that?

  Sir Brian Unwin: My recollection, and it is only my recollection because the copy of the report I have strikes out the introduction and I do not have my covering minutes to the Prime Minister, which no doubt repeated what I had been asked to do, is that I was probably discouraged from getting into the needs issue and so did not cover it.

  Q517  Lord Moser: By the Treasury or somebody else?

  Sir Brian Unwin: It was not the Treasury who asked for the report; it was asked for by the Prime Minister, I think, on behalf of the government.

  Q518  Lord Moser: Who might have discouraged you?

  Sir Brian Unwin: I simply do not know. It may have been that what the Prime Minister and ministers wanted was a pretty quick and clean report and to have gone into the needs element would have made it a much more complicated and lengthier exercise although it could have been done.

  Lord MacGregor of Pulham Market: I think that is the answer, we were trying to find something for the 1986 public expenditure round. Looking at the whole of the needs basis would have been a massive task in a few months and we were looking for something that would have got quicker results. I repeat that I certainly did not know the Treasury had done a needs assessment in the late 1970s.

  Q519  Lord Rooker: Thinking about the dates that we are talking about, 1985-86, this was raised with somebody else that came in front of us and I thought at the time you have to think of other things going on. Surely in 1985, in preparation for parliamentary year 1986 in terms of the atmosphere, particularly when you mentioned about the rate support grant, the legislation for the community charge for Scotland was actually right in front of us as parliamentarians. The legislation took place before the 1987 election so it was a real hot potato in 1985 as you go into 1986. Given the radical change, with the allegations that Scotland is being used as a test bed for this, if then someone starts an internal discussion about the Barnett Formula and chopping back in Scotland you can imagine closing that discussion down, and I am just thinking aloud. I am thinking of the other things going on at the time which would have caused the pressure. You do not go onto another debate when you already have this one; keep the Formula as it is, do not pursue the report that you used and do not open it up.

  Lord MacGregor of Pulham Market: That may be part of it and it is difficult to reflect back on how many issues there were. Every week, sometimes almost every day, I came into the Treasury and there was a demand from somewhere for additional money as a result of EU decisions, European Court decisions and so on. I can remember on one occasion I had to negotiate very, very hard for a very quick period about some outcome of a thing called the Tin Council which was more than £400 million, so in relation to fighting those for £2 million that was just not worth it. I had hoped it would come up with more than it did.

  Sir Brian Unwin: It is also true that in the context of the public expenditure round whether you did a bit more or less on Scotland, Wales or Northern Ireland was pretty irrelevant to the outcome of the whole exercise. The exercise was primarily about defence, health, housing, social security and so on. Important though the territorial issues were, they were not crucial to the conclusion of the public expenditure round.

  Lord MacGregor of Pulham Market: Perhaps I can make one other point before we go onto other things. I am describing what happened exactly then but I have always been in support of Lord Barnett wanting to see a change in the Barnett Formula. I do very much agree that a needs assessment has to be the basis to see what the change should be. Although I did not tackle it ministerially then, I do strongly support it.

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