Examination of Witnesses (Questions 508
- 519)
WEDNESDAY 18 MARCH 2009
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 recollectit was a long time agobut
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 Formulaand if you like I will go into
that in some detailbut 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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