The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 520 - 539)


Rt Hon Lord MacGregor of Pulham Market and Sir Brian Unwin

  Q520  Chairman: What I find fascinating is clearly the base line, the block line, went on from year to year without any re-examination of what it should and should not be and no re-examination of needs either. The Barnett bit of it was really to do with changes in the existing expenditure round.

  Lord MacGregor of Pulham Market: That is absolutely right. I have every sympathy with the point that Lord Barnett was making to you. I can remember 1978 very clearly. He was having a terrific problem with his Finance Bills because we had quite a powerful team on our side and these were the days when we went through the night. It was almost a full-time job in handling it. It was a tremendous pressure period and to get them off your back, in a public expenditure review, having to argue the minute details of the territorial departments was a great prize in the negotiations and so the Barnett Formula was created. Doing it on the basis of one year should not have meant that it lasted as a formula for 30 years. It was never conceived that way at all.

  Q521  Lord Lawson of Blaby: Lord MacGregor mentioned, and it was also my recollection of that time, that as a government we were fighting battles on a number of fronts. We had to choose, and I am sure it was true with every government but it was certainly true with that government, which fronts we were going to fight because you cannot fight on every front at the same time because that would be stupid. The political battle on making an adjustment would have been a very considerable one and, therefore, you can say, even though objectively this does not stand up this arrangement, it is ludicrous, the battle would be such a big one that you choose battles where you are going to get a bigger return. The fact is that in the first instance, whether you have a needs assessment or whether you adjust on population because of the base line on population, it comes to much the same thing. The number one premise must be that needs are greater the greater the number of people. In the first cut, as you said, the population thing is the same as the needs and then you refine it further, of course. You say, "If we are going to do this we cannot do it straight away; we are going to have to phase it in over a number of years". If you phase it in over a number of years then the gain each year is relatively trivial and so you say, "We are not going to fight that battle. We are going to reserve our ammunition and our strength for fighting other battles" and that is, in fact, as I recall it, what happened.

  Lord MacGregor of Pulham Market: I see that convergence has featured quite a bit in your discussions. I do not recall convergence ever being mentioned from the time I was there. The first time I was aware of the convergence argument was in Lord Lang's book which came out in 2002 and its pages on the Barnett Formula mentioned convergence. That was the first time I was aware there was a convergence.

  Sir Brian Unwin: If I may just endorse what I think Lord Lawson was, in principle, saying, from the point of view of the public expenditure control troops fighting in the Treasury trenches, it was extremely convenient to have a formula which had automaticity each year however intellectually defective that might be. If the rest of Whitehall accepted it, it was convenient. You got that out of the way before you got on to the big stuff in the public expenditure battle.

  Chairman: If you look at it now, clearly it was intellectually defective and for 30-odd years nobody has looked at the defects.

  Q522  Lord Lawson of Blaby: We were aware of them but we had bigger fish to fry.

  Lord MacGregor of Pulham Market: Several of us have advocated the fundamental assessment of the Barnett Formula in Parliament since. It has not been 30 years without it being challenged.

  Q523  Lord Smith of Clifton: All these arguments about bigger fish to fry will always apply and, therefore, there will always be the convenience and opportunity across Parliament: let us leave it alone. Lord MacGregor said that he thought you should do this at the beginning of a Parliament and it would take two years. One of the questions I was asked to put was what would be the level of administrative resources. It seems to me the level of administrative resources would be disproportionate just to get an intellectually coherent formula; you might just as well carry on as before.

  Lord MacGregor of Pulham Market: I do not agree with that.

  Q524  Lord Smith of Clifton: I am not saying I agree with it. I am saying the argument would be persuasive at any one time.

  Lord MacGregor of Pulham Market: Personally, I think the time has come to really look at it and it is up to your Committee to decide whether that is feasible and how it should be done. There are the grounds of equity and we all know those arguments. There are grounds that the base line was set in 1978 in totally different circumstances. We would probably have to look at the needs assessments in 1978 too, but it has carried on ever since and all of those arguments. The argument about convergence only makes a marginal difference. All of those arguments seem to be pointing to a need to look at a real needs assessment, and both in Scotland and England they do have it in local government in the way in which we distribute grants to local government. It is a big issue and that is why I think it needs to be tackled at the very beginning of Parliament.

  Q525  Lord Smith of Clifton: What do you think would be the level of resources?

  Lord MacGregor of Pulham Market: It depends how you intend to do it. It depends on what form of inquiry. You would have to have an independent inquiry of some sort, an independent task force, and not politicians, that would look dispassionately at the issues and the actual facts. I do not know how long that would take or how many resources.

  Sir Brian Unwin: Probably the argument against it, as you imply, is the can of worms argument rather than the administrative effort and resources that would have to go into it. Even if you commissioned an external independent inquiry, it would not require all that much to do a decent job looking at needs and all the other factors, perhaps including tax although that takes you into another very controversial area.

  Q526  Baroness Hollis of Heigham: I understand the comments made by Lord MacGregor and reinforced by Lord Lawson about bigger fish to fry and prioritisations. That would have a political judgment that we all sympathise with. What I do not understand however, and still do not, is the role of, if I may use a generic term, the Civil Service. In my limited junior experience, all the time benefits, forms of taxes and so on are kept under review. This is part of the guardian trustee role of the senior Civil Service, certainly for Grade 5 and elevated levels above. The fact that political masters may decide not to act on it is perfectly comprehensible given the situation. What puzzles me is the withdrawal from any apparent contemplation in a way that seems to me unprecedented from my experience, certainly on the benefits side. I would have expected every three to five years a senior civil servant, Grade 5 or above, to come along and say, "This benefit is now no longer adequate or fit for purpose. We believe we ought to review it. You may or may not find the recommendations acceptable, palatable, desirable or whatever but, minister, we will be failing in our duty as trustees and guardians of public monies if we did not go down that path." What baffles me is that failure of the Civil Service, particularly the Treasury, to act. I take Lord MacGregor's position and he might well have said "Go away. We are not going to do this" or it might go into the manifesto or what was thought appropriate. I do not understand the Nelsonian blind eye that the Treasury was knowingly engaged in. It seems to me really a dereliction of public duty.

  Sir Brian Unwin: If I may answer as a former official, although I was not in the Treasury at the time but in the Cabinet Office, the Treasury's overriding duty was to control public expenditure in accordance with the economic policies of the government. In this case there was a formula which, though not perfect, and the report says there is no right answer, had been broadly accepted by Scotland, Wales, Northern Ireland and England as being an adequate one and was carried on from year to year with no particular challenge. I do not think there was any reason or incentive for either the Treasury or the Scottish, Welsh or Northern Ireland offices to seek to reopen the formula; it worked broadly.

  Q527  Baroness Hollis of Heigham: I would have expected you to be evidence-based driven and clearly you were not. The fact that because politicians were not shouting about it then it was OK effectively, I am surprised at that.

  Sir Brian Unwin: This review took place in 1986. The Formula was produced in 1978-79 so it was not all that long after the Formula was agreed and put on the table.

  Q528  Lord Forsyth of Drumlean: The Formula was based on the base line and the issue was the base line. In my recollection, rather like Lord MacGregor, I was against a needs-based assessment when I was a minister because I believed that it would be disadvantageous to Scotland at that time. It was widely believed, mainly because people looked at the expenditure per head, which for example on health would have been about a quarter more, that Scotland was doing better particularly in respect to the English regions. Taking up your point about getting value for money for the taxpayer, every negotiation that I was involved with at the Treasury started from the proposition that Scotland was doing rather well and they were looking for ways to claw some of it back. Lady Hollis's question was why officials would not try and find a system which they could put to ministers which was fairer and which allocated public expenditure in a way which was more appropriate. I think one of the consequences of having that extra public expenditure was that value was not delivered because although we had 25 per cent more per head spent on health it is very hard to see that resulted in a Health Service that was 25 per cent better.

  Lord MacGregor of Pulham Market: First of all, I slightly correct Lord Forsyth. I did not believe that a needs assessment should not be looked at. I believed that it should be; I just did not think it could be done at this moment in time.

  Q529  Lord Forsyth of Drumlean: As a minister you took the view that what you thought should be done could not be done in your own office and I did the same.

  Lord MacGregor of Pulham Market: I would have gone on later strongly to argue it should be looked at because I felt very strongly about what I thought were the inequities. One of the reasons why I suspect that the Scottish Office did not want to look at this was they knew, as you, Lord Forsyth, have brought out very clearly, there was a big benefit to Scotland calculated at somewhere between £1.5 billion and £4 billion. £1.5 billion and £4 billion is a very different figure from £2 million.

  Q530  Lord Moser: It may be relevant to mention that we had evidence from the Treasury last week. The written evidence included a question, "What do you regard as the advantages and disadvantages of the Barnett Formula" and they could only think of advantages. I think it was the Chairman who asked what about disadvantages and they were rather lost to think of any. The present Treasury does not give me the feeling that they want to move on. Maybe there is something to be learnt from that.

  Sir Brian Unwin: Although the Treasury always wants to come back on a departmental programme when it comes to the public expenditure round, there was no deep feeling, in my recollection, across Whitehall, either in the Treasury or in the territorial departments, that this formula was wildly out of kilter. All departments were happy to let the Formula roll over each year subject to some argy-bargy at the margins. As we see in the report, following the 1979 needs report the Treasury did actually cut the Scottish allocation down by over £200 million over that period. The report also shows that over the period between the establishment of the Formula and my report the increase in spending in Scotland, Wales and Northern Ireland moved very closely in line with the increase in spending in England. It was not perfect but I think everyone was reasonably satisfied that it was equitable and in the context of the annual public expenditure round it was a very convenient way of rolling the figures over.

  Lord MacGregor of Pulham Market: I take a very different view from the officials. I do think it needs to be looked at. I think that basing expenditure rounds territorially today on a base line that was established in 1978 does not make any sense. I do actually think that it is inequitable or may be inequitable, I do not know. It looks as though it is inequitable with other parts of England and to England as a whole. We talk about Scotland being 126 if it is a 100 base for England, actually the eastern region of England, of which Lady Hollis and I are representatives, or I was, was 83 per cent. There was a huge disparity between eastern England and Scotland. Maybe that was justified but I do not think you can actually establish today whether it is justified without doing a needs assessment.

  Sir Brian Unwin: I was only referring to the position in 1986 as compared to 1978 but, of course, since 1986 it has changed profoundly for all sorts of reasons.

  Q531  Lord Forsyth of Drumlean: You, Sir Brian, keep focusing on the Formula which was supposed to produce convergence even though no-one noticed it.

  Sir Brian Unwin: It was maintaining divergence.

  Lord Forsyth of Drumlean: No, it was not.

  Lord Lawson of Blaby: In practice it was.

  Q532  Lord Forsyth of Drumlean: If the Formula provided for a 10 per cent increase, to make the numbers simple, and the base line on health was 25 per cent more, then the effect would be that it would produce convergence ultimately between what was spent per head in England and Scotland. Where it all went wrong of course was that the Scottish population was falling at the same time and the convergence effect was cancelled out by the population effect. There was no-one on either side of the border arguing about the Formula; what was being argued about was the base line. In those years we had phased discussions and every year the Treasury would try and do over the Scots, whether it was on council house receipts and how they treated on the capital programme, or the agricultural support programme or whatever, and there would be an endless negotiation. The premise behind that negotiation was: you are already doing very well on your base line. People were not arguing about the Formula, the 10 per cent, the additionality; it was the base line. I am with Lady Hollis on this. I do not have clear in my mind why nobody in the Treasury thought they should not be looking at the base line. To say that we were content with the Formula, of course you were content with the Formula because it was going to deliver ultimately if you dealt with population, convergence.

  Lord MacGregor of Pulham Market: I take the view that convergence has not occurred even with the population aspect and, of course, Formula by-basses have made it even more difficult.

  Lord Lawson of Blaby: This exposes most of the really important issues we have to deal with as a Committee. I would like to defend, if I may, Sir Brian Unwin and the Treasury from Lady Hollis's accusation of a dereliction of duty. That is a very serious suggestion indeed. The fact of the matter is that the Treasury's overriding duty was to maintain proper control of public expenditure. That was what the Treasury was doing and that was its priority. Going into a detailed needs assessment might have been somebody else's responsibility, I do not know, but certainly the Treasury's overriding responsibility was to have proper control over public expenditure, and indeed one might say that is something which is rather important today. In any case, I do not think you can accuse the Treasury of dereliction of duty. As for the question of convergence, it might be of some interest, and maybe academic advisers have done this, to do a simple statistical exercise of how many 100 years it would require to secure convergence under this absurd system. As to the question of the needs assessment or the population basis, what has happened particularly, which Sir Brian was saying, since 1986, which is almost a quarter of a century ago, the main thing that has happened and why this is a more serious matter now than it was then, and no doubt why this Committee exists, is that over the 23 years the divergence of the population of Scotland and the population of England has continued. It was alluded to in Sir Brian's report but of course it has got far, far worse since then and the difference is projected, if you look at the projections of population for the United Kingdom, to get even starker. Therefore, having a base line, unlike the annual increment, which does not reflect these changes at all is a much more serious matter now than it was in 1986 and likely to become even more so. Who is it who makes these projections for the government of population?

  Lord Rooker: It is the National Statistics Office, formerly the Office of Population, Censuses and Surveys.

  Lord Lawson of Blaby: If you look at their projections it is going to become even more absurd.

  Q533  Lord Rooker: Going back to the time when you were dealing with the issue you talk about the Formula taken each year one with another and it was not worth looking at it. There was also another issue which I think Sir Brian touched on in the sense that the Formula only delivered half or two-thirds of the expenditure. We were given one of the Treasury documents, these comparability tables of each department's percentage of UK. Did you ever look at those? Were those ever altered? One thing I should have asked last week was whether they had been stable throughout the 30 years as different things have come and gone. Was that an issue that was dealt with?

  Sir Brian Unwin: We certainly did. As the report brings out, we looked at three expenditure aggregates: the territorial blocks which were allocated to and under the responsibility of the Secretaries of State; the total expenditure in the territories under the control and responsibility of the Secretary of State; and total public expenditure. In the last category were things like defence, and so on, which were not allocated between the territories. We looked at all those aggregates and the broad conclusion was that over the fairly limited period we were looking at, 1978 to 1985-86, all these aggregates had moved in a broadly consistent fashion. In particular, spending in the three territories had moved in line with the general trend of expenditure in England. There was no dramatic divergence or lessons derived from that given the base line.

  Q534  Baroness Hollis of Heigham: Simultaneously you, in conjunction with what was then still called the Department of the Environment, were making quite detailed adjustments to the RSGs going to local government within the regions on transitional periods over three years, and cushions and all the rest of it, so this was an exercise. When I was talking about dereliction of duty, I was not talking about bad faith but I am saying that I think there was a vacuum that should have been filled, in my judgment and in my view, by officials in the same way and analogous to what was going on within local government and regional expenditure. We expected this to happen. One of our difficulties in local government was we were always changing. There were always cushions, dampening, underpinning, caps, and so on, but this exercise was done, and done continuously, and continuously adjusted in the name of control of public expenditure, subset value for money, subset fairness, equity, et cetera, et cetera. In an attempt to meet the gap between needs and resources, however much that might be contested, sparsity versus density or whatever, we did this and that remains puzzling to me. Did the Treasury ever look at the regional heads, not necessarily the individual authority as that would be a matter for the Department of the Environment when I was involved in those negotiations? Did you ever look at the regional dispositions relating to your regional offices for similar activities?

  Sir Brian Unwin: I cannot answer for the Treasury, Lady Hollis. I was in the position of, as it were, holding the ring in the Cabinet Office and chairing the group on which were representatives of the territorial departments, the Department of the Environment, the Treasury and so on and so forth. Whether or not during that time the Treasury were doing what you suggest, I do not know.

  Lord MacGregor of Pulham Market: I am not aware of it. I certainly think that if I had sufficient time to get it done and was in a position to commission it I would want to do that because I think you are absolutely right. You put the subset of fairness and equity rather low down; I would put it higher up. We were always trying to do that based on need in local government, rates for grants and negotiations and so on, and the Scots were doing the same in the rate for grants negotiations. This would have been a bigger exercise but it has the same principles behind it. On the convergence point, when preparing for this I was struck by an argument on convergence on page 24 of the House of Commons research paper on the Barnett Formula which I would suggest you have a look at. It is a curious result, according to them, of convergence based on the amount per capita that actually the lowering of population in Scotland makes the convergence worse. It is well worth developing that argument too.

  Q535  Lord Rooker: In some ways we have batted this around. Looking at the slot between 1978 and 1985-86 it is useful to know what we know about that but now we are in 2009. We are in a completely different situation now because we have got the regions, if I can call them that, Scotland and Wales, competing with England—and I will give one example in a moment—which did not happen before because the political control was different. That is what is different. I am not saying that is the reason for opening it up but the fact is the English regions, the RDAs and that, effectively are not allowed to compete with each other. They are all doing their bit for each region in terms of competing, whereas there is an example I was unaware of until yesterday that the Welsh Assembly Government are offering a wage subsidy to manufacturing industry which Wales is not strong on so it does not cost very much. On the Hereford/Shropshire border in England you have got large manufacturing plants still and some of them have plants in Wales. Why have a plant in Welshpool and Telford when you can now go all to Welshpool and get a subsidy from the Welsh Government paid for by the excess. You have this competition across the border which did not occur. I am not arguing for total political change, although there is a Plaid Cymru-Labour coalition there and Scotland is clearly competing in lots of other ways. If we are going to have a reason to do this, if it is an independent body—we do not have Royal Commissions any more because they take so long—if you do something immediately at the beginning of a Parliament, a Royal Commission, it is 18 months at least and it reports and there is a debate. We are then back in the position we are in now coming towards the end of a Parliament when you have to take some action. I am not offering the best time but clearly enough people are looking at in now. The circumstances are completely different. The history is useful, but if we look at it now and assume for the foreseeable future the Scottish Government, the Northern Ireland Government and the Welsh Assembly Government and the Government here for England in Westminster will consist of different political parties which are by and large competing with each other, although you may get a couple the same, that is a completely different scenario from what we have assumed in the past. Devolution is the factor but devolution has brought about different competing parties using the money for competing across the borders within the UK. That is something I do not think was ever envisaged and that is the thing that is fundamentally different now. You could argue after 30 years is well worth a look at as to how the money gets divided up. If we go for a needs assessment in the sense of today's needs, we have to take out the competitive elements because they are building in these needs now. If we are not careful we are getting a false picture of what the needs in Scotland and Wales actually are based on what has been happening under devolution. Would you see major issues in assembling what the needs would be in the circumstances we are in now, not when you were in government? That is the key difference now.

  Lord MacGregor of Pulham Market: Leaving aside questions of fiscal autonomy and all that sort of thing, which I know you are not allowed to look at, undoubtedly these sorts of issues will continue to increase. We already have them in relation to Scotland with tuition fees and the rest which we are all very familiar with and yours is another example. I think these will increase. How you tackle it politically is an issue but I think it would illuminate all our thinking about it if we did have a proper needs assessment. That is the starting point.

  Sir Brian Unwin: I think, if I may say so, if we had been asked to do a full examination formula and do a needs assessment in 1986 one of our guiding principles would have been equality of services throughout the United Kingdom. I am not sure that now applies for the reasons you were suggesting because with the devolved administrations there are different political priorities. There are different weights attached to the value of different services, so it would be a more complicated exercise now given the changed political situation.

  Q536  Lord Lawson of Blaby: I said I would ask question three and you have confirmed there was no needs assessment done. This reinforces, in a sense, Lord Rooker's point. It always struck me when I was Chancellor that there was an element of make believe in all this where needs assessments were decided and calculated and this led to figures in the public expenditure White Paper for education and various other services which came under local government. People used to argue vigorously as to whether we had done the right thing in terms of too much or too little in education compared with other things. In fact, these figures in the White Paper bore only an accidental relationship to what was actually spent because local authorities, provided they fulfilled their legal statutory obligations, could use the money they got from the rateable grant for whatever they wanted. You were given this complicated needs assessment, so much for education, so much for local social services, and the public expenditure White Paper was just a make believe document apart from the totals which of course were very important. This has become even more so following devolution for the reasons Lord Rooker has pointed out. I am not saying we should not have a needs assessment at all but we need to be absolutely clear that what emerges from the needs assessment is most unlikely to be what happens on the ground. For example, there will not be an amount of money allocated for the Welsh Assembly to subsidise manufacturing across the border in Wales but that does not mean to say they cannot take it out of one pocket and put it in another. It is all a bit of make believe.

  Lord MacGregor of Pulham Market: In terms of looking at the table in the White Paper, that may be so to some extent but I do not think it undermines the general principles because the two general principles are more devolution of decision taking down to the local level to distribute resources in accordance with what they see as local need but a fairer way of distributing to the regions and to Scotland, Wales and Northern Ireland nationally. It is inevitable that if you base your distribution on needs in some regards, and that local authority decides to spend it somewhat differently, that will occur, but it is not necessary to say it is wrong.

  Q537  Lord Forsyth of Drumlean: A third of the Scottish block was distributed to local government on a needs-based basis. The next largest slice was the Health Service, and the Health Service money was distributed—I cannot remember what it was called—on a very complicated needs-based formula to work out what the health boards got. In practice, although the money may have come as the base line plus the percentage increase that happened in England, when it was dished out and when the Secretary of State decided its priorities the bulk of it was actually distributed under a needs-based system. I just wanted to follow up on what Lord Rooker has said. My experience of the operation of the Barnett Formula was that you needed to have Formula by-pass to deal with particular exceptional circumstances that arose because the base line was higher. For example, if there was a nationally agreed pay settlement in the Health Service which was substantial the Formula consequences of that for Scotland, given the base line for Scotland was 25 per cent higher and given that three-quarters of the money went on pay, would have been far short of what was required to meet the pay bill. We knock on the Treasury door and say, "We are poor Scots. Can we please have an extra dollop of money?" We got that money in 1986-87. I think it was after you left. There were various adjustments made from time to time which is another reason why convergence has not happened.

  Lord MacGregor of Pulham Market: Absolutely.

  Q538  Lord Forsyth of Drumlean: Now we have devolution and what appears to be happening is there is no dialogue at all between the Scottish Executive and the British Government and they simply get the straight Formula consequences and ultimately that will lead to pressure on those budgets. Is there not an argument that you need to have a needs assessment in order to be able to defend what you are getting? There must come a point where what they think you are receiving will be not overgenerous but less than what is required in order to meet the needs. If you have not got some objective method of doing that, given that you have lost the ability of having one party in government and colleagues who do not want to embarrass each other and make it difficult, is there not a requirement arising from the devolutionary situation, even if they pursue the same policies, to have some kind of system? The fact that they are pursuing different policies makes it even more important to draw the line at an early stage. That I think is the key question.

  Lord MacGregor of Pulham Market: I agree with that conclusion. Could I say that it would not necessarily follow the consequences of pressure, with your Health Service for example, on the base line leading to the negotiations either side of the Formula. What could well happen, depending on the political strength and the position of the Secretary of State, is you would take the base line as a given and then argue in negotiations that of course the base line is there but he must have something extra because of the consequences of the National Health Service National Pay Agreement. That could lead to moving in the other direction, that the Formula by-pass gets bigger and bigger while the base line is still much higher than the financial average and is 126 against 100. It could work that way but I think we end up with the same conclusion.

  Sir Brian Unwin: A key question, if I may just comment, is that whatever its defects the Barnett Formula, with some changes as we went along, was accepted over a long period as a reasonably fair and sensible base for the annual decisions on public expenditure. Perhaps the question for your Committee is whether there is a prospect of producing a substitute formula which is any fairer or more realistic or more acceptable in the more complicated circumstances of devolved government in the territories.

  Q539  Chairman: You are absolutely right. One thing that is perfectly clear is the convenience of the Formula. Successive governments found it much easier just to let it run than to have a good look at it and decide how they wanted to finance the devolved administrations. It has not been done in any meaningful sense of the word. We had six questions on the paper and I think you have answered them all. Is there anything else you wish to add?

  Lord MacGregor of Pulham Market: It is interesting that two former Chief Secretaries had to go along with the Formula for the reasons I have described with me and Lord Barnett described with him, but both of us did not like it and, in fact, think it needs to change.

  Chairman: Can I thank you very much for coming? It has been a terribly helpful session. We have learnt a lot and had some enlightenment and are grateful to you for coming. Thank you very much indeed.

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