The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 540 - 559)


Dr Eurfyl ap Gwilym, Professor James Foreman-Peck and Dr Gillian Bristow

  Q540  Chairman: Thank you all for coming. You know what we are about. You have heard that we have this inquiry by the Select Committee of the House of Lords, and I think you have seen the terms of reference of the Committee, so you know what we can look at and what we are not supposed to look at. Can I say two housekeeping things? First of all, this is a public hearing. As I understand it, the BBC is taking a full sound video of the whole thing. Whether they use it or not, I do not know. A full transcript is obviously going to be taken. When the transcript is out, you will have an opportunity to look at it and see whether you want to make any alterations to it. If you want to make small alterations, fine; but if you want to change the sense of what it is you said, I am afraid, like Hansard, the answer will be "no". I wonder if I can ask you some basic questions to start us off! What do you understand was the object of the Barnett Formula? What was the object of the exercise when it was first introduced? Do you think its purpose has changed over time? It is a long time now since Joel Barnett—well, he did not introduce his formula—it was not even called a formula for about a decade, but it is one that now bears his name. Do you think it was designed to reduce tensions arising from disparities in public spending per head of population, or do you think that is the way it has developed, and do you think it has been successfully responding to any of those tensions?

  Dr ap Gwilym: I imagine that the purpose is rather clear. Bear in mind the timing of this as well; it was in the run-up to the devolution referenda in 1979. There was already funding, with funds going to Wales, Scotland and Northern Ireland for devolved services. Clearly there needed to be some sort of funding mechanism. Why those three departments did not have bilateral negotiations with the Treasury the way other departments of state have, I am not clear. I assume one of the advantages to the Treasury was that there were three fewer sets of negotiations—remember the old days, the Star Chamber and all that—though that is speculation! I do not think it is reasonable, by the way, but it probably seemed reasonable from a London viewpoint that you said, "Let us look at the changes in expenditure when planning our programmes in England, and in the case of those programmes where the spending on the programmes in Wales and Scotland is devolved, let us change those by the same amount as in England on a per capita basis." The interesting thing about that, of course, is that they did not do the obvious thing, which is that if spending is going up on a particular programme in England by X per cent, that you do the same for Wales and for Scotland. Instead of that, they said, "Let us take a monetary amount per capita"—and we will come, presumably, later on to the question of convergence, which is, to my mind, intrinsically built in to the way the Barnett Formula works. Nevertheless, it was a way of saying, "Right, we are going to spend so much extra on a programme in England and where it is devolved in those two countries, and we will take the lead from the change in England and that is how we will change the moneys coming to Wales and to Scotland." That was the purpose. I think the "reducing tensions" consideration, if it was there at all in those days, comes back to the next question you have got on your list, which is the convergence issue. I do not think it does reduce tensions because the key issue there, is that if you look at the disparity in identifiable public expenditure per capita within England, you have a very wide range within England, and that has nothing to do directly with Barnett at all. Barnett is designed to allocate moneys to three of the four countries of the United Kingdom and has nothing to do with intra-England allocations. Indeed, if you level the identifiable public expenditure per capita across the UK, England gets about 3 per cent more—that is all—so that would not sort out, for example, the north-east of England problem. If you look at the disparities, the IPPR report last year again, from Nuffield College, states that the huge additional spend is in London, where it is about 28 per cent above the UK average. Broadly, Barnett does what it says on the tin, as it were, which is to allocate these moneys in a fairly easy way, using a rather simple—people might argue crude—formula on a population basis. That is what it has done the whole time. We may come back, Chairman, to questions about convergence and why there has not been so much until the last decade, in a moment.

  Dr Bristow: I would just echo that and say it is probably quite well acknowledged now that the Barnett Formula was a temporary, probably political expedient that became permanent. It is something that was designed principally, as Eurfyl said, in relation to the first proposals for devolution in the 1970s and used to determine how public expenditure should be allocated to Scotland principally, in the context for those preparations for devolution which subsequently did not occur. I think Lord Barnett himself has stated that he did not expect the formula to last as long as it has, but clearly it has been something that has worked. It has been practical and effective in that sense.

  Q541  Chairman: He told us on a number of occasions that it was a convenient way of avoiding three different rows between parts of the UK and the centre; and the convergence as far as he was concerned did not enter into it at all. Interestingly, too, on convergence, we had giving evidence to us this week Lord MacGregor, who was Chief Secretary to the Treasury in the mid-eighties, and he said exactly the same thing; that convergence was not part of the exercise as far as certainly the ministers of the Treasury were concerned. Whether the civil servants of the Treasury took a slightly different view as to how this worked is another matter, but certainly as far as the ministers were concerned, two or three of them said it did not enter into their consciousness in the operation of the formula.

  Professor Foreman-Peck: I do not have a great deal to add about the intentions of ministers, which were obviously opaque. One can infer what people intend from what they do, but this is a pretty risky strategy. Certainly on the basis of what you told us, civil servants are quite smart sometimes at getting policies through despite ministers, and that is certainly consistent with what I know in this case.

  Q542  Lord Sewel: Jim Callaghan always said the real purpose of Barnett was to enable the Cabinet to have lunch! There might be an element of truth in that! Let us talk about convergence. It is a property of the Formula—there is no doubt about that—and we could have debates about whether ministers realised it or did not realise it. I am pretty sure that some people in the Treasury did realise it, because it sticks out straight away as soon as you look at it, that it has an inevitable convergence property, and you can almost leave it at that. The interesting point is, though, as I think was said earlier; if you look at Scotland the convergence has not taken place. There has been a series of Formula by-passes, partly a delay factor because of the Scottish falling population, which delays the impact from one comprehensive spending review to the other, so you are always a bit behind; but, clearly, there were lots of wadges of public expenditure that were shifted to Scotland without going through the Formula—and I am afraid some of us were involved in those dirty deeds! It was basically national negotiated wage settlements that were the cause of major disruption in the progress in Scotland. That does not seem to have happened in Wales. Wales is almost the example of how the Barnett Formula is intended to operate where you do have a convergence effect. Any explanation for that divergent experience?

  Dr ap Gwilym: I think it is quite fascinating, and we are going to come back later on maybe to talk about some data and information where you can have lots of distinguished academics, like these on my left, delving into this material for a lot of time, trying to work out what exactly happened. I take your point about national wage settlements and so on, the so-called Barnett by-pass, though sometimes I think Barnett by-pass is a convenient way of trying to explain away lack of convergence. Even in the case of Wales, there was not that much convergence until about 1997. Why I say 1997—bear in mind that soon after the Formula came into being, of course, there was a change of government at the UK level, and then the Conservatives had a long run until 1997. I get the impression—and it is only an impression—you will be better placed than myself to judge—that Barnett was often more honoured in the breach. Even in the case of Wales for a long period there was quite a skilful Secretary of State, Nicholas Edwards, Lord Crickhowell, who was quite influential and probably punched above his weight a little bit in Cabinet as well. Since 1999, though—first of all, bear in mind the incoming Labour Government did say, "We are going to use Barnett with some rigour." In the case of Wales there has only been one exception to my knowledge, which is the EU funding of Objective 1, and that effectively took the removal of the very first First Minister in Wales to achieve. However, if you look at the growth in total identifiable public expenditure in Wales—I say total not just the devolved, because again we have got problems with data—since 1999 it has grown in real terms by 2006-07 by 30 per cent, whereas England grew by 33 per cent and Scotland by 32.9 per cent; so Scotland is tracking England again but Wales has gone the other way. I think I put in my written evidence that in 2006-07, the last year for which we have reasonable public expenditure data, the shortfall for Wales was £700 million. If you take away the other elements of expenditure in Wales, you come back to the conclusion that it is due to the operation of the Barnett Formula, not necessarily only convergence of course, because there are substantial sums where the consequential (if I go to the jargon of Barnett) is zero, and where that money is spent of course—it might be spent in Wales, in Scotland or in England, the theory being that it is for the benefit of the UK as a whole. I suspect most of that is spent in England, not on a population basis, but a disproportionate amount, just because the UK is a highly centralised state and many British spending programmes take place in the south-east of England. The £700 million has happened, and therefore we have experienced convergence in Wales since 1999; but I think that you can partly at least speculatively relate that to the incoming government saying, "we are going to use Barnett with rigour".

  Q543  Lord Sewel: Is it also that actually getting round Barnett becomes more difficult in the context of devolution?

  Dr ap Gwilym: I think that is a very good point, because it was much easier, to put it crudely, to do backroom deals in the old days, whereas I think it is more difficult now to do that. This, of course, does not explain Scotland, because Scotland has not experienced that reduction compared with England and Wales has. I think Northern Ireland has as well, by the way.

  Professor Foreman-Peck: I think we can all agree—down here anyway we all agree that Wales has been squeezed and Scotland has not. We think that Wales has been squeezed because the Barnett Formula has been applied in Wales's case. We do not really understand what goes on in Scotland's case.

  Q544  Lord Sewel: Mr Swinney, the nationalist Finance Minister in Scotland, is very much in favour of the Barnett Formula.

  Dr ap Gwilym: I can well understand that he is!

  Q545  Chairman: To be fair, he did not actually say that!

  Dr ap Gwilym: I suspect—they always relate, if you ask them about it—"give us fiscal independence and then we can talk about Barnett", which is their way of addressing—or not addressing the question—

  Q546  Chairman: Could not care less about Barnett; it did not really matter: fiscal autonomy was what they wanted.

  Dr ap Gwilym: That is right. Scotland has—I hesitate to say this but it appears to have done rather well, going back to the Goshen Formula in the 1890s. I leave the Scots to argue their case. I do not feel obliged at all to defend them.

  Dr Bristow: I would agree again with what was said. Wales has certainly experienced the Barnett squeeze since 1999 in particular because the Formula has been applied more rigidly. It is interesting in the case of the Barnett Plus Settlement that Wales secured, in as much as it shows how, with devolution, the whole issue around the settlements given to the devolved administrations becomes more transparent and has become a bit more subject to political scrutiny and debate. That perhaps raises issues around how comfortably the Barnett Formula now sits and works within the system where we have devolved governments.

  Q547  Lord Sewel: For the record, is convergence a good thing or a bad thing?

  Dr ap Gwilym: It is a bad thing. It is very clear. In any sensible society—and I think James has done some work on this and maybe presented it in his evidence here—the amount of public expenditure a citizen makes use of, public services, is partly dependent on their own situation, whether they are young, old, poor, sick, healthy, in work or out of work. To the extent that it is unrealistic to expect to have a homogeneous distribution of those characteristics across the United Kingdom, you would not expect to have a level settlement of public expenditure per capita. Quite clearly, again, if you look at all the statistics, the UK is one of the most regionally unequal states within the European Union. It is most unequal in fact if you use measures such as GVA per capita. Therefore, you would expect logically that you have got some poorer regions which need a greater consumption of public services.

  Professor Foreman-Peck: May I take issue with Dr ap Gwilym's contention of convergence not being a good thing? It is undoubtedly a good thing where Scotland and Northern Ireland are concerned. What the question begs is how we know what the appropriate devolved budget is for these authorities. That really seems to be the nub of the problem. There are two ways you can look at it, roughly. You can take an aggregate measure, because it is an aggregate budget; or you can try and get some more sophisticated needs analysis, paying particular attention to education and health. If you take an aggregate measure, which is what I favour, the obvious measure is disposable household income. This is not widely focused on, compared to GVA per head, but it is much more appropriate because income is a reflection of needs, in a way that gross value-added is not. The disparities between regions and devolved administrations are much less when you look at household disposable income; and they become even less when you divide through by regional prices. One of the reasons that Wales is such a pleasant place to live is that it is considerably cheaper to live than anywhere else in the UK, certainly once you have adjusted your budget or your spending pattern to take into account of what is cheaper here relative to elsewhere. If you take household disposable income, the gap, as last measured, is about 10 per cent in nominal terms between the UK average and Wales, maybe 11 per cent with a fair wind; but there is about a 7 per cent lower price level in Wales if you include housing—6-7 per cent or 7-8 per cent. Once you have taken that into account the disposable income difference between Wales and the UK average is about 4 per cent. So if you take 4 per cent as the inequality level, it is not a great deal. That is why I submit that the inequities of the Barnett Formula are not that great for Wales. But when you apply this to Scotland and Northern Ireland and compare it to their receipts of public expenditure, they clearly do far better on this aggregate needs measure than England or Wales. For Northern Ireland and Scotland, it seems to me that if you have got to get some form of equity between England and Wales and these two administrations, convergence is a good idea.

  Q548  Chairman: That is if you lump England and Wales together.

  Professor Foreman-Peck: Wales is pretty close to England in a number of respects, but the critical one is in the level of public expenditure per head relative to income, and it is particularly close to the north-east of England in that respect—not perfectly close!

  Dr Bristow: I do not think convergence sits comfortably with a notion of territorial justice or equity, which is an important principle. Public spending levels ought to be such that there is opportunity provided for the different regions to offer equal levels of public service provision if they wish. That is a fundamental principle.

  Dr ap Gwilym: I do not want to get into too lengthy a discussion with my good friend James now—there will be another opportunity—but one thing is the provision of public services, but of course I do have a concern about things like gross value-added. One of the reasons why the cost of housing in Wales is on average lower than other parts of UK is because Wales is performing very weakly economically. The fact that relative GVA per capita is down to about 75 per cent of the UK average is indicative of this. Therefore, the danger is that you have Wales with a low cost of living, low housing, low incomes, and you say that they are not doing too badly overall. I must say that, having spent a lot of my career working in the City of London, I was very happy to pay high house prices in Central London, because that was a measure also of the high GVAs we were generating. I think gross household income and looking at the cost of delivering public services is a rather narrow view of looking at this. We would like to see Wales being in a position where it is going to generate more wealth for itself, which is why we talk about remediation of weakness, not just delivery of public services. That is quite a large field we could explore maybe some other time.

  Q549  Chairman: If you want to produce a fair and equitable allocation system, to use a fairly neutral phrase, how do you do it? You would have to have some kind of needs assessment involvement in it. I am not absolutely clear in my own mind as to precisely where it comes in and how it comes in, but to have one that is certainly divorced from any kind of assessment of what the needs of a particular country are seems to me to be very difficult to support.

  Dr ap Gwilym: It is, and if you focus on spending—I think roughly 70 per cent of the block grant that comes to the Welsh Assembly Government is focused on education and health. Even if Wales pursued a somewhat different set of policies say from England or from Scotland, that will be the broad figure, so with slightly more than two-thirds being spent on education and health, one would hope one could come up with some measures in those areas of need and relative need. In fact, as you know, at various stages attempts have been made to do that. The Treasury did attempt this not just in the well-publicised case in about 1976-77 but we have seen from the Freedom of Information Act papers that came out last year that they had another shot at it in about 1984 and retired bruised from their confrontation with the Scottish Office. There are mechanisms for assessing needs. It is complex, and one needs to recognise that. That is the argument for having expert advice, but also having it done in a very transparent way, so that when people see these issues you can have an intelligent debate about them. At the moment what we have is essentially a very crude formula. The virtue of it is that it is quick and simple, but it has many drawbacks as well.

  Professor Foreman-Peck: In my submission to the Committee I suggested a way of taking into account needs at the aggregate level by looking at the allocation or consumption of state benefits by income group across the United Kingdom. You can find that there is a very close inverse statistical relationship between income group and consumption of state benefits. That partly depends on the composition of the income group. But if you wanted a simple way of allocating money, you could just apply that inverse relationship that applies across income groups in the United Kingdom. You could apply that to the devolved administrations using average income groups of those administrations. That is the calculation that I did in my paper.

  Q550  Lord Moser: I found your paper extremely interesting, as a statistician. Once we decide or are advised to go beyond the Barnett Formula towards needs assessment in a serious way, some people then picture an enormously complicated approach with hundreds of indicators. It can be done, as you know—and then there are weighting issues, et cetera. Obviously, it is rather off-putting. Some people favour getting it down to three or four indicators measuring maybe something very economic, something environmental, et cetera, and there are still some weighting problems but more manageable. Some people, including yourself in your paper, Professor Foreman-Peck, look for a proxy—not just population but, say, GNP, GVP inverse, or one of the papers we had suggested a poverty measurement. There are social security measurements. If I understand you right, you favour disposable household income. We have to think of the politics of all this and on the assumption that it is done by somebody other than the Treasury, because the Treasury probably would never do it. Could you talk a bit about the pros and cons of the multiple approach versus the proxy approach and your favoured examples for each? I would like to hear a little bit more why—I have not quite understood why in your paper disposable household income is superior to the conventional GNP measure. Any help on this would be appreciated.

  Professor Foreman-Peck: To take the last point first, GVA per head is the critical indicator that many people favour. The reason why you get such wide discrepancies between regions in the UK is because participation rates vary very substantially. Wales has about a 4.5 per cent lower participation rate in the labour force than the UK average. That means, for various reasons, a smaller proportion of the population is working. GVA per head of population is not just a measure of productivity; you have to multiply participation in the work force times productivity of the work force to get GVA per head of population. That really is the critical issue.

  Q551  Lord Moser: Could you do that?

  Professor Foreman-Peck: Certainly you could do that, yes; you could control for whether people work or not. The second point is: what exactly has productivity got to do with what we are talking about here? Productivity is to do with industry and making things. Here, we are talking about, as I understand it, the equitable provision of public services. I would have thought most people would have said that those with low incomes are more likely to have unsatisfied needs than people with high income. That is the basis of my proposal to use household income as a needs indicator.

  Q552  Lord Moser: Disposable household income.

  Professor Foreman-Peck: Yes, after tax and after support. Arguably, the weakness of the numbers I come up with derive from the cross-UK consumption of state benefits in kind with income, because that is the only thing I could put my hands on at short notice. I think you can probably get a more precise indicator than that, given more time. I think social security is not a good aggregate index because that is already covered. In a sense, households receive social security, or social protection or family income supplement effectively from central government. It is largely annually managed expenditure. So you would be counting the outlays twice in a sense. I am not convinced that that is a good idea. My objection—and it is not a particularly strong objection—I can see there are arguments for doing it, for looking at disaggregated measures of education and health and so on—is that when you devolve authority you allow authorities, administrations, to decide on how they are going to spend on education and health. So if you give them money based on your calculation of how much it is reasonable to spend on education and health, you are in a way double-guessing them. I did a little experiment in something that the IWA published a couple of years ago, called Time to Deliver where I compared health spending across regions and education spending and used standardised mortality ratios for health spending and free school meals for education spending; and you get very, very close fits. Wales looks fairly similar to the English regions in that respect. In fact it spends slightly less on education, especially about three or four years ago, and spends rather more on health. Scotland spends more on education and health than England on both those criteria.

  Q553  Lord Moser: How would you feel about—Chairman, if I can go on for a moment—the other sort of approach, 4, 5 or 6 indicators, with suitable weighting? The weighting would probably vary between regions. Well, it would certainly vary between regions because of your 70 per cent that does not fit the other regions.

  Professor Foreman-Peck: I have no fundamental objection to it. My understanding is that when you look at the way these formulas operate in practice, particularly in local government, they become areas for bargaining. There is a very strong pressure to increase the number of indicators and change the weights for special circumstances. In other words, it is a Pandora's Box and extremely boring as well! I favour simplicity on the grounds of sanity.

  Q554  Lord Moser: On the assumption that Barnett is free of bargaining?

  Professor Foreman-Peck: Barnett is not going to last for ever, and I think that a simple needs-based formula is better than a complicated needs-based formula.

  Q555  Chairman: You could go half-way between the two, could you not? The suggestion Lord Moser is making is for four to six variables, which should not be too difficult to categorise, and on that basis you could arrive at a better assessment of needs and fairness than by just taking one.

  Dr ap Gwilym: Without being facetious, I am not sure if you are familiar with the Lottery Fund, the way they allocate moneys. They have a formula that is related to GDP and to a deprivation index. I am not an expert on that at all, but it might be well worth a look at.

  Q556  Lord Sewel: Should you put in the cost of providing services as factors? I have an interest here because I live north of the Highland line.

  Professor Foreman-Peck: The cost of providing services is arguably determined by the system, and so if you have a formula that takes into account the cost of providing services, then it is likely to affect the cost of providing the services—and the cost-plus contracts in defence are the classic example. If you do want to take into account costs, you need to have something fairly sophisticated.

  Q557  Lord Sewel: There is a problem, is there not, in, say, education provision in the Islands of Scotland? There is a cost driver there.

  Professor Foreman-Peck: Yes, and this is why many people think that one of the indicators, which Lord Moser would favour, would be population density as a contributor.

  Q558  Chairman: Except density has problems as well as advantages, does it not?

  Dr Bristow: I would make two points. One is that there is never going to be a system that is perfect and entirely free of political bargaining, some degree of trade-offs and compromise, and that is the reality in a sense. Secondly the key then is finding a situation, or a settled compromise that minimises potential trade-offs and conflicts that might arise. What is critical is devising a system that is transparent and accountable; and we therefore have to understand what we are trying to achieve first and foremost and then design a needs-based system around that. It is important to have a debate about the key objectives you are trying to achieve, and then determine the indicators on the basis of that. There are a number of different options you might choose. One might be to have a fairly comprehensive annual rigorous assessment of needs undertaken, and therefore the desire that you try to achieve a unanimous verdict on the settlement as a result of that, and if you cannot reach some sort of unanimous settlement, then you go to a default option where you use simpler, cruder indicators as your default mechanism for allocated spending. That is certainly something others have suggested as a practical solution and way forward.

  Q559  Earl of Mar and Kellie: I would like to ask about the absolute need for reform. From what I have seen and heard, the workings of the Barnett Formula are probably best demonstrated in Wales. I suspect they are distorted by other factors in Scotland and Northern Ireland. Therefore, I wonder whether a replacement will in fact ultimately be any better; and would any of these suggestions so far be fairer?

  Dr ap Gwilym: I am not sure I would agree with you when you say "best works in Wales" because what do you mean by "best" and what are your criteria? As you appreciate, we would contend that it is very unfair to Wales, and therefore it does not work well for Wales; and therefore that is why we want it replaced. In my submission, I gave a whole series of criticisms of the Formula. One recognises of course that replacing it will be difficult and complex, but I think we need to replace it. The other issue is that whatever system we have, it needs to be open and transparent, and then you will have the debate. You will have disagreements but that is at the heart of democracy, that people debate and disagree and then try to reach a compromise. At the moment we do not get that. The other thing of course—I do not want to be party-political, but since 1999 when we have had the Assembly here in Wales, you have had the Government in London and the Government in Wales, even allowing for the couple of coalitions in Wales, being led by the same party. It might be somewhat different if you have a different party in London and in Cardiff; that might open up the differences a little bit more. At the moment you have not had a rigorous debate between those two organisations as far as I can see, about these issues. For obvious reasons, it is rather difficult, being of the same party. I suspect if you had a Conservative government in London and a Labour-led government in Wales there could be more friction, and hopefully out of that friction you might get a little bit more light on these mechanisms. I am afraid the whole working of the Formula is probably exemplified most clearly in Wales, and I think it exemplifies the weaknesses of the Barnett Formula as well.

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