Examination of Witnesses (Questions 560
- 579)
FRIDAY 20 MARCH 2009
Dr Eurfyl ap Gwilym, Professor James Foreman-Peck
and Dr Gillian Bristow
Q560 Earl of Mar and Kellie:
That was the point I was making; that it does need exemplifying.
Do you believe that it is possible within the constitutional set-up
of devolution, a relatively limited form of self-government, to
have equitable or open discussion; and does devolution not imply
that ultimately the Treasury will decide?
Dr ap Gwilym: The old saying is that power devolved
is power retained, and that is a reality. Clearly, the Treasury
is a very powerful player here, but that does not mean that one
simply therefore gives up; one tries to shift the balance a little.
I would say that opening up the discussion and being much more
transparent about how the whole thing works and how funds are
allocated would be a step in the right direction. It still would
not be perfect. The other issue, as you know, a central one, is
the way the Barnett Formula works is very much that the United
Kingdom is a unitary state with some asymmetric devolution; and
therefore what drives the changes to the Barnett Formula overwhelmingly
are decisions made about spending programmes for England. This
is not being anti-English at all; it is just the reality: England
is over 80 per cent of the UK's population, so that is the way
it is. Therefore, what drives Barnett—the changes to the
block grant are decisions made overwhelmingly by the UK/English
Government for the spending needs of England; and then as a consequence,
that indeed what it is called in the jargon, a "consequential",
there are changes to the spending in Scotland and in Wales. One
understands that reality, but I would say that we do need to move
away from Barnett. It will not be easy. In my paper I described
the potential process rather than the solution, if you like, so
it sidesteps this whole issue, which Lord Moser quite correctly
raised, about "what indicators do you have; three or four
broad proxies or a huge number of detailed ones?" I confess
I have sidestepped that question because I think that needs a
lot more debate. Certainly, even using four or five more proxies,
I would argue that it would almost certainly be better than using
the current system, and having used the current system for thirty
years the outcomes from the point of view of Wales are very unsatisfactory.
Q561 Earl of Mar and Kellie:
Is there sufficient urgency?
Dr ap Gwilym: On whose behalf?
Q562 Earl of Mar and Kellie:
My guess is that ultimately the Treasury will have to decide what
they are going to allow as the criteria. Is there sufficient urgency
yet for them to undertake this difficult task?
Dr ap Gwilym: I would say there should be, but
I doubt if there is. The Treasury has somewhat larger issues probably
on its mind at the moment. Therefore, it is not a good time in
that sense—and of course it never is a good time. If you
look back from about 2000 onwards, we enjoyed across the United
Kingdom seven or eight years record growth in public expenditure,
and therefore at that stage the pressures were less. Now we are
reaching a period of course where there is going to be very little
growth in public expenditure. The pressures will be greater, and
of course on the Treasury there are far bigger pressures from
elsewhere. The Treasury, I would imagine, is very content with
the current system; it is simple and they basically work out the
spending for England, and then you hit the calculator button and
the consequentials come out for Wales. From their point of view,
that is easy.
Q563 Lord Sewel:
If public expenditure is severely under pressure, Barnett rides
to your rescue.
Dr ap Gwilym: It could potentially ride to our
rescue if you started getting negative nominal growth. I take
your point. Even if it is going to be negative nominal growth,
it is going to be at a very small level I think, even allowing
for the dire state of the public finances.
Q564 Chairman:
What is interesting from all the evidence we have heard and the
papers that we have seen is that by and large nobody is prepared
to say that the present Barnett Formula is an acceptable way of
actually doing the job that it is supposed to. The only people
who have gone anywhere near saying that is the Treasury, which
for obvious reasons one would expect them to. There seems to be
a general feeling that you should somehow or other introduce a
needs assessment element into the way in which you allocate these
resources. I assume, from everything the three of you have said,
that you basically go along at least that far with this. The argument
then becomes: what sort of needs assessment; how do you do it;
what criteria do you take? Also, I suppose, you would want to
say something about a transparency process by which the existing
Formula is in fact being administered and on the reform to it.
It seems clear that you cannot go on—I think somebody in
London the other day described it to us as—it was not intellectually
corrupt—intellectually defective. If it is intellectually
defective, we have to try to see how we can do something about
it.
Dr ap Gwilym: It is difficult. That is why I
suggested these steps. Some are quite modest steps, and in the
case of Wales, even such a radical one as "freeze the squeeze",
if you like, so that rather than getting the same monetary increase
per capita you get the same percentage increase. One of
the objections to Barnett is that whilst it has no reflection
of need, it is not a static formula, it is a dynamic one; it is
a convergent formula that is used. It is not neutral, as it were;
it is driving identifiable public expenditure on devolved services
in Wales down compared to the average for the United Kingdom,
year on year. Freezing the squeeze is one trivial thing to do
and is an intermediate step. I do not think that is far enough,
and that is why I suggest some further steps beyond that. I thought
that was at least a modest first step.
Q565 Lord Moser:
Do you think we are right, all of us, in thinking of the needs
approaches as a total change from Barnett; or supposing we could
agree on these two or three or four crucial indicators, could
they be, in a multi-varied sort of way, included in the Barnett
Formula population measurement? I have not thought this through,
but what would be the objection to that?
Professor Foreman-Peck: In principle you could
modify the Barnett Formula to do that. The problem is the baseline,
and that is the way you would use those variables, to calculate
the baseline. Then you would go through a percentage increase
from that baseline, once you have got the baseline.
Q566 Lord Moser:
But not just on population!
Professor Foreman-Peck: No, you use the Formula
to get the per capita allocation.
Q567 Lord Moser:
So the Treasury could be fooled into thinking that we are keeping
the Barnett Formula!
Dr Bristow: The other problem is that Barnett
is a system that rests on linking spending allocations in Wales,
Scotland and Northern Ireland to incremental changes in expenditure
in England, and that is the fundamental issue that then would
have to be addressed: how do you disentangle spending from England
and what do you do about English regions?
Q568 Chairman:
You have to look at the baseline. It seems to me that Barnett
is used almost as a generic term for a block allocation as well
as the method for dealing with variations in expenditure. It seems
that if you are going to introduce fairness into the thing you
have to look at the baseline as well as looking at the mechanism
operation. I do not see how you can avoid that.
Dr ap Gwilym: I agree. Bear in mind that whilst
the Treasury did a needs assessment in 1979, that did not change
the baselines in 1979: whilst they did a needs assessment, they
did not put that in as the baseline for Barnett nor adjust the
existing pattern of spending. They did not adjust it. People often
think they did but they did not. This goes back into deep history,
if you like. When were the baselines established? They evolved
over decades, prior to 1979.
Q569 Chairman:
Presumably they were based on a baseline pre 1979 and pre needs
assessment.
Dr ap Gwilym: That is right.
Q570 Chairman:
Which, incidentally, the ministers of the day knew nothing about!
Dr ap Gwilym: Did they not?
Q571 Chairman:
No.
Dr ap Gwilym: That is interesting.
Chairman: Joel Barnett said he did not
know it was going on, did not know the results and was not told
about it. It is the most extraordinary history that seems to be
emerging. There we are!
Q572 Lord Sewel:
I will say in passing that I do not think "freeze the squeeze"
is a particularly romantic slogan!
Dr ap Gwilym: I am ready to take advice!
Q573 Lord Sewel:
I just have a worry at the back of my head because years and years
ago I used to be involved in local government taxation. There
is almost a similar sort of argument: Barnett wrong; move to something
called needs; leave it relatively undefined what is in the needs
thing. That fits so easily with what happened with local government
taxation. Property tax: wrong; move to something else; oh dear—even
worse! The test is: moving away from Barnett is there an alternative
to a needs-based assessment?
Professor Foreman-Peck: The simple one, which
Eurfyl already mentioned, is just a percentage on where we are
at the moment. I use the term "Barnett relaxed" which
may be more saleable than "freeze the squeeze"—I
do not know—but they are not the same. You accept the baseline
from history and then just make sure it is embedded in the Treasury
consciousness for ever.
Q574 Chairman:
How do you determine who gets what percentage above the baseline?
Professor Foreman-Peck: When England increases
spending the devolved administrations get the same percentage
increase- I have a little calculation in my paper about how this
would be done. I used illustrative numbers. This is on page 3.
The problem is you have got to have a budget constraint. The Chancellor
or somebody decides there is £15 billion available, and you
keep the comparable programmes system so you know how much money
is being spent on comparable programmes, and under Barnett you
divide the £15 billion by population roughly speaking. Under
the "relaxed Barnett" you divide £15 billion by
the baseline spending, say £300 billion, so you get a percentage.
Then you increase the budget allocations by that percentage. Under
Barnett you have a lump sum, a numerical figure; under "relaxed
Barnett" you look at the proportionate increase in comparable
spending programmes.
Q575 Chairman:
Are you in favour of relaxing Barnett?
Dr ap Gwilym: I do see that as a very inadequate
early step because I think the fundamental objections are still
there. The real difficulty of course is if the UK—I am not
advocating this, by the way—were a federal state, then you
would have a series of parties of roughly equal weight. The reality
is of course that England has 50 million odd out of the 61 million
population of the United Kingdom, and even more for GDP. I think
we need to move beyond relaxing Barnett; we need to move beyond
determining increases in public expenditure in the three other
countries in the United Kingdom having that driven entirely by
the needs of England. That is not adequate either, in my view.
Therefore, one needs to move to a system where you have—and
this might sound a little naive looking at the political and power
realities—the three devolved administrations at least having
a chance of debating and negotiation with the centre on the allocation
of moneys. Otherwise, if we take relaxed Barnett, although I have
said it is a modest step along the way—freeze the squeeze,
relaxed Barnett—we still have the current baselines that
are unsatisfactory. We still have the determination of spending
priorities and total quantity in terms of the needs of England;
and then we trail behind on the consequentials. To my mind that
is really a slight improvement, but the danger there, thereby,
by making that slight improvement is that that then stops any
other further development for another thirty years.
Q576 Lord Sewel:
If I understood you rightly, you are saying you want annual negotiation
between the three or four elements.
Dr ap Gwilym: Either annual, or at the moment
you have a spending review or comprehensive spending review every
two to three years. Clearly, that is within UK parameters of total
managed expenditure and so on.
Q577 Lord Sewel:
Is that basically throwing the Formula out of the window?
Dr ap Gwilym: Yes.
Q578 Lord Sewel:
So it is just hard negotiation across the table!
Dr ap Gwilym: No, I would not say that, because
I have also said one would establish a commission to look into
these matters. I do not want to push it too far, but like the
Australian Commission where you have expert advice, and you have
studies made in terms of needs, and you discuss the key indicators
and which proxies we can use, rather than a whole gamut of too
many parameters. That group advises the ministers, but you would
then involve the finance ministers of the three devolved administrations.
Q579 Lord Sewel:
It advises, it does not determine.
Dr ap Gwilym: No, it gives advice. Of course,
if that advice is in the public domain, then the politicians,
if they are accountable to the electorate, at least have to justify
why they did not take that advice.
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