The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 560 - 579)


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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