Examination of Witnesses (Questions 584
- 599)
FRIDAY 20 MARCH 2009
Mr Paul Griffiths, Mr Ian Carruthers and Ms Maria
Jones
Q584 Chairman:
Thank you for coming. You know why we are in Cardiff and what
we are taking, and I think you know our terms of reference, so
you will know the extent of the inquiry we have been charged to
make on behalf of the Lords. Can I say two or three housekeeping
things before we start? Can I just remind you that evidence sessions
are broadcast and a full transcript is going to be taken; but
you will have the opportunity, if you want to, to make some corrections
to the transcript. A bit like Hansard, you can correct
the grammar but you cannot change the substance of what it is
you might have said. Also, you may feel that when you have given
your evidence this afternoon and when we have had our discussion
on it that there is something additional you wish to add to it,
so will you please feel free to send us a letter on it? Do you
want to be treated collectively as the three, or different organisations?
Mr Carruthers: In a sense it depends how you
want to direct your questions, because obviously both CIPFA and
the WLGA have put in separate sets of evidence. It depends whether
you want us to address similar questions.
Q585 Chairman:
They are very similar questions actually. The most important single
one from our point of view is: do you think the Barnett Formula
treats Wales fairly? If you do not think it treats Wales fairly,
why not—how come it does not?
Mr Carruthers: If I can start and give you an
introduction to CIPFA as an organisation and then move on, CIPFA
is the leading professional accountancy body focusing on public
services, and is unique in that respect. As a professional member
body for accountants we both train accountants and we are responsible
for professional development and disciplinary matters. In particular,
we comment on management and accounting for public money. In terms
of today, obviously we are very interested in Barnett because
we believe that good planning, financial management and governance
are fundamental in terms of the management of public money. We
are also an international body, and therefore we felt we had something
to offer in terms of international experience in terms of the
Committee's inquiry. Inevitably, in terms of the subject matter
for this, it does have this strong political background, but in
terms of offering our written evidence and in terms of the comments
we will make today we are very much coming at that from being
a professional body and a professional commentator. I have brought
my colleague Maria Jones along with me. I am Director of Policy
and Technical for the Institute; so in my comments I want to bring
more of a national flavour to things. Maria leads on our activities
in Wales, and will then put, if you like, a Wales context onto
things. In terms of addressing the question that you posed in
terms of fairness, one of the things is that "fair"
is different to different people. It is not an absolute concept,
and particularly with regard to funding fairness is in the eye
of the beneficiary, and that is very important. In terms of the
way the Barnett Formula works, obviously it has three main components:
the population base, the comparability element, and the spend
element in England. It is obviously easy to be objective about
the population element. Comparability is where we start to get
into particular challenges in terms of the way that the Formula
is built up, because it is built up bottom-up in terms of the
way it operates. Looking at that individual programme object level
that it is built up from, either it applies 100 per cent or it
does not apply, in which case it is a zero. There must be a question
as to whether that is true in all cases. The key issue that comes
in there, in terms of comparability, is the fact that the Formula
at the moment does not build in anything in respect of relative
needs.
Q586 Chairman:
Do you think it should?
Mr Carruthers: I think that is one of the issues
as to where you come from in terms of what objectives you want
out of the process because if you want equity, then perhaps needs
is an objective; but if you want to look at it from a fiscal perspective,
that would be something different. If you want equality of access,
that would probably give you a different answer again, so it really
depends on the objectives as to the answer you want. Clearly,
in terms of need you have to look at the way in which you generate
the data, the choice you make in terms of measures, the way you
weight different measures and so on, so there are some issues
there. Then, if you look at spend, the issue there is the fact
that the Formula is very much based on patterns of spend in England.
It is historic. Therefore, we are looking at a pattern that was
there largely in the past. It is also generated—for example
if you look on the capital side—very much by the distribution
and condition of the asset base that was inherited in England,
rather than being the asset base in Wales, and also what it is
likely to be and what it is designed to be in the future.
Ms Jones: Good afternoon. I would just like
to give you one or two examples really in terms of where we see
that Barnett was not working in terms of Wales. One of them you
will have heard about already, and it has been relayed to you
at a number of the inquiries you have had so far, and it is in
relation to the Olympics and the top-slicing of the allocation
towards the Olympics. It is not the Olympics themselves but it
is the regeneration aspect of the Olympics that was in question
at the time, and the lack of transparency in terms of determining
that the Olympics were considered to be top-sliced from the overall
moneys available before Barnett was applied to the remainder.
The question for Wales then is in terms of its support for the
Olympics, how the Welsh Assembly Government is intending to fund
its regeneration projects that it chooses to implement as support
for the UK Olympics bid.
Mr Griffiths: An equivalent introduction: I
am here on behalf of the Welsh Local Government Association, which
represents 22 local authorities in Wales. I have worked for the
Welsh Local Government Association for 12 out of the last 19 years,
concerned with distribution systems within Wales. I should point
out that between 2000 and 2007 I worked as senior special adviser
to the First Minister, and was therefore involved in distribution
systems from the other perspective, and with relationships with
the Treasury. I am here today in my WLGA role. The WLGA has not
spent the last devolved decade deeply concerned about the Barnett
Formula; it has been far more concerned about the best allocation
and use of resources that come from that Formula within Wales.
It is this inquiry and the Holtham inquiry that has led it to
review its position. In the discussions we have had, I could best
describe them as a discussion around a pragmatic balance of risk
and what local government has been doing is considering the risk
of not changing from Barnett and balancing that against the perceived
risk of change. We have not been persuaded, as perhaps have some
other participants in the debate, that there is a certain outcome
through any change or from any new needs-based assessment; and
there is unpredictability about that. Having said that, having
reviewed the evidence and noted that the per capita advantage
of relevant expenditure in Wales appears to have fallen from something
like 13 or 14 per cent to something like 8 per cent, those figures
are not hard—all the data is not available—there is
that convergent trend, noting not only does that leave you in
a worse position but it leaves you managing the rate of growth
which is lower than in other parts of the United Kingdom and managing
that lower rate of growth has its own problems. Taking those factors
into consideration the WLGA has come to the view that the balance
of risk for Wales would lie in exploring a needs-based assessment;
but working in local government we are well aware of the difficulties
and unpredictability around that. You may want to return to those
points in questions. We are equally concerned about the absence
of any independent evaluative mechanism in the operation of Barnett
or any other system. Whether you have the existing one or a new
one, there are judgments to be made. At the moment those judgments
appear to be made wholly by the Treasury, which, if you like,
is both a competitive player in this process and a referee in
the process; and it is a referee without a referee's panel. There
does not seem to be any means whereby open challenge or explanation
of the judgments can be made. The Olympics has been mentioned,
but there is a range of other subjects that would benefit from
a more open and transparent appraisal of the judgments that are
being made. I would also make a case that just as local authorities
have the flexibility of, for instance, the ability to hold a reserve,
and the ability to borrow prudently and within rules, then we
cannot see an explanation for why the devolved administrations
cannot have equivalent powers as the local authorities they work
with in that respect.
Q587 Chairman:
Can I make one point? The WLGA submitted a piece of paper to us
which was extremely helpful. You say in paragraph 12 of that statement:
"WLGA believes that an alternative distribution mechanism
based on an open and transparent assessment of expenditure need
would deliver more resources for public expenditure in Wales and,
on that basis, supports the proposition that such an alternative
mechanism should be developed and implemented." That is your
position. I got the impression you were a bit more tentative in
expressing it today than perhaps—
Mr Griffiths: As soon as you read it out, I
thought I was contradicting myself.
Q588 Chairman:
There are shades—
Mr Griffiths: That paragraph represents the
conclusion that has been come to on an assessment of that balance
of risk. I do not think it was intended to contradict the fact
that there is an unpredictability about that; but having looked
at the risk of moving to something new, and having looked at the
fact that we have 20 per cent less per capita wealth, having
looked at the fact that our dispersal of our population is more
sparsely populated than other parts of the United Kingdom, if
most assessments of need use indicators of deprivation and population
dispersal we would be well placed to gain advantage from the needs
assessment, but as I say we also know there is an unpredictability
about that.
Q589 Chairman:
Can you help me a little more on this? You talk about balanced
risks, risks for both sides. Can you spell them out briefly, what
the risks are as you see them on each side of the argument?
Mr Griffiths: Pragmatically, our judgment is:
what is going to provide more money for Wales? It may not seem
to be the most idealistic position to take, but that is the one
we are taking. The risk is that the Treasury will be in control
of this process, and the Treasury will in the end conclude on
the indicators that are to be chosen. On the indicators that we
think are relevant and are used elsewhere, we think Wales has
a good case for equivalent or more expenditure from a needs assessment.
But the risk is that for one reason or another the Treasury will
choose other indicators, and that is what we have to judge.
Q590 Chairman:
If the assessment were carried out by a body which is not the
Treasury but was objective—I am not saying it would be easy
to achieve this, but if it was—that would presumably deal
with that particular issue.
Mr Griffiths: Yes, we believe it would lessen
the risk.
Q591 Lord Sewel:
You are being brutally frank, are you not? You are in it for the
money!
Mr Griffiths: I would be surprised if anyone
did it for anything else.
Q592 Lord Sewel:
The trouble is that the two other devolved administrations might
take completely the opposite view on that basis that Barnett—the
Scots and the Northern Irish might well think that they stand
to lose on the basis of a needs assessment. Is there any other
argument you can advance rather than it gives you more money?
I do accept that that is a perfectly legitimate and understandable
argument, but try and convince me, as a Scot, why I should sign
up to a needs assessment!
Mr Griffiths: Because the objective of public
expenditure is to meet public need. An efficient allocation of
public resources is one that responds to the differential positioning
of that need in the United Kingdom or within your nation or wherever.
If, on the evidence we have looked at, we believe that relative
need in Wales is greater than elsewhere, and to an extent that
is not currently covered by the allegations in the Barnett Formula,
then it would be not just on the pragmatic conclusion of where
we would gain, but on the criteria of efficiency and fairness
that you would allocate resources to the areas of greater need.
Chairman: I think that was very precise!
Q593 Lord Sewel:
Now we come on to the slightly more difficult bit. Okay, we have
made the argument in favour in broad terms, in terms of equity
and justice and to have a needs-based approach; how do we get
there? Do we do an aggregate indicator like GVA or household disposable
income, net household disposable income, or do we go for three
or four variables covering the demographics, deprivation and the
factors that affect cost of provision, or do we go right down
to looking at the hundreds of individual drivers of need on a
service-by-service basis?
Mr Griffiths: We have tussled with this, as
you can imagine, within our own distribution formulas within Wales.
Simplicity has its advantages. The disadvantage of going into
micro service-based assessments is that there would be those who
would look at that mechanism and assume that service-based assessments
you have made should be interpreted as hypothecations or targets
for actual spend; so you have a dynamic, whether intended or not,
where the various lobby groups—
Q594 Lord Sewel:
It defeats the value of devolution.
Mr Griffiths: That is right. There are dangers
to very detailed service-based allocations. No matter how often
you say these are only calculating devices, the education community
will say, "The assessment says we should have £4 billion
and you have only given us £3.9 billion". There are
risks there. On the other hand, I am not persuaded by Professor
McLean's view that there can be a default position which uses
GVA as a single measure of need to spend. It is simply an unproven
hypothesis, that there is a direct correlation between GVA and
what you need to spend on health of social services or education
or whatever.
Q595 Lord Sewel:
Do you think there is a single aggregate measure?
Mr Griffiths: Not a single one. My answer is
that, as so often, you would have to find a balance which had
simplicity as an objective but not the only objective. You should
aim at as few indicators as is sensible, but you will need sufficient
to capture the different variables involved. In terms of the Welsh
Local Government settlement—do you want me to take you briefly
through that? It is a reasonably standard one, as I look throughout
the United Kingdom and other parts of the world. It is based primarily
upon an assessment of the relative need to spend in each of the
local authorities. There is then an assessment of the relevant
tax base of each of those local authorities, and the grant is
the difference between the notional taxable return and the relative
assessed need to spend. We have a mixture. First of all, we do
fall into the trap of making it service-based, not dozens of services
but main services. I have learned from that, that it does lead
you into the demand that the budget should follow the allocation
so we have fallen into that trap, and others should be aware of
it. But we have kept the indicators to a limited number. The other
point you made is that the balance of them is about 70 per cent
population and 24 per cent deprivation and 6 per cent population
dispersal, so that is the broad bands there. If you looked at
the deprivation indicators, you do find that they vary from service
to service; so the ones that we use in schools or in education
are selected and somewhat different to those that are chosen in
social services. We have what I believe is a sophisticated approach
to population dispersal which, interestingly, was not used in
the Treasury assessment in the seventies, which I believe to have
been—I have not seen it but I am told about it—a fairly
blunt division of the total area of the nation, divided by the
number of people, in which case you tend to catch large areas
of the country when nobody is there and not driving expenditure.
What we do in our assessment is define viable settlements for
service. It happens to be 7,500 people for a secondary school.
We look at the proportion of people who live outside the viable
settlement, and we build that into the calculation of the relative
cost to spend there. The end result of that is a distribution
which has been agreed formally by all the participants—this
was agreed by local government and the Welsh Assembly Government
at the beginning of the decade—and is then almost uniformly
decried by everyone who suffers from it. I give the warning that
no distribution formula is ever popular, and whenever it comes
to results all the losers will line up to say, "it must be
reformed", and all the winners are strangely silent. So if
your quest is to find something that people will thank you for
ever more, I suspect you will not get there. The other point I
would make is that there is often a lot of concern on how you
test whether you have the right indicators and you test the weightings
you put on them. We use a mechanism which may not be available
if you have only got four parts of the United Kingdom to deal
with, and one of them a lot bigger than the others. What we do
with 22 local authorities is statistically test whether the variable
has had a correlation with expenditure patterns among the 22;
and, if it has not, it is not used. We had an interesting debate
only two or three years ago where we tested the social services
expenditure against population dispersal and found no correlation.
So we have a social services formula which has no indicator, no
weighted indicator for population dispersal. Many in the rural
areas were horrified. It must be the case that providing a service
in small communities—needs assessment taking place over
longer car journeys, increasing expenditure. However, the evidence
was not there in the expenditure pattern, so we did not use it.
That is the way we identified the right indicators and the weighting
to put on them. I think that is a sophisticated approach and one
relatively novel to Wales.
Q596 Chairman:
Can I ask Mr Carruthers to comment on that!
Mr Carruthers: I think it is a very good example
of the conundrum you face, which is: at what level do you set
the indicators, and how detailed do you go? It is refreshing to
hear that quite a lot of science has been put into it and the
evidence base, because certainly one of the risks that we see
in this process is that by going down in terms of levels of detail,
what you do and substitute is a macro level judgment as to how
you split expenditure with a series of micro level judgments,
that is very much where we share the view being put forward by
WLGA. We included this in our submission, that we felt that an
independent element was required in this process to give a view
of what were the drivers and what were not the drivers. Due to
the subjectivity and the fact that those that lose will be vocal
and those that win will be quiet, you need that independent element.
That operates both at an individual recipient level but also,
as you have said, if Scotland wins out as opposed to Wales, then
clearly that will skew the decision in a different way. If you
had some kind of independent commission it will mean that different
parts of the UK have to come together on a much more level basis
and have an adult-to-adult discussion about how distribution should
be done, the principles, rather than it descending into a haggling
session, which happens behind closed doors at a fairly late stage
in the process, as so often happens in the public expenditure
process. I speak as somebody who used to work at the Treasury,
and, albeit not directly involved, saw those negotiations happening
and the fact that they tended to happen fairly late at night and
fairly close to the deadline. You do need that independent element
in the process in order to get that objective view as to what
the right level to pitch it at will be, and it will vary from
service to service.
Q597 Lord Moser:
I really want to go back, if I may, to square one, because if
the decision generally was to go back to the needs-based approach,
there are no promises that it will help Wales or that it would
be good for Wales or that it would harm Wales. I also respect
your frankness in your basic criteria for wanting change. I have
not understood from both organisations really whether intellectually,
so to speak, you favour A versus B, the new approach versus Barnett.
It is a very straightforward question. Irrespective of where it
ends up for Wales or for anybody else, and on the needs thing,
which we will talk more about no doubt, there are a thousand different
ways of doing it, and I am not sure that I am totally convinced
by the way you do it within your local authorities, but it is
one way of judging whether a particular indicator makes sense
or does not make sense. The basic question to me is: do you, like
most of our witnesses, think that Barnett is so defective technically
and intellectually, historically, that a change is indicated or
are you not sure about that and therefore it is worth trying something
else? I am not sure where you come in.
Mr Griffiths: The Welsh Local Government Association
having considered your question and preparing evidence for this
Committee has come to the conclusion that it would support a replacement
of the current arrangements by a needs assessment; but it has
come to that conclusion recognising some of the unpredictability
of what the outcome of that may be. That is why I said that it
has been based on a balance of risk. That is the conclusion that
it has come to. I have tried to give some intellectual justification
for that. What I would say of course is that the current arrangement
has an almost total absence of intellectual justification, based
upon the historic base of 1979, added to by population-determined
increments of spend in one particular country, and it is something
that has survived on the basis presumably that we cannot agree
an alternative, but it is not an arrangement that you could defend
on an intellectual basis.
Q598 Chairman:
It survived because it is convenient to the Treasury; to be brutal
about it. It is terribly easy for them to administer. You do not
have to do anything to the baseline, and if things get really
hairy, you will then go outside the Formula and then in effect
brave your way out of the problem. It seems to me the process
by which this operates.
Mr Griffiths: I read the transcript of some
of your earlier meetings on the experience of the pre-devolutionary
times, where the by-pass route appeared to be used regularly to
overcome specific difficulties. One of the features of post devolution
is that you do not have a mechanism for providing such by-pass
routes, so you are stuck with almost a rigidity of the basic Formula.
The one example quoted in Wales of the by-pass was the additionality
accorded to European Union support, but that was a very specific
argument. Since then, I do not think the case has ever been made,
let alone considered, for a by-pass. There is no mechanism to
do that.
Q599 Lord Sewel:
That is interesting. Certainly up until devolution Scotland was
enormously successful in by-passing. I do not want to go into
the reasons why. Wales did not seem to enjoy this great success,
but now you could almost say that Wales was almost pure Barnett,
and Scotland was a corrupted Barnett until devolution and now,
as you say, the political institutional structure makes Barnett
by-pass very difficult to deliver.
Mr Griffiths: I read with interest the illustrations
you have heard of and felt somewhat jealous and aggrieved!
Ms Jones: I wanted to make a couple of points.
Whatever distribution methodology is determined for the future,
what is critically important is that the system has greater transparency,
and there is an ability to have more independent monitoring and
review within the process, as well as some procedures for adjudicating
on disputes, because that is sadly lacking within the structure.
Mr Carruthers: It is more or less inevitable
that within any disbursement system there will be disputes over
what is right, and you see that wherever you go where you have
a federal structure; there is always an issue about how, and on
what basis, decisions are made.
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