The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 584 - 599)


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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