The Barnett Formula - Select Committee on the Barnett Formula Contents

Supplementary Memorandum by the Welsh Local Government Assocation

  This note covers three issues:

    1. How a relative needs based assessment could build upon the existing mechanisms for allocating resources to Devolved Administrations;

    2. A summary of how needs based indicators are selected and weighted in the Welsh Local Government Distribution Formula;

    3. A further illustration of the need for independent advice on allocative judgements

1.  How a relative needs based assessment could build upon the existing mechanisms for allocating resources to Devolved Administrations

  1.1  At the Select Committee's meeting on 20 March 2009 the discussion in which I participated concluded with Lord Moser's question of whether a needs based assessment of expenditure need could be utilised to provide a complement to the existing population based increment of allocation. I said that I would reflect on that question.

  1.2  Given that any introduction of a needs based assessment would undoubtedly have a transitional process to diminish any turbulence in the allocations, I suggest that such a transition could perhaps best be achieved by using a needs based assessment as a complement to the existing Barnett calculation.

  1.3  If we assume that agreement could be reached on the factors and weightings to be used in the assessment of relative expenditure need, taken together they could be used to calculate a "Composite Indicator of Relative Expenditure Need". So if some part of the United Kingdom was judged to have a need to spend on comparable expenditures which was 15 per cent above the UK average it would have a Composite Indicator of 1.15. In parallel there could be a calculation existing relative expenditure so that if the same part of the UK was spending 8 per cent above the UK on comparable expenditures then its indicator of existing relative expenditure would be 1.08.

  1.4  The existing Barnet calculation of any change in the allocation to a Devolved Administration is:

Change to UK RelevantRelevant
Programmepercentage proportion

  1.5  It would be possible to amend the existing calculation in the following way to take account of relative expenditure need and relative expenditure by using the following calculation:
Change to UKRelevant Relevant
Department's        X comparability        X population
Programmepercentage proportion
Composite Indicator of relative expenditure need )

( Indicator of existing relative expenditure

  1.6  The advantage of the above calculation is that it will achieve over time a convergence of actual relative expenditure with the assessment of relative expenditure need whereas the Barnet formula on its own is designed to converge on uniform per capita expenditure. The rate of convergence would be a matter of judgement and can be varied by the factor applied to the last part of the calculation. It is estimated that the suggested factor of three would achieve almost complete convergence with a relative needs assessment over a 10 year period if total expenditure growth in cash terms continued at its present rate.

  1.7  In illustrating the impact of the above amendment to the Barnet calculation it is possible to consider the circumstances of the Welsh Assembly Government. The allocation to the Welsh Assembly Government for 2009-10 is £14.986 billion. It is currently projected to grow using the Barnett calculation to £15.389 billion in 2010-11—a rate of growth of 2.6 per cent.

  1.8  If we assume that through some, yet to be developed, formula it was judged that the Welsh Assembly Government had a need to spend which was 15 per cent above the UK average then the composite indicator of relative expenditure need would be 1.15—this is an assumption for the purpose of illustration; it is not a prediction of how Wales would fair in any needs assessment. Let us assume that the indicator of existing relative expenditure was 1.08. The effect of these assumptions applied to the amended formula would be to increase the growth in WAG expenditure by around £80 million in 2010-11; increasing the annual rate of growth for 2010-11 to 3.2 per cent. By such an annual increase there would be almost full convergence of Wales' assessed relative need to spend and its actual spend over a 10 year period.

  1.9  There could of course be periodic re-assessments of the relative expenditure need and these could be reflected in the annual calculation using the above amended formula. Significantly by implementing such reassessments through this formula their impact is dampened and achieved over a period of time.

2.  A summary of how needs based indicators are selected and weighted in the Welsh Local Government Distribution Formula

  2.1  In developing the Welsh local government distribution formula the aim generally has been that any indicator included in the formula should be subject to a statistical test of the extent to which existing expenditure patterns within Welsh local government correlate with the incidence of that indicator. If the correlation cannot be found the indicator is not included. The strength of the correlation informs the weighting that is given to that indicator. The advantage of this methodology is that it allows the expenditure priorities of all relevant organisations to inform the selection and weighting of indicators.

  2.2  One problem of this method is that currently indicators are tested with reference to specific service expenditures and the end result of the exercise is that expenditures are hypothesised for each service in each local authority. This has led to demands by Welsh Assembly committees and various lobby groups that the hypothesised expenditures should be regarded as a target expenditure, thus undermining local budgetary choice.

  2.3  In considering a UK needs assessment, it ought instead be possible to test the significance of any potential indicator, and thereupon calculate its appropriate weighting, by testing the correlation of a basket of service expenditure patterns against the incidence of that indicator. That basket could perhaps be as wide as the whole of comparable expenditure or it could be a limited number of groupings of services. In testing a basket of expenditure patterns against potential needs indicators the danger of hypothesised expenditures being seen as expenditure targets is diminished.

3.  A further illustration of the need for independent advice on allocative judgements

  3.1  All the issues of contention regarding the application of the current distribution formula appear to emanate from contestable definitions of comparable expenditure. This would equally be the subject of contestable judgment if a relative needs assessment was incorporated into the allocations and this adds to the case for an independent body to advise on the process.

  3.2  Much reference has been made to the issue of expenditure on the Olympics. The Treasury view is that it is not possible to disentangle the element of the expenditure which is in support of an event which benefits the whole of the UK and that element which is primarily related to the regeneration of east London which would be comparable expenditure. However, whenever those responsible for the Olympics programme are asked to explain and justify the total expenditure they give specific figures on the proportion of total expenditure which is primarily related to regeneration.

  3.3  The repeated reference to the Olympics should not lead to the view that this is a unique issue. For the sake of further illustration, attention is drawn to the complex issue of Housing Revenue Accounts (HRA). Since 1989 in England and Wales central government has set out a notional HRA account for each local authority which provides council housing. The notional account provides notional figures for rents and for allowable expenditure. Where rents are assumed to exceed expenditure, as in all of Welsh local housing authorities, the excess amount is then used for public expenditure purposes other than the provision of council houses. Until 2002 it was used to part-finance rent rebates, ie it financed a non-devolved welfare benefit purpose. Since 2002 the notional surplus has been received by the Treasury for its general public expenditure purposes. Since 1989 the "surplus" generated by local housing authorities in Wales, and lost to public expenditure in Wales, has averaged around £100 million a year.

  3.4  In 1989 the legislation regarding Housing Revenue Accounts was not applied to Scotland. If Wales had been treated on a par with Scotland since 1989, there would have been around £2 billion extra public expenditure in Wales over the past two decades.

  3.5  In 2001 the ODPM introduced a new element of allowable expenditure for the HRAs in England, called a Major Repairs Allowance. The effect of this was to reduce the "surpluses" generated by local housing authorities in England and therefore the amount received by the Treasury. The Treasury judged that this was a policy change and not a change in comparable expenditure in England and provided no consequential adjustment for Wales . Since that date Welsh local housing authorities have been required to provide each year the same historic level of funds to the Treasury, adjusted only in the cases of stock transfer. If, since 2001, Welsh local housing authorities had been treated on the same basis as English local housing authorities it is estimated that there would have been around £1 billion extra public expenditure in Wales over the past decade.

  3.6  Attention is drawn to this illustration to show how the unchallengeable judgment of the Treasury on what is and what is not comparable expenditure can over time have very significant effects on the allocation of public expenditure across the United Kingdom. The existence of an independent advisory commission on inter-governmental allocations would have allowed an independent appraisal of such important exercises of judgment.

April 2009

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