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 |
| Relevant | | Relevant
|
| Department's | X
| comparability | X
| population |
| Programme | | percentage
| | 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 UK | | Relevant
| | Relevant |
| Department's | X
| comparability | X
| population |
| Programme | | percentage
| | proportion |
| | |
| | |
| |
| | | |
| |
| | | |
| Composite Indicator of relative expenditure need )
|
| X |
|
| ( 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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