Letter from Mr Bruce Robinson, Head of
the Northern Ireland Civil Service
Thank you for extending the invitation to submit
evidence to your Select Committee. You will appreciate that the
Barnett Formula and it's outworking is of great interest to the
Northern Ireland Executive. I therefore welcome the opportunity
to comment on the issues identified in the evidence call note.
I have tried to follow the guidance instructions as closely as
possible.
1. APPLICATION
OF THE
FORMULA IN
PRACTICE:
When referring to "present disparities"
in per capita public expenditure allocations across the UK countries
I presume the Committee is referring to the Identifiable Public
Expenditure (PE) per head data presented within HM Treasury's
annual Public Expenditure and Statistical Analysis (PESA) publication.
The trend data from this publication (table below) does suggest
that spend per head is indeed higher in the Devolved Administrations
but there are some concerns about how this table is compiled in
terms of how expenditure is attributed to the regions. These concerns
have existed for some considerable time. The extent of HM Treasury
mis-allocation of expenditure to the devolved regions is considerable.
An example of these anomalies was the inclusion of English and
Welsh prison spend in Scottish estimated spend. These anomalies
were acknowledged by HM Treasury under challenge from the Scottish
Executive. The expenditure estimates for the devolved administrations
were then subsequently revised downward.
It is also worth noting that the table highlights
evidence of some degree of convergence in Northern Ireland with
the UK average—presumably an outworking of the "Barnett
Squeeze".
TOTAL IDENTIFIABLE EXPENDITURE PER HEAD INDEX:
2002-03 TO 2007-08 (UK=100)
|
| | 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 (planned)
|
|
| England | 96
| 97 | 97
| 97 | 97
| 97 |
| Scotland | 117
| 116 | 113
| 115 | 117
| 118 |
| Wales | 114 |
112 | 110
| 111 | 112
| 110 |
| Northern Ireland | 130
| 126 | 125
| 124 | 123
| 126 |
| UK | 100 |
100 | 100
| 100 | 100
| 100 |
|
I would also make the important point that drawing conclusions
from this table on whether a region is over or under-provided
for in terms of public expenditure allocations is very risky and
potentially misleading. The PESA data in no way reflects variations
in regional needs. These needs reflect a range of factors such
as demographic profiles (which influence spend in key service
areas such as education and health), mortality, economic structure,
peripherality etc. All these factors vary by region and determine
the demand on public services.
The Barnett Formula process accounts for some 90.5 per
cent of the Northern Ireland Executive budget. In terms of flexibility
to allocate public expenditure, the Devolved Administrations have
considerable autonomy. In the Northern Ireland case a Budget is
approved by the Assembly which allocates money to spending areas
according to the priorities defined in the Executive's Programme
for Government. There are, unfortunately some constraints on flexibility
imposed by HM Treasury such as the discretion to switch between
current and capital definitions.
2. FORMULA BY-PASS
AND THE
BARNETT SQUEEZE:
Barnett convergence hastens during periods when public expenditure
is growing above long term trend rates. It is therefore not surprising
that there has been some degree of convergence over the last decade
when the annual average growth rate of public expenditure was
7.6 per cent. The pace of convergence is ameliorated to some
extend by receiving Exchequer funding outside of the Barnett process.
This "bypass" was a common feature of Northern Ireland
allocations when significant resources were received for various
EU structural funds/PEACE programmes. The scale of these funds
is now diminishing and so, therefore, is the influence of "bypass".
One would also expect the pace of any convergence to slow over
the coming years as the growth rate in UK public expenditure over
the next few years is likely to fall below trend.
3. DATA QUALITY
AND AVAILABILITY:
The HMT Statement of Funding Policy explains the mechanics
of the Barnett Formula in a very transparent manner. There should
not therefore be any misunderstanding about what it is trying
to achieve over a long term time scale. Where confusion does exist
is in understanding how HMT determines the extent of "comparability"
in the tables annexed to the Statement of Funding Policy. These
tables provide some insight into the degree to which English determined
funding is replicated in the Devolved Administrations. The manner
in which this data is presented and the inability to source the
English expenditure attributions back to specific areas in Whitehall
departments is a concern. There remains a concern that some of
the comparability percentages are arbitrarily set. Clearly full
transparency in the application of the Barnett Formula process
requires better information on how the comparability percentages
are derived.
One solution to this concern over how comparability is set
would be for HMT to publish additional tables which explicitly
link expenditure spending areas to clearly identifiable functions
within the individual Whitehall departments. To ensure that the
whole exercise was conducted in an objective manner, this task
could be given to the Office of National Statistics (ONS) who
have a statutory duty to remain independent in discharging such
functions.
4. NEED FOR
REFORM/ALTERNATIVES
TO THE
EXISTING FORMULA:
The Barnett Formula mechanism does bestow many advantages.
It should give the Devolved Administrations greater certainty
in terms of the quantum of resources that they have to incorporate
within their budgets. It also has a degree of transparency of
application (not withstanding the concerns over the comparability
factors) and it reflects population variations.
There are however two major concerns over the application
of Barnett. The first relates to the fact that the mechanism cannot
account for regional variations in need. Issues such as demographic
profiles, mortality rates, economic structures, peripherality
etc all impose demands on public expenditure in the UK regions.
In the Northern Ireland context, there are needs, particularly
within the education and health sectors that cost considerably
more to meet than the Barnett consequentials deliver.
The second concern about the Barnett Formula relates to the
application process. HM Treasury arbitrarily determine the outcome
without independent validation. This then allows HM Treasury to
arguably abuse the Formula to ensure that bypass results in non-allocation
to the Devolved Administrations. A recent notable example of this
was the decision to exclude 2010 Olympics funding from the
Barnett process.
On the specific issue of reforming or replacing Barnett,
in the absence of an alternative process, I would suggest that
the Formula process can undoubtedly be improved upon. Ensuring
independent validation of its application (ie ONS) and creating
some form of appeals procedure to allow a challenge to HM Treasury
would be helpful.
The difficulty with any needs-based approach to determining
public expenditure allocations between regions is reaching agreement
on the actual definition of need and how it might be measured.
The original HM Treasury Needs Assessment Model (NAS) contained
a vast array of need indicators across many spending areas. These
indicators then had weightings attached to determine relative
priority within the NAS model but this determination was quite
subjective in nature. Any future allocation model based on relative
regional need will still have to overcome this qualitative allocation
of weights.
If such as model is to be constructed, it is imperative that
it is done so in a collaborative fashion with the full participation
of the Devolved Administrations. Anything produced unilaterally
by HM Treasury will be treated with healthy scepticism.
5. DECISION MAKING
AND DISPUTE
RESOLUTION:
I have already alluded to the rather arbitrary approach adopted
by HM Treasury in allocating funds to the Devolved Administrations.
There is often a lack of clarity in how funds are attributed to
these regions. Furthermore, there is an increasing number of HM
Treasury decisions on public expenditure that result in reducing
the spending discretion of the Devolved Administrations either
by imposing efficiency targets/cuts to baselines or tightening
rules on issues such as resource/capital switching, access to
end-year-flexibility (EYF) stocks accumulated etc. These all effectively
reduce the spending power of the Devolved Administrations—thus
undermining the principle of devolved governance.
There is also a concern about the manner in which HM Treasury
impose alterations to expenditure allocations. There tends to
be little in the way of advance consultation with the Devolved
Administrations and even after public announcement, it is often
very difficult to obtain a full understanding of what HM Treasury
has actually done.
These concerns highlight the need for greater engagement
between HM Treasury and the Devolved Administrations, at least
at ministerial level, when amendments to financial allocations
are proposed. Ideally there should be some form of formal mechanism
established to allow for appeal/resolution. This mechanism could
then be reflected within an amended Statement of Funding Policy
document.
I trust the Select Committee will find this submission helpful
in their deliberations.
17 February 2009
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