Examination of Witnesses (Questions 647
- 659)
FRIDAY 27 MARCH 2009
Mr Leo O'Reilly, Mr Richard Pengelly and Mr Mike
Brennan
Q647 Chairman:
Gentlemen, can I thank you very much for coming. As you know,
this is a Committee set up specifically by the House of Lords
to look at the Barnett Formula, how it works, what it does, what
its prospects are, whether it should continue, whether it should
be replaced by something else and, if so, what. There are certain
things we are not entitled to look at. I imagine you have seen
our mandate. We are not allowed to look, for example, at the breakdown
of cash inside England by regions of England. We are not allowed
to look at revenue raising issues, so we cannot express a view
as to what should happen about, say, the demand for fiscal autonomy
in Scotland. Indeed, it is a fairly narrowly focused inquiry looking
at Barnett, how it came into existence and whether it works. I
am very grateful to you for coming to assist us in that task.
Mr O'Reilly: You are presumably going round
all the regions of the Devolved Administrations?
Q648 Chairman:
Yes. We have been to Scotland and Wales.
Mr Pengelly: Saved the best until last!
Q649 Lord Sewel:
The missing bit of this is the authentic voice of Middle England.
Mr O'Reilly: Thank you very much
for the invitation to attend. Obviously the Barnett Formula is
something that we operate, as those who operate basically the
central finance part of the Department of Finance in Northern
Ireland, and are aware of on a fairly frequent and if on not a
daily basis, certainly a monthly basis. At the times of Spending
Reviews, et cetera, it comes into focus. It is also something
which I know is part of the issues you want to raise with us,
and is quite topical because of the discussions around it, which
are the financial arrangements that surround the devolution of
policing and justice. That, again, has refocused some interest
in Northern Ireland on how the Barnett Formula operates and how
it might operate in respect of policing and justice. Just by way
of a general overview, to give a potted overview of our perspective
of the Formula, although I know you want to come back in some
detail on it, generally speaking we believe that the Barnett Formula
as it operates and has operated generally has been a fair and
effective way of dealing with the tricky issue of how you allocate
resources to devolved regions in a single state. Some of the difficulties
that have been attributed to it reflect in some respects the fact
of the significant imbalance in the size of the four regions of
the UK, if I can call it that, where 85 per cent of the population
is around England and 15 per cent in devolved administrations
and, indeed, in the case of Northern Ireland roughly 3.0 per cent
of the population. Any arrangement that operates has to take account
of that very skewed distribution of population, and hence resources,
around the regions of the UK. From our perspective, the Formula
generally has operated effectively. The principal advantages,
as we see them, are first of all that in a sense it takes immediate
politics, if I can call it that, out of the negotiations on financial
allocations to each of the devolved administrations. For example,
particularly now that we have a devolved administration in Northern
Ireland where local ministers obviously want to set their own
priorities, the Formula, by allocating a global sum of money and
leaving it to the devolved administration to decide how that money
is spent, very much gives them a sense of much greater control
over what is happening locally. It also takes away the enormous
difficulty that would no doubt be in place if we had to negotiate
with the Treasury about allocations of sums of money for different
issues on an ongoing basis, which to some extent would cut across
the devolution of political responsibility because inevitably
the Treasury, Treasury officials, Treasury ministers, would take
a view as to how money should be spent locally and that would
cut across the devolved settlement in that sense. In a sense,
it also bestows transparency. One of the positive things that
have happened with the Formula since devolution has been the fact
that the Treasury now publishes its statement of funding policy
for the devolved administrations, so the detail is there and it
is openly available. To some extent, I think that has helped remove
some of the misunderstanding and mystique around the Formula.
We have just a couple of difficulties as we see them, and we can
come back to them later. First of all, the way the Formula is
operated is while on the surface it appears straightforward, at
times we have concerns as to the way the Treasury decide what
is and is not falling within the scope of the Formula and what
is and is not English expenditure as distinct from UK-wide expenditure.
To some extent we are entirely dependent on the Treasury telling
us what our comparable adjustments in expenditure are.
Q650 Chairman:
Do they consult you at all?
Mr O'Reilly: In a sense it is a one-way flow
of information.
Q651 Chairman:
Do they consult you on this issue or not?
Mr O'Reilly: Sometimes, but often not. Often
it is very much presented as a fait accompli. I will finish my
introductory remarks now and then we can come back to these points.
Certainly within the recent years there have been occasions, most
particularly in the 2004 Spending Review, when the Treasury suddenly
and with no warning introduced significant changes to the way
the Formula operated in terms of the capacity of the devolved
administrations to switch between capital and resource and also
the arrangements for EYF, which locally meant that, for example,
we simply had to set aside the budget we had planned for the following
three years and do a new one. That obviously caused difficulties
here. Those difficulties were lessened to some extent because
at that time we had direct rule, but I can imagine that if we
had had a devolved administration at that time it would have caused
major difficulties locally. We feel the fundamentals of the Formula
operate effectively. It is not ideal, but it is difficult to work
up in your mind an ideal situation that would have no difficulties
whatsoever. Our concerns in general terms are around how it is
operated on a day-to-day and year-to-year basis and some of the
transparency issues involved in it. Thank you.
Q652 Chairman:
Thank you very much indeed. When we took evidence from Lord Barnett
he was really quite firm about it. He said it was his intention
when he did it in the 1970s—it was not even called the Barnett
Formula for another ten years, I think it was Sir Leo Pliatsky
who actually did it—that it was intended to be temporary
to get over some political difficulties, to remove the argument
between the devolved administrations, although of course they
were not devolved then, but, if you like, the territories and
the Treasury over many years and it was a simple Formula that
could be applied and was only to be applied to variations in the
expenditure and not to be applied to the block. In his opinion
it had outlived its usefulness, its day had passed and he thought
that a Formula that was based virtually entirely on population
was not reasonable and he wanted needs assessments to be pushed
more into the equation. From your experience of Barnett, do you
still think it is a useful and effective way of actually distributing
money from the centre to the devolved administrations?
Mr O'Reilly: Yes. I will ask my colleagues to
come in on that one in a moment. One of the things about the Formula
is that it does not distribute the total of the funding to the
devolved administrations; it deals with the marginal adjustments
in funding to the devolved administrations. I suspect part of
the reason for its longevity is the fact that its foundation was
when the distribution of resources that were in place in 1977/78
were relatively favourable to the devolved administrations and
that has allowed the Formula to continue in place and deal with
subsequent adjustments at the margins. The other obvious point
is the Formula only deals with part of public expenditure within
the devolved administrations and in our case, if you add up our
total DEL and AME, just over half of that is accounted for by
the Barnett Formula, so a great deal of public expenditure happens
and is distributed by other means.
Q653 Chairman:
Can I ask you about negotiations over the block. How do you do
that with the Treasury?
Mr O'Reilly: I will pass to my colleague, Richard,
who does most of that.
Mr Pengelly: In terms of negotiation, the position
has been changing over the last number of years. The Treasury
has adopted a policy for the devolved administrations to try and
get as much funding as possible channeled through the Barnett
Formula rather than have what was lovingly referred to as a "Barnett
bypass". Effectively, in terms of the Spending Review, the
initial point is the Treasury will agree the baseline, so that
is your starting point, which is effectively the conclusion from
the previous Spending Review. They will produce a list of the
comparability factors, and that is for all the Whitehall Departments.
They will break the individual spend to a low level of analysis
and for each of those units of analysis indicate whether it is
a UK-wide programme or an England only programme. They send that
to us and there is a dialogue. There is a particular issue around
the Olympics, which we might come on to, which is a specific and
thorny problem. That aside, to be fair to the Treasury, the debate
around whether programmes are comparable or not has not in my
time, going back ten years, ever been a particularly problematic
debate. In terms of the sub-programme, it is largely an objective
issue. There are programmes solely covering England, and those
which extend beyond England. There has been nothing like the Olympics
before, frankly. We agree that and that gives the comparability
factors. The population percentages are derived from ONS as a
statement of fact and put into a spreadsheet and when the Chancellor
announces the national spending review outcome it becomes a mathematical
exercise. We obviously check and double-check the amounts because,
being accountants, that is what we do. If I go back to previous
Spending Reviews, for example the 1997 and 1999 CSRs, there were
elements outwith the Barnett Formula where there was discussion.
Peace funding was always outside and there was a discussion about
the levels of that and there were some issues on agriculture around
modulation matched funding. Those areas have been diminishing
and we are now at the stage where off the top of my head I cannot
think of anything where there is active discussion with the Treasury,
it is all Barnett-based and formulaic. The negotiation, as such,
happens around the statement of funding policy and that is where
the difficulties are as opposed to the quantum of any specific
item of funding that flows through Barnett.
Q654 Chairman:
A lot of the evidence that we have heard has, in effect, concentrated
on having some kind of needs assessment fed into the way in which
the Formula is applied. As far as the Formula is concerned it
only applies to variations, I understand that, but if you are
going to look at the baseline, the block, do you not think that
some kind of needs assessment should be part of the process?
Mr Pengelly: Mike can say more about the detail,
but in terms of the starting point you have got to go back to
go forward. The debate is about Barnett or not—to me the
first stage in that is the debate about formulaic funding as against
a negotiated outcome. In a sense that is about choosing objectivity
over subjectivity. The view is objectivity and formulaic funding
is better. If you make that choice but when you get into it if
you introduce a needs factor you are reintroducing subjectivity
because there can be no absolute statement of needs, it goes into
the relativities. Maybe Mike could say more about that.
Mr Brennan: As Richard and Leo have said, the
totality of the Northern Ireland block is a given, so Barnett
really is amendments at the margins depending as you come to each
Spending Review. It is a marginal adjustment mechanism. The main
benefit of Barnett is the transparency in that we have the published
statement of funding policy and you can look at the consequences
at the back and see exactly how comparable you are to various
Whitehall departments. The minute you start to introduce the concept
of a needs assessment you face two difficulties. The first one
is do you want to do a needs assessment on the totality of the
block allocation or do you want to take the baseline as a given
and construct a mechanism based on needs assessment going forward.
As Richard said, any one of those approaches is a highly subjective
exercise and you would lose the transparency of the Barnett system.
You then get into second order considerations and problems about
how would you police a needs assessment, for example, and would
there be a need for an independent arbiter. Those are second and
third order considerations that come out of needs assessment.
Q655 Chairman:
Very important ones.
Mr Brennan: Yes.
Q656 Chairman:
Clearly it would have to be looked at. I get the impression, and
I may be quite wrong about this, that on the whole you are satisfied
with your block allocation and, therefore, you do not really need
to look at Barnett because Barnett is there as a sort of mathematical
formula which you can apply to variations up or down and that
is enough. Is that right?
Mr Pengelly: We are trying to completely differentiate
the size of the block as against the approach to determining the
size of the block. In terms of needs, we have talked about the
flaws because you are introducing subjectivity and the difficulty
of determining needs. There is no question that there are issues
of deprivation, geographic issues, peripherality issues, where
Northern Ireland has higher need and, therefore, in our view it
could make a coherent case for additional funding. The problem
is, in terms of the mechanism to do that, that is not in the Barnett
Formula. The other option is to set aside the Barnett Formula
and have a subjective discussion with the Treasury. At any point
in time, let alone in the current economic situation, you are
entering the unknown. I would not say that our views on Barnett
equate precisely to a view that we have an adequate block, there
are issues in terms of the level of public expenditure in Northern
Ireland.
Q657 Chairman:
I am sure nobody would say they have an adequate block, but my
impression is that on the whole you are not dissatisfied with
the block and that Barnett, therefore, is a peripheral issue and
you do not want to change the way in which the block is allocated
except you want it to be a bit more transparent. Is that fair
or not?
Mr O'Reilly: The absolute size of the block
is not ultimately a Barnett issue, it goes back to the start of
Barnett. In a sense that is a separate issue as to what should
be the basic size of the block and how much money should be allocated
to each of the regions. If you wanted to look at that, Barnett
as a formula cannot address that issue.
Chairman: I would agree with that, but
it does not seem to me that you can look at this thing without
looking at the baseline as well.
Q658 Lord Sewel:
You are keen to avoid subjectivity, and I can understand that,
and you say Barnett is the means of avoiding subjectivity, but,
as you say, if you trace it back to its origins, that initial
block, that is the historic accumulation of subjective judgments,
is it not?
Mr O'Reilly: Yes.
Mr Pengelly: It is, but the other point I would
make is that the block at a point in time was the basis on which
the devolved administrations were established and they were aware
of that in the context of the needs issues for Northern Ireland.
To change that now means you reintroduce a subjectivity that in
effect has been managed out of the system because of the transparency
of the position at the establishment of the devolved administrations.
Q659 Lord Sewel:
Yes and no. Yes, the year-to-year adjustment with minor reservations
is non-subjective because it is a formulaic judgment. You could
say the Treasury is making subjective judgments on what it decides
on England and the UK, that is a subjective judgement, but certainly
the application of the population is objective. That is the incremental
bit. The historic substance is purely the project of subjective
negotiations.
Mr O'Reilly: We did some local needs and effectiveness
work back in 2001 and we will explain how that exercise went.
Mr Brennan: I take your point entirely about
the totality of the block having been set in a subjective fashion
some time in the dark, distant past. The difficulty we have in
terms of trying to form a view on the needs assessment is that
it has been so long since we have seen the Treasury's view of
what a needs assessment might look like, they have not published
anything, so we struggle to find where we might be in that counterfactual
world. In 2001 when the new devolved administration came in we
tried to do some preliminary work on using the old Treasury NAS
model to try and form some—
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