The Barnett Formula - Select Committee on the Barnett Formula Contents


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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