Examination of Witnesses (Questions 680
- 699)
FRIDAY 27 MARCH 2009
Mr Leo O'Reilly, Mr Richard Pengelly and Mr Mike
Brennan
Q680 Chairman:
Were you consulted on it or just told?
Mr Pengelly: We were just told. I think the
Treasury might suggest there was some consultation and what they
would be referring to is in advance of the UK bid to host the
Olympics there may have been a discussion at political level as
to whether the devolved administrations would support the UK bid,
and the answer was clearly yes. That was not a discussion about
the Barnett Formula comparability factors. There was no discussion
or dialogue about the comparability factors for the Olympics.
Q681 Earl of Mar and Kellie:
How much money does it cost Northern Ireland, have you any idea?
Mr Pengelly: In excess of 100 million.
Chairman: Appreciable.
Q682 Lord Sewel:
Consequentials have been applied.
Mr O'Reilly: Yes. Is that just to the regeneration
element?
Mr Pengelly: We have not quantified it precisely
because the debate was always on the fundamental principle because
the principle is so flawed. If you could get past the principle
you could either say that we get full Barnett consequentials on
the regeneration element or we get a weighted comparability factor
on the totality of the Olympics budget, which is the way Barnett
normally applies to any Whitehall department, we get a reduced
comparability on every allocation as opposed to full comparability
on a particular element. We never entered that level of debate
because the Treasury would not go past the high level point.
Q683 Earl of Mar and Kellie:
Is the Olympics issue the biggest issue of this type or have there
been other ones?
Mr Pengelly: The other one of a similar scale
and political difficulty was that at the point of the establishment
of the devolved administrations, Scotland, Wales and Northern
Ireland had complete flexibility to move between current and capital
allocations. However, in the 2004 Spending Review the Treasury
reduced that to 3 per cent flexibility, and in their 2007 Comprehensive
Spending Review they removed the 3 per cent flexibility. The numbers
might be slightly different but they are on a par with each other
in terms of their impact.
Q684 Lord Sewel:
And the justification?
Mr Pengelly: The justification is that it is
important to treat the devolved administrations like a Whitehall
department.
Mr O'Reilly: The Treasury will say it has got
to do with the Golden Rule but, in fact, if you look at the absolute
numbers here there is nothing that the devolved administration
could have done with this capital budget that would have affected
the Golden Rule.
Mr Pengelly: In the dialogue with the Treasury
we worked out that the exposure was something like 0.03 per cent
of total public expenditure. Scotland, Wales and Northern Ireland
in the previous Comprehensive Spending Reviews have not made any
movements from capital to current, but on the assumption we exercised
the maximum flexibility it would have been 0.03 per cent. Our
position was that we did not necessarily want to make those moves
but it was important to have that flexibility in a changing environment.
Q685 Earl of Mar and Kellie:
Perhaps we can go on and ask about the prospective devolution
of policing and justice. Is this expected to be a straightforward
transfer of monies allocated presumably to the NIO to yourselves
or is it going to be a new baseline? Is it going to be a planned
Formula bypass?
Mr O'Reilly: There are two issues in response
to that question and I will ask Richard to deal with the first
one. The first set of issues deal with the question are the present
budgets that are in place for policing and justice, primarily
in the NIO but also in the Northern Ireland Courts Service, adequate.
Once a settlement and decision is reached on how much money should
transfer, the second issue is how will we then apply Barnett,
if we do apply Barnett, to that baseline moving forward. We see
those as two important aspects.
Mr Pengelly: In terms of the adequacy, we are
locked in a process of dialogue with the two main organisations
of the Northern Ireland Office, which will include policing and
prisons, and the Northern Ireland Courts Service, and the big
issue there is the Legal Aid budget. In terms of the dialogue
we are having with them, at the moment the information we have
is data they have given to us, we have not gone through it in
detail and quality assured it, and they are telling us that over
the remaining two years of the current Spending Review there are
pressures totalling some £500 million above and beyond the
level of funding that they have in place. That is against total
funding for the same period in the region of about three billion,
so some very, very significant issues there that are being presented
to us to manage. There are big issues in policing. There is a
hearing loss issue of former police officers who were not given
adequate hearing protection for firearms training. At the time
of the agreement on the CSR outcome for the Northern Ireland Office,
it was expected to be an issue that might amount to a few million
pounds at most, but it is now heading towards £100 million.
There are issues around capital, a big issue around pension arrangements
for police officers arising purely as a consequence of a decision
by the Home Secretary, not a decision by the Northern Ireland
Office. The other big issue we have in the Courts Service is the
Legal Aid budget. Funding for Legal Aid is presented to us as
an issue in the region of £60 million to £100 million
and Treasury has acknowledged there is a problem there but we
are still drilling into the detail of that. There are some very
significant issues.
Mr O'Reilly: I was going to supplement that
answer by saying there is also the question of how much money
will transfer, but also out of the cake that exists at the moment
how much needs to be held back to fund the future of NIO, as it
is referred to, in other words the residual responsibilities that
will remain with the NIO. A major issue that is being considered
is how do you continue to fund the various inquiries that are
in place or, indeed, may still be put into place in the future.
The lesson from those is they have turned out to be quite expensive
exercises. That is a fundamental issue which leads on to a related
issue which is, as you may know, the mechanism for funding the
Scotland Office and Wales Office is basically a top slice off
the Barnett allocation to the Scottish Executive and the Welsh
Assembly Government. We understand that while that does create
some sense of friction between the Scottish Executive and the
Treasury, by and large because the sums of money are relatively
small, ie it is mainly maintaining the administrative offices
in place for those two Offices, in the case of Northern Ireland
the functions that will be retained and continue to be operated
by NIO will be much more substantial, so there is an issue as
to how those will be funded into the future. That is another aspect
of the discussion that is continuing.
Q686 Earl of Mar and Kellie:
The last thing I want to ask you is, is the future budget stable
enough to become a new baseline or is there always going to be
a need for a bit of a Formula bypass should the situation become
less secure, for example?
Mr O'Reilly: Richard and Mike can come in on
this. Unfortunately, within the last couple of weeks we have had
an illustration where suddenly substantially new financial pressures
can emerge because of a deterioration in the security situation.
That is obviously an element of instability and the debate has
been had around here as to what would have had happened if policing
and justice had been devolved, say, a year ago to Northern Ireland.
The point you have raised moves on to the second strand of this,
which is what happens into the future. The context and background
here is the Barnett Formula has not been applied to the NIO's
policing and justice functions since 1998/99 because the Treasury
acknowledged what they wanted to do was effectively bring down
the scale of that expenditure moving into a period of stability
whereas previously it would have been much higher in a period
of instability. They openly acknowledged that what they wanted
to do over those years was to bring that baseline figure down,
which they have been doing. That is one issue. There is also a
smaller issue around the fact that part of the expenditure that
will transfer has never been subject to Barnett ever, namely the
Courts Service expenditure. The basic question is do we put in
place arrangements to reactivate Barnett in respect of policing
and justice and, if so, what will be the detailed issues arising
from that.
Q687 Chairman:
I am sorry, I am getting a bit lost on this. If you are going
to get policing and the Courts Service presumably you would want
an alteration to the block?
Mr O'Reilly: The first issue is what size will
the baseline be.
Q688 Chairman:
That is what I am saying, you will have to alter the block and
Barnett eventually, if need be, will apply but only on the same
basis that it applies to anything else.
Mr O'Reilly: There are two options. You could
decide not to apply Barnett to policing and justice.
Q689 Chairman:
And do what?
Mr O'Reilly: Simply continue to operate on a
negotiated basis with the Treasury. The downside of that is it
would be inconsistent with the rest of the Northern Ireland block.
However, I suppose the single biggest reason for considering that
comes back to the previous question around the stability of this
function and this budget.
Q690 Chairman:
I can see Northern Ireland is a special case obviously, one accepts
that, there are particular security problems that we do not have
in the rest of the UK.
Mr O'Reilly: I think it is fair to say our view
would be if the baseline figure was got right then the logical
conclusion would be that Barnett should also be reinstated in
respect of that tranche of block expenditure as well.
Q691 Chairman:
So you are in negotiation with the Treasury about the baseline?
Mr O'Reilly: Yes. There are discussions continuing.
Mr Pengelly: We are locked in dialogue. Our
main task at the moment is to try to understand the scale of the
pressures.
Q692 Chairman:
The pressures this end?
Mr Pengelly: No, the pressures in the area of
policing and security because that fundamentally determines the
way forward. If there are a number of unfunded pressures and if
that transfers across and becomes part of the block, the only
way the Executive could deal with those issues would be to divert
funding that currently sits with, for example health and education
and the range of other services for which they are responsible.
If those pressures are not specifically funded, for that responsibility
to devolve at the moment would have to be on the basis that there
remains an open dialogue with the Treasury about additional security
funding the way a Whitehall department works. There are issues
about when it comes within Barnett. In terms of total stability
and being absolutely sure at the point of transfer that the services
are adequately funded, that would make a very compelling case
for a Barnett-based approach, but we are not there yet. We have
recently initiated this process of dialogue to try and get to
the bottom of that.
Q693 Chairman:
I am sorry to be slightly pedantic about it, and it is a point
you made very early on in this discussion, but you are using Barnett
there as including the block, the block as well as variations
in the block.
Mr Pengelly: Yes.
Q694 Chairman:
When you say whether Barnett applies, you mean whether it applies
to the baseline and whether it applies to the variations.
Mr Pengelly: Yes.
Mr O'Reilly: Barnett will only ever apply to
the variations.
Q695 Chairman:
Of course it does, except the way you are using the phrase "the
Barnett Formula" would include negotiations about the size
of the block.
Mr O'Reilly: We would see these negotiations
about the size of the baseline for policing and justice to transfer
as being a precursor to a decision on whether or not Barnett is
reinstated.
Chairman: Okay. I think I understand
that.
Q696 Lord Sewel:
I want to talk about convergence and bypassing, but before I do
that can I ask two questions. One is, is the population of Northern
Ireland going up or going down?
Mr Brennan: As far as I can recollect it has
been increasing in the last couple of years.
Q697 Lord Sewel:
That has some consequences on squeeze. Secondly, in Wales there
is quite a lively debate about the Barnett Formula and whether
it should remain or go and in Scotland there is also quite a lively
debate, not so much in the press but amongst the political class
and the academics. Is there a debate in Northern Ireland about
Barnett or is it something that is not really referred to?
Mr O'Reilly: I think it would be fair to say
there is less of an overt political debate here about the issue.
It is also a reflection simply of the fact that we recognise whatever
happens to Barnett shall not be driven, shall we say, by Northern
Ireland considerations, that Northern Ireland will deal with the
consequences of whatever happens to Barnett because we are such
a small proportion of the total, even of the 15 per cent of the
total UK population affected by Barnett we are a relatively small
proportion of that, so our concern would be to highlight if and
when such proposals as emerge for any change that we will want
to engage on that.
Mr Brennan: On the issue of public understanding
and awareness of Barnett, I think I would have to say that a lot
of the public debate here about public expenditure allocations
in Northern Ireland, for example, is quite ill-informed. The public
do not readily appreciate the stricture that Parliament imposed
on the devolved administrations in terms of you have a limited
pot of money to use and at times you get this frustrating argument
breaking out about going back to the Treasury to get more money.
There is not a great awareness about how Barnett actually works
on the ground here. On the issue of convergence, it is very difficult
to say. You would think over the last ten years or so when there
have been quite high levels of public expenditure across the four
countries that the mathematic construction of the Barnett Formula
would mean that there should be some convergence. The only proxy
we have to try and get some insight into that is obviously the
Treasury's public expenditure statistical analysis tables at the
back where they have the territorial analysis and that shows,
for example, the identifiable public expenditure in Northern Ireland
has gone from 130 down to about 126 in the latest PESA publication.
That suggests there has been some convergence over recent years
and that does seem intuitively correct because public expenditure
has been quite high.
Mr O'Reilly: There has been an intensive public
debate, particularly just prior to devolution, on an area which
I understand falls just outside your remit, which is the whole
question of fiscal measures and tax autonomy. For example, there
was a whole debate that happened in the period before devolution
around comparable levels of corporation tax and the argument was
put forward by some that corporation tax in Northern Ireland should
be realigned with the levels in the Republic of Ireland to make
us more competitive. That led into much wider interaction with
the Treasury but also consideration of the European-wide dimensions
of varying tax rates within particular countries.
Q698 Lord Sewel:
Could we concentrate on convergence. The point was made, and you
are absolutely right, that the Treasury wants to put more and
more into the Formula and avoid the opportunity for bypass. I
think that is inevitable in a fully devolved situation because
you remove the opportunity for secretaries of state to sort things
out, you just rely on a formula because a property of the Formula
does mean that if it is applied in its pure way there is a dynamic
towards convergence. You are also increasing in population, so
that will add to a downward pressure on per head expenditure as
well. Why then do you want to stick with Barnett because you are
going to have a significant squeeze?
Mr Brennan: I suppose the immediate response
to that is we do not know what the counterfactual would be. It
goes back to this question of if you decide not to go with Barnett
and you go into the world of constructing some sort of needs-based
system it would be very difficult to form a view on where Northern
Ireland or, indeed, Scotland or Wales might be in terms of relative
needs.
Q699 Lord Sewel:
Do you accept that if you stick with Barnett and continue to have
an increasing population you will face significant downward pressures
on public expenditure?
Mr Brennan: The mathematics of Barnett suggest
there will inevitably be what they call asymptotic convergence.
That is inevitable.
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