The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 680 - 699)


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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