The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 700 - 718)


Mr Leo O'Reilly, Mr Richard Pengelly and Mr Mike Brennan

  Q700  Lord Sewel: Do politicians realise that?

  Mr O'Reilly: I suppose the history of this has shown that over the 30 years of Barnett there has not been a major problem in the way the Formula has operated, so I suspect because of our historical experience we tend not to anticipate, perhaps incorrectly or unwisely, a major problem moving ahead around this issue for the foreseeable future.

  Q701  Lord Sewel: That was because we were all at it doing bypassing as much as we could, was it not?

  Mr O'Reilly: It is that combined with the pace and rate of increase in total public expenditure and now that we are entering a period where it is likely that public expenditure growth will be much lower than it has been over the last decade, say, then the convergence will lessen.

  Mr Brennan: It acts as a dampener.

  Mr Pengelly: Mike's point is very strong on the counterfactual position. Barnett in the last Spending Review delivered for the Northern Ireland Administration in the region of 1 per cent real terms growth per annum. If we compare that to the likely outcome from a subjective dialogue with the Treasury we could point to many Whitehall departments, which I suspect would be likely to present as compelling a case as we could for strong need, receiving flat cash or, indeed, cash reduction in terms of outcomes. It is trying to get a sense of what you are comparing it with. Barnett may not deliver as much as people want, but I suspect it delivers more than we would receive by another method.

  Q702  Chairman: I still have problems with the application of a Formula which is based upon population ratios 30 years on from the time when it was first introduced.

  Mr Brennan: Although the population ratios are updated now on an annual basis, that was not the case until ten years ago and that was a fundamental flaw. The Treasury agreed in 1997, I think, to use annual updated population shares.

  Q703  Lord Sewel: The recalibration applies to the increment, it does not apply to the block. We are back to population increase again. If your population is increasing the block refers to a level of provision for a smaller population.

  Mr Brennan: Yes.

  Mr O'Reilly: Just reflecting on your comments there, part of the discussion we are having has to be constrained by your terms of reference but if you get into a more abstract discussion on these issues you inevitably draw yourself into issues of revenues and regional revenues and the issues that those raise because if you look at models of distributions to regions within other states in the world it is usual that there is an interaction between needs and local revenue raising or, as they talk about it, fiscal effort. In a sense, the UK system sets aside and takes as a given there is a national tax system and that influences how we approach these issues of dealing with expenditure levels in devolved administrations.

  Q704  Chairman: Yes. I suppose if you had responsibility for social security expenditure you would do things rather differently. I think that is certainly true.

  Mr O'Reilly: Inevitably.

  Q705  Earl of Mar and Kellie: It is also interesting that when you were talking briefly about the possibility of varying corporation tax in Northern Ireland, that was not going to bring the Northern Ireland Executive any more money and it was not going to reduce it because that would have merely reduced the amount flowing to the Treasury, there would be no increase in income.

  Mr Brennan: No, it would have cost both the Northern Ireland block and the UK Exchequer. There would have been a net cost to both.

  Q706  Earl of Mar and Kellie: So if that had been implemented there might have been a claw back?

  Mr Brennan: The implications of the distant, now infamous, Azores judgment would imply that the shortfall in revenue, in corporation tax, would have had to have been covered by the Northern Ireland devolved administration, but at a wider UK level there would have been a tax distortion as well in terms of shortfall in revenue through transfer pricing and also lower tax-take at a UK level. What Sir David Varney estimated was somewhere in the order of two billion over ten years.

  Mr O'Reilly: Against that you have got to factor in that because of the market failure in our local economy there is a lot of public expenditure intervention, but with a different fiscal regime that market failure would reduce and, therefore, the need for public expenditure would reduce in terms of those issues.

  Q707  Earl of Mar and Kellie: So there would be GVA. It becomes a very complicated way of working it out.

  Mr O'Reilly: It does, yes.

  Q708  Lord Sewel: There is another issue which is at the end of the day through the Barnett consequentials it is driven by an English pattern of expenditure. Is that not really incompatible with the concept of devolution because devolution is there to enable the territories to develop their own priorities, their own programmes, and over time it is clearly the case in Scotland that the profile of provision is diverging significantly from the profile of provision in England yet the expenditure reference is the English profile?

  Mr O'Reilly: What you are saying is simply stating what is the truth, which is the variations in the Barnett Formula from one Spending Review to the next are determined by how the expenditure allocations work out in the Whitehall Spending Review negotiations. To take a simplistic example, we are always aware that if there was a very major push to increase defence expenditure substantially we would get no Barnett consequentials, therefore that would have a comparatively detrimental effect on us, whereas if there was a very major push to increase expenditure in the Health Service, because we have high Barnett comparability factors that would benefit us. In an absolute sense you are right, but then what other mechanisms do you have to lessen that distortion of basically being driven by Whitehall allocations. The main one is when there is money allocated to the devolved administrations via Barnett it is for the devolved administrations to decide how those sums are distributed amongst the various services for which the devolved administrations are responsible. Going back to the 2004 example, this is why the Treasury reintroduced the split between resource and capital and constrained the movement between those two control totals. It meant that, in effect, variations to our capital were being driven by what was the consequence of Whitehall departments' requirements for capital allocations and in a sense that accentuated the problem for us that you have highlighted.

  Q709  Lord Sewel: This is a silly question in a way. In England, water is privatised and in Northern Ireland it is not. Do you get any money for the water?

  Mr O'Reilly: No, we do not.

  Mr Pengelly: I think that is a very important issue. The Treasury answer is that this reflects a policy choice by the devolved administration. Clearly, as regards the Barnett Formula, if things were in the private sector and outwith the public sector in England there is no public expenditure so there will never be a Barnett consequence and that is a very understandable and logical position. The Treasury view would be in essence that exacerbates the "Barnett squeeze" because you are having to divert money flowing from the Barnett Formula to services outwith, but there is an available solution to devolved administrations to deal with those issues, which takes us back towards the issue of revenue raising and I know you do not want to get into that. That service in the public sector as well as the private sector is funded by charging in England and Wales. If there is a policy choice by a devolved administration not to do that, the Treasury would not see that as an issue at all to do with the Barnett Formula, that is an issue purely about policy choices by a devolved administration.

  Q710  Lord Sewel: What happens if the Health Service in England becomes an insurance-based service?

  Mr O'Reilly: We would have an issue to consider.

  Mr Pengelly: In many ways, certainly from the public perspective, notwithstanding devolution, there still is a National Health Service in the United Kingdom. The changes between England and the devolved administrations tend to be around the margins. Clearly a change of such fundamental significance as that would cause the health ministers in the devolved administrations to pause for thought if nothing else.

  Lord Sewel: You certainly would not have any Barnett consequentials, would you?

  Q711  Chairman: It does increase the block.

  Mr O'Reilly: This line of questioning does get into something which I noticed you raised in the various questions that you might raise with us, which is the issue of the interaction. I know that national tax may not be outside the remit but local revenue raising capacity in terms of the council tax in Scotland and Wales and the rates system here obviously interacts with the overall capacity of a devolved administration to deliver services. That has a particular implication here because while council tax in Scotland and Wales, as I understand it, goes exclusively to support the local councils, in Northern Ireland part of our rates revenue is used to support the services funded by the Northern Ireland Executive and that simply reflects the historical fact that the Executive is responsible here for education provision and certain other services that in the rest of the UK the local government would have a key role to play in in delivering the funding of those services. There is a further interaction around those issues locally.

  Q712  Chairman: Can I come back to your papers in 2001-02. Did the Treasury, as far as you know, produce anything on their side of the argument?

  Mr Brennan: No. We copied the Treasury into the work that we were doing as it evolved for comment but we got no formal critique back on the methodology we employed or the results that we produced.

  Q713  Chairman: You did not gather that they were doing a needs assessment or something of that sort at that time?

  Mr Brennan: No, not that I am aware of.

  Q714  Chairman: So it was just Northern Ireland?

  Mr Brennan: Yes.

  Mr O'Reilly: It is fair to say that they were not enthusiastic about the fact that we were doing it, put it that way.

  Q715  Chairman: I wonder why! Thank you very much, I think we have had a good run round the course and it is very interesting indeed. I have to tell you my experience so far with evidence is that on the whole some form of introduction of the needs assessment does seem to be fairly popular with many people we have talked to.

  Mr O'Reilly: Our concern is with the complexity and subjectivity of such a needs assessment. I suppose I would say an essential requirement is that there would need to be some form of independent/objective oversight because our experience would indicate it could create difficulties for us if it was left exclusively to the Treasury to arbitrate.

  Chairman: I think we would all agree with that.

  Q716  Lord Sewel: If you could be absolutely copper-bottomed guaranteed that the needs assessment would be done by an independent, non-Treasury outfit, something like the Australian Commonwealth Grants Commission, would that change your view on needs assessment?

  Mr Brennan: It would certainly mean that we would probably have less fear of what I call the Barnett consequential world that may exist out there. Basically we have got a great fear of the unknown.

  Q717  Chairman: The other general point we have been hearing, particularly since we have been here, is you should not interfere with Barnett at the moment because Northern Ireland needs a period in which to let the devolved government bed in and the problems begin to resolve themselves rather more, but further down the road that might be a different proposition. Do you feel that?

  Mr Brennan: This goes back to the earlier point I made about the level of understanding in the political class here about how Northern Ireland is funded. There is still a lot of education to be done out there in terms of where resources come from and how they are used. For example, if you were to impose a needs assessment model now the external shock that could bring to the decision-making process of the devolved administration could be very destabilising. Once you bestow credibility and there is greater understanding about how resources are allocated to Northern Ireland in that mature environment then you do have a debate.

  Mr O'Reilly: There is a further interaction here with another major issue, which is the dependence of the Northern Ireland economy on public spending. It is an historical fact that we have an underdeveloped private sector, perhaps for obvious historical reasons, and people would say it is a clear objective of the Executive to build the size, coherence and strength of the private sector here but we would say that is going to take a bit of time to allow that to happen and to reduce the scale of dependence in Northern Ireland, which I think most commentators accept is excessive dependence, on the public sector.

  Chairman: That is a very long-term prospect.

  Q718  Lord Sewel: So a "Barnett squeeze" would be economically attractive in that it would cease the crowding out of the private sector by the public sector, is that the sort of argument that you could make?

  Mr Brennan: The key problem is the size of the private sector. It is not that the public sector in Northern Ireland is too large, it accounts for about two-thirds of regional GVA, but if you look at the public sector in Northern Ireland and compare it with Scotland, Wales or England in terms of the number of public sector employees or services provided it is very, very similar, it is that the private sector in Northern Ireland is far too small.

  Mr O'Reilly: The problem is the overall size of the economy is too small here because you have an underdeveloped private sector.

  Chairman: Thank you very much indeed.

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