Memorandum by Professor Colin Thain
RESPONSES TO
SUGGESTED QUESTIONS
FOR ACADEMIC
WITNESSES IN
NORTHERN IRELAND
PRIOR TO
THE EVIDENCE
SESSION ON
27 MARCH 2009
DEVELOPMENT OF
THE FORMULA
Q1. What do you understand was the purpose
of the Barnett Formula was when it was first introduced, and has
its purpose changed over time? Was it designed to reduce tensions
arising from disparities in public spending per head of population?
Has it succeeded in resolving such tensions?
ANSWER:
1. It is important to note that like so
many developments in British public administration the Barnett
formula evolved from rules and precedents going back well before
the 1970s. There was a tradition of allocating resources to Scotland
through the Goschen formula from 1891 giving Scotland 11/80th
of British spending on comparable programmes, this continued long
after population shifts meant this was generous to Scotland, and
for education the formula remained in use until the end of the
1950s; in Northern Ireland from 1920 to 1938 special
bilateral negotiations between the Treasury and the Northern Ireland
Ministry of Finance enabled the Province to by-pass normal UK
Department-HM Treasury discussions. By 1938 the two departments
agreed the principle that Northern Ireland citizens should have
parity of service provision with the rest of the UK. By 1942 it
was recognised that this meant the province would require extra
resources, and in 1950 a de-facto allocative arrangement
based on local needs was established.1 Although during the
1960s formula-based systems of allocation lapsed, the principle
of using allocations agreed for English departments was the benchmark
for discussions between the three territorial departments (the
Welsh Office having been established in 1964). Moreover, the principle
evolved that Secretaries of State (and the Northern Ireland Government,
pre-direct rule) would have discretion in dividing the pot of
resources and in practice block grant arrangements were in place.
Thus some of the building blocks of what was to become immortalised
as the Barnett Formula were already part of the non-statutory
rules-of-the-game agreed between HM Treasury and its counterparts
in Edinburgh, Belfast and Cardiff.
2. The immediate antecedents to the Barnett
formula were the debates prior to the plans to devolve legislative
and executive power to Scotland and Wales during the last years
of the 1974-79 Labour Government. The Treasury led an inter-departmental
review to try and establish an "objective" measure for
needs for each part of the UK. The Needs Assessment Study2 worked
on the assumption that what each part of the UK received in identifiable
expenditure should ensure "broadly the same level of public
services" and be "allocated according to their relative
needs". The report was replete with caveats about the difficulty
of deciding on needs and then measuring these objectively rather
than subjectively. It concluded that in 1976-77 Scotland
should receive per capita spending of 116, Wales 109 and
Northern Ireland 131 on the basis of spending in England
of 100. The reality was that Scotland received 123, Northern Ireland
136 and Wales 101—suggesting the baseline benefitted
Scotland and Northern Ireland but not Wales. The Barnett formula
then introduced in 1978 was based on a population balance
between England, Scotland and Wales of 85, 10 and 5. Northern
Ireland was treated differently with spending based Northern Ireland's
share (2.75 per cent) of UK population, rather than a share
of GB population used for the rest of the UK. The NIO was also
ring-fenced outside the process with separate discussions between
the Treasury and NIO on spending related to security, law and
order and constitutional matters. A significant element of Barnett
was that the territories received increments based on spending
increases (or decreases) in comparable English functional programmes.
It was therefore based on marginal changes in resources not the
overall level. Once the increments were added up a block of resources
was then created with a great deal of discretion given to the
respective Secretaries of State to allocate down to local programmes.
Barnett implied that the Treasury accepted that the levels of
spending were roughly acceptable enough to justify a formula based
on population rather than some more complex needs formula. Wales
lost out in the setting of the baseline based on the historic
accumulation of resources up to 1978. Thereafter the intention
of the Treasury was that over a considerable time there would
be convergence of expenditure toward population share. As spending
continued to rise over time, there would be relative gains to
England and Wales and losses to Scotland and Northern Ireland
(cuts in spending levels would reverse this). The problem for
both Scotland and Northern Ireland was that the formula was not
revised until 1993-94, and the Conservative Government failed
to cut spending thus ensuring the dynamic of the formula would
produce convergence with English spending levels.
3. There is no evidence that the Barnett
formula was anything other than a relatively short-term fix to
potential problems created by devolution proposals which in the
end failed to pass referenda in Scotland and Wales. It survived
long after those initial circumstances passed into political history.
That it survived was the result of inertia, the administrative
rationality of the process, and some inherent flexibility
in the rules of the game. It cannot be stressed enough how important
it was to finance officials in Scotland and Wales (and by implication
Northern Ireland) that the Treasury (a) left them alone to determine
the value and effectiveness of particular programmes and (b) allowed
their Secretaries of State to determine the allocation within
a block grant between local departments and agencies, without
recourse to the Treasury in Whitehall. English departments thus
bore the brunt of Treasury scrutiny. This was rational for both
the Treasury and the territories. In addition, for most of the
period after 1978 the Territories could bid "outside
the block" in exceptional circumstances. A careful balancing
act was maintained with the territories seeking to extend comparability
where appropriate and ask for more than the increments received,
but not to press too hard so that the Treasury would then seek
to open up territorial spending to greater scrutiny. For the Treasury
it was administratively easier to devote scarce staff resources
to scrutinising English departments than to delve into all spending
in the UK. Thus a typically British solution evolved which just
about worked, which maintained the closed world of administrative
discretion based on uncodified and non-statutory rules.
APPLICATION OF
THE FORMULA
IN PRACTICE
Q2. Do you consider that convergence in per
capita levels of public spending on the English level was an intentional
feature of the formula, or merely an incidental one? Do you think
it is overall a beneficial or harmful feature of the working of
the Formula?
ANSWER:
4. As I note above, convergence was an intentional
feature of the formula although the Treasury did not expect the
formula to last as long as it has.3 Given that more than
80 per cent of public spending is allocated to England, and
that we still have what is in essence a unitary state (albeit
with quasi-federal features), I would argue convergence in per
capita levels of public spending is on balance a beneficial feature
of the formula. Creating greater equity across the UK in
terms of public policy outcomes should be the province of other
public policies, many of which can be UK based and many determined
according to local priorities and the operation of local politics,
rather than the budgetary allocation system. The overall budgetary
system needs to maintain a large element of convergence to ensure
its acceptability to the majority of UK citizens. It is important
to note that the current formula applies to DEL (departmental
expenditure limits) or what might be called discretionary expenditure,
rather than to AME (aggregate managed expenditure), which includes
demand-led spending such as social security benefits and tax credits.
Thus the total public spending allocation system does include
elements outside Barnett which in effect adjust spending to some
elements of local needs (higher unemployment in Northern Ireland
or higher working tax credits as a result of poorer income distribution).
NEED FOR
REFORM/ALTERNATIVES
TO THE
EXISTING FORMULA
Q3. What criteria do you consider to be important
in assessing the success or otherwise of the present formula,
and of any possible replacement to it? Would a fair or equitable
allocation system necessarily be a needs-based system?
ANSWER:
5. I would place a great deal of emphasis
on the importance of the current formula in being administratively
easy to apply, and the adjunct rules allowing a great deal of
discretion to the territorial administrations in allocating
resources to local priorities within the envelope of the block
grant. If the Union is to survive it is important that the allocative
mechanism used is in a rough and ready way based on population
shares.
6. I would accept the tenor of the question
that in practice there are many definitions of fairness
when discussing budgetary policies. I am also sceptical that it
is possible to arrive at a needs based allocation regarded
as balanced and fair to all parts, regions and nations of the
UK. As I note above, the division of spending into DEL and AME
does allow spending based on needs to automatically feed through
to deprived parts of the UK—assuming policies for ensuring
take-up of benefits are applied equally across the UK.
Q4. To what extent are there tensions between
allocating expenditure according to such criteria as need, efficiency
and effectiveness? How would you suggest those tensions might
be resolved?
ANSWER:
7. There clearly are tensions between the
various criteria by which spending could be allocated. The current
Barnett formula gives greater precedence to efficiency
and effectiveness than to needs-based elements.
I remain to be convinced that the way to deal with the political,
social and economic inequalities in the UK is through wholesale
changes to the Barnett formula. If the Union is to be maintained
in more or less its current form, the onus should be on changing
public policies, and changing the way in which those policies
are delivered rather than through changes to the allocative mechanism.
Greater emphasis on the demand (and by implication needs based)
led element of spending outside the DEL process would be one way
to help resolve tensions. If demand for social security payments
rise differentially across regions, this is easier to "sell"
as part of the social contract implied by the Union, than highly
contentious debates about which parts of the UK have greater need.
Q5. How effective would it be to use population
or other proxy indicators of need, such as inverse GDP or perhaps
social security spending per head, as alternatives to carrying
out a detailed needs assessment? What would be the overall effect,
in terms of the distribution of spending, of adopting those?
ANSWER:
8. I can see many problems with using inverse
GDP or social spending per head as proxy measures for need. GDP
data is notoriously difficult to predict and is subject to considerable
revision. Social security spending per head represents only one
element of needs (and as I note above is already part of the non-Barnett
element of public spending which acts as a social stabiliser).
In Northern Ireland, for example there are needs which result
from historic inequalities of opportunity in education and skills
which would not be picked up through social security benefit indicators.
The costs of separate schools and even health centres based on
the sectarian divide cannot easily be calculated, but remain a
significant element of any needs assessment for the Province (and
could apply equally to parts of lowland Scotland) and other parts
of the UK—the North East or North West of England—for
example would not have particular elements of needs allowed for.
Q6. Assuming there is to be a mechanism for
distributing financial resources from the UK Government to the
Devolved Administrations, as the main source of revenue for the
Devolved Administrations, do you think that a needs-based formula
is the only real alternative to the current Formula? What other
alternatives might there be?
ANSWER:
9. I would propose a Barnett-plus approach
to reforming the current formula. Essentially the existing population
based formula should be applied to comparable Departmental Spending,
but a more explicit bidding process outside that allocation should
be set up allowing the devolved administrations to bid for a Reserve
of additional spending. This would be set as a proportion of total
DEL and could also be open to the regions of England (via the
Ministers for the regions) to bid for specific additional resources
seeking to address quantifiable social and economic need. The
bids would be made on the basis of programmes to be funded for
the three years of the Survey cycle (assuming there is another
CSR in the near future). Allocations would be made on the basis
of submission to the Treasury and final adjudication would be
before a Cabinet Committee made up of senior non-departmental
ministers. I would be open to persuasion that adjudication could
be through the Australian model (in Q9) below or the Canadian
model, rather than via a Cabinet Committee.
DATA QUALITY
AND AVAILABILITY
Q7. Are there still problems relating to the
collection, quality or availability of data on the distribution
of public spending and its effects? What issues are there on data
about indicators of need and tax revenues?
ANSWER:
10. We still have some way to go to have
more reliable data on the distribution of spending and on need
and tax revenues. The most pressing relate to assigning tax revenue
where there is an HQ in one region for purely administrative purposes
whilst there is a greater distribution of outlets in other parts
of the UK—does this over-accentuate the dominance of London
and the South East? How far can the administrative and HQ spending
of UK departments be assigned more broadly when many departments
(such as the Treasury and Cabinet Office) are effectively both
English and UK departments?; how far should the MoD's central
HQ spending be allocated outside London?. Much of this is the
product of the failure by successive governments to move civil
service jobs outside London. I am sure we could learn from comparative
research on the way Canada, Australia or Germany arrive at data
measures upon which to build fiscal transfer policies.
DECISION MAKING
AND DISPUTE
RESOLUTION
Q8. Most writers consider that procedural
fairness and transparency are important aspects of any system
of financing the devolved administration, and that this an area
in which the present arrangements are defective. Do you agree?
What information should be published or other processes adopted
to improve procedural transparency?
ANSWER:
11. Transparency has been improved since
the Treasury published the basic handbook on funding arrangements
for the territories after each Comprehensive Spending Review.4
Prior to 1999 researchers relied on occasional morsels from
Parliamentary Written Statements or off-the record discussions
with officials. It is now possible to track programmes and sub-programmes
for English/UK Departments deemed comparable with spending in
the territories, and read explanations about how different elements
of spending are treated using the Barnett Formula. However, this
only goes part of the way to opening up the process. It would
greatly help if the Treasury published the actual increments distributed
to the territories in the construction of each of the three block
grants—it would then be possible to see how the territories
had decided to allocate more or less than comparable spending
in England. It would also enhance procedural transparency if details
of bids outside the Barnett formula made by the territories were
published, and outcomes agreed with the Treasury clearly outlined.
The machinery for operating the concordats between Whitehall,
Westminster and the Territories needs to be dusted off, oiled
and given more regular outings, and minutes of meetings between
Ministers published.
Q9. How workable would be a UK Territorial
Grants Board given that its Australian prototype, the Commonwealth
Grants Commission, operates in a symmetrical, federal system of
government, with substantive fiscal autonomy for the States? Can
a Territorial Grants Board improve procedural fairness or provide
a system which is deemed legitimate?
ANSWER:
12. There is a need to debate comparative
experiences and see what can be learnt by the UK. Although beyond
the scope of the Committee's inquiry, there is a prior issue to
be addressed—creating more explicit rules for our quasi-federal
polity. If a Territorial Grants Board were to be created, we need
to have clearer rules about representation (should English Regions
through RDAs or regional assemblies be part of the process?),
dispute adjudication, and whether a statutory framework should
replace the "gentlemen's agreements" of the Concordats
(as they so anachronistically define themselves). As so often
in the analysis of apparently technical budgetary procedures,
the real political issues which lie beneath are about constitutions,
rules and procedural norms.
NOTES
1 Discussed in Colin Thain and Maurice Wright,
The Treasury and Whitehall: The Planning and Control of Public
Expenditure, 1976-1993 (Oxford: Oxford University Press, 1995),
ch 14.
2 HM Treasury, Needs Assessment—Report,
Report of an interdepartmental study coordinated by HM Treasury
on the Relative Public Expenditure Needs in England, Wales and
Northern Ireland (London: HMSO, 1979).
3 In recent discussions with Treasury officials
as part of a current research project—the Treasury under
New Labour (www.treasuryproject.org
)—it was apparent that officials who deal with territorial
expenditure are as surprised as outsiders that the system has
survived more than 20 years. Lord Barnett is also on record as
expressing surprise at the longevity of the formula to which his
name was assigned.
4 HM Treasury, Funding the Scottish Parliament,
National Assembly for Wales and Northern Ireland Assembly: Statement
of Funding Policy, 5th Edition (October 2007) [available from
http://www.hm-treasury.gov.uk/d/pbr_csr07_funding591.pdf
]
22 March 2009
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