The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 719 - 739)


Mr Michael Smyth, Professor John Simpson and Professor Colin Thain

  Q719  Chairman: Thank you very much for coming. It is good of you to give up this time to help us. We have been doing the rounds a bit; we have been to Scotland, Wales and obviously London. It helps us very much to get an academic feel for what the situation is in different regions of the UK. I wonder if I can start off by asking you how active an issue is the Barnett Formula here. What are the sorts of issues that people think about and talk about, if, indeed, they think and talk about anything?

  Professor Thain: My take is that it is not a particularly active issue in Northern Ireland, although I think the general question of resourcing and funding is obviously something that concerns people. The actual Formula which your Committee is trying to focus in on as opposed to the broader questions of the powers of the Northern Ireland Assembly and Executive, revenue raising powers and so on, is an issue of some concern, but Barnett itself is too esoteric. Maybe that is less true in Scotland and perhaps less so in Wales. That would be my take.

  Professor Simpson: Thank you very much for the invitation. For the people who talk about this subject with an amount of knowledge, the attitude to Barnett is leave it alone, it is fine. The attitude is it is serving Northern Ireland reasonably well. Suggestions that it should be revised are usually associated very quickly by the political people with the Treasury is going to try and trim down the level of finance in Northern Ireland. We have close on 4 per cent of national expenditure in the relevant areas for a population of 2.75 per cent or whatever it is. The Formula is generous. The only thing I would add is a very much smaller group who are aware of the Formula think of it as a block grant but there is very little awareness of what I call the convergence implication of the Formula. Those who read it say, "Yes, it is only 2.8" or whatever per cent "of the changes", so you are going from 4 per cent and must gradually be coming down. There is an awareness of that, a worry about it, but all the evidence is the convergence formula is not working, Northern Ireland has stayed at this per head basis near to 20-25 per cent higher than the UK average per head and it does not look as though it is going to shift. I will get all my points in on the first answer! The other point is in terms of understanding the way in which the Barnett Formula operates, there is no published statement each year saying, "Here is how we did the calculation", we all accept it on trust, and yet we know on the edges because of the specialist professional action of the senior civil servants you have just seen they are continuously arguing minor adjustments and the net effect is that a statement of the Formula and then a conclusion does not fit the way that the Civil Service negotiates from here to the Treasury.

  Q720  Chairman: Looking at the history for a moment, we had a fascinating session with Lord Barnett himself. Joel's view now is very simple: he says it was never intended to last, it was meant to be a very short-term political fix and the idea was you could get negotiations between the individual territories and the Treasury off the back of ministers. Good morning, thank you for coming.

  Mr Smyth: Good morning. In mitigation, I had a macroeconomics class and, unfortunately, now with the state of higher education with modularised courses you cannot make it up in 12 weeks. They are the beneficiaries questionably.

  Q721  Chairman: Thank you very much for coming. As I say, Joel Barnett's own view is that it was temporary, it was never intended to last, it was a political fix, it got him out of a corner of having arguments with the individual territories and did not want to go into a possible devolution exercise with the old type of negotiation hanging over his head. The Treasury at the time were doing a huge assessment of need, which we all know about, and he did not even know they were doing it. Nobody told him that the Treasury was doing an assessment of need. As far as convergence was concerned, it never entered anybody's vocabulary, it was not part of the exercise. That was confirmed when we had Lord MacGregor who was Chief Secretary of the Treasury in the 1980s. He gave evidence to us in the course of which he said exactly the same. He said, "Convergence never entered my mind, we never discussed it. If it is a mathematical fallout, well it is a mathematical fallout, unintentional".

  Professor Thain: The difficulty is the political versus the official. Talking to Treasury officials in the 1980s, 1990s and now, they are well aware of the dynamics of the Formula, but whether they tell their ministers who do not want the flak of being told there is convergence, it is just going to happen the longer you leave it. The problem with people who look at Barnett is when Barnett was set up is it the same as Barnett now because there is the comparability exercise, as John said, adding bits on year-in year-out in negotiations gradually extending the web to cover a larger proportion of departmental expenditure and looking for proportionality of comparability, which has been done more and more in the last five years or so, so it is not just 100 per cent of a sub-programme, it is 40 per cent or 50 per cent. That sort of process has given it an administrative dynamic that has allowed the official side of the argument to say, "We are moving here, we are getting somewhere, negotiations have helped us get a little bit more" and that means we are not talking of the same beast maybe as we were in the late 1970s and even through the early part of the Conservative administration when they were trying to cut spending. The interesting dynamic of the Formula is if the Conservatives had been successful in cutting spending it would have reversed. We have not had many years where there have been the decrements as opposed to the increments coming to the devolved administration. Barnett is both a mechanism but also the block grant, plus a negotiating process, and as long as it has had that the Treasury and the officials across the various parts of the devolved administrations can see that there is movement, development, it is not a dead thing that has stayed the same.

  Q722  Lord Sewel: We have got an interesting one here. When you have territorial departments before devolution it is absolutely clear that basically the secretaries of state are at it with the Treasury, they will be knocking on the door saying, "This is awful. We face electoral wipe-out in Scotland, give us a bit more money" and they can do that, that is a political fix, it is the nature of the game. Once you get to devolution where you do not have the same parties in power across the board then the dynamics completely change and the Treasury is now putting everything it can into the Formula, everything goes into the Formula, so the ability to do bypass is reduced and it was the bypassing, plus population loss, that stopped the convergence from taking place. Now we have got the likelihood that we will have purer Barnett. Wales' population is going up, your population is going up, and that affects the block impact because the block has been predicated on a lower population, so there is a significant squeeze in the process now and there is no clear way of seeing how you can avoid that. The response to that in Wales is to say, "Let's get out of Barnett as soon as we can", but the response in Northern Ireland seems, "We're not sure".

  Professor Simpson: We have managed to hold a position that deep down we realise is actually quite generous.

  Q723  Lord Sewel: But it is going to go, is it not?

  Mr Smyth: Very slowly.

  Q724  Chairman: I do not know about the politics of it.

  Professor Simpson: We have a situation where we can manage with the present Barnett Formula to have our domestic rating at 50 per cent of the English level and we can afford to run our water service free of extra charges. That is a pretty good point of devolution.

  Mr Smyth: We aspire also to imitate our neighbours to the south in terms of the transformation that is taking place there, but right at this moment in time it is the old Augustine thing, "Lord make me virtuous, but not yet". We are very content with the settlement that we have. We need time to bed down the institutions here and to take those kinds of radical policy decisions and Barnett helps that.

  Q725  Chairman: That is a message we have heard.

  Professor Thain: Have you also heard the message which maybe you got from the civil servants you talked to and it may be people like Iain McLean, who has done some absolutely fantastic work on his assessment of fiscal transfers and so on, most of which I would not disagree with. One of the things he does not make enough of is the fact that you do not have the Treasury walking all over your departmental spends, you do have devolution to the Ministry of Finance and Personnel and the equivalent in Scotland and Wales, and there is a sort of acceptance that they are going to do the Treasury's job for them rather than the Treasury sending in IMF-like teams of people to Northern Ireland to go over relatively small amounts of money in UK terms, but very significant.

  Q726  Chairman: Well, that happens.

  Professor Thain: But it is marginal, is it not? It is not the same as having the whole of the public spending regime in Northern Ireland looked at by the Treasury with a dedicated expenditure team saying, "Right, let's look at everything that's going on in Northern Ireland".

  Q727  Chairman: What about the size of the block?

  Professor Thain: The block itself, in a sense, is another reason why John mentioned earlier about people being happy with it here, the fact that you can move money around, except that which is ring-fenced in terms of social security and so on, within local political compromise to put more money into education or transport or whatever. There is enough scope there. In the 1980s, there was the whole waterfront development and urban regeneration, Belfast First, was paid for out of using the block imaginatively before we had the devolved administration. There is enough scope there to tinker and move around without having to justify it to the Treasury. That is worth its weight in gold as far as the discussions I have ever had with officials in the territories, not to have that and to have a kind of high level discussion with the Treasury but not a detailed one.

  Professor Simpson: If we are going to have political institutions in Northern Ireland and Scotland—the Welsh have not gone so far—we do not want to turn them into a county council which administers services and the standards are set elsewhere. Clearly the principle is you can have a bit of variation in your services, and we have a different administrative structure on health and social services and we have a very peculiar structure in terms of education and schools, but we are not doing it very efficiently at the moment. It is there and nobody in London would want to try and interfere. It is quite sensible in terms of administration to say, "That's your amount". I would not like to give the Health Service a predetermined sum. It is not a bad idea that a range of services in Northern Ireland have flexibility. Let me just make one other point. The block grant gives us a generous answer. Half of that generous answer comes from two sources. One is the social security budget, and the rates are not yet, and maybe never will be, determined locally, we accept UK rates, and if the block grants gives an extra couple of billion that accounts for £800 million of it. The other element that does not enter into a Northern Ireland institution as yet is the policing and law order budget which at the moment inflates the calculation of the block grant but not in a way that affects the Northern Ireland direct administration, it stays with the Northern Ireland Office, and that is creating about £200 million for the moment which is under very intensive scrutiny and argument as to what we do in terms of changing that budget in the years ahead. Half of what is causing the enlarged block grant will not be altered by saying to the Stormont administration, "We'll give you a lower ratio". A lot of what we are talking about, shrinking the Northern Ireland block grant, we exaggerate when we do not take account of the policing and social security budgets.

  Q728  Lord Sewel: Is there a longer term problem over Barnett in the context of devolution because the justification for devolution is to have local priorities, local policies, distinctive policies in the territories, and yet when you trace back the funding it is driven through Barnett consequentials by the profile of the English public expenditure. As you get policy divergence there is a major lack of congruence there, is there not?

  Professor Thain: I think you have put your finger absolutely on the problem. That is the crux. You mentioned earlier in your intervention about powerful secretaries of state, not devolved administrations with devolved aspirations to start making decisions locally, so you could argue Barnett worked better when you still had a unified unitary state without the quasi-federal structure that we now have. The further we move towards a proper federal structure, the more we are going to have to get into debates about a Canadian or Australian approach where basically you allow your states, as it were, to determine almost everything and have revenue raising powers and then you have an equalising fund to try to more or less help the bits of the federation that are not doing so well, which I think is the tenor of some of your questions about an indexed GDP ratio and so on to try to help. We are not in that situation because we do not have a federal structure, we still have a unitary structure with elements of quasi-federalism grafted on that are becoming stronger maybe in Scotland, maybe a bit more in Wales, and, as Mike said, when Northern Ireland really beds down and the system has had a good period of time maybe we will have policies developing where people will start saying, "Why do we have to have an English style approach to this? Why can't we look at the Republic? Why can't we look at Sweden? Why can't we look at some other part of the world rather than look to England?"

  Lord Sewel: It used to be called the arc of prosperity but we do not use that phrase any more!

  Q729  Earl of Mar and Kellie: Can I ask whether there has been much policy divergence during the past ten years? It is certainly an issue in Scotland, but has it happened much here?

  Professor Thain: I do not think it has happened here.

  Professor Simpson: No, less here than in Scotland certainly.

  Professor Thain: And Wales on the edges has started to develop in certain policy areas, mental health and so on. Northern Ireland is still learning to be a devolved administration.

  Mr Smyth: From my perspective there has not even been a serious debate about policy priorities. When the first devolved administration in 1997 came around everybody agreed that the programme for government was boilerplate, it was there and ready to go to get the buy-in. The latest programme for government shows a little bit of policy debate but on water we fudged it, and we are fudging it on education. It is political immaturity that is still pretty strong here.

  Q730  Chairman: It is all a very British mess, is it not?

  Professor Thain: I say in my presentation to you that I actually like the British mess.

  Q731  Chairman: There is a cosiness about it, a familiarity about it, I understand all that.

  Professor Thain: It is not just the cosiness, and maybe that makes me sound more of an apologist, I like the inherent flexibility without excessive rules.

  Q732  Chairman: You are saying the same thing as I did but put in a different way.

  Professor Thain: A different style. It makes it more important that your officials and politicians are adept at arguing in the system that exists and that is about skills and style of approach and maybe Scotland has got the edge.

  Professor Simpson: It only comes under real test and strain when there is not an annual plus increment to what we are doing. In a situation where your spend is increasing you can debate the allocation and it is not so serious, but if we faced two or three years when public sector spending in real terms was to be lower I suspect that the tension between the political process here and London would increase and the tension in terms of relationships with the Treasury would increase. Taking on the point that Mike was getting close towards, and I thought he was going to mention it, in the last 18 months we have had a debate about the possible fiscal variation of corporation tax. The principle behind that debate is fascinating. You know the Treasury put David Varney on to the job and he came up with a very predictable Treasury conclusion. If I had been working in the Treasury I would have come to that conclusion. The thought of Revenue and Customs operating without there being a political border for taxation was mind bending. If we move on and devolution gets to the stage of some form of fiscal discrimination then there will be, and there is, an interest in Northern Ireland that has been generated in the business community that will go for a tax system on the model that would satisfy the Azores principle, if I can use that example. The Azores managed to find a form of corporation tax in relation to Portugal where they are allowed to do various things because the Azores themselves set the rates and determine the revenue. That is not regarded as a State Aid, it is within their delegated authority. There is a tension here: would we like to have the fiscal authority for some things that would give greater freedom? If you just ask that people would say, "Oh, what a good idea", but if you ask "How would you use the freedom?" it is always on the basis of "We would charge less", there are very few people saying, "Well, we could put the rates up by a few pence in the pound so that we can do things at the moment we cannot do". That is not part of the agenda.

  Professor Thain: Also you come across the problem of the subvention from the Treasury. If you allow Northern Ireland to have control over its tax revenue you have to subvent and what are you going to do about that, have a negotiation with the Treasury and the Treasury will quite happily say, "Okay, right, we'll forget about the subvention and then you can start having control over the whole of the waterfront", as it were.

  Q733  Lord Sewel: The reality, at least into the medium term, is that on the bit of the argument we cannot have, which is about fiscal autonomy, whatever happens to that there will still remain a significant grant element. That is not going to disappear, there will be a significant grant element, and the argument is what sort of grant, is it not, so can we explore the needs approach? I thought your paper was quite interesting because the tone is you do not like needs, you like the population base, and then there is a bit where you actually list all of the distinctive needs that Northern Ireland has which would seem to me to open up the argument that it would be best met by some form of needs assessment.

  Professor Thain: My problem is who decides on the needs. For example, I go back to Iain McLean's very good work. Why 60 per cent of income as a barrier to determine the level of need, why not 50, why not 70, why not 65? If you think of the problems there have been in England with the rate support grant, and as seasoned politicians in this room you will know the debates that we would have had with the different administration coming in saying, "let's give more to rural needs and less to urban needs because we're a conservative versus an urban labour administration", who will actually decide on the balance of the needs in the needs package? That is why I think the GDP figure which the European Union has used as a very good indicator to have with the Structural Funds is a good one, but it is fairly crude.

  Q734  Lord Sewel: There is a problem about needs, which ones, what weights, everything like that, but at least that seems to be more easily related to expenditure need levels of public expenditure required than a formula which actually when you strip it all out and let it run comes to the conclusion that the per head of public expenditure in West Sussex should be the same as the per head of expenditure in West Belfast.

  Professor Thain: Except it does not because the aggregate managed expenditure element of public expenditure allows for the fact that if we are going to have higher housing benefit, higher council tax, all of which are the real, crucial parts—

  Q735  Lord Sewel: I accept that. Spending on education and health would be the same.

  Professor Thain: Yes, and there are arguments to be had there. Northern Ireland has the problem of us wasting a lot of resources on a segregated education system and segregated health system.

  Q736  Lord Sewel: Is that a need or a policy change?

  Professor Simpson: The health system is not segregated.

  Professor Thain: I do not know if you walk down the Ormeau Road and there is a spanking new health centre which is cheek by jowl with a more protestant health centre up the road and the degree to which the Alliance Party, for example, have calculated something like a billion pounds is spent in Northern Ireland that is only on trying to duplicate not very efficiently services that are on the basis of quite understandable historic problems. I am not trying to minimise those.

  Professor Simpson: The education point is valid.

  Professor Thain: In fact, the expenditure in Northern Ireland on education and health, some of that has got to wind through historically to become a more normal pattern that is not based upon some of the questions of difference.

  Q737  Lord Sewel: Would you accept in some of the areas covered by the Barnett Formula, not totally but for most of those services, the drivers are demographics, something to do with levels of deprivation and cost of service delivery, sparsity?

  Professor Simpson: What about the cost of living?

  Q738  Lord Sewel: That is a very difficult one, I know, because you are building an incentive for inefficiency, I appreciate that, but clearly it costs more to provide a primary school service in the Highlands and Islands of Scotland than it does in the leafy suburbs of Aberdeen.

  Professor Thain: It is urban versus rural.

  Q739  Lord Sewel: Going down those dimensions it seems to me that fits more rationally with levels of public expenditure that are required in those services in comparison with just a straight population driven approach.

  Professor Thain: Except the straight population driven approach, I would argue, is easier to sell politically. In the end you have got to have an approach to distribution of resources that works politically. One of the problems I have with a lot of the debate that is going on about Barnett and fiscal transfers and so on is the degree to which English voters will see whatever is arrived at as being worth supporting as part of a contract of the union and is ignored often and put down to English voters not very happy with Scotland getting too much. That is a perception of the fact that Scotland is actually making waves rather than the fact that you can tell a voter, "Well, actually, resources are given to these parts of the United Kingdom on the basis of population and then there are policy divergences as a result of local decisions".

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