Examination of Witnesses (Questions 719
- 739)
FRIDAY 27 MARCH 2009
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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