Annex
RESPONSES TO
QUESTIONS
1. Application of the Formula in Practice
a. Are the present disparities in public expenditure
per head of population between the countries of the UK a consequence
of the Formula itself, the historic baseline or of other factors?
To what extent are those disparities related to need?
b. What effect does the Barnett Formula have
in terms of equity and fairness across the UK as a whole?
c. What effect does the Barnett Formula have
on the aggregate control of public expenditure?
d. What measure of flexibility do the Devolved
Administrations (DAs) presently enjoy in allocating funds, between
various policy areas, between capital and current spending, and
for accounting purposes? Is there any need for reform in this
area?
Response
a. The current relativities between public expenditure
per head in the countries of the United Kingdom are the result
of decades of fiscal arrangements, including special deals and
the outcome of successive rounds of applying the Barnett formula,
and relative population growth between these countries. In Northern
Ireland special factors such as the acceptance of the need to
"make up leeway" in expenditure in areas such as road
infrastructure in the 1960s and the effects of the "troubles"
which spread far beyond security issues to loosen up funding from
the Treasury all played a part.
b. The Barnett formula takes population as the
effective measure of need but equity is not only an expenditure
issue it also refers to tax effort so that shortfalls in the use
of population as a guide to equitable treatment in expenditure
have to be balanced with the cost to other regions in making good
a shortfall of revenue in any country of the UK.
c. It reinforces control because the mechanism
allows the Treasury to know exactly how much a given increase
in comparable expenditure per head in England will cost in aggregate
simply by using the comparabilities and relative populations for
the rest of the UK to establish an overall control total.
d. The devolved administrations have total flexibility
to allocate their Assigned Budget (the bit controlled by the Barnett
formula) subject to the normal rules of the public expenditure
regime which usually prevent veering from capital to resources
(current). Changing this needs to balance the need for flexibility
with the need for discipline in financial planning and the protection
of capital spending which is always an easy target in the short
term.
2. Formula By-Pass and the Barnett Squeeze
e. Has convergence of levels of public spending
in Scotland, Wales and Northern Ireland based on the English level
of spending happened and, if not, why?
f. To what extent did bypassing of the Formula
occur before 1999? Has scope for such "Formula by-passes"
changed? What have been the consequences of that change in scope?
Response
e. The evidence on convergence based on identifiable
public expenditure figures is ambiguous and depends on the period
examined (unfortunately changes in methodology for estimating
identifiable public expenditure and sorting out the assigned budget
elements for long periods, including times when this concept did
not exist, makes this sort of analysis dubious). The chart below
shows consistent figures but only over a five year period. The
absence of strong convergence is noticeable.
f. There has been extensive bypassing of the
formula going back decades. As noted in the main text, Northern
Ireland got money outside the formula for the EU Peace and Reconciliation
Programmes from 1996 onwards as well as money for police
and prisons reforms which went through the Northern Ireland Office,
the benefit of which will, in due course, be inherited by the
devolved administration. Wales got additional cover for Objective
1 receipts as a political arrangement. There were also deals
done in Scotland and all of these are merely a sample.
Getting special deals from the Treasury has
become more difficult and especially where these add to the baseline.
Thus virtually all of the financial package given to the NI parties
when devolution was restored after the St Andrew's agreement involved
additions within a financial year and not a permanent baseline
uplift.
3. Data Quality and Availability
g. Are sufficient data available to enable a
clear understanding of how public spending is distributed across
the UK and to show the working of the Formula as set out in the
Statement of Funding Policy?
h. What additional data, or ways of presenting
data, would be necessary to undertake a new needs assessment,
or otherwise to reform the Formula?
i. What additional data, or ways of presenting
data, should be available to ensure that the Formula is transparent
in its application?
j. What body should undertake the collection
and publication of such data?
Response
g. In general there is sufficient information
to estimate the distribution of public expenditure in the UK but
it is scattered across many publications and is very difficult
to interpret when the underlying institutions vary. Thus estimating
expenditure on schools, for example, is virtually impossible to
do on a consistent and accurate basis. Similarly housing expenditure
is a nightmare to sort out. In the same way even though comparabilities
and population figures are published in advance, working out whether
the additions to the devolved countries are accurate is really
only possible with inside knowledge.
h. Needs Assessment is an enormously data heavy
exercise and offers endless possibilities for argument. The 1979 Study
was only a summary document and there are detailed individual
programme studies behind it which were never published. A classic
argument at that time which has never been resolved is, what is
a good measure of health, mortality (which is fairly definite)
or morbidity (which isn't). It is crucial to realise that the
formula has nothing to do with needs assessment which is a periodic
way of resetting the baseline whereas the formula is an ongoing
way of adjusting it.
i./j. It is an illusion to think that public
expenditure and its presentation can be entirely divorced from
politics. Spending Review documents, funding rules and statistical
publications involving public expenditure are very carefully vetted.
4. Need for Reform/Alternatives to the Existing
Formula
k. Do the advantages of the Formula as presently
constituted outweigh its disadvantages?
l. Should the Barnett Formula be (a) retained
in its current form, (b) amended or (c) replaced entirely?
m. Should the Barnett Formula be replaced by
a system more adequately reflecting relative needs, costs of services
or a combination of both? If so, what factors should be considered
as part of a needs assessment?
n. What practical and conceptual difficulties
(particularly for defining "need") would arise in carrying
out a needs-based assessment? How can these difficulties be overcome?
o. Should a needs-based assessment seek to encompass
a wide-range of factors or be limited to a smaller number of indicators
of "need"?
p. Who should carry out a needs-based assessment,
if one were to take place?
Response
k. The formula has the benefit of 30 years
of refinement behind it and it's interaction with the other funding
rules is reasonably well understood. It offers a considerable
degree of protection to the devolved administrations and it is
by no means certain that they would be better off with a direct
negotiation approach. There is no favourite alternative formula
that has been thoroughly tested in the many situations that the
Barnett formula has survived. In the absence of an alternative
formula that all of the devolved administrations could unite behind
they should weigh heavily the very great risks of direct negotiation
with the Treasury which, after all, represents, in one sense,
the 80 per cent of taxpayers that keep the rest afloat.
l. If there is a workable formula that is fair
to all who have a stake in financing the devolved administrations
then it should certainly be adopted. None of the solutions presented
by academics begin to approach this requirement.
m. Practicalities have to be considered in this
matter. It is not ideal that devolved administrations get their
share of changes in a Spending Review on the basis of the average
comparability of English departments but at least they get their
allocations on the day of the Spending review announcement. Would
the devolved administrations be prepared to await the announcement
of detailed allocations within English departments, which might
be months behind the broad allocation to these departments' as
a whole, before they knew the resources they had available? The
preparation of estimates takes a long time and if the devolved
administrations are dependant on the final distributions made
by Whitehall Ministers amongst their comparable programme objectives
to inform them of what their consequentials might be they would
be a long way behind in their planning process.
n. The concept of "need" has to be
anchored in criteria that are relatively immune to manipulation
in the short term. That is why the "objective" factors
used in traditional needs analysis tend to be population based
such as the total population or its structure for various client
groups such as school age children. Alternatively physical measures
such as population density or even physical area might be used
for some programmes. The more that one moves away from these relatively
immutable factors the greater the difficulty in relation to need.
Unemployment is a good example. What does this mean? Is it the
administrative measure of claimants—Northern Ireland 38,000—or
perhaps the Labour Force Survey definition—42,000—or
perhaps economic inactivity in the population of working age—circa
100,000. The easier that a weighting factor like this can be manipulated
by definition the less valid it is in a needs assessment. In addition
it is a central assumption of needs assessment that throughout
the UK administrations are striving to the same basic standard
of public provision, the benchmark for which is provision in England.
If that is in fact a deficient benchmark (as it might be in education,
for instance) in what sense is the need being properly assessed.
In 1979 when this technique was adopted it was at the cutting
edge of methodology for a relatively homogeneous country. This
may no longer be the case.
o. The larger the number of factors in any assessment
of need the greater is the problem of assigning weights to these
factors to come to an overall judgement. This is rich ground for
argument. If a small number of factors are included that are closely
correlated the result of a composite indicator is not much different
than for a single indicator such as population proportions.
p. If this is going to be done then it cannot
be a Treasury led exercise as in the past. Probably the best way
forward would be a joint exercise by independent bodies from the
various jurisdictions, such as the Institute for Fiscal Studies
in London and research institutes or universities in the devolved
countries. The funding should be borne jointly with a joint steering
group drawn from officials in all of the countries involved.
5. Decision-making and Dispute Resolution
q. How effective, appropriate and fair are the
processes and criteria by which HM Treasury determines matters
relating to the Barnett Formula? In particular, is the way HM
Treasury determines whether items of spending in England do or
do not attract consequential payments under the Formula, and claims
by the DAs on the UK Reserve, appropriate and fair?
r. Are the existing procedures for resolving
disputes between HM Treasury Ministers, territorial Secretaries
of State and the Devolved Administrations about funding issues
adequate?
s. How could dispute resolution procedures be
improved?
Response
q. On paper the procedures are very fair. Officials
from the Treasury and the devolved administrations meet well in
advance of the conclusion of the Spending Review and agree the
necessary figure work regarding population proportions and degrees
of comparability. Outside Spending Reviews the situation is less
well structured and less transparent. Typically an initiative
will be announced for England and when the DAs ask about their
share the response will be that this is an existing allocation
which is being re-brigaded and of course the DAs already have
their consequentials. What is particularly annoying is when the
Treasury announce at very short notice a change which though not
strictly part of the formula nevertheless has implications for
the DAs. The revisions made to certain UK departmental baselines
just before the SR 2007 announcement is an example.
r. At the end of the day how negotiations between
Ministers go depends on the force of the argument and the strength
of the individuals. A DA with a good case and supported by a strong
Secretary of State generally prevails over a Chief Secretary.
However if the argument is weak and particularly if the Chancellor
sees no merit in it the Treasury will usually carry the day. The
current dispute between the DAs and the Treasury over bearing
a share of additional resource releasing efficiency savings in
UK departments (the Barnett formula working in reverse) should
be instructive in this matter.
s. Perhaps inserting a "no suprises"
clause in the Funding Rules could help but this could be honoured
more in spirit than practice.
February 2009
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