The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 801 - 819)


Mr Patrick McCartan and Mr Victor Hewitt

  Q801  Chairman: Gentlemen, thank you very much indeed for coming this afternoon. As I am sure you know, we have been asked by the House of Lords as a Select Committee of the House to look into the operation of the Barnett Formula. I hope you have seen our terms of reference because you will see that they fairly focused and limited. We are not entitled to look at tax raising powers for any of the devolved administrations. We are not entitled to look at the division of monies among the English regions. Our function is to look at how Barnett operates and whether it should go on operating as it does. It is really quite an interesting conundrum as to what is the best way of getting money from the centre out to the three devolved administrations, particularly in a situation in which the three devolved administrations do not have symmetrical devolution, it is different in the three areas. What one wants to do is devise a system if one moves away from Barnett which produces sensible and effective allocation of resources and resources which, by and large, are fair. I wonder if I could ask you a general question to start off with, which is a very simple question to ask. Do you think the Barnett Formula treats Northern Ireland fairly and, if so, why, and, if not, why not?

  Mr Hewitt: We must remember that the Formula is an adjustment mechanism, it is not a mechanism for setting a baseline, that has to be done by other means. Historically it takes the baseline and adds to it or potentially could subtract from it depending on what is happening across the world. It is a marginal adjustment mechanism simply based upon your relative population proportions and the comparability of your expenditure with expenditure essentially in England at this moment in time. It is a relatively simple conceptual formula. What it effectively does is to give each of the countries of the UK the same per capita increase in expenditure as is happening in England. That is effectively what it does each time it is applied. One of the consequences of that is if your baseline is proportionately bigger than your population proportion then there will be an effective squeeze upon the amount of money coming across because you are adding at the margins less than the proportion of the baseline. Is it fair? Well, we would need to look at not only the Formula itself because it only really applies to a proportion of the expenditure which goes on in the region and part of the expenditure in the region is outside the Formula altogether. Such things as social security and the annually managed expenditure money is done under an entirely separate mechanism, a sort of sale or return type mechanism. The Barnett Formula only tackles that bit which we call the assigned budget in the block, which is round about half of our total budget. Has it enormously disadvantaged or advantaged us? There has not been a sign that we have converged dramatically over time with the situation in England. There has been some movement, but quite often the relative figures are distorted because additional monies have come through other mechanisms, what Professor David Heald referred to as "bypass mechanisms". Money such as the funding of the EU Special Programme Bodies, the Peace and Reconciliation Funds, and in earlier times monies which were associated with the privatisation of Harland & Wolff and Shorts, all of these flowed into our block outside the Barnett mechanism and tended to push up the per capita lead. It is not just a matter of being fair but is it a mechanism which can be easily replaced by something which is as workable, that is the question which really needs to be addressed. It is okay in theory to devise all sorts of sophisticated mechanisms for allocating money out, but the practicalities are that on the day of a Spending Review the devolved administration would want to know how much they are going to get, and since Spending Reviews are not finished until the last minute there has to be a relatively straightforward mechanism for allowing them to calculate how much money is coming to them. That is a roundabout answer to your question. It is a complicated formula when other factors are taken into consideration. It is very simple in itself. By and large it has served us reasonably well. We cannot answer the issue of needs through the Formula and whether the amount of money we are getting is proportionate to our needs, that is a matter for needs assessment and perhaps we might talk about that later.

  Q802  Chairman: Certainly it is true that the Formula narrowly applied only applies to the changes up and down, but it seems to be being used and understood and, indeed, applied now as to the block as well as the variations. Do you think the amount Northern Ireland gets for its baseline is a fair allocation?

  Mr Hewitt: That is very difficult to say unless one were to carry out what is known as a needs assessment but, as in life, these things are never simple because there is not an absolutely agreed methodology about how one should approach a needs assessment. As you are probably aware, the only published version of a needs assessment relates back to 1977 when devolution was first conceived for Scotland and not carried out at that time. A system was devised to estimate our relative need and that of Scotland and Wales relative to England, and I can go into the detail of that if you like. That has actually been updated annually but never publicly. The Treasury updates the needs assessment formula annually, or certainly it did well into the 1990s. They are less in favour of that methodology these days because they think the underlying structures for the UK have changed so much and different parts of the UK tend to have experiences different from London. For example, they will say that parts of England have a high influx of immigrants, and that is not quite the case for, say, Scotland or Wales, so that creates a particular need in England which is difficult to roll out to the others. The things which go into a needs assessment formula are supposed to be objective factors—population, the structure of your population, how many young people, how many old people and so forth—but inevitably there will be subjective things put into the mix as well. There are always arguments around the subjective things. What is the best indicator of ill-health, for example, is a classic one. Is it the standardised mortality ratio by the number of people who die, or is it some other measure of ill-health? That has always been a bone of contention when these things are looked at. Needs assessment is something which a lot of people talk about but very few people have ever experienced what a needs assessment is really like.

  Q803  Chairman: But you say it cannot be done.

  Mr Hewitt: It can be done.

  Q804  Chairman: It does not have to be as complicated as it was in 1979.

  Mr Hewitt: Once you start on these things it tends to become complicated.

  Q805  Chairman: Only if you make it so surely. If you were to cut down the number of variables that you were going to take account of to four, five or six, I do not know, you would probably get 95 per cent fairness although you would not get 100 per cent.

  Mr Hewitt: Possibly so. You will always have arguments from the other side that you have left out a very important dimension to the problem and there is the problem of what weight do you attach to these various things and there will be different views about the weight that should be attached to one factor as opposed to another. Once you get into those sorts of arguments you rapidly begin to think whether it was worth going down this route in the first place because you are not going to get agreement at the end of it.

  Q806  Chairman: Have you looked at the Australian system?

  Mr Hewitt: Yes, the Commonwealth Grants Commission. It is a pretty good example of the complications which arise in these circumstances but it is there for a different purpose than the allocation of public expenditure in the UK. It is there to essentially allocate out the proceeds of certain taxation among the states. It operates on a federal system. It is about horizontal equalisation, ie putting the various states on the same basis so that they can deliver services, but taking account of the amount of taxes which they actually raise. It does focus on a slightly different issue. We are a purely expenditure based system, taxation has no role other than through local government.

  Q807  Chairman: But the needs assessment bit would be the same, would it not?

  Mr Hewitt: Yes.

  Q808  Chairman: In other words, if they assess need in Australia we can assess need here.

  Mr Hewitt: Yes, indeed. Needs assessment is very simple in concept. The policies are broadly similar throughout the United Kingdom, so if it costs £100 to deliver some sort of service in England how much does it cost to deliver the same service in Scotland, Wales and Northern Ireland. That is the starting point for the whole thing. It then generates an index and typically Northern Ireland would come out at something like £125 through to £130 as opposed to an English spend of £100 in that context. The full-blown thing is an extremely data heavy exercise. The original one took three years essentially.

  Q809  Chairman: Yes.

  Mr Hewitt: Updates on these usually take at least 18 months.

  Q810  Chairman: Do you know how long the Northern Ireland Government took to do its one in 2001?

  Mr Hewitt: Since I was doing it, yes, 18 months. Of course, that was a unilateral thing, it was not done with the co-operation of the Treasury.

  Q811  Chairman: But it was 18 months?

  Mr Hewitt: Yes, about 18 months.

  Q812  Chairman: If needs assessment could be done by an objective commission like the Australian Grants Commission, why should it not be applied to the UK?

  Mr Hewitt: There is no logical reason why it should not. It would have to be done by something outside the Treasury.

  Q813  Chairman: I think we would all agree with that.

  Mr Hewitt: Because the devolved administrations will not accept that the Treasury is an honest broker in these matters, and rightly so. It cannot be done that often because we cannot really rely upon this to be an annual mechanism.

  Q814  Chairman: They do it annually in Australia.

  Mr Hewitt: Yes, they do, and it is a very large effort indeed. I was having a look at their website the other day and a very large effort goes into that. It is full of methodological pitfalls as you go along to calculate things on net or gross terms, you get different results on those sorts of things. How much of the block do you actually take into account? When it was done in the 1970s the law and order and protective services were effectively outside of it because of the extraordinary circumstances in Northern Ireland, so there will be judgments about things like that. It is certainly an interesting exercise but it is not a magic bullet in terms of guaranteeing that you are going to get more money from the Treasury at the end of the day.

  Q815  Chairman: If there is a finite amount some will get more and some will get less. What we have really been concerned about is whether or not it could be feasible to have a needs assessment procedure along the lines of the Australian system which we could apply to the allocation of resources here in the UK. I think with all the qualifications you made about it you do think that is possible.

  Mr Hewitt: Yes. The methodologies are relatively straight forward. The needs assessment system which we operated did not involve a lot of statistical work in the sense of doing estimations and stuff like that. It was certainly less complicated than the old standard spending assessments which operated in local government, which you might recall. It was never designed to be that, it was to take into account people's experience of how programmes worked, what was important in driving expenditure in a programme and so on. It is not quite as scientific as some of the work which is done in Australia. I think you will find the Australian system still produces results which are not universally welcomed by the participants.

  Q816  Chairman: What we heard about it was it produces its report and then for about two or three days everybody says how unfair it is, but it gradually goes to another sleep for another 360 days until it produces another report and there is the same eruption. It is not a serious business but it is loud while it is going on.

  Mr Hewitt: Even if you did this, what would you do in the intervening years? You would have adjusted the baseline and how are you going to continue to adjust the baseline outside that period. That is what the Formula is there to do, it is not there to set it but to adjust it.

  Q817  Chairman: The Formula is not there to adjust the baseline.

  Mr Hewitt: No.

  Q818  Chairman: You would have to adjust the baseline

  Mr Hewitt: Are you proposing to run the exercise every year?

  Chairman: I should think so, yes. The Australians seem to do it and I do not see why we should not. I do not have violently strong views as to whether you do it every year, 18 months or two years but it has got to be done within a fairly narrow band of time. It has got to be able to stick to the length of time it is meant to be done for.

  Q819  Lord Sewel: Can we look at convergence. I have seen some figures that indicate over recent years there has been some convergence in Northern Ireland. Obviously the weight of the past to prevent convergence was bypass and really bypass was not easy but at least it was a route that was accessible prior to devolution when we basically had the territorial ministers going to the Chief Secretary, and if that did not work going to the Chancellor and if that did not work trying the Prime Minister, and they were all ministers of the one government. Some were more successful than others, it has to be said. Then with devolution that system breaks down so the opportunity to bypass reduces. If you then have, if you like, more pure Barnett convergence is likely to kick in much more heavily. If your population is going up, which I understand the population in Northern Ireland is, then because your base is a product of a lower population you are also going to get a squeeze, yet people seem to be relatively content with Barnett whereas because of those factors if I was in Northern Ireland I would be pretty worried about that.

  Mr Hewitt: The "Barnett squeeze" is primarily a mathematical phenomenon. The faster expenditure goes up in England, the faster the squeeze will be applied. In recent years we have been living through very rapid increases in public expenditure in the UK, certainly since 2000, therefore it is not surprising to see there has been some convergence. Of course, the absolute amounts of money which have been transferred through Barnett are very, very substantial. The second thing, as I emphasised before, is it only applies to part of the totality of public expenditure in the Province, the other half at least is coming through annually managed expenditure and the benefits system. There is also expenditure by UK departments actually in the Province, so the Ministry of Defence will be spending money in Northern Ireland which is not part of the block. Should we be worried about it? It has not really been a problem. I think David Heald put it quite well, that one of the great fears at the beginning of devolution was there was going to be too little money whereas in reality it appears that there has been rather too much money available to the devolved administrations. What is the evidence for that because that is a fairly harsh thing to say? If you actually look at the under-spends from the devolved administrations over the years, these have been very substantial and have not been diminishing very rapidly, so we are carrying forward from year-to-year substantial sums of money under-spent from the previous year. That does not suggest there is a vast shortage of money, but it may suggest there has been not very good estimating by departments.

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