The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 880 - 899)


Rt Hon Jim Murphy, Rt Hon Paul Murphy and Rt Hon Shaun Woodward

  Q880  Lord Lang of Monkton: Do you see convergence happening in Scotland?

  Mr Jim Murphy: With the drive theory of the Formula it is an in-built principle but the Government does not start on the basis of seeking to create convergence as a matter of policy but it is certainly part of the Formula, all other things being equal. Anton Muscatelli and his colleagues have reflected that as well.

  Q881  Lord Lang of Monkton: We know that mathematically it should be happening but it does not seem to be happening in the way one expects. How do you explain that?

  Mr Jim Murphy: It is the way in which inflation was treated up until 1992 in terms of the calculations. It was also a reflection of the way in which population shifts were not brought up to date and the fact that for a period it was eleven eightieths as opposed to eight eightieths in terms of population proportion, so it was the way in which some of the changes over previous history did not keep account of the trends in Scotland as part of the United Kingdom. It is population and taxation policy.

  Q882  Lord Lang of Monkton: Could I ask your colleagues if they see convergence happening in their areas of responsibility and if they think it is a fair and good thing?

  Mr Paul Murphy: It was not the policy of Lord Barnett but it will probably happen eventually as a by-product of the changes in spending and of course there are changes in population. Wales' population has risen since its introduction by a considerable number. I think it may eventually get that way but that was not the intention, nor is it now, as far as I can see, the intention of successive governments that there should be convergence but as a by-product of what has happened it may well be there eventually.

  Q883  Chairman: It is convergence down, is it not, not a convergence up?

  Mr Paul Murphy: Yes.

  Q884  Chairman: Certainly so far as Wales is concerned, convergence insofar as it has taken place, Wales has lost money. That is right, is it not?

  Mr Paul Murphy: But nevertheless, of course, on per head of population comparison with English regions. My colleagues elsewhere would not necessarily agree with that. The problem we have is that we will get people in Wales arguing the case that the Formula is not good enough for them and then you get people in England saying it is too good for them. It is quite a difficult one. English members have been asking me questions in the House of Commons for ten years on whether in fact they have been hard done by because of the Barnett Formula and then you go to Cardiff and they say we have been hard done by as well. I suspect that something in the middle is really what it has turned out to be.

  Q885  Lord Forsyth of Drumlean: I am having some difficulty understanding what you are saying because, as Secretaries of State, you obviously fight for your corner and you want to get the best for the area you represent in Cabinet. The Secretary of State of Scotland has said that Scotland has got a third of the landmass and it has all kinds of additional demands upon it. The Secretary of State for Northern Ireland can make the case. All of you have higher baselines, higher expenditure per head than England. It is a mathematical certainty that the Barnett Formula will result in your budgets being reduced and eventually you will have the same expenditure per head as England. I am a little bit puzzled as to why you are happy with the situation. Under the previous pre-devolution arrangements which you will recall, the Secretaries of State would indulge in what is now called "Formula bypass", or ways of compensating for the effect. Assuming that the Formula works and that the population is correct, the effect of continuing with Barnett will be that there will be a reduction in the money made available. I would have thought that that could lead to unfairness. If Scotland had the same expenditure per head as England that would clearly be unfair and wrong and that is where Barnett is leading us. What do you expect to be done to avoid this happening?

  Mr Woodward: We are now 30 years on since Barnett and we are a very long way away from convergence.

  Q886  Lord Forsyth of Drumlean: That is because, to put it very crudely, the system was adjusted when we had one government governing the whole of the United Kingdom and ministers of the same party who were able to do so. You do not have that now. You have a situation where you have Devolved Administrations run by different political parties in some cases who are able to do their own thing and where the dialogue is limited. That is what has changed and that is why I am concerned that you do not seem to see that this is going to result in an unfairness and a disadvantage in the long term to what used to be called the territorials by the Treasury.

  Mr Woodward: It could do but let me give you a very good example about Northern Ireland. In Northern Ireland, because of the troubles, we have a situation whereby up until the beginning of this global recession we were in a situation in which something in the order of 72 per cent of the economy in Northern Ireland was in the public sector, 28 per cent in the private sector. One of the reasons there are all kinds of problems in Northern Ireland which therefore require all kinds of extra help, for which indeed the baseline needs figure actually assists with, is precisely because of that and as a legacy of the troubles. The difficulties we are facing at the moment affect this and as we come out of this recession the capacity for Northern Ireland to generate a very vibrant private sector is absolutely enormous and it will transform the needs of the economy in Northern Ireland at I dare say a far quicker rate than what happened in Scotland or Wales, for example, simply because they do not have only 28 per cent in the private sector. I put that on the table simply because I think the problem with all of these formulas are the danger is you think if we change this bit of the Formula we will get it right. The problem is there may be another bit of the Formula that is also going to change as well which is what really takes me back to saying I do not have a problem, Lord Forsyth, with you advocating whatever system you want, but as somebody who has to actually look after the interests of people in Northern Ireland do I believe at the moment that the system we currently have is inherently unfair, does not work, does not deliver for people across the public services? The answer is that I think that would be a wrong conclusion to reach.

  Q887  Lord Forsyth of Drumlean: I was not advocating a system; I was just asking you how the changes that have been made as a result of devolution, if you stick with Barnett, would not result in Northern Ireland and the other territorials being disadvantaged?

  Mr Woodward: Because I think other factors would actually change the economy in Northern Ireland more fundamentally than the Barnett Formula.

  Mr Paul Murphy: There are examples too. On a couple of technical points, the spend per head is going up of course but at a slightly lower rate in Wales, but everywhere has had an increase in spend, it is just that the rate is lower; and secondly, budget and spend have to grow a lot for convergence to happen at all and so we are talking about very much in the longer term for that. In terms of Formula bypass, these have occurred, considerable ones in the Welsh context. When I was Secretary of State for Wales before, negotiating the Objective 1 funding for Wales, there was an enormous bypass there amounting to I think £3 billion when it was matched by the Welsh Assembly Government so it does happen.

  Mr Jim Murphy: In respect of my Lord Forsyth's point, it is a reasonable point to make which is this thing about the party political dynamic. None of us operate in a situation where our party has a monopoly of power and two out of three have no formal elected politicians in power in terms of party politics. That internal party dynamic, looking at it only in terms of Scotland, and I can only speak from my own experience over the few months I have been in this role, is that I try where possible to find common cause with a party that again philosophically I entirely disagree with, but there is a common effort to try and maximise the continuing benefits of the United Kingdom in terms of the support for Scotland. One example would be on this important project of the Forth Road Crossing where again a cross-party divide and with a lot of support from the Treasury there is a unique deal being put in place to ensure retention of efficiency savings to help fund that project. You may not call that a Formula bypass, but certainly it is a fiscal innovation which involves the Treasury essentially, myself and the Scottish Government under a separatist party. I just wanted to put that in terms of the point you made, Lord Forsyth, about the party political nature of it.

  Q888  Lord Sewel: I think we are agreed that the Formula as such, and the way it treats the increment as a converging dynamic as a property, the question is why has it not happened? The answer to that is you have got a big base which is not based on population to begin with so you are always dealing with an increment upon an increment upon an increment, but the two factors that seem to have had the effect of delaying convergence are bypassing, which has happened less since devolution. I think that is the important thing. In the past pre-devolution bypassing was used to an extent to fund significant public sector wage settlements which were beyond the capacity of the Formula to absorb. I do not think that has happened since devolution and the fact that that has not happened and would be difficult to happen will make the convergence accelerate. Secondly, surely it is the importance of population, whether population is increasing or declining. If we look at the three countries there you have got two countries where the population is increasing and one country where it is decreasing. I think the reason why Scotland's convergence is much less than Northern Ireland and Wales is because its population continues to decrease. If that is a major factor I would have thought that it is worrying that one of the only ways in which you can keep the Scottish share up is for the Scottish population to continue to decrease.

  Mr Jim Murphy: I do not think it is healthy for the UK as a whole, or Scotland specifically, to have those types of population shifts, a decline in population with the demographic trend within that decline. Since 1979 the Scottish population has reduced by 1 per cent where the English population has increased by 8 per cent. There are a clear set of trends there. The Scottish Executive (as was) and Scottish Government (as is now) have tried various measures alongside the Home Office to try and address that: the fresh talent initiative and others. Inside the Formula one of the difficulties was that up until—this is not a party political point but a statement of how the statistics and the Formula was updated—1997, the changes in population were not updated as regularly, but that is now happening more regularly.

  Q889  Lord Sewel: That does not affect the base, does it? The population recalibration affects the increment but it does not affect the base.

  Mr Jim Murphy: That is right.

  Mr Paul Murphy: We have just mentioned again the Formula bypass issue which is important because the one that I touched upon with Lord Forsyth, which is the Objective 1 European funding for Wales in the 2000 spending review, was huge in its implications. When we found out that the Formula did not meet the situation that we qualified for 60 per cent of all the European Union Objective 1 funding for the entire United Kingdom. The Formula meant that we could only get 6 per cent of it. There were considerable long negotiations on it but eventually it was agreed, rightly, that Wales should benefit by a bypass to the Formula and it worked to the tune of a huge amount of money.

  Q890  Chairman: I do not want to flog this but it really does seem to me that to argue that the Barnett Formula gets credibility because of the extent to which you avoid it by bypass does not seem to be a great commendation for the Formula itself.

  Mr Paul Murphy: That was not the purpose of it. The purpose of my comment was nothing to do with that. My comment was about the issue of Formula bypass and that it is possible when you have an exceptional circumstance, which that was in fact, there were no considerable circumstances which were comparable to that in terms of the amount of money that actually came to Wales as a consequence of Objective 1 European funding. It has made an enormous difference to Wales but it would not have done if we had stuck to the Formula. The point was that the Formula is sufficiently flexible to take into account dramatic situations and anyone in Wales will tell you that, Lord Chairman.

  Q891  Lord Lawson of Blaby: I ought to welcome the innate conservatism of our three witnesses. As Lord Sewel was saying earlier, the disparate trend, particularly in the Scottish population and the English population, has made the Scottish baseline somewhat anomalously high. I think that is acknowledged by the fact that more of you agree that there is some logic in convergence. I would like to ask two questions about convergence. First of all, there seems to be the view that convergence is all right provided it continues at the positively glacial pace which has occurred so far. My first question is do you think that there is perhaps the case for the process of convergence being slightly less glacial? Secondly, how far do you think convergence should ideally go? I am not saying how long it should take. At the end of the day where should we be?

  Mr Jim Murphy: The point that the noble Lord makes on the baseline is that the population shift has not in and of itself affected Scotland's historic baseline. The baseline reflects what was happening at a particular point in relative recent history. What has happened is the increments or otherwise over time—

  Q892  Lord Lawson of Blaby: If I may interrupt, that is not what happened, as has been pointed out. You get the same cash increase per head, that is catered for with the population changes. The point is that, as the Treasury has pointed out to us, but I think we always knew this and you certainly knew this, that there are very marked disparities between the various countries of the United Kingdom in planned total identifiable expenditure per head of population. That difference has been exacerbated by the difference in the population trends. That is the point.

  Mr Jim Murphy: The public expenditure statistical analysis that the noble Lord is referring to is a mixture of reserved and devolved spend. It is a measurement of actual spend, not allocated spend, and it is more difficult to disaggregate the reserved fiscal footprint in respect of what the noble Lord mentions. You have the issues about social security dependency, the numbers of people on incapacity benefit and all of those other related issues. Scotland has, although there have been welcome reductions in the last couple of years, a dramatic and unacceptably high level of incapacity benefit dependency. On the point of the speed of glacial melt, the Government has not set out a timeline or a policy of when it would hope or expect to see convergence. As I said in answer to an earlier question, it is a theoretical part of the Formula that we have not set out a timeline as to when we would currently expect it to happen, or indeed when we would like to see it happen. It is not something that we have commented on publicly in terms of a timeline.

  Mr Paul Murphy: There was never any policy intention for convergence to be a policy, full stop, and nor is there, as far as I am aware, any intention to recalibrate it so that it changes the rate at which it gets to that point. In terms of our responsibilities—Lord Forsyth quite rightly pointed them out—ours is to ensure that the Formula is the best for those countries we represent around the Cabinet table.

  Q893  Lord Lawson of Blaby: I understand that but I would like you to look at it also as members of the Cabinet of the United Kingdom, not just fighting your own corners for your own people, which is thoroughly proper, but you are also members of the United Kingdom Cabinet and you look at things from a UK basis as well. From that basis do you think as fair-minded ministers—I would like to think that such a thing exists—that there is a case to be made for a degree of convergence and, if so, do you think the present glacial pace is good enough? How far do you think it should go? What should be the terminus ad quem?

  Mr Woodward: The question posed is in danger of saying the convergence is an end in itself. Convergence is an end which we desire because what it may reflect about the conditions in which people live and the public services they enjoy, the wealth that they are able to create in the communities that they are in and this is a formula and a set of baselines on which the Formula is applied which tries, and has tried—whether it has succeeded or not is in other people's views, I happen to think it does work—but whether it has worked is a very important question. What is the point we are trying to achieve with convergence? The point you make is that it is glacial. Another word for `glacial' might be `evolutionary'. The real distinction here is to whether or not we actually have a pathway to convergence regardless, or whether it is a mathematical formula which reflects an aspiration to eliminate disparities in the system. Again, I come back to saying that I still have not seen anything on the table which at the moment could deliver something which would be significantly better than this. Perhaps this slightly pre-empts the question that Lord Lang posed right at the beginning. It is important to remember, which I am sure you have all done, what was there before 1979. Certainly what was there before 1979 was tortuous, unfair, involved line by line negotiation, was pretty opaque and did not much work. It seems to me that, despite the three years' work that was done on the baseline assessments between 1976 and 1979, the fact of the matter is a system was produced and, yes, it has been glacial, but I am not sure that it is any the worse because it has been glacial. I am not sure that it has been any the worse because it has been a mathematical formula rather than a pathway to convergence. At the end of the day I come back to saying I find it quite difficult to see that there is a better system that would replace this, albeit that this perhaps is somewhat imperfect.

  Q894  Lord Rooker: We had a difficulty with the Treasury that they could not give us a single disadvantage and you have not offered any except obviously in the round. The reason we are sitting, I suppose, is because of the pressures coming domestically from England and within the regions, which of course is not our remit, but the differences within those regions are part of the festering sore which then the Barnett Formula is tagged on. However, if it is so good and so satisfactory, and I am no expert on what I am about to say, how come the millions, indeed billions, of pounds of Lottery money are divided up between England, Scotland, Wales and Northern Ireland on a completely different formula that takes account of social deprivation, deals with environment, health, all the issues that devolved governments deal with? How come a different formula is used for that whereas you are saying there is nothing that anyone else can invent and leave the Barnett Formula alone because long-term the festering sore of discontent based on sometimes myths, I accept that, is still going to be there?

  Mr Woodward: Can I just respond to the thought of it being so good and so satisfactory. To be fair, Lord Rooker, I do not think that is what we are saying. What we are saying is that it works. We are not saying it is the most sensational system that could possibly be devised and please keep your hands off it. That would be a caricature of what we are saying. What we are referring to is the fact that it works. I do think one of its strengths, for example, is that it is up to the Devolved Administration in Northern Ireland to decide how it wants to spend that money and, if it wants to, it can choose to allocate more money to one area rather than another and that not be decided here in Whitehall. I think that is a real merit of the system. Whatever is proposed to take its place, if your Lordships are so minded, I think it is very important that that is retained. That dimension of it is so good and so satisfactory. However, I do think if you want me to point to disparities here, part of the problem comes when you actually look at disparities within the Devolved Administrations themselves, and where you can begin to see quite big problems is potentially in how the Formula effectively applies itself in England. If you look at problems and indices to reflect poverty and deprivation in Wales or parts of Northern Ireland and you can readily find those in England, there are some very interesting questions to be asked around that. If you want to point to some of the problems I think you can begin to see difficulties that need to be addressed in that much more readily than we can between ourselves. I am sure we could make claims for what extra we would like if we wanted to between ourselves, but I do think in the area to which I have just pointed, particularly within England where you have these extraordinary disparities, I think there is some very interesting work to be done in that area.

  Mr Paul Murphy: As far as the Welsh situation is concerned, where some of our English colleagues would consider that Wales is treated unfairly as a consequence of the Barnett Formula, the very fact that the Objective 1 funding was awarded to Wales was on the basis of an indication of need in most of Wales as well. The other point is, post devolution, the ability of the devolved assemblies and governments to be able to decide how to spend the money is also a complicating factor in the way that, say, the Lottery would decide to draw up how you give money to each of the countries. This block grant allows each of the individual Devolved Administrations to spend the money as they wish. At the end of the day they themselves work out how that money is distributed in order for deprivation to be met.

  Q895  Lord Trimble: A point that has arisen from what Paul Murphy has said and what Shaun Woodward said, there are two different concepts here that we need to keep separate: one is a concept of a block grant. Nobody is talking about going back to the pre-1970s position where there was not a block grant. There is then the concept of the formula that is used to determine the block grant and that is the Barnett Formula. You could have a variety of different formulae that could be used to produce the block grant. I do not think anybody is calling the block grant concept into question but what they are saying is could there be better formula for working out the block grant? It is not necessary to go into an argument about the flexibility that there is in the block grant—nobody is challenging that—but it is a question of how you arrive at it.

  Mr Woodward: Forgive me, but I think some people are challenging that. I am not suggesting that you are. I think the reason that some people are challenging it is precisely because of the baseline need that became the block grant that was the figure in 1979 to which a formula is applied, but for some people some of these disparities exist. For some people the argument is revisit the overall number to reflect baseline need and then whatever formula you come up with it would be different.

  Q896  Lord Trimble: The question of the baseline is also a separate issue and we are best to keep these issues separate.

  Mr Woodward: You would of course make the biggest difference, if you were so minded, to be addressing the baseline figure rather than the actual formula.

  Chairman: We are.

  Q897  Lord Forsyth of Drumlean: You keep talking about how there is no alternative.

  Mr Woodward: I did not say there is no alternative.

  Q898  Lord Forsyth of Drumlean: You said there is no obvious alternative. In each of your departments you allocate most of the block grant that you receive to local government and to health on the basis of a formula based on need, not on population. Is that not a contradiction?

  Mr Woodward: I do not allocate them.

  Q899  Lord Forsyth of Drumlean: The Devolved Administrations who get the money under the Barnett Formula then allocate that money to local government and to health and they use formulas which are based on assessments of need.

  Mr Woodward: With respect, there is a big disparity in Northern Ireland.

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