The Barnett Formula - Select Committee on the Barnett Formula Contents


Examination of Witnesses (Questions 980 - 999)

WEDNESDAY 17 JUNE 2009

Mr Liam Byrne, Mr Mark Parkinson and Ms Helen Radcliffe

  Q980  Chairman: As far as the increments are concerned?

  Mr Byrne: Yes.

  Q981  Chairman: I think that is a fairly automatic thing. There are problems with it, but it is a fairly automatic process, that bit of it, is it not?

  Mr Byrne: Indeed.

  Q982  Chairman: But it is the baseline point. Do you think the way in which the baseline has been calculated and the way it has been used in the last 30-odd years has produced a fair result?

  Mr Byrne: The reason why I say "fair enough" is because, as I have dug into this question over the last week and a half, it strikes me that there would be at least three quite significant issues involved in getting into a process of really unpicking those baselines and building adjustments in a more radical way to those baselines into any new kind of formula. I think those problems, to me, feel like they fall under three headings. The first is obviously complexity. If you really wanted to get stuck into a ground up needs assessment then you have automatically got some pretty significant problems in coming up with a formula or different formulae which can operate across a whole range of public services, right the way across the UK. As I was thinking about it this morning, it just struck me that there is a fundamental tension involved here, which you have no doubt already seen, which is that on the one hand if you try to set out needs formulae which were capable of operating right the way across the UK that would be a standard thing, but the whole purpose of devolution is to give different nations more flexibility in defining what needs are important to them. So it struck me that you would immediately run into a fundamental tension which is involved in devolution and that formula would be complicated indeed. I began my short ministerial career as a social care minister and I remember how difficult some of these formulae are. They do involve different assessments of relative need. They involve matters of judgment about how much to weight the different kinds of need. They all involve floors, ceilings, dampenings, transitional arrangements; matters of judgment.

  Q983  Chairman: In the seventies the Treasury did it?

  Mr Byrne: Indeed. My point was going to be that it is a very complicated process. You run into a fundamental problem involved in the principle of devolution.

  Q984  Chairman: Why does it have to be so complicated? Why does it have to take that time? Why can we not have a much simpler assessment of relative needs? I appreciate if you want to get into every issue, dot every `i' and cross every `t' it will take a very long time, as indeed it did, it seems, in the seventies, but you could do it much quicker on an easier basis if you take out perhaps half a dozen or so comparators and use those?

  Mr Byrne: Well, it is just an observation really. When you look at the way the Police Formula is distributed in Britain, if you look at the way health spending is distributed, the way local government spending is distributed, all no doubt started on the principle of administrative simplicity but all—and this is just an observation—have ended up in quite a complicated place. Again, all do involve matters of judgment about what factors, such as sparsity, you give different weight. My observation is that all involve different floors, ceilings, dampenings. There were just complexities involved in all of them. The second point I was going to make, my second difficulty, I suppose, is the question of consent because given the complexity which was involved in coming up with those formulae, I wonder whether you could come up with formulae—and it is an open question, I know—with a UK-wide formula which was able to command the consent of political parties and politicians in different parts of the UK. If, of course, we could not, that immediately takes you into my third problem, which is about the cost of change, because if you came up with a new formula, that would inevitably involve, or one should at least plan for an outcome where you had different distributions of funding. You would then always almost certainly need transitional arrangements, which in themselves would be complicated. When you put all of that together, it just makes me think that the system becomes less predictable and from a good public administration point of view I think that three year budgets and the degree of predictability which we now have are good for good public administration because it gives frontline public service leaders, and indeed politicians, the ability to plan ahead a little more rigorously. If you had a situation of complexity which was contested, with complicated change arrangements, my suspicion would be that whatever the outcome was it would be more contested, it would be debated, it would be slower and harder to set up and, Heaven forbid, you may end up in a situation where you were not giving frontline public organisations their final settlement, definitive final word, all the `i's dotted and `t's crossed, until some way into their financial year. As I say, it poses risks of predictability which I do not think would be good for public administration. It just struck me that those are the two sorts of things in the balance, which is why I came to the conclusion that it is probably fair enough.

  Q985  Chairman: Do you think it has got any disadvantages?

  Mr Byrne: Certainly, I think it has got some disadvantages.

  Q986  Chairman: What do you see as the disadvantages?

  Mr Byrne: I see three principal disadvantages. The first disadvantage is what I think is colloquially known as the "Barnett squeeze", which is that because of the higher baselines inherited, certainly in Scotland and elsewhere, when you have got these standard increments of new public money coming in, then proportionately those growth rates can appear lower in different nations. In theory, arithmetically that can produce a degree of convergence. When you look back over the last 20 years it does not appear to have produced much, but nonetheless it is a criticism which I know is well-rehearsed. Second—and this, I guess, is a criticism coming from a slightly different direction—if you did step back and look at what baldly are the different levels of public spending per region, why is it that that nation has got more than another nation, principally England? That, I think, is another criticism which is well-made. The third criticism, which I think for me is the most important, is how precisely are we matching the delivery of resource with need? I think the current arrangements, as I say, do a reasonably good job of that but they do not allow us, when we discuss this level, at the level of the nation, to really answer the question with massive precision. For me those are two of the features which are well known. One is more, sort of, personal.

  Q987  Chairman: But they could all be corrected, those three disadvantages?

  Mr Byrne: I hope you are going to tell me that.

  Q988  Chairman: It is a valid criticism, but it is a criticism which could actually be dealt with?

  Mr Byrne: I hope so. That is genuinely why I look to the Committee's advice on this because, as I say, from my look at this over the great span of nine days I can see an argument which says, "This is fair enough. It does a pretty good job. There is a minefield of issues involved in moving away from it which produce new risks to good public administration," but if there is an alternative which is better, which is capable of commanding political consent, which can be delivered with satisfactory transitional arrangements which do not disturb too much the predictability which good public servants need in their finances, then I am all ears!

  Chairman: You may be all eyes when we produce the report!

  Q989  Baroness Hollis of Heigham: May I leapfrog, because this is actually a question I was going to raise? This is actually a point which you were making about the disadvantages associated with the risks of change, which in a way overlaps with a later question. I just want to press you on the outcomes. Your analogy of the local authorities and health authorities was absolutely right, but of course they are very small units and the smaller the geographical and population unit, the more precise you have to be in tailoring because they are very sensitive to the 500,000 here, the 500,000 there, and the bigger the unit, the less sensitive you need to be, the simpler the formula can be and the more there are conflicting pressures which even out the outcome. For example, Scotland will have higher morbidity rates amongst older people, Northern Ireland will have a higher number of younger children. They have different needs, but if you put them together against an English base they, so to speak, cancel each other out. Would you not, therefore, agree that a lot of your concerns and your analogies with local authorities, health authorities, police authorities, and so on, would not necessarily come into play provided (a) you could keep it simple, (b) the change was incremental, (c) the transitional arrangements were sufficiently adequate, and (d) it showed a relatively clear correlation between, say, the rate of populations and some degree of other needs against outcomes?

  Mr Byrne: That already sounds a complicated story to me. I am from Birmingham and we have a local authority in Birmingham which has got a population of a million -

  Q990  Baroness Hollis of Heigham: It is the biggest in the country.

  Mr Byrne: —total public spending is about £7 billion in Birmingham if you pull all the different agencies together, so I am not quite sure that I completely subscribe to the argument that all things even out if you deal with population units, like nations which are bigger. I think the list you have already given is long and I guess I would still just come back to one difficulty, which is that one of the principles of devolution was to give greater flexibility to different nations to prioritise need in different ways. For example—and this is a hypothetical example—it could be that in one nation people want to give much greater weight to the needs involved in sparsity, and that will be a political judgment. How could you, as the UK, if you like, say, "Well, that's all very interesting, but actually we're just going to have a standard set of needs and a standard weighting of needs and we are actually now going to override your political autonomy to adjust the prioritisation of those different needs in different ways"?

  Q991  Baroness Hollis of Heigham: No, because we do that in local authorities now. We make an allocation of funds based on, say, the rate of population, but if Worthing decides to spend their monies for the over 75s on residential care and Bournemouth chooses to spend it on an ordinary alarm system, that is their determination of the best way to meet local need and how to assess it. So that happens now. You have a common basis of assessing need, but local authorities then have the power and the autonomy to determine how that resource, allocated by a standardised formula of need, is actually spent in their patch to meet local needs. I do not see any problem with that and I do not see why that would not apply under any system that we are proposing, perhaps, here.

  Mr Byrne: If I may, let me just pursue this example of population density, because it is perfectly possible in this hypothetical world we are talking about for the Scottish Government to say, "Okay, you've got a formula for need there. We agree with a great deal of it, but actually we don't think you have given it anything like the right weight for population density," because, as you know, Scotland is the least densely populated part of the UK. How would you resolve this debate and this discussion about what weight to give to that particular need? I do not want to flog this horse to death, but my point is that there will be different dimensions to any need assessment. You have got to make political judgments about what weight to give each one and the principle of devolution allows different politicians in different areas to assess needs differently and to weight needs differently. To then create a UK-wide needs assessment just appears to me to slightly reverse that and it is a conundrum which I do not offer an answer to. It is just an observation which struck me this morning.

  Q992  Lord Sewel: Can I put to you that a fundamental weakness of the Barnett approach is to do with the baseline and the fact that population changes within the four territories have moved differentially over time, because most of the money that is in the baseline at the time that it went into the baseline went in through the population increment. The weakness is that over time, as the population shares have changed, the baseline has not changed to reflect the change in populations of the four countries, the four areas. So you get a situation where you are in one country, because of that, funding a population which is no longer there and in another country under-funding a population which has increased, and that seems to me to be fundamental weakness.

  Mr Byrne: I think that is a fair point. Some figures I looked at for Scotland this morning make that point exactly, which is that if you look at the declining population of Scotland then that does mean that public spending per capita has gone up in part because of the declining population and that increase, because of the gearing, will not have been offset by slower rates of public spending growth as shared out by the Barnett Formula. So I agree that is a weakness and I guess I come back to this question about whether the weakness is so great that one should embark upon a new approach with all the risks associated with it, my sort of three `C's, if you like, about complexity, consent and change. So when I look at it and I look at the outcomes which we have today, especially the outcomes which have already been published in PESA, and we will update the House again with new numbers tomorrow, you obviously do get some differences, so I agree that is one of the weaknesses. Again, I think you have got to make a careful judgment about how seriousness the weakness is, because if you look at some differences in some pretty basic dimensions, between, for example, Scotland and England, you can see that in terms of GDP per capita there has not actually been a huge convergence in GDP per capita rates between England and Scotland over the last twenty years. If you look at morbidity rates, life expectancy is still, unfortunately, quite substantially lower in Scotland than it is in England. Household income rates are not converging rapidly either, so there do remain some differences in public spending per capita between Scotland and England, but there also appear to be some quite stark socioeconomic differences as well. So the conclusion I draw from that comes back to the first point I made really, which is that I think the formula as it exists at the moment is fair enough at this stage.

  Q993  Chairman: "Fair enough" does not actually mean anything. In what respect is it fair and in what respect is it not fair? You have just answered a question about the different levels between England and Scotland, and look at the different levels, for example, between Northern Ireland, Wales and Scotland. Is that fair?

  Mr Byrne: As I say, I think the Barnett Formula in and of itself does a pretty good, a pretty fair and equitable job of slicing up and distributing public sector spending growth.

  Q994  Chairman: How is it a pretty good job? I understand that it is functional, of course it is. It is a quasi mathematical formula which is applied. It does not require anybody to do a great deal. You have got the figures and then you apply them, but how is that fair?

  Mr Byrne: Because it is largely geared to the population and it does ensure that there are uplifts in per capita public spending growth across the UK.

  Q995  Chairman: But you have just agreed with Lord Sewel that it did not.

  Mr Byrne: No, my point actually was about baselines, which is that the thrust of this argument is that what the Barnett Formula does not do, the failure which you allege, is that it does not disturb the baselines inherited radically enough and we are all worried—you are worried and I am a bit concerned—about whether resources are matched tightly enough to need. The only kind of observation I was offering really was that if you go back to the inequalities which helped inform those baselines back in 1979-80—

  Q996  Lord Sewel: It is only a small proportion of the baseline that is accounted for.

  Mr Byrne: Yes, but the inequalities between the countries are still pretty stark, so GDP per capita is 7 per cent lower in Scotland than in England. If you look at mortality rates, they are 18 per cent higher in Scotland than in England. If you look at sparsity rates, Scotland has got the lowest population densities. So there remain some pretty profound and stark differences in inequalities. As I say, if you look at growth and wealth per head, those GDP per capita rates have not converged over the last 20 years. I am sorry to labour this, but that is a long way of saying that many of the inequalities between Scotland, England and other parts of the UK which informed the baseline in 1979-80 are still with us and probably warrant different per capita rates of public spending.

  Q997  Lord Sewel: In 1979-80 where were these inequalities in the baseline? Nobody did an exercise pre the application of the population increment to work out the funding between the different countries on the basis of some inequality of need.

  Mr Byrne: Let me put to you this: if you look at the index of relative spending over time, if you look at 1977-78, if you take England at 100 per cent, Scotland would be at 128 per cent, Northern Ireland 141 per cent and Wales at 100 per cent. So in 1977-78 England would be 100, Northern Ireland 141, Wales 100 and Scotland 128. If you then looked at that same index of relative spending in 2007-08, England again is 100, Northern Ireland would be 130, Wales would be 113 and Scotland would be 122. Between Scotland and England there has been a degree of convergence, between Wales and England there has been a degree of divergence and between Northern Ireland and England there has been a degree of convergence, so I guess my argument is that there has not been a massive convergence between Scotland and England over that period, but nor has there been a wholesale closing of some of these gaps in equalities. Those gaps remain, I am afraid, a bit stark.

  Q998  Lord Forsyth of Drumlean: I know you have just taken over your post, but I do not know if you have had a chance yet to read the Calman Report, which the Prime Minister welcomed with enthusiasm yesterday and which I understand the Government is committed to the proposals?

  Mr Byrne: I have read a summary.

  Q999  Lord Forsyth of Drumlean: I do not want to stray into the areas of tax raising powers, and so on, because they are not for this committee, but the Calman Report says, on p.111, where it is talking about the proportion of the block grant that is not raised by income tax, it says: "The block grant, as the means of financing most associated with equity, should continue to make up the remainder of the Scottish Parliament's budget, but it should be justified by need." It is on p.111, recommendation 3.4. Now, I do not want to get into the merits of the Calman Report but the question you were asked was whether it was fair or not, and Calman is resting on the point that it needs to be fair, and in order for it to be seen to be fair it has to be justified by need. You are justifying it by history and you are saying it is "fair enough", and "fair enough" seems to me to sound like, "It is administratively difficult for us to do this, therefore we just don't bother." My question is, what did the Prime Minister mean, and the Secretary of State for Scotland, when he welcomed these proposals if the Government's position is not that the funding should be continued on a block basis but on the basis of some kind of justification by need?

  Mr Byrne: If you look at the second sentence in 3.4 it says, "until such time as a proper assessment of relative spending across the UK is carried out the Barnett Formula should continue to be used as the basis for calculating the proportion of each block grant." What I do not want to rule out is the possibility of a more perfect formula. My only observation is that today, now, until your Committee reports, perhaps, there is big complexity -


 
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