The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 1000 - 1019)


Mr Liam Byrne, Mr Mark Parkinson and Ms Helen Radcliffe

  Q1000  Lord Forsyth of Drumlean: I am sorry to interrupt you. I understand that point, but I am focusing on the Chairman's question, which is, is it fair, and Calman seems to be suggesting that no, it is not fair unless it is based on some assessment of need. I am just trying to get from you what the Government's position it. I appreciate that how you change it is a matter for us and for the Government, but the fundamental question is, are you satisfied with the system we have at the moment as being fair? This report is saying no, it needs to be changed. What is the Government's position? Is it in line with Calman or something else?

  Mr Byrne: Firstly, we welcome Calman, welcome the principles set out, welcome the argument and welcome the recommendations. Calman makes some pretty astute and acute observations about the need for further work on taxes and the way that that will work in practice without setting up the wrong kinds of incentives, and we will carry on that work to puzzle through those questions. That is the position on Calman. The argument about the Barnett Formula versus proper needs assessment for me comes down to this: I think the Barnett Formula at the moment works pretty well. Is it my platonic ideal of equity and fairness? No, it is not. Have I seen the platonic ideal of equity and fairness? No, I have not, because what I do not want to do is to get trapped between false alternatives. At the moment there is not a choice between the Barnett Formula and another formula which is better; it is between Barnett and the kind of hypothetical, and that is where we are at the moment.

  Q1001  Lord Forsyth of Drumlean: So you do not agree with recommendation 3.4, that it should be justified by need, the block grant? You do not agree with that?

  Mr Byrne: I think it should be justified by need. I would agree with that, but my concern would remain that we would still need to devise a way of moving towards that position which we have not yet seen, which is why I come back to this observation I made at the beginning, which is that what we do not have at the moment is perfection, incredible though that may seem.

  Q1002  Lord Lawson of Blaby: I must say, I think you are making your task too difficult and I am surprised that the present Government will not undertake any reform until it has discovered the platonic ideal! I think that is rather too high a hurdle. If I may make another observation, because I have not got time to argue the case now, the three `C's, which are your objections to making change where you cite the difficulty in finding the platonic ideal, which is not unique in this area, are four `C's in fact, and I hope that in our report we will be able to demonstrate to you why that is so, which will be a fourth `C', a great comfort to you! I would like to focus on the baseline question which has come up. You are aware that the Treasury gave us evidence—I will read it out in full if you like, but the summary is that they take no notice of the baseline or the existing level of provision, they are just concerned with the so-called Barnett consequentials and going forward. So it follows from that logically, does it not, that if the baseline is, for whatever reason, seriously wrong then since the baseline is so much larger than the consequentials then each year the settlement will be seriously wrong? If the baseline is seriously wrong and this is not looked at—and the Treasury officials in their evidence assured us that it is not; I can read it out, if you like, but that is the reassurance—then the settlement each year will also be seriously wrong?

  Mr Byrne: I am sorry to be a bit thick, but I have not quite followed that argument.

  Q1003  Lord Lawson of Blaby: The settlement is the baseline plus the consequentials, which you said steadily increase but I am not so sure you can count on that. I realise this is what you are grappling with at the moment, the overall public finances, and therefore I understand that you have not been able to devote too much of your attention to this. I fully understand that and I apologise for burdening you in this way, but it would have been discourteous to you if we had not invited you to come and talk to us about this. I will read it out. This is the Treasury evidence. "It is also worth noting for the operation of the Barnett Formula it is not necessary for the Treasury to scrutinise the existing level of provision or baseline of the devolved administrations. The baseline level of provision is in the year before the first year of the Spending Review and rolled forward over the Spending Review period and the Barnett consequentials are added to this baseline." Therefore, since you have a large baseline and relatively speaking small consequentials which you add on to get the settlement, this means that if the baseline is seriously wrong then each year's settlement is seriously wrong? Is it not so?

  Mr Byrne: Not quite! Firstly, the increment and the Barnett Formula and the way it is devised is about sharing out equitably increases in public spending growth, but I think the more significant thing you say is that the baselines may be seriously wrong. I am not sure the evidence for that is clear-cut and it would be useful to get the Committee's observation on that. The reason I say it is not clear-cut is because of some of the facts and figures I have quoted earlier. There were differences in the distribution of public spending back in 1979/80 and there are differences now, but it is not clear that there has been a fundamental shift in inequalities which might actually point you to a need to fundamentally restructure some of those baselines.

  Q1004  Lord Lawson of Blaby: I was just going to make one other observation, which is that there is one objection to change, which I think is the real objection to change, which you have not yet mentioned and that is the political difficulty of doing it, which is particularly likely to occur so far as Scotland is concerned. If you find the baseline is seriously wrong (to use my expression) and therefore because you want to get it right and because the Calman Commission and you have agreed that the baseline really should be based on need, the way you can ease the pain, as it were, is to have a transition period from the wrong baseline to the right one, which you may need to review, no doubt, every so often. How long a transition period would you think would be wise?

  Mr Byrne: I did actually flag as one of my `C's this problem of consent because I think one of the great risks, which you found looking at local government finance, is that there are big administrative and political risks associated with fundamentally restructuring some of these arrangements in a way which is contested. So given the complexities, with great respect to Baroness Hollis, which I think would be involved in coming up with this formula, I think it would be inevitable that the dimensions, the mechanics of that formula, would be contested. I think the result of that would be quite complicated change arrangements. When you look at the current local government funding formula, it is quite short, only 16 pages long. It is a sort of model of clarity from DCLG. It is full of floors, ceilings and dampening mechanisms. I remember being involved in some of those conversations myself three or four years ago and there are fine, delicate and difficult political judgments to be made in getting these transitional arrangements right, as you are all too familiar with. I just think that if you put all that together it really does create some quite big risks and that will damage predictability. It is not good for public administration.

  Lord Lawson of Blaby: I am slightly surprised. You will recall that the Justice Committee of the House of Commons said, "The Barnett Formula is overdue for reform and lacks any basis in equity or logic." So I think it does seem to most people that there is a problem here. As I say, most of the difficulties you adumbrate I hope we will be able in our report to show are readily and easily overcome, and indeed in many cases it is like, having taken so long each year, you have to do things mid-year, but you say it may be contested. I am quite sure—certainly this is my experience as a Chancellor—with every Chief Secretary I have found that pretty well everything he proposes is contested by his colleagues!

  Baroness Hollis of Heigham: Tell us more!

  Q1005  Lord Lawson of Blaby: But that did not mean that decisions were not taken. That is the point. So I do come back to my question. You will listen, obviously, to the arguments, you will evaluate them very correctly and properly, and at the end of the day you will decide, I think sensibly, that an adjustment needs to be made. Then the question is, over how long a transitional period? How long a transitional period would you suggest, because obviously it cannot be overnight, but equally it would be a nonsense if it were too long because it would just prolong the pain? So what would you say?

  Mr Byrne: Absolutely, and if you were sitting in my seat your advice to the Prime Minister, or if you were Chancellor, would be that you would choose a transitional period which took account of the greatness of the transitions involved. So I am afraid it is a hypothetical question and you would actually have to have a look at what kind of movements and money would be entailed.

  Lord Lawson of Blaby: Thank you.

  Q1006  Chairman: Can I ask you one further question on the baseline because it seemed to me that underlying what you were saying about the baseline in the Barnett Formula there is an assumption that the baseline is correct. What is that based on, because it is 30 years old?

  Mr Byrne: My view is that looking at some admittedly quite basic matrix, I do not see a great convergence in equalities across the UK which implies that you should see some kind of much more marked convergence in the index of public spending. The Committee has got the secret needs assessment conducted by the Treasury in 1994, has it not?

  Baroness Hollis of Heigham: 1984.

  Q1007  Chairman: We have had a sniff at it!

  Mr Byrne: Sorry, 1984.

  Q1008  Chairman: Could I just say that if it is 1994 we would like to have it.

  Mr Byrne: There are two, are there not? I think there is one that you had to FOI out of the Government in order to get it out, and there is another one which was last done in 1979/80. The only point I would make is that there was not a great deal of difference between the indices of needs assessment that was done then. Again, I quoted earlier some figures about the index of relative spending which showed that there had been a degree of convergence between Scotland and England over the last 25, nearly 30 years. So there has been a degree of convergence but the gaps remain. Is that a bad thing? Well, if you look at the differences in GDP per capita, if you look at the differences in life expectancy, if you look at the differences in household income, there also has not been a lot of convergence in those matrix either. That is my own, after a week and a half, personal view. I have not seen some great flash of insight which tells me that the differences in the baselines from 1979/80 absolutely demand -

  Q1009  Chairman: Let me just give you a glimmer. You quote the 1984 assessment and you say there is not a big difference between 1984 and the one which was done in the 1970s, and that justifies a continuation of the baseline. I would just like to point out that between 1978 and 1984 is six years and between 1984 and 2009 is 25 years, so are we really going to base this whole thing on a set of calculations which were done 25 years ago?

  Mr Byrne: That is why, cleverly, I did not rest my entire argument on that one data point! That is why I did pray in aid these other, I think, pretty important matrix like wealth per head, morbidity and household income. Because we have not seen such a fundamental convergence on those figures—I know you cannot read too much into it, but you have to look at those figures and say, "Well, based on those figures there is not overwhelming evidence for a fundamental restructuring of relative baseline differences."

  Q1010  Baroness Hollis of Heigham: If you are right, what is the problem, because if you are right there will not be much change, and if you are wrong you certainly do need change?

  Mr Byrne: I go back to my three `C's. Those are my problems.

  Q1011  Lord Rooker: I have to say, Liam, you deserve, I think, the Committee's respect given the fact that you have only been in the job a few days. You have clearly spent some time on this and we appreciate that, because that is obvious from the way you have answered the questions. I am desperately tying to think of a change what has occurred in the last 30-odd years since I have been in this place where everyone has been a gainer. There is not. The point is, as we have discovered as we have looked at alternatives, the dog that is not barking—and you in one of your very early answers alluded to the figures—is Wales. The Welsh are the big losers. It was quite apparent to us. The Secretary of State (as was) did not quite appreciate how much they were losers under the status quo as it has gone on for 25, 30 years, and this is really more a question to ask you to go back and have a look at it because the status quo, as it drifts through the decades, is a festering sore now. The reason this Committee is sitting now is because it has been perceived that this issue is a festering sore between the nations of the United Kingdom. We have not quite got all the answers and we are not exactly clear what happened. We have got to look at it, and others have looked at it as well, but it is quite clear we are building up a huge problem for later on. In the meantime, because most of the discussion is UK v. Scotland, England v. Scotland, and Northern Ireland we almost park as a special case, significantly because of the nature of what has happened there in the last 20 years. I have no special knowledge of this, only what I have gleaned from this Committee, but the Welsh nation is the big loser of the status quo. It is amazing they are not up in arms about it, but they soon will be once various indices are published and various reports are published. This is the supreme difficulty, that while you say, broadly speaking it is fair enough -

  Mr Byrne: Given the risks of change.

  Q1012  Lord Rooker: Yes, given the risks of change, fair enough, but for how long? There is the six year gap and then the gap we are getting on to now is quite unsustainable, therefore—and I am just putting the bid in, I have no special axe on this, except that the figures we have seen in trying to get a simple formula, anything that is simple is unfair, it is too simple, I fully accept that, and you try and get it super-fair and you build in, as you have said, incredible complexity. We have got to try and find a way through that and we have got to look at some possibilities. Let me put this to you: it is just not fair and it is not good conduct of public administration to knowingly know that one of the nation states under the status quo is actually losing out, and it is getting worse each year, but it is the one that people do not talk about. That has got to be unacceptable and all I am saying is—because you have to spend a lot of time on this—this does need addressing by the Treasury and those policymakers you have got there.

  Mr Byrne: Could I just make three points in response? On this question of dogs and barking—and again I just put this down by way of submitting evidence, as it were—if you look at the index of relative spending over time and contrast 1977-78 with 2007-08, in 1977-78 Wales and England were both at 100. These are two numbers which have diverged now over the intervening period, so now Wales is at about 113 and England is at 100. So there has been a degree of divergence there. I just think that that is worth the Committee reflecting upon. The second point I would be fascinated to hear the Committee's observations on is that we are only talking about some dimensions of public spending in this debate, are we not? We are only talking about comparable spend and some of the most important public spending in the system is, of course, not allocated to local authorities or strategic health authorities, et cetera, it is allocated to individuals and it is called social security spend. So in the PESA estimates, which we will publish tomorrow to the House, I just think it would be useful for the Committee to opine on the fact that if you look at total public spending per capita in different regions you will get some quite interesting contrasts. So if you take last year's data, 2007/8 plans by country and region, put reserved and devolved spending together, London is at an index of 117, Scotland at an index of 118 and Wales is at 110. So when you consider all public spending you actually get different patterns of comparison between regions. This takes me to my third point on which I would also welcome the Committee's observations because I am intrigued by it. I have not got an answer to it and I do not fully understand it, I have not fully thought it through, but much of this question depends on how you draw your boundaries. If you were to look at public spending per capita in Hodge Hill, the fourth highest unemployment in the country, failed by a number of administrations in the city, I think it would be quite high and it would contrast, I think, with the Scottish average, the Welsh average, the Northern Ireland average and no doubt the English average. So I do not think we can entirely remove from this debate considerations on the question of what does the total spending picture look like per capita. Secondly, much will depend upon how you draw the boundary.

  Q1013  Lord Sewel: You might be surprised we are on question three now, formula bypass—perhaps one of the reasons why there is not convergence. How does the Treasury decide whether it is appropriate to use a formula bypass, and to what extent has it happened since devolution?

  Mr Byrne: Let me give you more on the examples since devolution. The pretty obvious examples we considered this morning, Scotland, G8 policing costs, Northern Ireland exceptional EU PEACE funding, Wales there have been increases to cover exceptional EU objective 1 funding decisions. The devolved administrations can bid to the reserve on an exceptional basis, but there are three tests, if you like: the spending does indeed have to be exceptional, it has to be unforeseen, and third, it cannot reasonably be "absorbed" (I think is the word) within existing budgets. I think it would possibly help the Committee if I came up with some more examples of those exceptions since devolution

  Q1014  Lord Sewel: I am sorry, I did not get the Scottish example.

  Mr Byrne: The policing costs for G8, to keep everyone safe.

  Q1015  Lord Sewel: I take it that has not gone into the baseline then?

  Mr Byrne: Correct.

  Q1016  Lord Sewel: Because the pre-devolution ones tended to go into the baseline because they were basically to help finance public sector wage settlements.

  Mr Byrne: Yes, but I shall come up with a better and more comprehensive list.

  Q1017  Lord Sewel: So effectively bypassing as a means of basically dealing with the problem of funding an unfundable wage settlement in the devolved areas is not a possibility?

  Mr Byrne: Not really, because, as I say, you have got these three tests of exceptional, unforeseen and cannot reasonably be absorbed.

  The Committee suspended from 5.00 pm to 5.15 pm for a division in the House

  Q1018  Lord Trimble: Do you think that Parliament gives the devolved administrations sufficient scope for them to develop their own policy agendas?

  Mr Byrne: I think so, because I think the arrangements allow the devolved administrations, if they want to, to depart in quite fundamental ways from policy positions adopted in England and elsewhere. The obvious example, which I am sure you have got already, is the policy of free care for the elderly in Scotland, funded out of the existing provision. I would be really interested in evidence from the Committee as to where more flexibility is needed.

  Q1019  Lord Trimble: The example you gave does not strike me as actually being fundamental. While it is paying for that level of care in Scotland but is not available elsewhere, the sums involved were not huge. What would happen if there is a really fundamental divergence? Let us say, for example, the Government decided it wanted to change the basis on which the National Health Service was financed but the devolved administration wanted to keep to the old arrangements?

  Mr Byrne: That is a very good example because you would then, I think, be in contravention of the NHS Act, clause 1.

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