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Barnett Formula

My Lords, the exodus having taken place, perhaps I could say one or two words about the Barnett committee. I had the privilege of chairing your Lordships’ ad hoc Committee on the Barnett Formula. It was an interesting committee, whose membership is worth looking at. Not only was the membership good but it produced a unanimous report. We were helped in coming to our conclusion by our special advisers, Mr Alan Trench and Mr Peter Kenway, who gave us invaluable advice. We were extremely well served also by one of your Lordships’ Clerks, Ms Audrey Nelson. It is almost de rigueur now to mention Clerks, but she did an extraordinarily good job and I am very grateful to her. The mandate given to the committee was necessarily limited. It was, ""to examine the purpose, methodology and application of the Barnett Formula as a means of determining funding for the devolved administrations of the United Kingdom, to assess the effectiveness of the calculation mechanism to meet its purpose and to consider alternative mechanisms"." I am delighted that my noble friend Lord Davies of Oldham will reply for the Government to this debate. He has always struck me as the sort of Minister who is essential in any Government. You give him a brief on anything and he gets up, he is persuasive, he is bland, he is pleasant and he is very good at defusing a situation and bringing the temperature down. I pay tribute to him for all those qualities, which I have observed on many occasions in the past, but I am bound to tell him that, in all the briefs that he may have handled from that Dispatch Box, to defend the position of the Government on the Barnett formula is going to prove a very difficult, forensic task indeed. At the outset, he has my deepest sympathy. Our terms of reference were not only limited but they specifically excluded consideration of three particular areas. One was the overall system of funding the devolved Administrations, particularly tax-raising powers. Secondly, we were not allowed to consider other political aspects of the devolution settlements. Thirdly, we were not allowed to consider the distribution of funds within the different regions of the United Kingdom. Therefore, the scope of the inquiry that the Select Committee undertook was focused tightly on the methodology and the practical application of the Barnett formula. We asked ourselves four main questions and produced unanimous answers to them all. First, what is the Barnett formula; what is its purpose; how did it come to be introduced; how has it worn with time? Secondly, how does the formula at present operate, particularly the part that the Treasury plays? Thirdly, is the formula still relevant and, if not, what should be done? Fourthly, is it possible to produce a formula for the distribution of moneys from central government to the devolved Administrations that is based on an assessment of need rather than, as at present, only on population? I cannot resist going into the history of the Barnett formula a little, although I see that my noble friend Lord Barnett is here. The history is interesting and, indeed, instructive. It dates back to 1976, when it was felt by Ministers in the Treasury that a formula was needed to determine the territorial distribution of public spending in the UK. As far back as 1888 the Goschen formula—named after the then Chancellor of the Exchequer, the one whom Lord Randolph Churchill forgot—allocated funds based on the population: 80 per cent to England and Wales, 11 per cent to Scotland and 9 per cent to Ireland. Over time the precision of that formula came to be eroded. After World War II successive Scottish Secretaries of State negotiated additional allocations. They argued special needs, such as sparsity of population in the remote areas and density and poor housing in the central belt. The introduction of what became known as the Barnett formula was part of a wider attempt to constrain public spending in the mid-1970s. The new formula was in essence an update of Goschen, being based on population rather than need. I cannot resist quoting from one or two portions of the evidence given by the noble Lord, Lord Barnett. He made it clear to us that the formula was not designed as a permanent solution. He said: ""I thought it might last a year or two before a Government would decide to change it. It never occurred to me for one moment that it would last this long"." Later, I put it to him: ""You devised a mechanism which helped the Treasury to distribute money. You did not base it on need. It was a straight population index and you did not think it would last"." To this, the noble Lord, Lord Barnett, gave a simple and definite answer: "No". When asked whether he thought that the formula had been successful, he answered in thoughtful terms: ""Successive Governments over 30 years have kept it going. I do not consider it is successful. I do not think it is fair. It cannot be fair with this kind of gap … At the moment, all one can say is that the figures indicate a huge gap in the expenditure of the different regions"." Right at the outset of this debate, the author of the formula is disclaiming any responsibility for its longevity. One of the oddities of this part of our inquiry was that it emerged that, at the very time that the Barnett formula was being proposed by the noble Lord, Lord Barnett, the Treasury was engaged in a detailed assessment of need. The noble Lord, Lord Barnett, was asked whether he knew this. He replied: ""If they were, it was not done by me personally. I was not doing any needs assessment"." Summing up his evidence, I put it to him in this way: ""As I understand it, what you have been telling us can probably be summed up in two sentences. You devised a mechanism which you hoped would last for a few years. You did not expect it to last for as long as it has lasted. You are not sure now whether it is based on the right criteria and you lean towards having, among other things, a needs-based assessment. Is that fair?"." He answered: "That is fair". It is very clear that the formula was devised in a not particularly intricate or sophisticated way to deal with a short-term problem and that it was intended to be temporary. It is perhaps understandable that in those circumstances it was found easier to base it on population rather than on any assessment of comparative need. The formula has been in existence ever since. It has become one of those subjects that most now agree is crude, unsophisticated and ineffective. There is no doubt, based on the totality of the evidence that we have received, that needs and fairness have never been taken into account. They should be and it is high time that they were. One of the issues that we considered in detail was the role of the Treasury in administering the formula. It is quite frankly opaque and murky. On many issues the Treasury is judge and jury in its own court. Decisions on Barnett consequentials are taken in secret with no consultations and then presented to the devolved Administrations on a take-it-or-leave-it basis. We were firmly of the opinion that this procedure was unsatisfactory. Decisions on, for example, the extent to which expenditure on the Olympics should attract a Barnett consequential were made by the Treasury and put to the devolved Administrations with little opportunity for them to question those decisions. I think that that is wrong. Of course, the formula works in the sense that it provides a mechanism for determining mathematically the amounts that should go from central government to the devolved Administrations. The flaw is that the formula itself is based on population criteria going back to the mid-1970s. It is no longer sensible or fair to keep the baseline for payments where it was 35 years ago. The proportions allotted to each nation in the 1970s were based on the situation then. That is no longer appropriate. Things have changed. Populations have moved. Different areas have become more or less prosperous and communications have improved, yet the baseline has remained constant. It is very difficult to justify this on any grounds save perhaps prolonged ministerial torpor. Furthermore, the way in which the Treasury has dealt with formula bypass problems and Barnett consequentials means that the whole edifice is now distorted. When we questioned Mr Liam Byrne, the Chief Secretary to the Treasury, and specifically asked whether he thought that the Barnett system was fair, the furthest that he would go was to say: "it is fair enough". What "enough" meant in those circumstances was not entirely clear, at least not to me. One of the committee’s main recommendations was to take the administration of the formula out of the hands of the Treasury and transfer it to an independent expert body, which we suggested might be called the United Kingdom funding commission. It is important that the new commission should be independent. The Commonwealth Grants Commission in Australia offers an institutional model of an independent body with responsibility for making recommendations about the allocation of finance. We said in paragraph 73 of our report: ""It should be the role of such a body to recommend the allocation of public monies based on population and through a new needs-based formula"." We accepted that the Treasury would need to retain authority over the overall level of the block grant but not the proportionate allocation of the grant between the devolved Administrations. The example of the Australian commission is helpful. It is an advisory body to the federal Government with terms of reference framed by the Commonwealth Treasurer after consultation with the states and the territories. Crucial to that operation is the fact that its impartiality is accepted by the states and the territories and the fact that the commission’s advice has always been accepted by the federal Government promptly and without demur. We therefore agreed that the allocation of the block grant should be determined by such an independent objective body and no longer by the Treasury itself. If we concluded that the present system was not based on an assessment of what is fair and what is needed, we then had to consider whether it was possible to produce a needs-based formula to replace the present system. In many ways, this was the most important part of our report. It was not for the committee to decide what a fair allocation was or might be. Our function, as we perceived it, was to show that a needs-based system was possible and would be workable without too much angst. Of course, we accepted that it would not be possible to undertake a fully comprehensive needs assessment every year or two. The one in the 1970s took three years to arrive at its final conclusions, which astonishingly do not seem to have been passed to Ministers at the time. Nevertheless, it was a major, comprehensive piece of work. Instead of that we came to the conclusion that it was possible to arrive at a much fairer allocation of resources by looking at a smaller number of indicators. In the report, there are two illustrative charts, or webs—one with eight indicators and the other with 12. Neither of them was meant to be wholly definitive, but they are wholly indicative of future possibilities. We tried to take account of the four major aspects of each devolved Administration: the age structure of the population; low income; ill health and disability; and economic weakness. The age structure of the population was easily determined. Low income could be represented fairly by the number of children in poverty, as conventionally defined. Ill health and disability could be represented by the mortality rate and economic weakness by unemployment. It would be possible to argue that our criteria are too few and insufficient—that may or may not be so—but the fact is that you can get a clear indication of relative needs by using a few major indicators. One would produce a much fairer result on that basis than the operation of the Barnett formula does now. It is perhaps worth quoting the conclusions that we reached in paragraphs 101 and 102, where we said: ""While we are not in a position to reach a conclusion about precise relative needs in the four countries and regions, on the basis of our initial analysis, we believe that Scotland now has markedly lower overall need than Wales and Northern Ireland in comparison to England. The current allocation of spending does not properly reflect this basic pattern across the devolved administrations … We recommend that an alternative system on the broad lines suggested above be created to establish a new baseline grant for the devolved administrations and to review needs on a regular basis so that allocations of funds to the devolved administrations reflect the changing patterns of relative need"." Finally, there is the issue of the Government’s response to our report. I am bound to say that in all my experience, both here and in the other place and perhaps elsewhere as well, I have rarely if ever seen a response to a Select Committee’s report that was weaker intellectually or more politically disingenuous. My noble friend, who is to wind up this debate for the Government, has my deepest sympathy. The essence of the Government’s position seems to be that the present situation is fair enough, whatever that means. The only people who thought so were the Treasury, the territorial Secretaries of State and Mr Brown. Certainly, there was no sign of any deep analysis or appreciation of the magnitude of the issues involved. It was extraordinarily disappointing to be told that the Government did not agree with our report because they had no intention of implementing it and that they had no intention of implementing it because they did not agree with it. That does not seem to me to take the argument much further. Of course, one can and does understand that the electoral timetable makes it difficult for any Government to commit themselves at this stage, but the government response that all is well when it clearly is not is not good enough. In our report, we have set out what I believe to be comprehensive and convincing arguments: first, that the present situation is unfair; secondly, that it is possible to arrive at a much fairer mechanism than at present exists; and, thirdly, that the administration of whatever the new formula might be called should be taken away from the Treasury and administered by an independent commission. This is one of those issues that for many years successive Governments have found it easier to live with than to reform. I understand the politics behind the reluctance, but I really cannot condone it. The present system is faulty and quite simply unfair. It needs to be put right and put right soon. I hope that this report may hasten that process.