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Barnett Formula

My Lords, first, I thank the noble Lord, Lord Richard, who chaired in an exemplary manner the committee on which a number of us here sat. It was a very agreeable committee to be a member of. I should like to thank the other members, because we had a very good spirit. We had a range of backgrounds and experience and we reached agreement and unanimity without any difficulty and without even the chairman having to wield a heavy stick. We reached a happy unanimity and produced a result which, I believe, will stand the test of time, unlike the Government’s reply, to which I shall come a little later, as did the noble Lord, Lord Richard. Governments face two kinds of difficulties. There are problems for which the solution is very difficult to discern and problems where the course is clear and it is politically difficult to implement. It is clear where this particular issue fits—in the latter category. However, it matters that we deal with this problem for a number of reasons. The present system is grotesquely unfair, which is leading to an increasing sense of grievance, which could be very damaging for the union. This is not the only important public expenditure issue by any manner of means, but it is one at a time when the need to curb and control public expenditure is the number one challenge facing the next Government, whichever party provides that Government. Therefore, this needs to be addressed. The Government after the election will have to take a whole lot of politically very difficult decisions. If it is going to duck this one, I am afraid that there will be a sense that it will duck everything that is difficult, which would be absolutely disastrous. Indeed, I do not want to attach too much weight to the financial markets, but if they were to think that that was the case it would be a grave threat to our country in ways that I do not need to underline. The problem is a conceptual one. The purpose of public expenditure is to assist not territories but people. That is the point. Over the course of years, as the noble Lord, Lord Richard, said, we have reached a certain point as a result of differing population trends. I leave aside social security payments of all kinds, which are outwith the Barnett formula; those payments, along with the taxation system, which is also outwith the formula, are the ways in which the differing needs of different people in the United Kingdom are primarily addressed. Here, we are talking about the rest of public expenditure quite apart from that. Public expenditure per head in Scotland under the Barnett formula is 27 per cent higher than it is per head in England. There is no rational justification for that whatever. That has arisen because of differing population trends. There has been a very considerable growth in population in England since the Barnett formula came into effect, whereas there has been virtually no increase in the population in Scotland. The demographic projections say that that will get worse. People talk about there being an inherent convergence, but from the demographics we can see that there will be a divergence. From figure 1 of our report, we can see that the divergence of population of Scotland and England will be far greater in the next 20 years even than it has been in the past 30 years. Of course, the formula, as the noble Lord, Lord Richard, pointed out, is not based on actual population; if it were, there would be a rough and ready justice, but because the baseline is not touched under the formula and only the annual increment is affected by it, the population basis gets progressively more out of date, unrealistic and unjust. That has to be addressed earnestly by the Government of the day, whoever that may be; they must be prepared to take unpopular decisions on public expenditure, if they are right, on the grounds of fairness and justice. I find the Treasury’s response to this an embarrassment. I deeply regret it. During my eight and a half years as a Treasury Minister, I had a great respect for the Treasury; indeed, I am one of the few people who had a great affection for the Treasury. However, this reply is an insult to the House. It is only three and a half pages long, of which more than half is just a regurgitation of things that we said in our report, leaving about one and a half pages of actual Treasury response. All it does is to state what the status quo is and its unwillingness to entertain any possible change. Well, we know what the status quo is. Its only argument—if argument it be called—states: ""The Barnett formula operates according to long standing principles"." That is it. I thought that new Labour was meant to be a reforming Government. Apparently the essence of new Labour now is that if it operates according to long-standing principles, that is the end of the matter. It does not address the population point which, as the noble Lord, Lord Richard, and I have tried to point out, is absolutely central to this. It therefore does not address at all the projected deterioration in the system due to the increasing divergence of population trends, nor does it address the outcome so far. None of that is addressed. We in the committee have produced a solution—which is agreeable to all sides of the committee and to all parties—to a problem that no Government can escape. I hope that we will have a Government who have the courage to adopt the solution that we have put forward.