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Barnett Formula

My Lords, I also speak as a member of the committee which, like the noble Lord, Lord Lawson, I enjoyed enormously. It was agreeable and, thanks to our chairman, we were led with great calmness through this rather complex issue towards total unanimity. Of course, the statistical side interested me particularly. I also want to pay my tribute in retrospect to the ingenuity of the noble Lord, Lord Barnett, in creating the formula in the first place. Its survival over some three decades is a tribute in itself, and it makes it doubly significant that the noble Lord himself has urged the case for reviewing his creation. Let me say straight away that our deliberations and almost all the evidence—with the notable exception of the rather complacent attitude of the Treasury to the whole thing—left me in no doubt at all that the original formula has now had its time. For all the reasons already expressed by the noble Lord, Lord Richard, it does not lead to a fair and truly equitable funding allocation across the UK, which is what it was all about. The time is then right for a new approach, which has to be a proper needs-based formula. That approach has been considered many times over the years but not pursued. One argument against it has been that a needs-based approach cannot be done objectively. Judgments are, of course, involved in selecting appropriate measures of needs, but if those are done properly—especially by an independent commission—there is a safeguard in total transparency and good research back-up. Moreover, we need to remember that the Treasury’s application of the present formula is not exactly judgment-free either. It has also been argued that a needs-based formula is too complex to be practicable. As I hope that our report shows, that is just not the case. As the noble Lord, Lord Richard said, we have produced a purely illustrative model with a few key principles involved. The formula has to be simple, not only in its construction but so that it can be easily understood, so we suggest limiting it to a small number of broad-brush proxy indicators that, between them, get to the heart of funding needs. They must be based on good up-to-date official statistics, both to produce a new, sound baseline for the formula and for annual increments. Importantly, the formula must lend itself to easy periodic assessment and adjustment. Because relative needs will change, it is important that it is a flexible instrument. To deal with another possible objection, I stress that in my view this sort of approach in no way undermines territorial autonomy for the devolved Administrations in deciding how to spend their money. That is a different issue. In our model, we chose illustratively to focus on four broad categories of measurement that have a bearing on needs. They are the size and structure of the population; issues of income and poverty; health and disability; and general economic strength. Each of those, and perhaps others, would he represented by proxy indicators that simply measure the number of people with a particular need as a proportion of the population. Obviously, population is the starting point, as it was for the Barnett formula. Conversely, however, it is not only the size, as in the Barnett formula, but the sex and age structure. Age is particularly important because many needs vary substantially between the young and the old, so, illustratively, our indicators distinguish between the under-fives, those aged from perhaps five to 16, and the old—say, the over-65s. We make suggestions, as the noble Lord, Lord Richard, has said, for low income as a possible indicator. Child poverty is conventionally favoured in that respect. It is certainly a good proxy, but so would be reverse household income, which some of our witnesses proposed. We have our own suggestions for measuring health and disability, and for the general economy, perhaps through employment measures. I stress, as our chairman did, that these examples in the report are purely illustrative; they are not definitive or complete. It would be totally up to the advisory funding body—the proposed independent commission—to propose the choice of suitable proxy indicators. A great deal will depend on the availability of really responsible up-to-date figures. We were hampered in our examples by not including housing, because there are no suitable figures, or population density—a very important measure, but here again there are no national figures. All this can change with time and improve, and that is one reason why we proposed the involvement of the UK Statistics Authority in this whole task, perhaps allied to the proposed commission. Choices have to be made not only about the proxy indicators, but also about the weights to be attached to each indicator, so that they can be combined into a single, overall measure of needs. We suggested that the weights be based on how much national public expenditure is related to each type of need. Again, there is a choice: there are different kinds of weights that can be considered. What we have shown, very much with the help of our expert advisers, is how a needs-based formula can be constructed. The age-old objections to going down that route may have political backing, but they certainly cannot be justified on statistical or methodological grounds. We emphasised repeatedly that, especially in the hands of an independent body, backed by thorough and on-going research, this was an eminently practical task. It is just not true to say that it is difficult or too time-consuming or too complex—that is not so. If we are serious about allocating funding in a fair and equitable manner across the UK, the Government’s duty now seems clearly to move to an explicit needs-based formula.