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Barnett Formula

My Lords, it is a pleasure to follow the noble Lord, Lord Barnett, who is responsible for the paternity not just of the formula but of our committee. I recall that he fought pretty hard for it. The first time around there was a view that the committee might not be needed. When I saw the composition of the committee, I thought, "This is going to be an absolute nightmare. Here we have a lot of very strong Members of the House who are coming from completely different directions. There is no way we will be able to get a consensus on something as complex as this". It is a real tribute to the noble Lord, Lord Richard, and his chairmanship of the committee that we did. I have to say, it was great fun and this House at its best. The path before us was laid out inexorably towards the conclusions we reached. There was no rancour or division in the committee. Some of it was quite amusing. One of the things that amused me most was all the vast academic tomes and theses that have been produced about how the Barnett formula was carefully constructed to achieve convergence and was all very clever. These were blown sky-high out of the water, not least by the evidence which the noble Lord gave to the committee. It turned out that the formula was a short-term political fix. All the attributes that had been ascribed to it were post facto rationalisation. It is very hard to argue against having a needs-based formula. I cannot think of any such arguments. When I was Secretary of State, I struggled with that. It is something that is on my conscience. The reason why the work to try to develop a needs-based system of funding was being done when the noble Lord, Lord Barnett, was producing his formula in the Treasury was that it was then anticipated that there would be a Scottish Assembly. However, the referendum was lost. The officials in the Treasury knew very well that you could not have a devolved Administration without some kind of objective needs-based system of funding. All the efforts by the Treasury over the years, as set out in the committee’s report, to move to a needs-based system were as a result of anticipating devolution. If I may be just a little partisan, one of the things which was quite disgraceful was that when the present Government took office in 1997 and decided to set up a Scottish Parliament, the then Chancellor—not the Prime Minister—gave absolute instructions that there was to be no work done on a needs-based system. The Parliament would be funded on the Barnett formula. That was a fundamental strategic mistake. I agree with the noble Lord, Lord Barnett: the sooner that this is dealt with, the better. It is unanswerable. We have the absurd position of people in the devolved Administrations and elsewhere arguing that it would be a very difficult to have a needs-based system. However, when they get their £30 billion, how do they distribute it? It goes to health and local government by using formulae that are based on needs. It is simply intellectually impossible to argue that there is one rule for the determination of the amount and another for its subsequent distribution to devolved authorities within the devolved areas. I have a confession. When I was Secretary of State for Scotland and negotiating with the Treasury on the Budget, I was briefed by my officials under no circumstances to let the Treasury talk me into moving to a needs-based system of funding. They told me then that it would result in Scotland losing £2.5 billion to £3 billion of funding. I hope the House will forgive me if I saw it as my job to look after Scotland’s corner and took that advice. One of the reasons why I was totally opposed to a Scottish Parliament was that I realised it would mean moving to a needs-based system. For us, as Conservatives, there was political difficulty in moving towards a Parliament when we could not find a system of funding that would not result in a substantial reduction in funding. The noble Lord kindly pointed out that we were not particularly strong in Scotland, and we were even less so after my tenure. With all the other problems, including West Lothian, that was one reason why we opposed devolution. The moment a Scottish Parliament was established, it became inevitable that we had to have some kind of objective system of funding. The noble Lord says that maintaining Barnett did us no good because we lost every seat. We did not take a position on any of these matters because of what we thought was in our party’s interest. We did it because of what we thought was in Scotland’s interest. Professor David Bell from Stirling University is one of these academics who has made a great career out of explaining the Barnett formula. He now estimates that the amount Scotland would lose as a result of a needs-based system would be £4.5 billion. I do not know whether that figure is correct but it rings alongside what I was told when I was Secretary of State. On page 41 of the report, the committee produced a diagram which shows broadly the needs of the various parts of the United Kingdom. One of the things that is clear is that the needs of England and Scotland are not very different. We have to accept that if we move to a needs-based system, there will be a substantial reduction in the grant available. Therefore, what I want to highlight from the report to whoever forms the next Government is that it is absolutely essential that we do this over a long transition period. You cannot do this overnight. This issue is a ticking time bomb at the heart of the union; it is very important that it is defused and not allowed to explode. Therefore, the first point is that we need to have a long transition period. The second point is that we could do with fewer reports which do not address this matter. The Select Committee in the other place has reported on the Calman commission report today, which had no mention at all of funding or Barnett, which I find quite extraordinary. The Calman commission blithely says that Scotland should move to a needs-based system of funding as soon as practicable, and says that the gap in funding can be filled by allowing the Scottish Parliament to raise income tax. A gap of £4.5 billion, assuming no reduction in yield—which is highly unlikely—would mean putting 15p on the basic rate of income tax. That is before you start to deal with the consequences of the reductions in public expenditure which will be required in order to deal with the deficit. These are very serious matters which could do enormous damage. What we need is not more taxes in Scotland, but a period of time where value for money can be obtained and where the required reductions can be carried out. Incidentally, the Nuffield Foundation produced a report about a month ago which showed that, although Scotland was benefiting by about a quarter more on expenditure for health, England was doing rather better in many respects because of the reforms carried out here but not in Scotland. There are policy implications here and the Scottish Parliament needs time to adjust to it. Thirdly, I think it is irresponsible of the Government not to address these issues, but I understand the politics. Therefore it is very important that we have this independent body to recommend what the allocation of funds should be, and that the Treasury’s arbitrary powers be taken from it. We had the extraordinary evidence from the Secretaries of State that the Scottish Parliament wanted to build a second Forth road crossing. This is very expensive, and the Scottish Parliament is not able to borrow. There was a bit of a row, and the Treasury decided that the Crossrail scheme was a UK scheme so there were no Barnett consequences. As a result of the row, which happened to coincide with a by-election—I am sure the two are not in any way connected—it was suddenly decided that, after all, there were Barnett formula consequences from Crossrail. The Government turned full circle. I do not know which is right or wrong. Perhaps the Minister could, in his wind-up comments, tell us whether there will be Barnett formula consequences from the high-speed rail link which we heard about this morning. If that will cost £30 billion, then the Barnett consequences will be £3 billion. I can tell you that Alex Salmond will be spending the money even as we speak. We need to have some order, rigour and objectivity about this, because the Treasury is judge and jury in its own court. I am conscious that I am out of time. I just say to the Government that this is a very important issue for the United Kingdom as a whole, for people in Wales, for the north-east of England and for elsewhere. I accept that devolution is here to stay. The noble Lord, Lord Barnett, does not have paternity of devolution; the Government have. They owe it to the country and to the future of the United Kingdom to follow through what they started by having a funding system which is seen to be fair, which is objective, and which everyone can look to as a basis upon which to carry on with this constitutional innovation in the regions and countries of the United Kingdom.