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Barnett Formula

My Lords, I think there are only two advantages to the Barnett formula. One is that it has given my noble friend Lord Barnett cause for everlasting fame. People forgot Goschen, but they will not forget the noble Lord, Lord Barnett. That is a good thing. The Barnett formula has also produced for 30 years, I suppose, a stable and seemingly simple way of adjusting expenditure throughout the United Kingdom. However, I agree with all the previous speakers, who said that it is deeply unsatisfactory. We have had a solution that, as the noble Lord, Lord Barnett, explained, was thought to be temporary in 1978. This emergency stop-gap—this political fix, as the noble Lord, Lord Forsyth, said—has become a long-term feature of our constitution in a way that is very characteristic of this country. It has become increasingly unpopular; IPPR research has shown how unpopular it is. The Government’s response, as we have heard, is pathetic and intellectually contemptible, and I was deeply sorry to see it. The judgments of the Barnett formula are now clearly out of date. They are based on a passage of time but things have obviously changed. The calculations for the baseline expenditure should have changed. They are based on population not need, and are therefore crude and unfair—particularly for Wales, where the population growth has been slower and where there have been considerable changes in the economy, as the noble Lord, Lord Livsey, said. Therefore, Wales is directly disadvantaged. We have had asymmetrical devolution, and now we have an asymmetrical formula. I want to speak briefly about not the financial aspects, on which other noble Lords are far more expert than I am, but the constitutional weaknesses of Barnett. First, it seems a very centralised system, dictated by Treasury control—the noble Lord, Lord Richard, said that the Treasury was judge and jury in its own cause. Treasury decisions are based on the allocations in England. England in this context is another country, like the past. This affects the block grant in Wales and goes against the spirit of devolution, which seems to be a fundamental constitutional contradiction. Secondly, although Barnett appears to be a transparent system, it is not transparent at all. It does not have accountability written into it, and is not at all a model of open government. The Richard committee evidently found difficulty in discovering the relevant statistics on how it had worked. Indeed, when it was operated, there was evidently much confusion. The committee heard, I think, from witnesses about "Barnett plus" and "the Barnett bypass", where particular kinds of expenditure were taken out of account—notably the expenditure in Wales from Europe under Objective 1. Another aspect is that the constitutional change so far has not affected England. The Barnett formula seems very unfair to the different regions of England—the north-east, the north-west and East Anglia, where, by the test of needs, there should be very different and more substantial allocations. The operation of the Barnett formula, as we have heard, has been very damaging to Wales. The reason for that is historic. It is rooted in the history of Wales, whose political and administrative personality developed later than those of Scotland and Ireland. Administrative devolution only began in Wales at all in 1907 in education. It was much more developed in Scotland and Ireland, and Wales has suffered. The progress, such as it is, towards convergence has been very unhelpful and very unfair to Wales; it is based on English levels of spending. It has led to the Barnett formula becoming the Barnett squeeze. The Holtham commission’s findings are devastating on this. It shows how spending per cap has gone down steadily in Wales from £125 per £100 in England down to £113, and projections show that it could go down to £107 or worse. Wales is in many ways one of the most deprived areas of the United Kingdom and is in danger of becoming the most underfunded part of the United Kingdom. That seems very unsatisfactory and unfair. There is therefore a very strong case, which has been brilliantly made by the Richard committee, for a much more rational system. The committee very helpfully suggested the analogy of the grants commission in Australia. Such a system would be transparent; it would be based on objective criteria; it would show an ability to shift baseline calculations over a period of time; and, above all, it would be based on need. As other noble Lords, and notably the noble Lord, Lord Livsey, have said, the relative needs of Wales are greater than those of England when measured by unemployment, child poverty, claimants of benefits, housing and education. At present, the system does not reflect this and Wales has suffered most unfairly. However, it should be said that we need a system that is congruent with devolution. Some of the solutions that were proposed to and considered by the Richard committee were in a sense relevant to a quite different system—for example, if the United Kingdom were a federal country, which it is not and nor do I wish it to be. Therefore, we need a solution that is consistent with devolution and it needs to come from a Government who believe in devolution. Taking that context into account, the Richard committee has done a very great service. As has been said, this is the second great service that my noble friend Lord Richard has performed for the people of Wales. His commission in 2004 on the legislative powers of the Assembly brought about an enormous improvement. It led to improvement through the Government of Wales Act, and there will be more improvement if, as I trust, Wales has a referendum on the legislative aspects later this year. Therefore, we have had major legislative reform and I hope that, in addition, this committee will produce an important fiscal reform. I hope that it will give new authority to the Welsh Assembly. The Holtham commission has suggested ways in which the powers of the Assembly could be shaped in framing its budget and in moving funds from a capital to a resource budget. Very wisely, the Holtham commission suggests that funding for Wales per capita should not be changed until a new system is in place. At the moment, it is manifestly unfair and getting more unfair year by year. I strongly welcome this report as being consistent with an increasingly pluralist United Kingdom based on differentiation and diversity. I hope that, as part of that, the Barnett formula will soon be reversed, as it is doing considerable harm, and that in Wales the Holtham commission’s proposals will be taken seriously and enacted. Then, I think we will have a devolution settlement that is made on a durable and rational basis, which I am afraid does not exist today.