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Barnett Formula

My Lords, I had better make it clear at the outset to my noble friend on the Front Bench that, like everybody else, I have no words of comfort for him. However, I look across the Chamber to the noble Baroness on the opposition Front Bench: I look forward to hearing her clarify her party’s position on the Barnett formula and say whether Mr Cameron’s position is still as it was reported earlier in the debate. I have a couple of things to clear up. The first relates to the fact that the Barnett formula has no impact on the distribution of regional expenditure in England. That is an English matter, which the English will have to address; it is not determined by the Barnett formula at all. Secondly, everybody is agreeing with everybody else in this debate, so an element of disagreement might be appropriate. In that context, one turns to the noble Lord, Lord Forsyth. Following the noble Lord is always a bit of a challenge, because he is a passionate, sometimes persuasive and occasionally partisan politician. His two great passions are the Conservative Party and the union, for both of which he has done noble duty. He virtually annihilated the Conservative Party in Scotland and from time to time I am concerned that, despite his commitment to the union, he might be in danger of bringing it to an end. However, I am sure that his heart is in the right place. That is the tragic irony with some of these debates: the political outcomes and the policy discussion get a little out of joint. I fundamentally disagree with the view expressed by the noble Lord, Lord Forsyth, that it was wrong not to change the funding formula when devolution was introduced. I believe that it was right to maintain what had gone before—the Barnett formula—over that transitional period. With a great deal of political change, there was a strong argument to have the stability, continuity and predictability that the continuation of the formula allowed. However, I agree with all speakers that the mistake has been in not looking at and reviewing the formula subsequently, once the political institutions had bedded down. There is now an urgent case to make it clear that the funding formula passes the test of fairness and equity. Like everybody else, I have come to the conclusion that it no longer does; not only that, but I believe that it is so structured that it cannot pass that test. Let us look at the two elements of the formula: the base and the annual increment. Neither of them can be convincingly defended. The base, as we know, goes back to 1978. If you look at the amount in the base, about 10 per cent predates 1978. Everything in the base from then on are these annual increments that have been built up and aggregated, with the effect that the money in the base is financing services for a population that no longer exists. It is dealing with a series of fantasy populations: they were historically there, but they are not there now. It is a degraded, degenerate population formula. That is its primary weakness. The increment is effectively just a crudely driven population formula that pays no attention at all to need. That is a great weakness. One of the great things about the inquiry that we held was that we learnt quite a lot as we went along, sometimes from the academics and sometimes not. One of the revealing things was that the explanation for the disparities between the various territories was not what many of us thought it was likely to be—the differential use of formula bypass. Some of us on the committee had spent some time trying to argue for formula bypass, and quite successfully. But it was not that at all. As some noble Lords have pointed out, it had to do with relative population movement over time. Put simply, if your population is going up and you have that type of base formula, your per capita expenditure will inevitably go down. Let us look at Wales and Scotland, the two nations that are perhaps most obviously affected by the formula. The population of Wales is going up and, according to the needs analysis that we carried out, its needs are greater than those of anywhere else in the other three territories in the United Kingdom, so Wales gets a double hit. In Scotland the relative population is going down, so per capita expenditure is increasing. It is apparent that its relative needs are not as great as those of other parts of the United Kingdom, particularly Wales. Indeed, Scotland is now the fourth most prosperous part of the United Kingdom. That is a policy success. One of the problems is that we are reluctant to recognise such policy successes. Scotland has come up; it has been a success. That does not justify its retention of a high level of public expenditure. Perhaps a readjustment is needed. If we look forward, the question must be: what is the alternative? The committee came down clearly in favour of a needs-based approach. We did not have to look too far for that because, as the noble Lords, Lord Forsyth and Lord MacGregor, pointed out, you just have to look at what the devolved Administrations are doing themselves. They distribute money to their major spending areas—local government and the health service—on a needs-based system. We have a strange position in Scotland, where Mr Swinney, the Scottish nationalist Finance Minister, wants to retain the Barnett formula to get the money into Scotland but, once it is there, he wants to use a needs-based formula to distribute the money around Scotland. That is not very consistent. The point has been made—and I accept it—that if it is distributed on a needs-based formula, it ought to come in on a needs-based formula. As the Government are reluctant to embrace the idea of a needs-based system, there is a danger that they might try something else. The obvious thing is to move a percentage out of the base and distribute it according to the incremental formula. If, say, 10 per cent came out every other year, that would over a relatively short period bring about a major change in the territorial distribution of money within the United Kingdom. It would be based purely on population and would not be related to need. That would be a very adverse move indeed. The greatest argument for moving towards a needs-based system follows on from what my noble friend Lord Morgan said. It is the system that sits most easily with the idea of devolution. Devolution provides for the three territories what I have always considered to be the best of both worlds. They have the ability to make local decisions about local problems according to local priorities, while at the same time, at the macro level, enjoying the benefit and security of being a member of a larger state, which gives that larger state the opportunity and responsibility of dealing with matters such as fairness and equity. That is how I believe you square the circle of devolution. A needs-based approach is the way forward. It is right and proper that you then give those devolved Parliaments and Assemblies the opportunity to make additional adjustments either upwards or downwards through taxation, according to their own values and political priorities. We are now in a position where virtually no voice is raised in support of the existing system. It is bust; it is broken. I see a finger being pointed, but the noble Lord has said nothing yet; we are waiting for a conversion on the road to somewhere, so he may tear up his speech. The existing system is discredited. We have to move to a needs-based system and it has to be done with a degree of sensitivity. We must recognise that adjustments will be needed and that the long transition period will have to be handled with a degree of sensitivity.