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Barnett Formula

My Lords, I, too, had the pleasure of serving on the ad hoc committee on the Barnett formula. I use the word "pleasure" because, as my noble friend Lord Forsyth, said, the committee turned out to be great fun. At the outset, I had difficulty conceiving how the committee might result in agreement, let alone a unanimous agreement. It was a very pleasant surprise to find that we all agreed. The key term that has come out of the speeches during the day is "needs-based", and that is what we are suggesting. It is the sensible thing to do. I emphasise one point which is very important in the context of a needs-based system: we must preserve the concept of the block grant. Reference was made to the formulas for funding local authorities in England. We do not want to see that sort of situation obtaining because that would, effectively, mean detailed Treasury control. It would produce the situation which existed in Northern Ireland under Stormont, when there was detailed Treasury control of all expenditure. We did not have block grants then, but we now have a block grant, which is a considerable advantage to the Administration. As the noble Lord, Lord Moser, said, we are looking for a number of proxy factors which can be taken together to produce a simple formula which is related to needs, but without being a detailed ground-up construction of needs. It is important to make that point. I do not want to say too much about the needs-based formula itself. Another important term is "transparency", and I urge the Minister who is to wind up to reflect on that. It is crucial that we have a transparent system. We all know that there is much public concern about Barnett. In parts of England, there is a feeling that we have drifted into a financial arrangement which is somewhat unfair. As that feeling is then focused on the Barnett formula, I can well understand why the noble Lord, Lord Barnett, wants to disassociate himself from that. He does not want the public opprobrium which is around at the moment. It is ill focused, as they think the Barnett formula has produced this unfair situation. That comes back to the absence of transparency. If we are to deal with the public concern—in many cases legitimate public concern—we need a system which is transparent, and if the Treasury is not prepared to move immediately in the direction of the sort of commission we are mentioning, at the very least it needs to make the existing process as transparent as possible. Maybe we will be able to go further, but I emphasise that transparency is hugely important. It is also important to get some balance in the way in which we are looking at this. At the outset, my noble friend Lord Lawson made the point that Barnett covers only part of the expenditure in the regions—a very significant part—but it refers to annually managed expenditure relating to benefit; the welfare system is not part of Barnett. Essentially, Barnett is a population-based formula and, in addition, we have a number of other avenues whereby money can be found. From the point of view of local administration, the annually managed expenditure comes simply as a result of how many people are on benefits, or whatever, and the main Barnett money comes because of the population formula, which it cannot change. Therefore, the other little extras become very significant and you focus on them because that is the only way in which you get some money and have greater flexibility. Those areas are and, inevitably, will continue to be under the control of the Treasury. The Treasury does not have to feel too defensive about this. We will not deprive it of its major areas of power. We note in paragraph 46, on year-end flexibility, how, in the course of one discussion, the Treasury suddenly decided in 2007 to release £900 million from the accumulated underspend in Scotland. I am sure that the Scottish Administration thought that it was Christmas when they received that extra money, which they could do something with. There is also the contingency reserve. We had a very interesting exposition from Mr Liam Byrne about the basis on which the contingency reserve can be accessed, which depends essentially on a wholly exceptional situation. From the point of view of the Administration, that is an important matter. There is also the Barnett bypass. We deal with that in paragraph 42. Whatever might have happened in previous years, in recent years the Barnett bypass has been comparatively limited and the Government said in evidence to us that only matters which they regard as wholly exceptional come through that route. The example given in paragraph 42 is an arrangement which I had the pleasure of negotiating along with Mark Durkan with the Government for what we called a reform and reinvestment initiative in Northern Ireland. That reminds me of a point made again by my noble friend Lord Forsyth in his comments when he pointed out that, although there is more money in the Scottish health service per capita, the outputs are not as good as the outputs in England, where they do better with less money. That is why we were persuaded and why the Treasury was prepared to give us some additional scope with that initiative, because what Mark and I were proposing, or hoping to do, was to try and start reforming public services in Northern Ireland, which have not been reformed. The changes and reforms that have happened in public services in England, limited though they may be, have not been replicated in the regions and that is a huge problem. Instead of people in Scotland and Northern Ireland approaching this issue defensively, saying, "We must cling on to the amount of public expenditure we have at the moment", they would be better served if they approached this issue saying, "We need to use the money better and we will find that we can get by on less". That is important. I regret to say that, since Mark and I negotiated that nearly nine years ago, nothing has happened. The direct rule Administration that took over after 2002 did nothing about it and the new devolved Administration in Northern Ireland are also doing their best to avoid facing up to the realities which will, inevitably, force their way through. The fourth extra way in which you can get money is through new projects which generate Barnett consequentials. We give examples of those in paragraph 44 and a couple of them have been mentioned—the Forth road bridge in Scotland, Crossrail and the Olympics. We are not trying to take the power away from the Treasury, but endeavouring to put in position a more transparent process. In paragraph 60, we recommend that before decisions are made as to whether the system is bypassed, or a consequential is created, there is a clear process and open consultation with the devolved Administrations. I think that that should obviously be there; it is not there at present. The Administrations simply get told whether they are getting a consequential or not, and whether that will change depends on how much fuss they can create and how much pressure they can put on politically. We further suggest, in paragraph 77, that the new commission that we have in mind might give advice to the Government as to whether these consequential adjustments should arise. So we are not trying to deprive the Treasury of power in this matter, but to put in place a better process that would be more open, more transparent and more likely, we hope, to defuse some of the public concern that is clearly there at present and needs to be addressed. Parenthetically, on the question of consequentials, the terminology that we have to use—because it is the terminology that already exists—as to whether a project is a UK-wide one, or an England-only one, is misleading. It may mislead people into thinking that some decisions or matters are England-only. The things that are classified as England-only are the ones that trigger consequentials. What is important for the devolved Administrations is whether or not there is a consequential. If it is said to be UK-wide, there is no consequential and no extra money. If it is deemed to be England-only, then there is extra money, so obviously the England-only decisions are matters of huge importance to the devolved Administrations. If anybody runs around with the quaint notion that these England-only decisions should be taken only on English votes, they will find that there are huge uprisings in all the devolved Administrations and a constitutional crisis. I want to underline that: do not let the terminology mislead noble Lords on that matter. In conclusion, if we do not have the reforms to Barnett that we are suggesting, and if the Government do not go down the line that we have suggested here, the political pressure to go down other lines will become greater. By other lines, I am thinking partly of Calman. I think that Calman, in concept, is misconceived and is the wrong road to go down—it will be very difficult in practice and very dangerous for the union. I say to the Government that if they want to sustain the union, they should not sit back and do nothing, because then things will drift in the wrong direction. We want to see these reforms introduced. I hope that, as suggested by my noble friend, the next Government, whoever they may be, will take the opportunity of starting off with these ideas and running with them. I can understand why the Treasury of the present Administration, tired as it is—I shall not say too much more about that—is not going to do anything in the remaining weeks, but I hope that the next Parliament will.