---

Barnett Formula

My Lords, like other members of the committee, I enjoyed serving on it enormously, not least because one learnt a lot about the past history of Labour—and, intriguingly, Conservative—discussions, debates, in-fighting and public expenditure bids and how such procedures took place. Why does the report matter? It matters because more than 50 per cent of public expenditure to the devolved nations comes via the Barnett formula—a formula that, as every previous speaker has said, is founded on the basis of adjusted 1970s population figures rather than on need. It was meant to be a one-year fit, as the noble Lord, Lord Lawson, said, but it lasted for 30. As a result of predictability and inertia, few of us would now press its virtues on any allocation of moneys. I estimate that between £4 billion and £5 billion a year are misallocated. We were assured by retrofit statisticians that over time, in almost the words of the noble Lord, Lord Forsyth, the discrepancies would narrow—the Barnett squeeze—but that has not happened. The Barnett squeeze was invented after the event to justify the unjustifiable, but it has not even done that and it simply will not do. Nowhere else in government that I am aware of do we allocate resources not by need but by adjusted 1970s population figures. It would be unthinkable to do this for benefits in DWP, for aid via DfID or for expenditure on education, public health and local government. We certainly would not claim, as the Treasury does in paragraph 2.13 of the report, that "it has worked well"—although, of course, in Treasury-speak that is not about fairness, which most of us would think relevant, but about the simplicity of administrative and arithmetic rollout. I was especially shocked to read paragraph 2.15, where the Government state that the Barnett formula, ""has the merit of allowing the devolved administrations to determine their own assessment of needs and priorities in devolved areas"." For sophistry, that takes the prize. They are saying that, because we all know that the devolved Administrations allocate resources by need, it does not matter that the original sum received is not allocated by need. To give a non-PC example, that is like saying that because white male teachers are paid more than other teachers, it is okay that female and black teachers are paid less because they all have equal freedom to spend their salaries. I know that my noble friend will have to stonewall, but I have news for him: this is not acceptable. Almost every other public body providing services gets its central government finance according to the criteria of need—the RAWP formula in health authorities and local government. Let me spend a moment on how the allocation of need is decided within local government. Typically, a shire county and local authority will receive RSG on a number of headings—children’s services, adult personal services, police, fire and rescue, highways maintenance, environmental protection, cultural services and capital finance. Digging down a bit lower, one sees that within children’s services, for example, there will be allocation by education and by youth, community and conventional social services. Within the education sector of children’s services, there will be an allocation under further criteria—a standard pupil per capita, a pupil deprivation top-up for children such as those on benefits, and sparsity. The system is similar for adult social services, where allocation is determined by age per capita, with an additional increment for the older elderly, for those with disability, for those in rented accommodation, for one-person households and for deprivation as measured by being on personal pension credit. The point is that this is done year in, year out for more than 400 authorities. It is not rocket science. All that information is collected now as part of the National Statistics service on which departments plan their policy, as the report makes clear on page 55. Any of us can access almost all that disaggregated material on government websites. In figures 2 and 3—our spider webs on pages 41 and 42—we show what a similar approach might look like, simplified and for four nations only as opposed to the 400 or so local authorities that currently benefit from RSG. What do we find? We find that Scotland has greater need because of its poor mortality and morbidity figures, but that on child and adult poverty and unemployment it is either at the national average or better. While Northern Ireland does well on mortality and morbidity, it does poorly on children’s needs. Wales does poorly on almost all of it. Our estimates have been confirmed in the past month or two by John Hills’s report An Anatomy of Economic Inequality in the UK, which shows that Scotland has more people in higher education and in employment and that, although the median wage in England is 2 per cent higher, the cost of living in Scotland is more than 4 per cent lower. By a formula similar to the one with which local authorities allocate moneys in England, the devolved nations distribute their own resources downwards. I return to the question asked by the noble Lord, Lord Forsyth: if they can disaggregate downwards, why cannot we aggregate upwards? If they can so easily distribute money downwards on the basis of need, why cannot we distribute it to them in the first place on the basis of their aggregated need? What could be more unfair—the noble Lord, Lord MacGregor, is right about this—than an elderly, frail person in East Anglia receiving perhaps only two-thirds, in public expenditure terms, of what an equally elderly, frail person in Scotland receives, even though the person in East Anglia is poorer, because we are hanging on to an unfair population basis of estimating subsidy? It has been estimated by the Society of County Treasurers—I do not always agree with county treasurers, but I think that they are spot on here—that people in Scotland received more than £1,600 per head in 2007-08 than people in England. No wonder Scotland can afford free personal care; it is being subsidised by the elderly of East Anglia, who have lower incomes and greater need and enjoy no such benefit. It is regressive and bad value for money. Our report says that we should set out not a formula but merely the pathway—the journey, the route to take—of an independent commission to establish criteria of need. We give examples based on a local authority RSG, greatly simplified, in our proposals for the four main categories identified by the noble Lord, Lord Moser, and we recommend a long transitional period. As the noble Lords, Lord Forsyth and Lord Lawson, have said, the tighter the finances, the more essential it is to establish value for money along with fairness. Otherwise, disparities grow. The present funding mechanism misallocating £4 billion to £5 billion a year is indefensible. The only people who defend it are the Treasury and some politicians from places that gain unfairly. However, to coin a cliché, they would, wouldn’t they? That does not mean that we have to.