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Barnett Formula

Volume 589: debated on Tuesday 16 December 2014

It is a pleasure to serve under your chairmanship, Sir Alan. I am grateful to have this opportunity to discuss the future of the Barnett formula in a little more depth than recent debates have allowed.

My reason for calling for the debate was neither to call for the abolition of Barnett, nor to say that it must stay unchanged for ever more. My motivation was born out of frustration at some of the ill-informed comments made about it. In advance of the draft legislation on further devolution to Scotland, which is due before Burns night next year, I want to put on the record an explanation of what the Barnett formula is and, perhaps more importantly, what it is not. I also put on the record that I absolutely support extra fiscal powers for the Scottish Parliament. That is good for the democratic accountability of Holyrood.

The hon. Gentleman mentioned the Barnett formula and, before he goes too far, I want to highlight its operation. About a fortnight ago, the Treasury gave out money because roads and health in England had a shout for that. Therefore, from that followed Barnett consequentials to Northern Ireland, Wales and Scotland.

However, I notice that, if there is a need in Scotland, Wales or Northern Ireland for money for health or transport, the Treasury does not dip its hands in its pockets in the same way with Barnett consequentials running in the other direction. Barnett consequentials follow on from need in England. It is surely a governance problem when the Treasury responds only to health and transport needs in England and then we get consequentials. Should not the Treasury give money and have consequentials running in the other direction when need arises?

Order. May I point out to Members that we have only a short time for the debate? If interventions are to be made, can they be questions to the speaker at that time rather than statements? Hopefully everyone will have an opportunity to speak.

I am grateful for the hon. Gentleman’s intervention. If he bides his time a little, he will see that I will touch on some of those issues later on in my speech.

Does my hon. Friend agree, though, that the majority of people in my constituency would think that the Barnett formula is unfair?

There certainly is that perception. Part of my motivation for securing the debate was to address such issues so that we can have a more informed debate on the fiscal relationship principally between Scotland and England. I am conscious that Members from Wales and Northern Ireland are in the Chamber as well. My comments will be principally about Scotland and England, but the arguments also apply to the rest of the United Kingdom. As I said, there is much ill-informed comment and misunderstanding about what the Barnett formula is and does and that is why I wanted to have this debate.

As well as being misunderstood, the Barnett formula is much maligned. Contradictory simultaneous comments are made that it both penalises Scotland and is too generous to Scotland, but both of those cannot be right. I am reminded of a comment that Lord Foulkes made when he was a Scotland Office Minister about a decade ago:

“If the SNP think that Barnett is too mean and the English Tories think that it is too generous, most sensible people would think that it is just about right”.

For many years, reform of the Barnett formula has been parked in the “too difficult” box.

In Northern Ireland’s case the Barnett formula is just right. It recognises the need to keep the balance of wealth, because in Northern Ireland our wages are lower and the products we buy in shops are more expensive. At the same time, if the current talks work out—I hope that they do—and corporation tax is devolved to Northern Ireland, that could be a poisoned chalice. However, Northern Ireland has already been able to set its air passenger duty for long-haul flights with the permission of the British Government.

As I said earlier, the purpose of the debate is not to say whether Barnett is right or wrong or whether it needs to be changed or not; it is just to help inform a more considered debate about the issues.

I feel that Wales should have a contribution to this international debate. My hon. Friend is addressing the issue of clarity. In Wales, the lack of clarity in the Barnett deficit is leading the Welsh Government to resist financial accountability. Does he agree that it is vital that we find out what the Barnett deficit is? A whole range of figures have been bandied about. Most of them are untrue, but they are being used to prevent the financial accountability in Wales that we all want to see.

My hon. Friend makes an excellent point. There is a lot of darkness and cloud about these matters, and if we are to have a sensible debate about the fiscal balance between the component parts of the UK, we need that greater clarity.

I think that Lancashire needs a say. In the debate that is coming on English votes and so on, does my hon. Friend agree that we need to be honest with the English people? There is a cost to being the biggest part of the Union and there is a cost to the Union. Whether we agree about Barnett or not, England will have to pay more than the rest of the component parts of the United Kingdom.

My hon. Friend as ever makes a good point. At the conclusion of my speech I will say a little more on that.

While the hon. Member for Lancaster and Fleetwood (Eric Ollerenshaw) may be correct that England pays more, it pays more only because it is larger; it does not pay more per capita. Unfortunately, that has been Scotland’s preserve: it has paid more tax per capita into the UK each and every year for the past 33 years.

Again, I shall address those very points in a few moments. I want to shed some light on the issue. Critics of Barnett usually start by quoting Treasury figures that say that public spending per capita in Scotland is £1,600 greater than in England as a consequence of the Barnett formula. For once I may be in agreement with the hon. Gentleman, because that is not correct. The Barnett formula is only one part of the complex fiscal relationship between the different parts of the United Kingdom.

The Barnett formula applies only to certain parts of public spending. Currently, about 40% of public spending in Scotland is not covered by it because that spending is not determined by the Scottish Parliament. That proportion will reduce in time as further taxes are devolved, but that point is important. Nor does Barnett determine the size of the Scottish block grant as a whole. That has built up incrementally over the years and the Barnett formula determines only the annual changes.

In simple terms, Scotland gets a population share of a departmental budget change in England where the equivalent is determined by Holyrood. Each year, the changes for each spending programme are totalled up and an overall adjustment to the previous year’s block grant is made. It is then up to the Scottish Parliament to decide how it spends that grant; it is not hypothecated. If Scotland gets £100 million more for health services because of the change in England, it is not obliged to spend that on health. That partly explains why some public services and other matters in Scotland are different from south of the border.

It is important to note that when the formula was introduced in the late 1970s it was designed as a convergence formula to narrow public spending per capita between Scotland and England. In advance of the devolution legislation proposed by the Wilson and Callaghan Governments, the Treasury carried out a needs-based review to determine the extent to which public spending per capita in Scotland would need to be higher to provide a comparable level of public services to those in England. It was found that because of factors such as Scotland’s proportionally greater landmass, rural population, council housing stock and poor health indicators, spending needed to be 16% per capita higher than in England. It was actually 22% higher, so Barnett was introduced gradually to narrow the gap and avoid the annual round of what was described as table-thumping over agreements between the different spending Departments.

It would seem that convergence has not happened, and it is important to understand why. First, in the initial years of operation, the population share was never adjusted, and that was at a time when Scotland’s population relative to England was falling. For a decade or so, a bias was therefore built in to the formula in Scotland’s favour. In the 1990s, the population share was adjusted, but it helped to sustain the higher levels. Secondly, and more significantly, were the number of deals done outside the Barnett formula. Whatever calculation Barnett produced, there was always pressure, under Governments of all parties, for extra funding arrangements. In his autobiography, the noble Lord Lang notes that when he was Scottish Secretary, between 1990 and 1992, Barnett should have reduced the Scottish Office block grant by £17 million, but, as a result of separate deals agreed with the Treasury, it was increased by £340 million.

I hope that the hon. Gentleman will forgive me, but I must make some progress.

The simple point is that if Barnett were to be ended tomorrow, the issue of comparative spending would not go away. There has not been a needs-based review since the 1970s, in which time many economic, social and demographic changes have taken place, so we do not actually know what the current position is. There are also difficulties in defining exactly what territorial spending is. One example is the building of High Speed 2, a project of which both phases will be entirely within England. One could therefore argue that spending on it should accrue only to England, but there is a benefit to Scotland and Wales—

I am not quite sure whether the hon. Gentleman’s geography is correct. High Speed 2 will go from London to Birmingham and the north of England.

The hon. Gentleman has conceded, as he is right to do, that High Speed 2 will be built in England, and says that it will also bring benefits to Scotland. If there are benefits to Scotland in the north, surely there will also be benefits at the other end, in the south—namely, to France. The benefits will be not only within but outwith the United Kingdom. High Speed 2 is not running in Scotland, but the hon. Gentleman argues that it will benefit Scotland; if it is going to benefit Scotland, it will benefit France in the same way.

Given the fact that there is currently no straight link between High Speed 2 and High Speed 1, that is a slightly tangential point. I have simply given High Speed 2 as an example of how difficult it is to assign exactly public spending on a territorial basis; I could cite many other examples.

It is worth while to look not only at public spending relationships between Scotland and England and Wales and England, but within each nation and the regions of each nation. There is currently a process of further devolution in England, which is producing more demands for tax and spending powers in the cities and regions. The north of England says quite regularly, “We’re being hard done to because of the Barnett formula.” London says that it pays far more than it receives in public spending—[Interruption.] I am not saying whether that is right or wrong, merely that such comments are made. I have funding issues in Milton Keynes in my constituency: with a rapidly growing population, sometimes the funding formulae do not keep up with the population need. There are also tensions between urban and rural spending—the issue is not only between the component countries of the United Kingdom.

We must start to open up a wider debate about the allocation of public spending right across the UK, bearing in mind the fact that we have a finite pot of money. We must also look at the tax receipts side of the ledger, which is also controversial. We have never definitively established the comparative amount of taxes raised north and south of the border, or, indeed, within England, because we have never had to assign taxes territorially. Many studies have been conducted, but they have been based on controversial assumptions.

It is difficult to assign tax revenues on a territorial basis because we have long had a unitary system. For example, my father was employed by the Civil Aviation Authority. He was based at Prestwick but spent one week in every two working at head office in London. He commuted between the two, so his time was spent equally between Scotland and England, and, to throw another spanner into the works, his tax office was in Cardiff. It would not be impossible to unpick all that, but it would be difficult, for corporation taxes as well as personal taxes. Nevertheless, it is something that we will have to do if more tax powers are devolved to Holyrood. We must also look at the disaggregation of national insurance and pension receipts and liabilities.

Simple calls for the retention or abolition of Barnett are very wide of the mark. If we are going to dismantle what has been a unitary fiscal system, there are many aspects to consider. Without updated figures on the current costs of providing public spending in each nation of the UK and within each region of each nation, we are working in the dark. I gently suggest to my hon. Friend the Minister that the Treasury looks at providing those figures.

My final point echoes the excellent one made by my hon. Friend the Member for Lancaster and Fleetwood (Eric Ollerenshaw). We must look at this matter in the context of the cohesion of the United Kingdom. The hon. Member for Na h-Eileanan an Iar (Mr MacNeil) has left the Chamber, but his party, the SNP, lost the referendum. We must make the Union work better and we need a sense of fairness; as my hon. Friend the Member for Redditch (Karen Lumley) said, every part of the Union must be treated fairly.

A few years ago, I began to do research for a book, and I looked at what is done in places such as Canada, Germany, Spain and the United States with regard to different tax-raising and spending powers in the component parts. Whatever the system, everyone still argued about spending levels and transfers from more to less affluent areas. That will never end—it is part and parcel of political debate—but the important thing is that we have a sense of fairness. I hope that today’s debate has helped to shed some light on matters that are often simplified and on a debate that is often inflamed, and that I have made a useful contribution to a much longer debate that we must have about public spending in the UK.

It is a great pleasure to serve under your chairmanship this afternoon, Sir Alan. I congratulate my hon. Friend the Member for Milton Keynes South (Iain Stewart) on securing this debate and setting out his case in a characteristically thoughtful and analytical way. He brings great knowledge and expertise to the matter. I also thank other hon. Members for their contributions to this short debate, the timing of which is very appropriate. Given the momentous referendum in Scotland not that long ago and the Smith commission’s subsequent report, this subject has never been more topical. Furthermore, hon. Members will have seen that the Government have published a Command Paper today looking at the options for devolution in England. The paper acknowledges that the treatment of tax and spending decisions that impact on funding to the devolved Administrations will need to be considered in any solution.

Since its introduction over three decades ago, the Barnett formula has proved to be a durable and robust method of calculating changes to the block grants for the devolved Administrations, providing population-based shares of comparable UK Departments’ changes in spending. The leaders of the three main UK parties have confirmed that the Barnett formula will continue, and the House of Lords report in 2009, as we heard, recognised advantages such as simplicity, stability and the absence of ring-fencing. However, we also recognise the concerns expressed about the formula and we welcome all views on its continued implementation.

The vow has been made to the people of Scotland that the Barnett formula will be preserved and that Barnett funding will be preserved at its current level. Does the Minister not agree with my analysis, therefore, that a new benchmark has been set for what we would term fair funding? Whereas before the argument was for some sort of needs-based formula, the argument is now about making sure that the people of Wales, for instance, are not disadvantaged compared with the people of Scotland in terms of public funding per head.

Let me turn to the issue of fairness for all parts of the United Kingdom, including for Wales—I assure the hon. Gentleman that I will get to that eventually. As my hon. Friend the Member for Milton Keynes South has mentioned, there is a perception, particularly in parts of England, that Scotland is overfunded because it offers generous policies on university tuition fees, for example. However, I must emphasise that devolved Administrations do not receive any additional funding for those policies. They accommodate them within existing budgets by prioritising those policies over others—for example, by not protecting school spending during this Parliament, as we have in England.

One of the purposes of devolution is to allow the devolved Administrations to make different policy choices. That was set out in 1997 in the statement of principles, which states:

“The key to these arrangements is Block budgets which the devolved administrations… will be free to deploy…in response to local priorities.”

In contrast, commentators in Scotland, Wales and Northern Ireland tend to be concerned about the Barnett squeeze convergence property of the Barnett formula, whereby the percentage changes in devolved Administration spending are lower than in England. However, the Barnett formula itself does not change the budgets of the devolved Administrations disproportionately to England’s: an extra pound per head in England means an extra pound per head in the rest of the UK. The so-called Barnett squeeze reflects the higher levels of spending per head in Scotland, Wales and Northern Ireland that have existed over many years, before and since devolution in the 1990s.

I know that some hon. Members consider Wales to be relatively underfunded as its spending has converged towards the level in England. In fact, spending per head there is 11% above England’s and has more than doubled in cash terms since devolution. Wales also benefits from large EU structural fund spending, having been awarded £1.9 billion from 2007 to 2013 and a similar amount for 2014 to 2020.

However, we recognise that there are concerns about relative levels of funding for Wales; that is why we have established a bilateral process to consider that in advance of each spending review. The most recent assessment, before the 2013 spending round, determined that convergence was not forecast to occur through to 2015-16 and that the existing level of Welsh funding was within the range suggested by the Holtham commission. The Government have now further agreed with the Welsh Government to review that process in the light of the tax and borrowing powers contained in the Wales Bill.

The Minister may have just answered the question I was going to ask, but perhaps he might reassure me on the uncertainty about the size of what I call the Barnett deficit in Wales. Everybody thinks it has decreased substantially over the last few years as a result of the change in public spending levels. Are we moving to a position where we will know precisely what that Barnett deficit is, because it is very important for the discussions that we are having about the powers over income tax that the Welsh Government should be taking on?

My hon. Friend raises an important point. I know that he has been very active in ensuring that the Welsh Government take advantage of the powers that may be available to them, and I know there is an issue of funding there. I hope that I did address his point by saying that the Government have agreed with the Welsh Government to review the process in the light of the tax and borrowing powers in the Wales Bill. I hope that process will satisfy him by shedding light on the issue that he raised.

I turn to the issue of the needs-based formula. I have heard it said that the Barnett formula does not take sufficient account of needs. The most basic issue here is that no one has been able to say how we would agree a needs-based assessment that would suit every part of the United Kingdom. However, far from being a static formula, the Barnett formula is regularly updated to take account of changes in population and levels of devolved responsibility.

The budgets of the devolved Administrations cover a very wide range of devolved spending programmes. It is, of course, for the devolved Administrations to decide how to allocate their overall budget to individual programmes, reflecting their own policies and their own assessment of the needs of each country. The Barnett formula allows them the freedom to do that.

However, we believe that financial accountability can be improved in Scotland, Wales and Northern Ireland as the devolution settlements evolve. The Government’s record on that speaks for itself. Both the Scotland Act 2012 and the Wales Bill currently in Parliament will devolve new tax and borrowing powers. We have also committed to implementing Lord Smith’s heads of agreement in full. As we devolve further powers, Scotland and Wales will be responsible for raising far more of their funding, so their block grants will become less important. The impact of the Barnett formula on overall levels of funding will decline.

Finally, in highlighting today’s debate in The Daily Telegraph, my hon. Friend the Member for Milton Keynes South set out that the debate would be better informed if we had

“detailed and incontestable territorial public accounts”,

which is a point he made earlier. The Government do not disagree, but this is a complex matter. The Office for National Statistics is considering the development of sub-national accounts as part of its implementation of the European system of accounts, and it is also undertaking work on the comparability of official statistics across the United Kingdom.

It is right that a formula that has set out devolved spending for over a third of a century is continually kept under review to make it fit for the needs of the current day. The three main party leaders have stated that the Barnett formula will continue, and that is therefore what will happen. However, we continue to listen to the strong views on the formula from all parts of the United Kingdom, which have been represented in this debate this afternoon. In that spirit, I thank everyone for their contributions today. I particularly thank my hon. Friend the Member for Milton Keynes South, who has brought to this debate careful, thorough and thoughtful analysis. He has succeeded in shedding some light on an important issue and has highlighted some matters that can often be lost in this important debate.

I was not planning to, Sir Alan, but may I thank the Minister and other Members for their contributions? The debate has been helpful. I am particularly interested by the work of the Office for National Statistics on the development of sub-national accounts. I think that will help to inform the debate, but I am sure that this is not the last word on the subject.