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Comprehensive Spending Review

Volume 685: debated on Tuesday 10 October 2006

asked Her Majesty’s Government:

Whether the forthcoming Comprehensive Spending Review will cover expenditure in all regions of the United Kingdom.

My Lords, the forthcoming Comprehensive Spending Review will cover public expenditure in all regions of the UK. Allocations to the individual regions of England will be determined by the relevant spending departments in the normal way. The devolved Administrations will be funded in accordance with the updated statement of funding policy, the latest edition of which was published by the Treasury in July 2004.

My Lords, I had hoped that my noble friend’s Answer would include the fact that a certain formula that allocates expenditure in Scotland is grossly unfair. It is bound to be, because it is not based on need. Is he aware that our right honourable friend Gordon Brown recently laid emphasis on the need for fairness? How can a policy of allocating expenditure to Scotland that is far in excess of what is needed in other parts of the UK be fair? Will the Minister therefore assure me that the comprehensive review to which he referred will include a review of the formula?

My Lords, I should make it clear that the Government have no plans to review the Barnett formula. The funding arrangements were set out in the latest statement of funding policy, which, as I said, was published in July 2004. That remains the Government’s policy. Spending in the devolved Administrations is not derived just from the Barnett formula; there are other components to it, including the annually managed expenditure and locally financed local government expenditure. The differences between the regions and the devolved Administrations have as much to do with the starting baseline and the annual managed expenditure as they have with the application of the Barnett formula. Perhaps I may gently remind my noble friend that, in his evidence to the Select Committee in November 1997, he said:

“I am flattered that the Barnett formula has lasted 20 years. I hope it will last much longer”.

My Lords, he continued:

“I am not in favour of scrapping the Barnett formula”.

To be fair to him, he also said:

“There is a case for Mark II… I have grown to love it now”.

My Lords, I agree with the noble Lord, Lord Barnett, that his formula, which had the objective of creating convergence in expenditure, has failed dismally in that objective. I am sure that he will agree that it was intended to last for only a short time. Will the Minister confirm that whatever assessment of expenditure takes place, taking account of the needs of the different parts of the United Kingdom, will be based on an impartially conducted and objective needs-assessment review?

My Lords, the Comprehensive Spending Review is a fundamental review of public expenditure across the board, based on zero-based budgeting by departments, and it looks objectively at what services need to be delivered and how they are to be funded. That is a thorough-going review of public expenditure. If one looks at what has happened to expenditure in the devolved Administrations and England in the six years to March 2006, one will see that identifiable expenditure, which is the bulk of public expenditure, has increased faster in England than it has in Scotland, Wales or Northern Ireland.

My Lords, is the Minister aware that some of us are extremely puzzled by the Treasury’s persistence with its approach to this matter? Surely the analysis of the regional impact of public expenditure must be based on serious economic analysis and research. It is matter not just of needs, although that is important; it is also a question of where that expenditure can take place most effectively. The Barnett formula simply does not meet either of those criteria, and it never has. Is it not up to the Government to take the criticisms more seriously and offer us a more fundamental approach to regional expenditure?

My Lords, I say again that the application of the Barnett formula, which looks just at year-to-year changes from the base, is a small part of total public expenditure. The Government are committed to improving prosperity in public services in all regions. Their regional policy was set out in the SR 2004 White Paper. The Government have established a PSA target to make sustainable improvement in the economic performance of all English regions and, over the long term, to reduce the persistent gap in growth rates between the regions. That is an objective approach to regional policy.

My Lords, if the Barnett formula applies only to certain aspects of the public expenditure and is therefore not absolutely central—some of us would question that—why are the Government not prepared even to review it?

My Lords, I tried to explain that the Barnett formula was just a component of how public expenditure changes and that the Government have been about a comprehensive spending review. That review has gone back to zero base right across the board, across departments, looking at public expenditure, making sure that there is efficiency in the system and driving inefficiencies out of the system by reductions in administration costs right across the piece. That is the right approach.

This debate is taking place in circumstances in which there have been substantial and sustained increases in public expenditure across the board. That has been enabled by our successful policy on the economy. It has given continual growth to the UK, in a way that has produced low inflation and low interest rates, which means that we can sustain high public expenditure across the board, redressing some of the underinvestment of the past.