Question for Short Debate
My Lords, I know that we have just had an interesting afternoon but we still have great interest in the Question for Short Debate asked by the noble Lord, Lord Barnett. There are 15 speakers—a long list. I invite him to start his speech now.
My Lords, I am grateful to the noble Baroness. I have spoken on this subject fairly often and I have been pressing this matter for a long time. In many ways, I can do no better than to quote the Select Committee of your Lordships’ House in support of everything that I might say this evening. I am delighted to welcome to the debate four distinguished members of that committee: my noble friend Lady Hollis, the noble Lord, Lord Forsyth of Drumlean, and others who I see around. We also have a maiden speaker, who I am delighted to welcome in advance. He comes fresh from the Scottish election and he might be able to tell us rather more about opinion in Scotland, although I have a fair idea myself what the Scottish people are now thinking on this subject.
I have been pressing for a very long time for the formula in my name to be changed to one of need. I told the previous Government that if they had become so fond of my name, I did not mind if they kept it provided that it was based on need rather than on population, as it is now—unfairly, as it has turned out. The first question, of course, is: what is it? Most Members who will be speaking in this debate will know very well what it is. However, the question then is: what needs to be done?
I said that we have some very distinguished members of that Select Committee with us this evening. More than that, it was a very distinguished committee. I had difficulty initially in getting the House to agree to an ad hoc Select Committee but we got one and we got my noble friend Lord Richard, the former Leader of the House, to chair it. As I said, it had a distinguished membership including the former Chancellor of the Exchequer, the noble Lord, Lord Lawson. He was a distinguished member of that committee, as were my noble friend and the noble Lord, Lord Forsyth. Many others, including the noble Earl who is a Lib Dem and those from all parties and all regions of the country, were members of that committee and I am happy to say that they came up with a unanimous report. This report needs careful reading because it tells anybody who is the slightest bit interested, first, what the problems are and, secondly, what needs to be done.
The terms of reference were clear. I am not going to bother with quoting too often from the Select Committee's report, because it would take too long and I want to leave as much time as possible to the noble Lords and the noble Baroness who are going to speak in this debate. Even though it has been extended and is now going to be an hour and a half, I am a bit disappointed—I thought it might go on until 10 o'clock. However, I am sure that it will give time to noble Lords to make their feelings felt on the issue, which is: what should be done now? There was a Calman commission, as many will know, on Scottish matters but that had different terms of reference. It was looking primarily at devolution and even though it obviously had to refer to the Barnett formula, it did so almost en passant and did not really dwell on the main issue, as our House of Lords Select Committee did.
I come to the main question: what is the Barnett formula? In case people do not know, I shall quote, which I do not do very often, from paragraph 11 on page 13 of the report. The formula is,
“the mechanism used by the United Kingdom Government to allocate just over half of total public expenditure”,
to the regions. Certain parts of public expenditure are excluded, such as defence, foreign affairs and social security, which are already allocated according to need to a large extent, and do not need to come under the Barnett formula. When the Select Committee looked at the formula in 2007-08, total managed UK government spending was more than £582 million—rather a lot of money to be left entirely to changes in population, which is what happens now. It effectively results in approximately 80 per cent of expenditure in the UK going to England, 10 per cent to Scotland, 5 per cent to Wales and 5 per cent to Northern Ireland. This has varied slightly over the years because of changes in population and Governments amending the formula slightly.
The plain fact is that the formula was still based on population rather than need. That resulted in gross unfairness, as the Select Committee indicated. It noted clearly that the public expenditure allocated to Scotland has resulted in its obtaining substantially more than it would have on the basis of need. The current leader, Alex Salmond—a very shrewd political operator if I may say so—has used those extra funds to huge political advantage by helping the people of Scotland with, for example, university fees and prescription charges. I am sure that this is very welcome but the people of England do not get that. The people of Scotland have benefited substantially. I am told by many people who tell me what regularly appears in the Scottish papers that my name is reasonably well known there. Indeed, Tam Dalyell, the former Member for West Lothian, drops me notes from time to time to tell me exactly what is being said and how often.
What changes should we make? The noble Lords on the committee came up with a very clear answer: there should be an independent commission. Its name is not terribly important, but the committee thought of the UK funding commission. It would look at how the basis of need should be dealt with, and make clear and firm recommendations thereafter. Because there would be substantial changes to Scottish public expenditure, there should be a transitional period so that any changes would be spread over a number of years.
I know that there are political concerns. Any Government making these changes may lose out in elections. I can say only this about the formula that bears my name: when I published a book called Inside the Treasury, which covered my five years as Chief Secretary to the Treasury, the phrase “Barnett formula” never appeared. It appeared only later because the Thatcher and Major Governments not only created the formula but kept it going for 18 years. That is when it became well known. Those Governments did not want to upset the electors of Scotland or Wales. So what happened? In the 1997 election they lost every seat in Scotland and Wales. Please do not worry about upsetting people in doing the right thing and making the right kind of changes that need to be made.
When the Select Committee report was being worked on, the Chief Secretary to the then Government was Liam Byrne. I regret to say that, as his excuse for inaction on the Barnett formula and the need for change, he said that it was too complex. However, the Select Committee has shown that that complexity is just not a fact. It could have this commission that would look into the question of need, and that would be that. Therefore, I have a simple solution for what needs to be done now. My dear friend, the noble Lord, Lord Sassoon, the current Commercial Secretary in your Lordships’ House, who deals with Treasury matters, answered a Written Question of mine about what the Government plan to do. He said that,
“the Government recognise the concerns expressed on the system of devolved funding. However at this present time the priority must be to reduce the budget deficit and therefore any decisions to change”,—[Official Report, 2/11/10; col. WA 380.]
I am sorry for going over my allotted time, but I shall just finish; what I intend to say is very simple. I was delighted to quote the noble Lord, Lord Sassoon, who has pleasure in quoting me from time to time, in support of what I now propose. He said that it should not be done because the priority is now the deficit. However, I suggest that it should be done in 2015. The Treasury cannot believe that all its policies will not have come true by that year. I shall formally move in due course on the Scotland Bill. I hope to hear that the Government’s current approach is one that will accept my proposal and hugely endorse everything that the Select Committee said.
My Lords, I believe that we are heading for a real constitutional crisis. The Scotland Bill, which is still in the other place and heading for this Chamber, introduces powers for a separate rate of Scottish income tax. I congratulate the noble Lord, Lord Barnett, on securing this debate, and the Select Committee on which I sat.
As the noble Lord pointed out, the effect of the Barnett formula has been to give Scotland much more than it would have received on a needs basis. The needs basis is firmly established because it is the basis on which the Scottish Parliament distributes money to health authorities and local authorities. There is no magic about this. Professor David Bell of Stirling University has done some work on the size of that amount. Scotland gets around £4.5 billion extra. You cannot change that overnight. It would need to be phased in over a period of years, as the Select Committee indicated.
We need to get on with this. It is the height of stupidity to give a Parliament the power to set income tax rates, but at the same time not deal with the basis on which the baseline funding is achieved. Baseline funding would alter according to policy decisions taken in Westminster rather than in Scotland. That would create opportunities for conflict. Trying to raise £4.5 billion as a Scottish income tax would involve doubling the basic rate of income tax after you allowed for a loss of yield. It is a huge sum of money.
It is therefore imperative that we have a stable, well established basis on which the Scottish Parliament is funded. It should not be open to criticism, and must be seen to be fair to the rest of the United Kingdom for this policy to work. Otherwise, if the Government down here change their policy on health, education or law and order, that will in turn result in a change to the revenue gain to the Scottish Parliament. We now have—contrary to what we were assured would not happen when we had devolution—a nationalist Administration determined to break up the United Kingdom, which will use this as an issue. The noble Lord is right; we cannot have the Treasury deciding how the formula is created; we need to have an independent commission along the lines of the Australian system, which phases its results over a period of time.
I find it extraordinary that the present Government, whom I support, and the previous Government have both taken the same line in saying that it is too difficult to tackle this issue. It should never be too difficult to do what is necessary to maintain the unity of the United Kingdom and to end the resentment which has been created on both sides of the border because of these anomalies. This marriage that was created, the union between Scotland and England, is the most successful the world has ever seen. It is being put under strain because of a failure to address the policy consequences of constitutional change. Parliaments are about raising resources and voting means of supply. It is essential that this is addressed in the Scotland Bill before it has completed its passage through Parliament.
My Lords, the Barnett formula matters because something like half of all public expenditure in Scotland is funded by it. It is distributed on a population basis. However, as the noble Lords, Lord Forsyth and Lord Barnett, have said, if Scotland can distribute its own public finance downwards on a needs basis, as it does and as it should do, it can receive it on a needs basis, as it should but does not.
The House of Lords committee, this House and the other place in its January debate this year all said so, apart from HMT, whose coalition Minister said that the Government,
“do not plan to change the Barnett formula”.—[Official Report, Commons, 18/1/11; col. 206WH.]
Yet since our report was published two years ago, public finances have deteriorated and services have been cut while, as the noble Lord, Lord Forsyth, said, £4.5 billion of unmerited, inherited and unearned money is going to Scotland, allowing the SNP to provide additional services courtesy of the British and English taxpayer.
On the formula, if you assume that England represents £100 per head, Wales gets about £112 per head on population, and should get about £115 per head on needs; it is marginally underfunded. Northern Ireland is about right. Scotland should get about £105 per head but instead gets subsidised to the extent of £120 per head—or a subsidy worth about £1,600 a Scottish citizen or, as the noble Lord said, an overexpenditure of about £4.5 billion. No other public moneys are distributed solely by population in this reckless way. Local government, health and social security are all based on need, as they should be. This is not rocket science. It is not complicated. It is done in all other areas of local government policy. For example, in local government you look at needs, which may be the number of elderly receiving attendance allowance, children with special needs or whatever, and you relate that to resources and the capacity to meet those needs—the revenue support grant is often the difference between those two—so that, rightly, Winchester will get less than Wigan, even if their populations are broadly similar, as their needs and resources are different. That is fair.
I do not have much time in which to attempt further financial forensics, although that needs to be done. However, my second point is a moral point. Consider every teenager in Birmingham who is going to lose their education maintenance allowance; every young person in Cornwall who is discouraged from applying to university by virtue of the increased tuition fees; every large family in inner London who will face cuts in housing benefit and may lose their home; every frail pensioner in Norfolk struggling to meet increased care costs. That teenager, that would-be university student, that large family losing their home, that frail pensioner; they are all subsidising—effectively paying for—Scotland’s handouts of free tuition, free personal care and frozen council tax. I object. This House faces welfare reform bills with many of us pleading with the Government for £75 million here and £100 million there for some of the most vulnerable people in our community, yet £4.5 billion is going to Scotland on no other basis than that it always has done. Where is the Treasury’s much vaunted financial prudence? Where, indeed, is our collective moral compass? It is not fair. It is not right. It is not decent and it should end—gradually, slowly; I accept all that, but it should end.
My Lords, I congratulate the noble Lord, Lord Barnett, on his fame in Wales. In fact, he is almost a household name, but not perhaps for the reasons for which he would like to be known. The Barnett formula now has a sort of infamy as it is referred to as a formula in disrepute. The case is perfectly well made about a needs-based formula which would serve Wales much better.
The main problem with the formula is what is known as the Barnett squeeze. If any noble Lord can imagine being squeezed by the noble Lord, Lord Barnett, please carry that image in your mind, but the eventual ending of the Barnett formula—we are running towards it at a rate of knots—will result in every person in Wales being paid the same contribution from the public purse as anybody else in the United Kingdom. In other words, no matter where you are, you will be paid the same. The realisation is quite obvious; Wales is the part of the United Kingdom in greatest need. Two-thirds of the population of Wales are in a convergence zone of the European Union because their GDP level falls below 75 per cent of the average across the European Union. That has occurred not just once but twice and is likely, given current performance in Wales, to fall into that category for a third time, so Wales is in greater need than any other part of the United Kingdom as a whole. In fact, two local authorities in Wales compete in terms of their populations having the worst health of people in Britain. The money that is required to treat people well and appropriately across our country should be distributed according to need. The squeeze must be imposed over a period of time and we must move to a needs-based formula.
You could simply transfer the money from Scotland and give it to Wales but I am sure that that is not appropriate. That is probably why the previous Government always said that they were opposed to changing the Barnett formula. Alternatively, you could provide some new money to cushion the change which will take place over time. Timing is important because we now have devolution across many parts of the United Kingdom. We have asymmetric devolution, which means that powers have been handed over at different rates in different areas of public life in Northern Ireland, Scotland and Wales, but gradually the devolved regions are moving closer together in terms of the devolved powers that they have. Devolution involves being responsible for your finances as well. The Scotland Bill, which will come to this House very shortly, as has been said, looks at one side of that coin. It gives fiscal responsibility to Scotland. Undoubtedly, that will occur in Wales as well over the next few years. However, the other side of the coin is that in a United Kingdom it is important that we balance the needs of our country by offering the opportunity of a grant which is disbursed according to need around our country. It is just as important for Cornwall as it is for the north-east of England, Wales, parts of Northern Ireland and parts of Scotland. We need to address that need; it is two sides of the same coin.
Therefore, we will need that change over the coming years. It means that we will make a start on the process of moving towards a needs-based formula. It will take time. To get the financial accountability right, the Scotland Bill itself looks to 2018, and I hope that the Minister in his reply will tell us what steps can be taken now that will lead to the post-2015 change that the noble Lord, Lord Barnett, quite rightly talked about.
My Lords, the number of speakers in this short debate is surely evidence that this issue should be much higher on the political agenda. I thank the noble Lord, Lord Barnett, for this debate and for his long-standing recognition of the problems that have grown over the years.
I well remember debating in another place, in 1978, I think, the appropriateness of a formula that should be based on needs—in particular the need to help to bring up the level of GDP per head in Wales to the UK average, whereby we could stand on our own two feet. Since that time the GVA in Wales has fallen from 88 per cent of the UK average to 74 per cent. Wales has pressing economic and social needs, but the formula does not take these on board.
The problems are the assumptions that underpin the formula: first, that the base position of expenditure patterns in 1978 was a valid starting point; secondly, that the changes in spending levels in England represented a valid mechanism on which to base the changes in Wales, Scotland and Northern Ireland; and, thirdly, that circumstances in Wales had changed over the years in a way that reflected the changes in England, ignoring the massive changes in the basic industries, such as coal and steel, over that period. All three assumptions are faulty. Over 30 years those changes have compounded to undermine the validity of the formula. On top of this, as the noble Lord, Lord German, said, we suffer the effects of the so-called Barnett squeeze.
Successive studies have shown that the Barnett formula is underfunding Wales, as a number of speakers have generously recognised. A decade ago, papers were produced at Nuffield College showing the unfair nature of the problem. According to last year’s Holtham commission report, the extent of the problem is a shortfall of approximately £400 million a year for Wales. The Calman commission noted that the Barnett formula,
“is not well related to need”;
and the excellent report of the House of Lords Select Committee to which reference has been made—I thank noble Lords here for their contribution to that report—emphasised that the Barnett formula fails to take into account,
“the relative needs of the devolved administrations”.
The report recommended,
“A new system which allocates resources to the devolved administrations based on an explicit assessment of their relative needs”.
The response of the Labour Government was, frankly, flimsy, totally unpersuasive and showed contempt for the excellent work of the House of Lords committee. Labour refused to change the formula at all.
We need to get rid of the Barnett formula, which has been acknowledged by the noble Lord, Lord Barnett, as outdated, and urgently to replace it with a needs-based formula. The basic question is what the objective should be of any redistributive funding formula. Should it try to sustain broadly comparative levels of public services across these islands? Should it merely reflect the resources that can be raised within the territory of the devolved Administration? Or should it be a mixture of the needs and resources, as was for such a long time the basis of local government equalisation mechanisms?
Frankly, we have had enough of studies, commissions and investigations. What we need is action. In Wales, we need action very soon indeed. We need it urgently and we want it now.
My Lords, it is a particular pleasure to follow the noble Lords, Lord Wigley and Lord German, because, having had the honour to serve on the special Select Committee on the Barnett formula and having seen the outcome of our deliberations that were unanimously agreed, I feel particular sympathy for Wales and the circumstances that it faces in this battle. I will speak this evening on the Scottish front, but we are happy to join the noble Lords in that battle, because we think that the formula is unjust to Scotland also—not because it gives us too little money, but because it completely distorts the picture in Scotland when we have important matters to deal with.
I start with a word of sympathy to the noble Lord, Lord Barnett. Most former Ministers would be thrilled to have a formula named after them—one that may resonate through history. However, the misery on the face of the noble Lord is tragic to see. I have some good news for him. His formula actually worked. The squeeze—which as a former Chief Secretary, although he will not admit to it, he must have really wanted—did work. When I was Secretary of State for Scotland, I commissioned an annual report on government expenditure and revenue in Scotland that persists to this day. It was a kind of balance sheet. In the years 2000 to 2002, it showed that the Barnett squeeze had taken £17 million off the Scottish block. Unfortunately for the noble Lord, Lord Barnett, the special deals that we managed to negotiate with the Treasury at that time added £340 million to the Scottish block.
Barnett has been used as shorthand for the whole complex of public expenditure. In reality, of course, one of Barnett’s problems was that it did not deal with the underlying block, the baselines in each of the countries; it dealt only with the annual increase. Many of those baselines were historically justified. They were the products of battles fought and won in difficult circumstances in parts of the United Kingdom where there were particular problems. Indeed, this happened in England also, because there were parts of this country—there may still be parts of the north-east and north-west—where, for all I know, public expenditure per capita in a defined area is higher than in Scotland, Wales or possibly Northern Ireland.
Scotland’s worst single problem was the nationalisation of all its primary industries. That was a tragic socialist disaster that led to those industries being badly managed, starved of capital investment and riven with industrial disputes. However, that was way back in the 1950s, 1960s and 1970s. Scotland was transformed in the 1980s and 1990s and, as a result, with new investment, increased productivity and unemployment falling below the English level, the baseline Scottish block began to look particularly out of place.
The real problem, as the noble Lord, Lord Barnett, identified, is that no account has been taken of need. That is unforgivable. It was all done in an arbitrary way, with special pleading. Inevitably, when you have territorial departments, you will get special pleading from their Secretaries of State and Ministers. Inevitably, they will win some of those battles. That is now less easy with devolution, but it is another reason why devolution is a less than perfect solution to the world’s problems. It was always hard to define need; and when we sat in the Lords Select Committee looking at this matter, we tried to find an easy way to find an accessible, simple and identifiable way of defining need that would be universally acceptable across the whole United Kingdom. We believe that we succeeded, and that is why it is particularly hard that the Government ignored the findings and shelved our report, almost before the ink was dry.
Add to that the constitutional change that besets us—the slow landslide of devolution, and what is now following, that some of us predicted. The demand for realism is absolutely overwhelming. Contemplating major constitutional change through the Scotland Bill and other measures that are happening, without realism and accuracy over the funding of these parts of the United Kingdom, is simply unacceptable. It would be disastrous. Billions of pounds are at risk, and it is demeaning to Scotland, if it is unfair to England, to be in this position whereby it cannot honourably and decently calculate the true justification of its case or of other cases without the facts. We must have the facts before any further damage is done.
My Lords, I, too, welcome the initiative and success of the noble Lord, Lord Barnett, in achieving this debate. I mean no disrespect to him or anyone else when I say that I fear that events have overtaken not just the Select Committee and its report but the Calman commission and its report.
Frankly, block grants are wrong and the Barnett formula should not be revived on a needs basis, or on any other basis, and should be scrapped. Block grants mean that all the easy decisions about spending money and priorities are made by the Scottish Parliament, which does not make any of the difficult decisions about raising that money. That is why no one has suggested the use of the plus-or-minus three pence in the pound that Scotland already has. The Auditor-General in Scotland has already indicated that free higher education, free prescriptions and free personal care will not be sustainable in the near future without substantial additional income. They will be under threat. What will happen? Alex Salmond, like Oliver Twist, will say, “I want some more”. He is already doing it—asking for more in the block grant and more taxation powers. If he does not get them, who does he blame? He blames Westminster.
That is why I think that the time has now come when we must seriously consider a more radical change in funding devolved Governments. It is described by some as full fiscal autonomy; I would describe it more appropriately as full fiscal responsibility; so that the responsibility for raising money as well as spending it goes to the Scottish and other Governments. Of course, there has to be an agreed pre-eminence of the United Kingdom Government in defence, foreign affairs, welfare and other reserved areas.
It also means that we have to start moving on from our present asymmetrical devolution towards a fully federal system. I am astonished that the Liberal Democrats, who, traditionally, have espoused federalism, are so quiet. Apart from the centralised system, which we have abandoned, or the break-up of the United Kingdom, it is the only stable, justifiable system. We should all be getting together to argue for it. If we do not, if we do not move towards a fully federal system with each of the devolved parts—I am open to argument whether it should be England or regions of England; we have tried regions of England—raising their resources and putting money into the central United Kingdom Government, if we unionists do not become federalists, we will see the break-up of the United Kingdom, which would be a disaster for all of us.
My Lords, it is a great privilege and honour to speak in this historic Chamber for the first time. It is exactly 20 years since I gave my maiden speech in the other place, but I guess that I am unusual as, in the intervening period, almost all of my political career has been spent in another other place—the Scottish Parliament. It is very supportive and reassuring to see many of my friends and close colleagues from across political parties—the noble Lord, Lord Foulkes, being one of them—in the Chamber this evening. I agreed with much of what he had to say.
It has been a great experience for me to be back in these Houses of Parliament, with all the history and ceremony, although, obviously, I was slightly disappointed that, unlike in the other place, there was no pink ribbon under my coat peg on which to hang my sword. Most important of all has been, not the surroundings that we see here, but the people. I have had incredible help from so many noble Lords and so many people who support the working of this House, from the doorkeepers through to Lyon, Garter, Black Rod, the Clerk of the Parliaments and many more. Never did I think that I would be present for a phone call that began, “Lyon, this is Garter calling”, and far less that it would be about my future title in this place.
In the Scottish Parliament, never would a week go by without mention of the House of Lords, and two noble Lords in particular. There was the noble Lord, Lord Sewel, and the so-called Sewel Motion, and the noble Lord, Lord Barnett, and his Barnett formula. The noble Lord, Lord Barnett, will be pleased to hear—or perhaps not—that he has outlasted the noble Lord, Lord Sewel, as the term Sewel Motion has now gone, to be replaced by the term Legislative Consent Motion, which is very disappointingly dull.
The Barnett formula, in contrast, is never dull. At times, it has taken on totemic proportions in Scottish politics, often seen as a touchstone of a political party's commitment to Scotland and supported over the years by all of the main political parties and— somewhat ironically, because under them there would be no such formula—by the Scottish Nationalists. That includes my party. It is not my place to be controversial this evening, but I fully share the objective of the noble Lord, Lord Barnett, of avoiding the break-up of the UK. However, as the noble Lord, Lord Foulkes, pointed out, not all share their view. The events of 5 May this year now mean that Scotland's political future is once again centre stage.
In my view, it was unsustainable for the Scottish Parliament to continue simply to receive this cheque, this £30 billion payment, under the Barnett formula, with its only role being to decide how to spend that money. I am very pleased that there was cross-party co-operation here and in Scotland between the Liberal Democrats, the Labour Party and the Conservatives to create the Calman commission and to progress so speedily now to deliver on its recommendations through the Scotland Bill. Creating a stronger Scottish Parliament with new powers, including tax-raising powers, is a vital step. It is a crucial test of any Parliament that it should have real fiscal responsibility. If the Barnett formula has helped, as I believe it has, perhaps through its controversy, to make that change more possible, it will have played a vital role in Scotland's history. It opens up the possibility of further change.
It has been a great privilege to participate in the debate led by the noble Lord, Lord Barnett. I have a hunch that the fame of the noble Lord in Scotland and, indeed, across these isles, will live on for quite some time.
My Lords, it falls to me to congratulate my noble friend Lord Stephen on his excellent and constructive maiden speech. We will have to guess which parts we would have been denied had the two minutes not been extended. My noble friend has excellent experience across a range of governance. Firmly rooted in Aberdeenshire, his career in law and politics has prepared him well for this House. Ten years as a Grampian councillor, a Westminster by-election winner for Kincardine and Deeside, an MSP for 12 years for Aberdeen South, a Minister for education and transport in Scotland, leader of the Scottish Liberal Democrats and Deputy First Minister. “Aye, and he's looking so young”.
My noble friend has, to his national credit, the signing of the order abolishing tuition fees in Scotland and, vital for those who live in Clackmannanshire, his coming to Alloa to speak up for the return of the railway after 39 years to the Railway Bill Committee, which wisely chose to sit in Alloa for its scrutiny of the Sterling-Alloa-Kincardine Railway and Linked Improvements Bill.
The last time I congratulated a maiden speaker was two weeks before the end of the hereditary peerage in 1999. I hope that my noble friend's career will last substantially longer than that of the hereditary noble Lord whom I was congratulating then. Again, on behalf of the whole House, I hope that we will hear from my noble friend often.
I was also a member of the Select Committee. I am very happy with the conclusion of our report: that the Barnett formula should be urgently brought to an end on account of its current unfairness to all constituent parts of the United Kingdom. Proceeding to a needs assessment approach would contribute to the much-needed reform of governance in this United Kingdom.
The unfairness which the outdated, but easy-to-use, formula delivers is as follows. My native Scotland receives more than it is due—perhaps £1,600 per person—largely because of a slight decline in population. Wales and Northern Ireland entered the scheme at a lower than accurate level. Wales has more chronically sick and Northern Ireland has disproportionately more young people. The English regions are treated in widely differing and, frankly, mysterious ways. Resentment against Scotland is, surprisingly, still only smouldering. For the people of Scotland, it is bad to know that you are being subsidised, even if there may be a justification, in part, based on the UK Treasury raids on the oil and gas fields by the Crown Estate Commissioners and the siting of the nuclear deterrent at Faslane and Coulport.
I hope to hear my noble friend say that the Government fully intend to sort out that fiscal unhappiness by adopting our suggested scheme, the bones of which are that each devolved institution would receive a universal sum of so much per head, with premiums paid for certain groups: the very young, the very old and the chronically sick.
Therefore, I encourage my noble friend to commit the Government to ending the Barnett formula, but I believe that it will be important that all citizens in Scotland become aware of the inevitable reduction in the block grant, which will certainly be morally correct. This will be a major consideration for all citizens who are likely to take part in a referendum on Scotland’s future governance. The challenge for those wishing to continue with the parliamentary union is to demonstrate that there is a way to distribute UK resources more fairly, as would be achieved by a Scottish Treasury collecting and spending Scotland’s taxes. I look forward to my noble friend’s reply.
My Lords, it can truly be said of the noble Lord, Lord Barnett, that he is a great man. His name is, in government-speak, legendary. Having seen it operate from the inside, I do not know what the Department of Finance and Personnel in Belfast would do without the name Barnett. Everything is consequential now that we have Barnett consequentials, and these things are looked at with great interest and concern. However, there are a number of very serious issues here.
Ten years ago, the Northern Ireland Executive entered into negotiations with the Treasury and we started a process of establishing a needs basis. It was our initiative. Work started and, before the first Northern Ireland Executive came to an end, the Treasury produced some needs-based assessments for a limited number of departments. Those established, for example, that we did not have enough money for health but they also established that we got more money for industry than we should have needed at that time. That process was not pursued because the then Executive did not survive and there was an interregnum. Northern Ireland does not fear a needs-based assessment, although the Barnett formula has, by and large, been good to us. We have had the fastest-growing population in the UK and therefore that has been reflected in the formula, but we have also had substantial pockets of real need, and the statistics are there for all to see. With a younger population, there is clearly huge pressure on our education and health systems. We have had substantial inward migration in recent years, and that is also now putting great pressure on housing, jobs and other services. Of course, we also have legacy issues that go back over 40 years to the Troubles, and we are still trying to come to terms with those.
I believe that, whatever other faults it might have had, the formula of the noble Lord, Lord Barnett, at least found an efficient and effective way of distributing resources, which was one of the main problems. If it is proposed to move away from that, agreement will first have to be reached on how needs are assessed, because to some extent need is in the eye of the beholder. What I might consider to be a need, others might not. For example, we have industrial legacy issues, which we share with Wales and Scotland—in particular, the west of Scotland—where huge pockets of people suffer from asbestosis and other industrial-related injuries; we have climatic issues; and our pattern of population distribution is linear rather than grouped, which of course means that more money is required for services.
Because of the political and economic significance of this proposal, it is important that there is national consensus on how it is carried out. Otherwise people will feel a sense of injustice, which will have a political knock-on effect and will be used rigorously by those who want to smash up the union. That would be an economic disaster for any part of the country and we must not contribute to it. Therefore, consensus on the mechanism for assessing these matters will be a critical factor before we carry out this exercise. I urge noble Lords to bear that in mind when we come to take a decision on this issue.
My Lords, I feel a certain wry amusement in this debate because I agree with almost everything that has been said this evening. I last spoke on this subject on the Scotland Bill on 30 July 1998. On that occasion, I moved an amendment to suggest that the formula for distributing funds between the United Kingdom and Scotland should be based on the comparator of GDP per head, which is a pretty good comparator for needs. The late Lord Mackay of Ardbrecknish, in keeping with the philosophy of the times, quietly put me back in my box—I was a relatively new Member of this House—by saying that he did not like my formula because it was too mechanistic. It was mechanistic and I do not apologise for that, even today. If we had been able to work it out and apply it, it would have exposed everything that has been described tonight and brought it out into the open.
So here we are 13 years later discussing the same subject, and I could say, “About time too”. However, we now have to face a different problem. Whatever we do, it cannot be a unilateral decision by this country; there will have to be an element of negotiation with the devolved Assemblies and Parliaments, and I suspect that those negotiations will be very tense and difficult. In Scotland, another potential problem looms: the issue of whether there will be a referendum and a move towards independence there, in which case we will have a very much more difficult and very different type of negotiation.
I am speaking in this debate tonight partly to issue a word of caution—not to anyone in this Chamber or the Palace of Westminster but to the people of Scotland. My view, for what it is worth, is that, if they were to go down that road, they would be sacrificing a milch cow in Westminster for a very uncertain future in which they would assume that the oil and gas in what would become their section of the North Sea might provide an equal source of revenue. Looking at the long-term future, which we do not think about often enough, the fact is that we, together with the rest of the world, are going to have to move away from fossil fuels. They may be an asset at present but over time they are likely to become a diminishing asset. Therefore, the people of Scotland might run the risk of swapping what I would call a moderately safe and secure future for one that, in my view, holds the prospect of a steadily reducing income base for their country if that is the route they choose to follow.
I welcome this debate and pay tribute to the noble Lord, Lord Barnett. I bumped into him in the corridor the other day. That is why I am speaking tonight and I have enjoyed every minute of it.
My Lords, I have had a really pleasant surprise tonight. I came here expecting to see an ogre in the shape of the noble Lord, Lord Barnett—such, I am afraid, is his reputation in Wales—but he will be delighted to hear that after his discourse tonight I shall be going back and singing of his many virtues to the people of Wales.
Ever since I entered the political scene about 17 years ago, the need to reform the Barnett formula has been top of the political agenda in Wales. Sometimes I feel that it dominates the political agenda too much because it hampers our ability to talk about other issues where we need to increase our GDP and work on other methods in order to do so. None the less, I am afraid that the term “Barnett” has become synonymous with unfairness in Wales. It is something that we need to correct and the only way of doing so is to reform the formula. Of course, there is unanimous cross-party support within the Welsh Assembly for such reform. The current formula, as we have been told, rests on an allocation based solely on population. This year alone, £50 billion of public sector funding has been distributed to the devolved Administrations without even the most cursory attempt to see whether it is based on need or not.
The Assembly set up a panel, led by Gerry Holtham, which concluded that through the methodology that is currently used based on the English regions, Wales is being short-changed to the tune of about £300 million compared with its needs. The problem is that this situation will persist and will become worse if and when we see an increase in public expenditure. Something needs to happen. We need an intermediary step to ensure that we put a floor in the system, to ensure that things do not get any worse when that happens. I do not think any of us believe that this will happen any time soon. We need an immediate response and I would like to know whether the Minister has any plans to put that floor in place sooner rather than later.
I endorse the setting up of an independent commission. We need to ensure that there are representatives from all the devolved Administrations on that commission. I agree with my noble friend Lord Barnett that it does not need to impact negatively on the attempts at budget reduction. Indeed, a member of the Holtham commission, David Miles, made it clear that there is no reason to believe that replacing the Barnett formula with a needs-based system should be costly in aggregate for the UK Government. In fact, the reverse is true. Reform would be completely consistent with the UK Government’s focus on deficit reduction. The key point to remember tonight is how unjust the current system is. A civilised society should distribute on the basis of need and not on the basis of the number of the population.
I have a number of questions for the Minister. In the mean time, what is the current thinking on introducing a floor to the current Barnett system so that we have an intermediary step? Will the Minister commit to an open-minded dialogue, particularly with the Assembly, to progress the wider issue of Barnett reform? What is the timeframe for reform? We need to take account of much broader constitutional issues which are at play here.
My Lords, I am grateful to the noble Lord, Lord Barnett, for his continuing determination to bring an end to the distortions of the formula that bears his name. Years ago, it was understandable to introduce the formula, but ever since it has been right to want to get rid of it because it was always meant as a temporary solution to a specific problem.
Not long ago, I was interviewed by BBC Scotland and asked whether I approved of the Barnett formula, given my interest in it as the then leader of Newcastle City Council. I said I could be a strong supporter of it, just as long as the Scottish border was redrawn along the River Tyne.
I have a serious constitutional point as well as a serious financial point. First, the principle should be that public spending should reflect public policy which should then be financed on the basis of need, irrespective of nation or region. The Government's official measure of need includes such matters as age, housing conditions, health, crime levels, unemployment rates, travel costs, and scarcity of population. This is right. Needs assessments may not be perfect but they are better than just using proportionate population figures.
The public spending figures published by the ONS by nation and region in July last year show that planned public spending for 2009-10 was £8,559 per head of population in England; in Northern Ireland it was £10,662; in Wales it was £9,597; and in Scotland it was £10,083. In London it was £10,139, second only to Northern Ireland. In my own region, the north-east of England, it was £9,588, only the fifth highest. It is very hard for people in England to comprehend how this financial anomaly has been allowed to continue for so long when every English region has lower public spending per head than the four devolved Administrations and in some cases significantly higher needs.
That takes me to my constitution query. Why is it that all the devolved Administrations receive more from the Government than English regions? We must understand better the reasons for this, which is why I believe a UK funding commission should be established to assess relative need and a new method for distributing funds in the context of recent and pending legislation. We need fairness for all parts of our United Kingdom.
My Lords, I begin with my own words of congratulations and welcome to the noble Lord, Lord Stephen, and I hope that next time he addresses us he is able to do so at much greater length in a more leisurely debate. I also congratulate my noble friend Lord Barnett on his persistence in trying to abolish, in its present form, the formula that bears his name. I have very much agreed with his views over the years and I feel that his persistence should be rewarded with a new Barnett system that is based on needs and that, I hope, is agreed by all parts of the UK as a sensible way forward.
I would also like to express my general support for the conclusions of the report on the Barnett formula, which was the work of the committee chaired by my noble friend Lord Richard. I was taken by the comments of the noble Lord, Lord Forsyth, and my noble friend Lord Foulkes in talking about the new political situation and our need to keep that in mind as well as simply looking at the issue, as we have done over recent years.
I was very tempted to respond to the challenge laid down by my noble friend Lord Foulkes in talking about a federal system for the UK. However, he immediately hit on a particular problem in that suggestion, which is, given the size and the population of England, whether England would be treated as one unit or in devolved units. Despite the failure of the referendum in the north-east of England, I would be rather upset if we simply ended up with a very centralised English system within a devolved UK. I hope that that will not happen in future.
Like the noble Lord, Lord Shipley, I am very much influenced in my comments about the Barnett formula by my experience of belonging to the north-east of England. As he well knows, the formula and the way that it operates has been the subject of much public criticism in the north-east—in fact, it is almost as hot a political potato as it is in Wales. That criticism has also been supported by at times a very vigorous media campaign against the formula.
I certainly know from my own experience, having represented a north-east constituency in another place, that it was impossible to defend the formula to my constituents. I did attempt to do so once as a loyal Minister defending government policy and I very soon found that I was on a hiding to nothing. However, I will pay tribute to the way that, despite the operation of the formula, certainly under the previous Labour Government, many programmes of expenditure were directed to areas such as mine, and that has helped to redress the balance.
However, it remains true that over the years the less well-off regions in England, as well as Wales, have understandably felt disadvantaged by the formula. My noble friend Lady Hollis made the point to the committee that obviously there are more badly off people in populous, prosperous areas. Despite that, in any formula based on territories, a territory such as the north-east, which has a similar population to Wales and a slightly higher population than Northern Ireland, will compare its receipts to them, as it has compared its unemployment rates and general economic performance with Scotland, Wales and particularly Northern Ireland over the years.
We should learn from the international examples mentioned in the committee’s report. We should bear it in mind that although the systems are different to those of the UK, having a regular and automatic review of any funding system is important if you are to have a proper system based on needs. I hope that the Government will take that dimension into account in their future deliberations.
My Lords, I, too, thank the noble Lord, Lord Barnett, for raising this debate. I also congratulate the noble Lord, Lord Stephen, on his participation, and we all look forward to future contributions.
I am praising the noble Lord, Lord Barnett, not only for his enormous contribution to political life in this country, both in office and subsequently in your Lordships’ House, but also for the Barnett formula. Whether one likes it or not, it has a characteristic of having survived; it has a characteristic of having done what it initially set out to do—to stabilise expenditure and allow planning in Scotland and Wales; and it has a characteristic that it has allowed devolution to take place. It has some good points—the sorts of points that the previous Government made in reacting to the Select Committee’s report.
We speak as though the Select Committee report was an answer in itself. It was not. What it said is, “You want to get yourself a commission, then we have this thing called needs and we will write some words about it but the commission has got to fill in the gaps”—a non-trivial task. The committee made a case that there is concern about this formula in Scotland, Wales, England and, I suspect, Northern Ireland. However, one should also remember that any change will be enormously difficult to change again so it has to be got right.
What does getting it right mean? First, it has to be fair. The idea that the word fair is not political is absurd—it is actually a deeply political word—so it has to be both fair and it has to enjoy political consensus. If it does not, it will not sustain, and falling apart quickly would be much worse than where we are. The facts of life are that we are a long way from political consensus. As the noble Lord, Lord Foulkes, points out, perhaps we should consider something a great deal more radical. It has been pointed out by other noble Lords that we need agreement across parties, across the stakeholders, for this to work. We do not have that. The SNP simply failed to engage with the Select Committee—never mind disagreeing with it, it failed to engage. With its recent success in the polls we have to recognise it is a force and it has to be a force in anything that comes out of it.
We have had continuous change and we are going to see this change in the Scotland Bill. We all look forward to the debate on the Scotland Bill because a lot of these issues will come out and we will be better informed after that. There are clear concerns in Wales that mean that any solution has to be a solution for all parts of the United Kingdom, not just for Scotland.
It is perfectly proper that the Government should be concerned about the issues raised tonight and I hope that they will indicate that at some point they will look at how to address these. Equally, I do not urge them to move in haste on this issue. In far too many places in the latest legislative programme we have seen legislation in haste. We do not need it in this case. They have to take a careful, measured approach to secure agreement about fairness and consensus. So I am not going to urge them tonight to act in haste.
My Lords, I am most grateful for the opportunity this evening provided by the noble Lord, Lord Barnett, to debate his eponymous formula. It is an important subject that is of great interest to all parts of the United Kingdom. I thank all noble Lords who have participated. I listened carefully to what they said. I congratulate in particular my noble friend Lord Stephen on his maiden speech, and look forward to many more of the quality that he showed us this evening.
It might help if I explain briefly the background. Changes in the departmental expenditure limit block budgets of the devolved Administrations are determined by the Barnett formula. The calculation in outline is the change in provision of the respective United Kingdom departments in the spending review, multiplied by the relevant departmental comparability factor—which, for example, would be 100 per cent for health, as health is fully devolved—multiplied by the appropriate population proportion. The population figures are updated at the spending review to reflect latest ONS estimates of population, and the comparability percentage is also revisited.
The previous Government decided at the time of devolution in 1999 to retain the block and Barnett formula arrangements for determining the budgets of the devolved Administrations. This was the basis on which the devolution referendums were held. It is worth noting that responsibility for allocating spending in England to the English regions and local authorities lies with UK departments. They make these decisions once departmental settlements have been announced in the spending review. There is no single formula for allocating money within England.
Several reports have recently been published that examined the funding of the devolved Administrations. All were referred to by noble Lords this evening. The Calman commission on developing the Scottish devolution settlement, which was commissioned by the previous United Kingdom Government and the Scottish unionist parties, reported in June 2009 and covered funding to Scotland. The Holtham commission on Welsh funding, commissioned by the Welsh Assembly Government, published in the summer of last year its final report on the Barnett formula and on devolving taxation and borrowing in Wales. The House of Lords Select Committee on the Barnett Formula reported in July 2009.
On the subject of the Calman commission, the Scotland Office published a Command Paper in November 2010. It accepted the recommendations that there should be improved financial accountability, including more tax devolution—the noble Lord, Lord Foulkes, referred to this—and that as a consequence the Barnett-determined block should be reduced by the forecast amount of the 10p devolved income tax receipts. It also accepted taking forward the devolution of other taxes, including stamp duty and landfill tax, and introducing new borrowing powers for the Scottish Executive. Implementing the Command Paper will require legislation: a Scotland Bill has been published and is currently going through Parliament. I listened to the comments of my noble friend Lord Forsyth and of other noble Lords, and certainly I will pass them back to Her Majesty's Treasury. The noble Lord will have ample opportunity to make his points on the Bill as it passes through your Lordships' House.
I was going on to say that the House of Lords report recommended replacing the Barnett formula with a needs-based formula. I will deal later with needs-based issues. The previous Government welcomed the House of Lords report, as noble Lords said, although they remained opposed to replacing the Barnett formula. Following the Holtham and House of Lords reports, the coalition Government said in their programme for government that they recognised the concerns expressed about the system of devolved funding, but that the priority must be to reduce the budget deficit and therefore any decisions to change the current system must await the stabilisation of the public finances. In addition, the Government announced in the spending review that there will be consideration with the Welsh Government of the proposals in the final Holtham report, consistent with work being taken forward in Scotland following the Calman commission.
The Government welcome all views on the future of the Barnett formula. I will ensure that Her Majesty's Treasury is made aware of what has been said this evening. In the past, the formula proved to be a durable and robust method of calculating changes for the devolved Administrations. Even the House of Lords report concluded that the Barnett formula had qualities such as simplicity, stability and the absence of ring-fencing. However, we recognise the concerns that are often expressed about it, and were expressed this evening.
There is perhaps a perception, especially in English regions such as the north-east, that Scotland in particular is overprovided for. Comparisons tend to be made using figures published in public expenditure statistical analyses on identifiable total managed spending per head. My noble friend Lord Shipley mentioned some figures. Those for 2009-10 are £8,531 per head for England, £9,940 for Scotland, £9,709 for Wales and £10,564 for Northern Ireland. On a comparable basis, the north-east has the second highest spending per head in England at £9,433.
The perception in England that the devolved Administrations may be overfunded may be exacerbated because they can afford more generous policies; for example, on university fees and the free provision of services. The noble Lord, Lord Barnett, referred to this. I must emphasise that the devolved Administrations have not received any additional money to fund those policies. They have accommodated them within their existing budgets. One of the purposes of devolution is to allow the devolved Administrations to make these different policy choices. This was set out in 1997 in the previous Government’s statement of principles:
“The key to these arrangements is block budgets which the devolved Administrations ... will be free to deploy ... in response to local priorities”.
I am sure that the devolved Administrations themselves do not regard their spending review settlements as generous.
My noble friend Lord German and the noble Lord, Lord Wigley, were concerned about the Barnett squeeze convergence property of the Barnett formula, whereby the percentage increases in spending tend to be lower than in England. The Holtham commission in Wales, in particular, has called for a floor to be placed under the formula to prevent further convergence with England. The expression “Barnett squeeze” reflects that the Barnett formula provides the same absolute increase per head but a lower percentage increase because of the higher baseline levels of spending in Scotland, Wales and Northern Ireland inherited from the past. Of course, the percentage reductions will tend to be smaller than those for many UK departments when spending is cut, as it was in the last spending review. I will return to the subject of Wales in a moment.
Some have raised concerns about the transparency of the existing system. The House of Lords report itself concluded that the quality of data on public spending has improved since 1999. The Government have provided further information about the allocation of grant to the devolved Administrations, based on data which the Treasury provided to the committee and which was published in the committee’s report.
Several, if not all, noble Lords criticised the Barnett formula because it does not take sufficient account of needs. In a similar discussion in your Lordships' House in 2009, the noble Lord, Lord Davies of Oldham, said for the then Government,
“there is no doubt that the Barnett formula has stood the test of time from its development 20 or so years ago”.—[Official Report, 15/12/09; col. 1392.]
The Barnett formula has indeed provided a simple, stable and robust method for funding the devolved Administrations over the past 30 years. It is, of course, for the devolved Administrations to decide how to allocate their overall budget to individual programmes reflecting their own policies. The Barnett formula allows them the freedom to do this, without being second-guessed by the UK Government or any other body on their needs.
Nobody tonight has queried the propriety of a block grant that allows the devolved Administrations to determine how they allocate their expenditure within that block grant, nor was it raised during the debate that my noble friend Lord Davies answered. The criticism has been about the size of that block grant, which is based on out-of-date, inappropriate and deeply unfair estimates.
Yes, my Lords, but as the noble Lord, Lord Tunnicliffe, highlighted, there are complications in reaching a consensus on a needs-based formula. I understand that in the 1970s a formal interdepartmental needs assessment was carried out by the Treasury in consultation with interested departments. It was published in 1979. The study was extensive, involved a number of experts and a large team of people and took two years to complete yet, despite a great deal of time-consuming work, it was unable to reach an agreed conclusion about the basis for a needs-based assessment, and therefore it was not implemented. Indeed, the Barnett formula was introduced at around that time. There is, of course, no consensus across the UK on how to measure needs at the country level and, as in the 1970s, it would inevitably be a contentious and very time-consuming exercise. The noble Lord, Lord Empey, explained some of the problems. A needs-based system would be highly sensitive to the chosen weightings and indicators, on which there is no generally accepted methodology or consensus. The perception of needs and the understanding of the relevant factors may vary over time. Additionally, as policies change, so may the relative cost of implementing them in different countries. The picture may be very different in, for example, 2015. A number of changes are being progressed, such as the Scotland Bill, discussions on the Holtham report, and Northern Ireland consultation on corporation tax. I am sorry to disappoint noble Lords but the Government’s position remains that the priority is to reduce the budget deficit and that any decision to change the current system must await the stabilisation of the public finances.
The noble Lord, Lord Foulkes, raised the arguments in favour of fiscal autonomy. The union dates from 1707 and is one of the oldest and most successful in the world. It has a single currency, central bank, monetary policy and system of financial regulation, which fosters trade, monetary stability and economic growth. Non-devolved risks are pooled and financed centrally. Fiscal autonomy could mean further spending cuts in Scotland, Wales and Northern Ireland, assuming uniform levels of taxation. Also, as my noble friend Lord Dixon-Smith cautioned, it would not be prudent to rely on volatile and uncertain future North Sea oil receipts. However, we believe that financial accountability can be improved in Scotland through greater devolution of taxation, as proposed by the Calman commission.
I spoke earlier about Scotland and I said that I would return to Wales. I know that some consider Wales to be underfunded, which was raised by the noble Baroness, Lady Morgan, among others. In fact, spending per head in Wales is 12 per cent above England and, furthermore, spending has more than doubled in cash terms since devolution. Wales also benefits from very large EU structural fund spending, which amounted to £208 million in 2009-10 and is expected to rise to £233 million by 2014-15.
On Northern Ireland, the Government attach priority to improving the security situation, including by confirming the £800 million financial package which accompanied the devolution of policing and justice just before the general election last April. A further £200 million was announced earlier this year for policing in response to the security situation. In addition, the Government believe that it is important to rebalance the Northern Ireland economy from the public sector to the private sector. They published a consultation paper in March, which included examining possible mechanisms for varying corporation tax. No decisions have been made yet.
Some are concerned that insufficient attention is paid to the English regions. The Barnett formula is not used to allocate spending within England. The Government have chosen to prioritise the NHS, schools and early years, security and the capital investment that supports long-term economic growth for reasons of prosperity and fairness. This means tough settlements for some other areas but, because we have chosen to reform welfare, departmental budgets other than health and overseas aid will be cut by an average of 19 per cent over four years, which I emphasise is the same pace as planned by the previous Government.
There are also claims that the Treasury is judge and jury, and that the Barnett formula should be administered by an independent body. The noble Lord, Lord Barnett, and my noble friend Lord Forsyth raised that. It is the Treasury’s core function to control public spending. But the statement of funding policy sets out the dispute resolution procedure under which, if all other avenues have been exhausted, disputes may be remitted to the joint ministerial committee.
The Government have no plans to change the Barnett formula at present but we will continue to keep all aspects of public spending under review. The Government listen to all views and I thank all noble Lords for contributing to the debate today.
House adjourned at 9.09 pm.