HOUSE OF LORDS Select Committee on the Barnett Formula 1st Report of Session 2008–09 The Barnett Formula Report with Evidence Ordered to be printed 9 July 2009 and published 17 July 2009 Published by the Authority of the House of Lords London: The Stationery Office Limited £price HL Paper 139 The Barnett Formula Committee The Select Committee on the Barnett Formula was appointed by the House of Lords on 10 December 2008 with the orders of reference “To examine the purpose, methodology and application of the Barnett Formula as a means of determining funding for the Devolved Administrations of the United Kingdom, to assess the effectiveness of the calculation mechanism to meet its purpose and to consider alternative mechanisms. These orders of reference exclude consideration of three main areas: The overall system of funding the Devolved Administrations – in particular the question of whether greater tax-raising powers should be accorded to the devolved administrations; Other political aspects of the devolution settlements; and The distribution of funds within the different regions of the United Kingdom”. Membership Lord Forsyth of Drumlean Baroness Hollis of Heigham Lord Lang of Monkton Lord Lawson of Blaby Earl of Mar and Kellie Lord Moser Lord Richard (Chairman) Lord Rooker Lord Rowe-Beddoe Lord Sewel Lord Smith of Clifton Lord Trimble Mr Alan Trench, Research Fellow in the School of Law at the University of Edinburgh and Mr Peter Kenway, Director of the New Policy Institute, were appointed as Specialist Advisers for the inquiry. Information about the Committee and Publications Information about the Select Committee on the Barnett Formula can be found on the internet at http://www.parliament.uk/hlbarnettformula. Committee publications, including reports, press notices, transcripts of evidence and government responses to reports, can be found at the same address. Committee reports are published by The Stationery Office by Order of the House. General Information. General Information about the House of Lords and its Committees, including guidance to witnesses, details of current inquiries and forthcoming meetings is on the internet at: http://www.parliament.uk/about_lords/about_lords.cfm Contacts for the Barnett Formula Committee All correspondence should be addressed to: The Clerk of the Ad Hoc Committee, Committee Office, House of Lords, London SW1A 0PW The telephone number for general enquiries is 020 7219 4878. CONTENTS Paragraph Page Summary 7 Conclusions and Recommendations 8 Chapter 1: Background to the Inquiry 1 11 Chapter 2: UK Public Spending and The Barnett Formula 11 13 The territorial distribution of public spending in the United Kingdom 11 13 Table 1: UK Public Spending and the Importance of the Barnett Formula, 2007–2008 13 Table 2: The importance of social security spending in Scotland, Wales and Northern Ireland 2006–07 15 Table 3: Index of per capita public expenditure, including and excluding social security 15 Table 4: Index of changes in the territorial distribution of overall per capita public spending, 2001–02 to 2008–09 16 How the Barnett formula works 16 16 Box 1: How the Barnett Formula works 17 Chapter 3: The Development of Formula from 1978–1997 23 19 The original purpose of the Formula 23 19 The Formula before devolution 28 20 The 1979 and 1993 Needs Assessment Studies 28 20 Table 5: United Kingdom Government Needs Assessments 1979 and 1993 and actual levels of spending (in index terms) 21 The future of the Formula 32 21 Application of the Formula in practice up to 1997 33 21 Convergence 1978–1997 33 21 ‘Formula bypass’ up to 1997 35 22 Chapter 4: The Formula since 1997 36 23 Devolution 36 23 The application of the Formula in practice since 1997 37 23 Handling disagreements about finance 40 23 ‘Formula Bypass’ since 1997 42 24 The powers of the Treasury 43 24 Chapter 5: Is reform necessary? 49 27 The baseline 53 27 Population effects 54 28 Figure 1: Actual and projected populations 1971 to 2031 28 The administration of the present system 57 29 Opaque decision making 57 29 Inadequate and inaccessible data 61 30 Chapter 6: Alternative approaches 64 31 What are the most useful comparators? 64 31 Local government and health spending methods 65 31 The Big Lottery Fund 67 31 Comparative lessons from overseas 69 32 Box 2: The Australian System 32 An independent commission 72 33 Chapter 7: The principles of a new approach 79 36 A needs based approach 79 36 Achieving substantive fairness 82 36 A system for determining the baseline 89 38 A top-down approach 91 39 Selection of measures of specific aspects of need 92 39 Figure 2: Measures contributing to relative need: 41 Figure 3: An extended selection of measures contributing to relative need 42 Combining the specific measures into a single overall measure 103 43 Annual increments and transition 108 44 Other matters 111 44 Review 111 44 Status of the new arrangements 112 45 Appendix 1: Select Committee on the Barnett Formula 46 Appendix 2: List of Witnesses 48 Appendix 3: Call for Evidence 50 Appendix 4: Glossary 52 Appendix 5: Data definitions, values and sources used in the ‘needs diagrams’ 55 Oral Evidence Lord Barnett Oral evidence, 28 January 2009 1 Professor Iain McLean, University of Oxford & ippr North Oral evidence, 4 February 2009 11 Supplementary written evidence 23 Scottish Government (Mr John Swinney MSP) Written evidence 26 Oral evidence, 27 February 2009 33 Professor David Bell, Professor of Economics, University of Stirling; Professor David King, Professor of Public Economics, University of Stirling; and Professor Kim Swales, Head of Economics Department, University of Strathclyde Written evidence, Professor David King 47 Oral evidence, 27 February 2009 54 Scottish Trade Union Congress (STUC) Oral evidence, 27 February 2009 70 Scottish Council for Voluntary Organisations Oral evidence, 27 February 2009 75 Supplementary written evidence 81 Ms Helen Bailey, Public Services and Growth Directorate, the Treasury; Ms Helene Radcliffe, Devolved Countries Unit, the Treasury; Mr Mark Parkinson, Devolved Countries Unit, the Treasury; and Mr Jim Gallagher, Ministry of Justice/Cabinet Office Written evidence, the Treasury 85 Supplementary written evidence, the Treasury 87 Oral evidence, 11 March 2009 89 Further supplementary written evidence, the Treasury 103 Rt Hon Lord MacGregor of Pulham Market and Sir Brian Unwin Oral evidence, 18 March 2009 120 Dr Eurfyl ap Gwilym, Plaid Cymru; Professor James Foreman-Peck, Cardiff Business School; and Dr Gillian Bristow, Cardiff School of City & Regional Planning Written evidence, Plaid Cymru 130 Written evidence, Professor James Foreman-Peck 138 Written evidence, Dr Gillian Bristow 145 Oral evidence, 20 March 2009 150 Mr Paul Griffiths, Welsh Local Government Association; Mr Ian Carruthers and Ms Maria Jones, Chartered Institute of Public Finance Accountancy, Wales Written evidence, Welsh Local Government Association 160 Written evidence, Chartered Institute of Public Finance and Accountancy 163 Oral evidence, 20 March 2009 167 Supplementary written evidence, Welsh Local Government Association 174 Mr Phil Jarrold, Wales Council for Voluntary Action; Mr Peter Price and Mr Cynog Dafis, Tomorrow’s Wales; Mr John Osmond and Mr Geraint Talfan-Davies, Institute for Welsh Affairs Written evidence, Wales Council for Voluntary Action 176 Written evidence, Cymru Yfory (Tomorrow’s Wales) 178 Oral evidence, 20 March 2009 182 Mr Leo O’Reilly, Mr Richard Pengelly and Mr Mike Brennan, Department of Finance & Personnel (Northern Ireland) Written Evidence, Northern Ireland Civil Service 191 Oral evidence, 27 March 2009 193 Mr Michael Smyth and Professor Colin Thain, University of Ulster; and Professor John Simpson, Queen’s University, Belfast Written evidence, Professor Colin Thain 204 Written evidence, Professor John Simpson 208 Oral evidence, 27 March 2009 210 Mr Patrick McCartan, Northern Ireland Confederation for Health and Social Services; and Mr Victor Hewitt, Economic Research Institute of Northern Ireland Written evidence, Northern Ireland Confederation for Health and Social Services 222 Written evidence, Economic Research Institute of Northern Ireland 224 Oral evidence, 27 March 2009 232 Mr Peter Bunting, Irish Congress of Trade Unions, Northern Ireland Committee; Mr John Corey, Northern Ireland Public Service Alliance; and Mr Seamus McAleavey, Northern Ireland Council for Voluntary Action Oral evidence, 27 March 2009 240 Rt. Hon Mr Jim Murphy, MP (Secretary of State for Scotland), Rt. Hon Mr Paul Murphy, MP (Secretary of State for Wales), and Rt. Hon Mr Shaun Woodward (Secretary of State for Northern Ireland) Oral evidence, 1 April 2009 246 Mr David Fillingham, Royal Bolton Hospital; Ms Rhona McDonald, Bath & North East Primary Care Trust; Mr Keith Derbyshire and Dr Stephen Lorrimer, Department of Health Written evidence, Department of Health 260 Oral evidence, 29 April 2009 263 Mr Liam Byrne MP, Mr Mark Parkinson and Ms Helen Radcliffe, the Treasury Oral evidence, 17 June 2009 274 Written Evidence Alliance Party of Northern Ireland 285 Australian Commonwealth Grants Commission 287 Madoc Batcup 290 cebr ltd 291 City of London 297 COSLA 298 David Hume Institute 301 East of England Development Agency and East of England Regional Assembly 307 Federal Trust for Education & Research 315 Professor David Heald 316 Independent Expert Group to the Commission on Scottish Devolution 324 Local Government Association 328 London Councils 339 Mr. Russell Mellett 341 Parliament for Wales Campaign 343 Reform Scotland 350 Sustrans Cymru 350 Society of County Treasurers 351 TaxPayer’s Alliance 353 NOTE: Reference in the text of the report are as follows: (Q) refers to a question in oral evidence (p) refers to a page of written evidence SUMMARY The Barnett Formula is the mechanism used by the United Kingdom Government to allocate more than half of total public expenditure in Scotland, Wales and Northern Ireland. The Formula has been used for the last thirty years to determine the annual increase in allocation (the increment). Each year these increments are added on to the previous year’s allocation (the baseline) to create what is now a significant block grant of funds.