Barnett Formula

Lord Forsyth of Drumlean (Conservative):

The other day, someone in my party-an accomplished policy wonk-was challenged with the notion that the Scotland Bill and the move towards taxation would inevitably result in discussion of the Barnett formula. He said: "Oh, there is no way that people will ever take that money away from Scotland. We are safe". We must not make these assumptions. These are deep waters.

The identity of the policy-wonk remains a mystery but it might as well be George Osborne who, as Chancellor of the Exchequer, has well and truly kicked reform of the Barnett Formula into a distant and unknowable future.

I wonder, has Alun Cairns signed this e-petition by Kev?

Alun Cairns (Vale of Glamorgan, Conservative)

The Scottish Government are the most resolute defenders of the Barnett formula, arguably against the interests of the other nations of the United Kingdom. Does the Secretary of State therefore think that if the people of Scotland vote yes in a referendum on independence, the Barnett formula should apply to the nation’s debt?

Michael Moore (Secretary of State, Scotland; Berwickshire, Roxburgh and Selkirk, Liberal Democrat)

I do not envisage that Scotland will become independent from the United Kingdom. I think we are stronger together and weaker apart. The hon. Gentleman touches on the fundamental issue of sorting out what the basis of that independence might look like, and the Scottish National party has so far singularly failed to answer questions on that.

I'm the proud owner of a letter from Mark Harper, in which he states "There is no link between the Barnett Formula and the West Lothian question".

Yesterday he wasn't daft enough to put such a view on the Hansard record:

Alan Beith (Berwick-upon-Tweed, Liberal Democrat)

Will the commission be able to consider what is really the Berwick-upon-Tweed question: how has it come about over so many years that Scotland seems to have had more money for schools and roads, and a great deal of say in the affairs of England?

Mark Harper (Parliamentary Secretary (Political and Constitutional Reform), Cabinet Office; Forest of Dean, Conservative)

Specifically, we have made it clear that the commission will not be able to look at the financial questions. The Government have committed to resolving them, but we have made it clear that the deficit must be dealt with first, and then those other matters will be taken forward by my right hon. Friend the Chancellor.

How peculiar that reform of the Barnett Formula must wait until the deficit is down. Why? If the Government manages to balance the books so that we have no deficit but still have a national debt of £1.1 trillion, why would that be any better time than now to reform the Barnett Formula? Answer: It wouldn't. In fact it could be far worse because people will have been living under austerity Britain for longer and will be more severely affected by a fall in central government funding.

If Harper was being honest he would have said that the Government want to wait until after the referendum on Scottish independence before debating whether to cut the budget of the Scottish Government by £4.5 billion, by which time they hope that Scotland will have voted to remain in the UK and the Scotland Bill will give the illusion of financial accountability, better enabling the UK Government to blame the Scottish Government when the axe falls on Scotland's public services.

As I have said before, I think Unionist politicians will regret not having reformed the Barnett Formula in times of plenty.

Regular readers of this blog will be aware of the 'Upper West Lothian Question'. But Mark Harper isn't. Mark Harper doesn't think that the West Lothian Question has any bearing on reform of the House of Lords:

Sandra Osborne (Ayr, Carrick and Cumnock, Labour)

I thank the Minister for that answer. I am sure he will be aware that constitutional change in one area can affect other areas. How might any changes suggested by his West Lothian commission affect reform of the House of Lords?

Mark Harper (Parliamentary Secretary (Political and Constitutional Reform), Cabinet Office; Forest of Dean, Conservative)

I am not sure that those two matters are connected at all. The commission’s terms of reference are specifically to consider the effects and consequences for the House of Commons of the devolution arrangements in Scotland, Wales and Northern Ireland. The hon. Lady will know that we have appointed experts to the commission. They will come back to the Government with their recommendations, and I have committed then to talk to all parties in this House about how we might proceed further.

Who put this Harper idiot in charge?

Presumably this makes sense to some boffin at the Treasury.

Thanks to Braveheart's Blog I see that the full text of John Major's speech is now available on the Ditchley Foundation website. Of particular interest are the terms that Major believes will prevent Scotland from voting for independence:

Unionists have a responsibility to tell Scotland what independence entails.

A referendum in favour of separation is only the beginning. The terms must then be negotiated and a further referendum held.

These terms might deter many Scots. No Barnett Formula. No Block Grant. No more representation at Westminster. No automatic help with crises such as Royal Bank of Scotland. I daresay free prescriptions would end and tuition fees begin.

Forgive me if I'm wrong, but there's nothing to say that there should be a Barnett Formula, a block grant, free prescriptions or no tuition fees for Scotland if Scotland remains in Union; these things are not intrinsically unionist. Bribing Scotland to stay in the Union makes no sense to me. And with whose money are you bribing them, John, and with whose permission?

The Telegraph's Allison Pearson writes on the Barnett Formula:

I don’t care whether our Government is keeping quiet about this grotesque unfairness to stop pro-independence feelings from growing in Scotland. I do care that English students are carrying vast amounts of debt on their young backs, while their exact contemporaries north of the border embark on adult life in the black.

Well perhaps you should care. Why is toleration of a grotesque unfairness acceptable if it is done by Unionists with the political intent of keeping Scotland in the Union?

Anyone?

Presumably the £4.5bn a year by which Scotland is overfunded would go some way to mitigating the severity of the Government's austerity measures in England. We are told that the Barnett Formula, although unfair, must remain in place until after the stabilisation of the public finances (which, by happy coincidence, will be after the referendum on Scottish independence - and, in all probability, after the term of the present government, which means that Cameron and Clegg will have broken their pre-election promise on Barnett reform).

People like Allison Pearson may be able to tolerate a policy of Killing Home Rule by Kindness during boom years but it will be interesting to see whether they regard it as a small price to pay during the austerity years. The tone of her article suggests not.

It's a rare day that I agree entirely with Michael Forsyth, but I can't see much wrong with this statement:

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.

Except, of course, that there should be no phasing in of changes. Any new formula designed to eliminate unfairness should be introduced immediately, irrespective of the consequences for any part of the UK that has been for years over-funded. After all, we "must be seen to be fair to the rest of the United Kingdom".

Extract from the Liberal Democrats policy paper "For the People, By the People", Autumn 2007.

6.3 The English Question

6.3.1 During the 1980s, the Conservative Government used its majority in the House of Commons to force through highly controversial legislation that applied only to Scotland, despite the fact that Scottish support for the Tories had substantially declined. Scottish voters were effectively disenfranchised and increasingly frustrated by the government’s activities. This gave added urgency to the cause of Scottish devolution.

6.3.2 However, devolution to Scotland and Wales has resulted in a new anomaly. Scottish and, to a lesser extent, Welsh MPs can vote in Westminster on legislation that will affect only England. While sometimes the opposite applies, with English MPs voting on legislation only affecting Scotland and Wales, this is far rarer. The issue arises because of the asymmetrical devolution so far introduced in the UK, with the Scottish Parliament having significant law-making powers, the National Assembly for Wales having more control over its own law and policy (though mainly over secondary legislation) and the English having no equivalent separate body.

6.3.3 Some advocate giving powers to an English Parliament as a way of overcoming this anomaly. Others believe that while all MPs elected to the UK Parliament deal with UKwide business, it would be possible for those MPs who represent English constituencies to deal with England only business in a separate forum and as an additional responsibility. To work properly, however, both models would require a separate executive arm for England. Clearly, if a different party were to hold a majority of seats in England to that which had an overall majority in the UK, this would be politically as well as constitutionally imperative.

6.3.4 Such a change would alter significantly the role of the UK Parliament in the affairs of the UK, reducing substantially the policy areas over which it had competence. If an English assembly of some kind were to be established within Westminster, composed solely of UK MPs representing English constituencies, inevitably it would be that assembly which dealt with much of the legislative business. On the Scottish model, the new English legislature and executive would gain power over health, education and training, local government, social work, housing, economic development, many aspects of transport law and home affairs (including, the police and the emergency services), and some policy concerning the environment, agriculture, forestry and fishing, sport and the arts, as well as statistics, public registers and records.

6.3.5 Importantly though, if the English executive were to be established along these lines, UK fiscal, economic and monetary policy would remain with the UK Parliament, with UK MPs deciding the level of taxation for, and allocation of resources to, each part of the Union. It is likely that an English executive, governing a large proportion of the UK in such a wide range of areas, would argue strongly that the UK Parliament should not frustrate its policies by agreeing on a financial settlement which has the consent of the UK Parliament as a whole, but not of a majority of English MPs. We believe this problem would be particularly acute if an English executive were not coupled with the arrangements for fiscal federalism we outline in 6.4, and would still be significant even if it were. It is for these reasons that many feel that a substantial layer of English governance – based, as it would be, on such a disproportionate part of the Union – would bring into serious question the continuing role of the UK Parliament and, by extension, of the UK itself, to which Liberal Democrats in England, Scotland and Wales are firmly committed.

6.3.6 Liberal Democrats want to see, as far as possible, decisions made, and services delivered, as near to the people and communities concerned as possible. To this end our local government policy paper, The Power to be Different, states that local authorities should be “the basic building block of government and public service delivery in England”. However, in the case of decisions and services affecting a large number of communities, or those spread over a large area, it advocates central government handing over powers and responsibilities to regional government. We also state in that paper our support for directly elected regional government in those areas where the public want it.

6.3.7 To this end, there is a wider party and national debate to be had as to whether domestic policy for England should be determined at national level or regional level. For many, England has a distinct national identity and they argue that it would entirely justified for there to be an English Parliament or Assembly and an English executive. Others argue that to devolve power from the UK Parliament, which represents c.60 million people, to an English Parliament, representing c.50 million people, would fail to bring government closer to the people and that instead there should be devolution to the English regions or to even smaller units.

6.3.8 In light of these arguments we believe that further consideration needs to be given to the mechanics and implications of such a constitutional change, and that any proposed change would require the endorsement of the British electorate. That is why we believe that this matter should be part of the remit of the constitutional convention that this paper advocates in chapter 2. The convention’s proposals, which would include a solution to the English question, would then be put to the UK public in the referendum seeking endorsement of the wider constitutional settlement.

6.4 Financial Issues Associated with Devolution

6.4.1 A key challenge of further devolution will be changing the funding system in the UK. The current funding regime throughout the UK is based around grants from Westminster. In the case of both the Scottish Parliament and Welsh Assembly their executives have considerable freedom over the use these grants are put to, while in England much of the grants given to local government are ring-fenced and have to be spent on policies defined by central government.

6.4.2 The amount of the grant given to Scotland, Wales and Northern Ireland is decided by the Barnett formula, which was a temporary measure introduced ahead of the expected devolution to Scotland in the late 1970s. The Barnett formula does not redistribute wealth between areas of the UK. Rather it links increases or decreases in spending in England to proportional changes in the grants to Scotland, Wales and Northern Ireland. It does not decide the overall size of budget or take into account public expenditure need. Indeed it was assumed that devolution would result in the establishment of a more needs-based funding calculation, which never took place due to the no vote in the referendum on a Scottish Parliament in 1979.

6.4.3 Liberal Democrats believe that, as well as devolving political power out from Westminster, fiscal power also needs to be devolved from the Treasury if the UK is to have a genuine federal system. While others propose full fiscal autonomy for the devolved governments (where they would raise all the taxes and then remit an agreed amount to Westminster), no other industrialised country has opted for this for a number of reasons. Fiscal federalism, however, avoids the pitfalls of fiscal autonomy and should give the institutions to which power is devolved substantial control over the levers of power controlling funding. That means the devolved institutions should raise as much of their own spending as practicable, and be able to significantly influence the development of their economy. It would also mean establishing agreed rules on such things as prudential borrowing. An essential element therefore of fiscal federalism is for devolved governments to have powers of taxation. Liberal Democrats endorse the principles of fiscal federalism set out in the Steel Commission report, and believe that the Scottish Parliament and Welsh Assembly should have more powers and freedoms to level their own taxes. We are also committed to increasing the percentage of revenue that regional and local authorities in England raise.

6.4.4 How fiscal federalism would work has been considered in detail for Scotland in the Steel Commission report. The Commission concluded that fiscal federalism in Scotland would mean the Scottish Parliament is given responsibility for all taxes except for those reserved to the UK, and that this would include the right to abolish and introduce new devolved taxes. Under these proposals the Scottish Parliament would have the ability to vary the rate and tax base for each devolved tax, and the power to borrow, subject to specific criteria. Were the Steel Commission’s proposals to be extended, the funding powers devolved to each nation and region would be a matter for each to decide and should be considered alongside work on the legislative and policy powers of the directly elected assembly representing it.

6.4.5 As the UK is a diverse country in terms of wealth, income and need, raising a greater proportion of taxation locally means there would have to be an element to redistribution in the interests of national unity and if poorer areas are not forced to have punitively high tax rates or sub-standard services. We believe the Barnett formula should be replaced by a new needs-based equalisation formula – the Revenue Distribution Formula – as set out in Policy Paper 75 Fairer, Simpler, Greener. This would take into account factors such as geography, how rural an area is, health, the state of infrastructure, poverty and deprivation and the cost of delivering services. The Formula would be drawn up by a Finance Commission of the Nations and Regions (FCNR). This would be made up of representatives of the UK government and representatives from the National Assembly for Wales, the Northern Ireland Assembly, the Scottish Parliament and the London Assembly, plus those from any English regional chambers or assemblies. It would reach its conclusions by consensus and any proposals would be ratified by the respective executive bodies. As well as agreeing the equalisation formula, the FCNR would also be charged with developing work on the whole agenda of fiscal federalism.

Another reason behind the delay to Barnett Formula reform comes courtesy of Rhodri Morgan.

Alex Salmond made it absolutely clear to me in 2007 that the new SNP administration would resolutely refuse to take part in any kind of review of the Barnett formula, unless it was linked with Scotland getting ownership of North Sea oil and gas revenues. If the British Government says it is going ahead with a review of Barnett anyway, then that strengthens the Salmond/SNP hand in the referendum on independence. In the short term, Wales will have to respond to any success Scotland might have in getting devolved control of corporation tax.

Awaiting the stabilisation of public finances, my arse. More like killing home rule by kindness, £4.5bn per year worth of kindness.

One wonders what percentage of Scots would favour independence if the UK Government was going ahead with Barnett reform.

From the Welsh Conservatives 2011 Manifesto.

Devolution has made Wales a political nation. The Welsh Conservative Party welcomes this development and believes it is completely compatible with a strong Union, which is the basis of the UK. Now that the principle of a primary law making Assembly has been settled, it is time to strengthen the political partnership between Wales, England, Scotland, Northern Ireland and the UK. This will require the UK to move to a fair, needs based formula for the funding of devolution.

Two questions:

If devolution has made Wales a political nation, doesn't England's lack of devolution make it a non-political nation that is incapable of being in a political partnership with Wales, Scotland, Northern Ireland and the UK?

Didn't the Tories promise to reform the Barnett Formula before they were elected and then kicked the issue into the long-grass after they were elected?

Unlike the Welsh Conservative Manifesto, the Scottish Conservative Manifesto makes no mention of moving the UK to a fair, needs based formula for the funding of devolution. Well it wouldn't, would it? Such a move could leave Scotland £4.5bn a year worse off.