Barnett Formula

HL Deb 07 November 2001 vol 628 cc225-64

4.16 p.m.

Lord Barnett rose to call attention to the case for a review of the Barnett formula; and to move for Papers.

The noble Lord said: My Lords, it will be clear that this is a non-controversial debate. There has been much written and said about the formula. It would, therefore, be sensible to start with a clear explanation of precisely what it is. I shall then try to explain why it was invented—if that is the right term—why it has survived for more than 20 years, whether it should be changed and, if so, how?

The formula was invented—I have used that word incorrectly—in 1978. Perhaps I should say at the outset that it did not occur to me at the time that it would become a formula, or that it would last so long. The formula really is quite simple. It applies to changes, whether up or down, in the Great Britain total of what is called comparable expenditure. Such expenditure is allocated on the following basis: England, 85 per cent; Scotland, 10 per cent; and Wales, 5 per cent. On that basis it was intended to be approximately population based. I had always assumed that the arrangement would be temporary until a more sophisticated method could be devised which took account of needs. In fact, not only has there been no change to take account of needs, there have been only minor changes to take account of changes in population.

Scotland's share of total UK population has declined ever since the formula was introduced. The White Paper on Scotland's Parliament indicated that the formula would be updated regularly to reflect the population ratio. In response to pressure from English MPs, Alistair Darling, then Chief Secretary to the Treasury, gave a commitment that it would be revised annually. I hope that my noble friend Lord McIntosh of Haringey will be able to assure us that that has taken place.

I should like to say a few brief words on population figures. I quote from a paper by Professor Heald of Aberdeen University who has done a great deal of work in this area. He states: The official population projections for Scotland are chilling, only 4,524,000 persons in 2031 which constitutes an absolute fall of 13.7 per cent from the peak population of 1974. On the basis of the projection, Scotland's share of GB population would be 7.60 per cent in 2031".

So much for the facts on the formula. The next question is why it was invented. The nearest that anyone in the present Government has got to answering that is my noble friend Lord McIntosh on 3rd December 1997. In case he has forgotten, I have extracted his comment from Hansard. He said: The advantage of the Barnett formula over the years has not been that it is based on strict rationality but that it avoids argument each year when the allocation of resources is determined".—[Official, Report, 3/12/97; col. 1362.] I can confirm that that is true. As far as I was concerned, the formula was not strictly rational. As I have said, it was basically decided on a population basis. However, I would not have been able to obtain Cabinet agreement at the time without being able to satisfy English departmental Cabinet Ministers that there were reasonable grounds for allocating a greater level of public expenditure to Scotland and Wales than population figures alone justified. The substantial case that convinced Ministers was the different levels of income per head in Scotland and Wales. My life as Chief Secretary at that time was therefore made just a little bit easier, although I hasten to add that that was not the case that I presented to the Cabinet, because they might not then have agreed it.

As the figures that I shall quote make clear, the situation now is very different. There is obvious unfairness in the working of the formula—although, I hasten to add, not for Wales. I see someone nodding on the other side of the Chamber.

Why has the formula survived for more than 20 years? The major—and, some might think, too simple—reason is that governments generally prefer not to make changes, as that only leads to difficult questions. If that is thought too simple, there is another, more political reason. For 18 years, Margaret Thatcher and John Major resisted making the changes that the figures clearly show should, in fairness, have been made. They were obviously worried that it would lose them votes in Scotland and Wales. The net result was that, despite not changing the formula, they lost every Conservative seat in Scotland and Wales. I do not pretend that that had anything to do with the formula, for or against. The new Labour Government have also resisted any changes to the formula. I look forward to hearing from my noble friend the Minister why.

The latest available figures come from the Treasury and the Office for National Statistics, so I assume that they must be true. The Chancellor of the Exchequer's document costs £15.60. I hasten to say that I got it from the Library, but at that price it surely has to be true and, I hope, accurate. The documents show that in 1999—the most recent figures available—GDP per head in Scotland was £12,512, in Wales it was just £10,449 and in the north-east of England it was £10,024. What is called "identifiable" managed government expenditure per head in 1999–2000 in Scotland was £5,271, in Wales it was £5,052 and in the north-east it was only £4,837. I shall not quote many more figures, but I hope that those are simple enough to make the position clear.

As a confirmed sceptic on statistics, I feel bound to say that the figures at least show a general factual position, if nothing more. In this context, I assume that the word "identifiable" is important in relation to expenditure. For example, Professor Heald, in an important paper, has given an indication of why the comparatively simple formula has in practice become rather complex over the past 23 years. He describes the changes since 1978 as "Son of Barnett". I do not complain about that, although I do not know what it means, except that there have been major changes. He said: an introduction of cash planning in 1982, and the new planning total in 1990 have fundamentally affected the operation of the formula". In addition, he points out that the formula applies only to block expenditure. I know that all your Lordships will know what that means. It certainly means that it is not the same as it was.

If the Minister has new figures, I am sure that the House would be glad to hear them, but for the moment these are the latest figures published. I would be pleased to hear what the Minister has to say in addition. It is clear that within any set of figures that one cares to take, be it the Barnett formula, "Son of Barnett" or "Grandson of Barnett"—although I have not got one; it would have to be "Granddaughter of Barnett"—there have been many changes that have confused an originally simple formula and made things rather difficult to comprehend.

Action taken on the basis of these figures alone would not solve the present unfairness of the allocation of resources. For example, within each area and region there are large differences. In the northwest of England, Merseyside is very different from my area of Greater Manchester—and most other parts of the region—in respect of GDP per head. Even in what is thought of as the affluent south-east, there are pockets where there is undoubtedly a need for higher levels of public expenditure. Relatively prosperous London, which is always much in the news, has the highest income per head, at approximately 130 per cent of the UK all-region average, yet I am sure that government expenditure there is much higher than in the north-east or the north-west. It is about the same as in Wales, where income per head is only 80 per cent of the UK average. I am sure that that will not stop the Mayor of London seeking even more.

Despite clearly doing very well in terms of income and expenditure per head, I am sure that Scotland can and will argue its case for even higher levels of expenditure. I am sure that we shall hear the arguments of sparsity of population, a colder climate, poor health records and problems of education. The case is further confused by the lumping together of capital and current expenditure. Yet even the general figures show conclusively at least one example of terrible unfairness. The latest figure for income per head in Scotland is £12,512 and government expenditure per head is £5,271, while in the north-east, with income per head at only £10,024, government expenditure per head is lower, at £4,837.

Lord Forsyth of Drumlean

My Lords—

Lord Barnett

My Lords, I am afraid that I have a problem fitting my speech into 15 minutes and I have to stick rigidly to the rule. In the other place I would normally have given way to the noble Lord at all times.

There will undoubtedly be scepticism about the figures. As I have said, I share that scepticism, but I hope that there can be little doubt from the figures that I have quoted about the overwhelming case for a change in the formula. As the founder, I readily admit to having given no consideration to needs at that time or where public resources should be allocated, not just in Scotland and Wales, but in Great Britain generally. In fairness, the job of Chief Secretary does not lend itself to doing what is essentially a departmental job.

What should be done? I hope that, inadequate as they are, the statistics show that the changes required go much wider than a simple amendment to the Barnett formula. The information currently available makes it impossible to propose the kind of major changes that are clearly required. I hate to recommend yet another review, but without one we shall not know where and what action is needed. The current Comprehensive Spending Review, as it is called, will not do the job.

The Motion relates to the subject of the Barnett formula. It would have been nice—over many years I have grown rather fond of the name of that formula—if I could have concluded that it was so good that there was no need to make substantial changes.

But I have previously suggested that instead of scrapping such an excellent name, any changes that result should perhaps be described as the Barnett Formula Mark II or the Barnett grandson's or granddaughter's formula. If the major review that I am suggesting concludes that the changes required would still need a formula for Scotland and Wales, I inform the Government that I should be very happy indeed if they wish to continue using the present name for the new formula. But as I have said, if the proposal should be scrapped, as I hope it will be, then as the man who introduced the formula, I hope that it will be wholly non-controversial in your Lordships' House.

My Lords, I beg to move for Papers.

4.30 p.m.

Lord Campbell of Croy

My Lords, I would like to start by congratulating the noble Lord, Lord Barnett, for putting down this Motion for debate and for being successful in the ballot. I also congratulate him on the way in which he introduced the debate and explained the mysteries of his formula. I believe that my contribution would best be from my experience as a junior Minister at the Scottish Office in the early 1960s, which is nearly 40 years ago, and later as Secretary of State for Scotland between 1970 and 1974, before the Barnett formula was available.

In reaching decisions on the amount of the Scottish block expenditure in relation to that for England and Wales, which were together at that time, negotiations had to take place. I understand that they were much easier after the Barnett formula was introduced. The formula has been much misunderstood. As the noble Lord explained, it does apply only to changes in block expenditure in England which automatically apply to Scotland in a set proportion. As it is sometimes thought, it does not set the initial block expenditure decided on for England and Wales and then for Scotland.

It has not been affected by devolution. As I said, I go back to the early 1960s when I was a junior Minister at the Scottish Office and this area was within my portfolio. Then we had to take decisions on the block grant for England and later for Wales. A pattern had been set by what was called the Goschen formula after 1888 when he was Chancellor of the Exchequer. The formula recognised that more expenditure was required in Scotland per capita for geographical and other reasons; for example, for areas of sparse population. The Exchequer contributions were accordingly larger in proportion in block grants for Scotland than for Wales.

At the time I was a Minister in the early 1960s, when the contribution by central government to local government expenditure, for example, with the rate support grant, for England was at 50 per cent, the contribution for Scotland was 8.5 per cent more. So that 58.5 per cent was contributed by the Exchequer to the total local authority expenditure for Scotland. Proportions had to be negotiated each year. I believe that when the noble Lord was Chief Secretary he performed a signal service in codifying and institutionalising the process through his formula.

Now he says that it is time to move on and that the formula should be altered and reviewed though it is still applicable now. I believe that the name Barnett is likely to become as famous as the name Goschen. That was suggested in 1988, I believe, and it has come true. The formula was extended to Wales in 1980 and I believe that it now applies also to Northern Ireland. But is it still relevant and necessary? I believe that the noble Lord, Lord Barnett, suggested that it may not be.

One favourable attribute of the formula has been its flexibility. For example, an increase in expenditure in England on health would lead to a proportionate increase for Scotland although it did not have to be in the health sector. It may be in other areas of public expenditure and for other purposes.

The advantages for the smaller parts of the United Kingdom have been that the formula recognised and protected the existing principle of differentials. It has reduced the amount of negotiation and argument each time England receives an increase to meet anticipated expenditure. I look forward to hearing from the noble Lord, Lord McIntosh, as regards what system or formula should be devised in future, if it is necessary and relevant, given that the Barnett formula has served its purpose and may no longer be needed.

4.36 p.m.

Lord Thomas of Gresford

My Lords, who is Goschen? We all know who the noble Lord, Lord Barnett, is, and he is to be congratulated on bringing forward an issue of great importance to the people of Wales. Perhaps I may also say how glad I am to be with my noble friend Lord Livsey of Talgarth on the day he makes his maiden speech. He is an expert in this field and I look forward very much to hearing what he has to say.

It has to be the aim of any government to distribute resources fairly between the nations and regions of the United Kingdom in order to remove deprivation and disadvantage and to equalise prosperity. The Barnett formula, based on a population count, assumed that if a higher average of percentage of available resources was given to the people of Wales, Scotland and Northern Ireland, then their pressing needs would be met. It was thought that in due course such an approach might lead to a level platform of prosperity throughout the United Kingdom. It may appear to have worked in Scotland because its per capita income has been lifted very nearly to the average of the United Kingdom, but only at the expense of the loss of population to which the noble Lord, Lord Barnett, referred.

It has most certainly not worked for Wales. In 1988 the income per capita in Wales was 87 per cent of the United Kingdom. Now it has dropped to 80 per cent. Wales is becoming poorer in relative terms. Therefore, 63 per cent of the land area of Wales, covering 65 per cent of the population of 1.9 million people, has now been granted objective one status for the purpose of European funds.

There is a clear unfairness in the formula. An inter-departmental study led by the Treasury in 1979 constructed a needs-based formula as opposed to a population-based formula. It calculated that, considering mortality rates, literacy, numeracy, unemployment, housing, deprivation and so on, Wales needed nine per cent more funding than England to achieve parity over a period of time as opposed to the Barnett formula allowance of six per cent. Wales would require 9 per cent on the needs-based formula that the Treasury constructed in 1979. Since that period Wales would have received £77.739 billion more for its needs than it actually had. That is a very considerable sum.

Scotland did better. The needs model produced a 16 per cent requirement, but Scotland's needs were met by Barnett to the extent of 22 per cent. That may be why Scotland has done rather better under the formula and has caught up, while Wales has slipped behind.

It is unacceptable that the prosperity gap between Wales and England should be widening and that the Welsh Assembly should be deprived of funds to deal with the endemic problems that Wales faces—problems that will no doubt be increased by fresh burdens on Welsh agriculture and the Welsh rural population. It is said that there are inequalities between the English regions. Well, it is up to them to press for the framework of government that they require. Wales cannot wait while areas of England complain about their relative poverty but do nothing about it. We already have some of the machinery to effect change in the Welsh Assembly. However, we in Wales pay our taxes entirely to the Westminster Government and nothing to the Assembly. We want that money back, and with it a fair share of the wealth and prosperity that accrues to the United Kingdom as a whole.

The way in which objective one funding has been allocated shows the difficulties arising from the mechanical nature of the Barnett formula. In last year's comprehensive spending review, the Chancellor had to bust the formula and announce a significant increase in the Assembly's budget. That, it is hoped, will release the additional European structural funds that Wales requires but, despite considerable lobbying by the Assembly, will not provide the matched funding that should accompany it. The Assembly will be required to find £380 million from its existing budget to provide matched funding for the structural funds. That will squeeze other areas of expenditure. What on earth is the use of giving additional European funds to Wales if its own expenditure on schools, hospitals and roads has to be cut?

The Barnett formula has run its course. It had its part to play in allocating funds between departments in Whitehall when the Welsh Office was simply another department, but even then it failed in its long-term goal of promoting fairness and equality between the nations of the United Kingdom. It is too inflexible and mechanistic to be applied to the allocation of resources between Westminster and the Welsh Assembly. A needs-based formula must be devised.

Baroness Farrington of Ribbleton

My Lords, perhaps I may remind the House that when the figure five appears on the clock, the speaker's time is finished. Recently, we ended up with the Minister having only half her allotted time to reply.

Lord Thomas of Gresford

My Lords, I apologise to the House for having taken too much of your Lordships' time on what is a matter of considerable concern in Wales.

4.43 p.m.

Lord Morgan

My Lords, the name of my noble friend Lord Barnett has been compared to that of Goschen. While Lord Randolph Churchill famously forgot Goschen, none of us will ever forget Barnett.

The Barnett formula was valuable in its time; it provided a rough-and-ready formula based on population that helped to ensure that the passage of devolution was not impaired or handicapped by conflict between Westminster, Edinburgh and Cardiff over the distribution of expenditure. For Northern Ireland, I am tempted to say that it was a godsend, if that is not too sectarian a remark for that part of the United Kingdom.

It was a rough-and-ready, practical approach, as my noble friend Lord Barnett observed. My noble Friend, Lord Callaghan, who was Prime Minister when it was introduced, observed in this House that it grafted something that was broadly rational on to something that was fundamentally irrational. Let us now consider it pragmatically, as was done in the 1970s, to see whether, for practical reasons, it is not time for a revised version.

The previous speeches have focused on fiscal aspects. I should like briefly to make three constitutional observations, because the formula bears so strongly on devolution. First, the Barnett formula illustrates how centralised is our system—how it works contrary to devolution. It is based on grants from the Treasury and power at the centre. It illustrates why the United Kingdom has been slow to devolve, and how devolution is still not observed in the spirit, although it is in the letter.

Secondly, the process under the formula is dominated by the needs of England. It is the expenditure on England from which the other percentages derive and the concept of needs is devised. That can lead to great distortions, as we have heard. There is a fundamental divergence in principle between the effect of the Barnett formula and the fact of devolution in Scotland, Wales and Northern Ireland.

Thirdly—although others, notably my noble friend Lord Radice, who will be speaking later, know more about this than I do—the formula contains a misconception of England. England is presented as a unit. There is no observation of regional variations within England. It may be fair to Scotland; it may have once been thought fair to Wales, although I do not believe that. But the north of England, especially the North East, has been a big loser under the Barnett formula. There is no conceptual way or policy mechanism by which the needs of the north of England can be spelt out and dealt with. We have heard the statistics that show that gross domestic product, income per head, and so on, in the north and northeast of England are unfavourable, and the region receives no assistance under the Barnett formula.

That illustrates the same point. Devolution, local needs, local democracy and accountability are not recognised under the formula. However well-intentioned it was, its effect is to work against the spirit of what is, after all, one of the Government's great triumphs—namely, the achievement of devolution and the recognition of the nationhood of Wales and Scotland.

The Barnett formula was conceived as a way of giving governments a quiet life. There are many reasons for that at a time of great complexity. However, it has not achieved that. As we have heard, it has produced problems in Northern Ireland; others far more knowledgeable than I will speak about Scotland; it has been disadvantageous to Wales. The noble Lord, Lord Thomas of Gresford, mentioned the effect of objective one. The Barnett formula was bypassed so that objective one funding could reach Wales at all. Repeated bypassing of the formula has helped to make it increasingly ineffective. Professor Hazell of the constitutional unit recently observed that, for Wales and for many parts of England, the Barnett formula has become the Barnett squeeze. That squeeze is likely to be felt shortly in Scotland and, perhaps more damagingly, in Northern Ireland.

There is therefore a strong case for a change in the Barnett formula. I suggest that that change should be deferred for a while. At present, in Northern Ireland, it could be catastrophic to hold a prolonged argument between Belfast and Westminster. The Barnett formula should be dealt with as St Augustine dealt with chastity: it should be enthusiastically endorsed but prudently deferred.

4.49 p.m.

Lord Livsey of Talgarth

My Lords, I welcome the opportunity to make my maiden speech on the Barnett formula. It is a privilege to take part in this debate with the noble Lord, Lord Barnett, himself. I had planned to make a 10-minute speech, but it has been cut to five minutes.

Autobiographically, I am lucky to be here at all, because my father was the youngest of seven and my mother was the youngest of six. I am proud to be a Welshman. My family, as my name betrays, has been in Wales for five generations. They were originally blacksmiths in Cyfartha ironworks in Merthyr Tydfil and made thousands of wrought iron gates for nonconformist chapels throughout Wales. They were also musicians, conducting the famous Cyfartha brass band and won a competition at the Great Exhibition of 1851 so doing; but I must move on because that was extinguished in the Great Depression. My family worked in both industrial and rural Wales and my maternal grandfather was orphaned at the age of nine on the family farm.

My career spans both industry and education as an agricultural economist and I entered politics later in life. Suffice it to say, before becoming leader of the party in the Commons, I fought seven elections, won three and had eight recounts. There we are; it has been a very invigorating political life.

It is inspiring to speak in this Chamber, but I must now turn to the two questions I want to address. One of them I must ask with due respect to my former constituency, Brecon and Radnorshire, which is the most beautiful in Britain. It was earlier this year struck by the dreadful foot and mouth disease. The experience was doubly galling for me because I was in Northumberland in 1967 and saw the terrible and tragic circumstances there, and I never wanted to see the disease rear its ugly head again.

I cannot compliment the Government on their handling of the disease. I coined the description "lamentable" long before Devon County Council. I described the lack of MAFF communications as "lamentable" over the proposed Eppynt mountain burial site in the Brecon and Radnorshire constituency last April. Suffice it to say that after seven hours on a mobile telephone, I achieved a meeting between farmers and a Minister at 11.30 at night in Brecon barracks. We persuaded the Government to abandon that site on geological grounds. Many families and children have been heartbroken by what has happened and a full public inquiry is essential to sort the matter out.

Rurality and farming impinge on the Barnett formula. That is especially so in Wales where population sparsity and urban deprivation—for example, in the valleys—predominate. The formula allocates and allows for changes in public expenditure in Wales, Scotland and England, but does not take regional inequalities into consideration.

The criticisms of the Barnett formula are that it is too crude because it is based on population statistics and results in per capita allocations. It ignores differences in health; rurality and sparsity of population; urban deprivation; lack of transport infrastructure; and, to a large extent, low wages. It does not reflect the changes in relative prosperity since 1978—there is no question about that.

When one looks at the GDP figures, particularly those mentioned by the noble Lord, Lord Barnett, in relation to 1999, one sees that the differences in the inequalities between Wales, Scotland and north-east England stand out starkly. North-east England and Wales account for just over 80 per cent of GDP while the proportion relating to Wales has declined by 10 per cent in the past 20 years. A new needs-based formula is absolutely vital to take account of the cost of providing services to sparsely populated areas on the one hand and to deprived and congested urban areas on the other. They have been blighted by poverty and social exclusion, particularly in Wales—I am also familiar with north-east England—with poor health and low wages.

The solutions we ought to be discussing today are ones which involve positive change. World-wide models are available; for example, from Germany and Australia. In Australia, the Commonwealth Grants Commission aims to secure equality and diversity to its federal states. Liberal Democrats propose a finance commission for the UK nations, which would have "constitutional status". That replacement device would introduce a revenue distribution formula and the Government should come forward and correct the inequalities within the regions and nations of the United Kingdom. I call on the Government to embrace such a proposal because we must stem the tide of urban and rural poverty which now affects important parts of the UK.

Finally, economic equality of opportunity must surely be the battle-cry for our deprived communities and their citizens.

4.55 p.m.

Lord Roberts of Conwy

My Lords, it gives me great pleasure to compliment the noble Lord, Lord Livsey of Talgarth, on the high quality of his maiden speech. We have known each other since he was first elected as Member of Parliament for Brecon and Radnorshire in 1985. I am sure that the whole House will look forward to his future participation in our proceedings.

I must also compliment the noble Lord, Lord Barnett, on securing the debate. It is more timely now than when he first called for it in 1997. More devolution is in the wind, the macro-economic scene is changing and his formula is approaching its silver wedding. Successive governments have been wedded to it for so long because it has provided them with a comparatively simple way of ensuring that each of the countries of the United Kingdom receives its population share of annual increases in public expenditure relevant to its block.

The Government claim that the formula is fair—and it is in principle—but there was that lengthy period when the population share figures used were wrong. The result was that Scotland received 1 per cent more than its due and Wales received 0.14 per cent less at the time of the great correction in 1992. It is too late for us to say, "Wales was robbed". The Government are now committed to annual revision. That sounds right, provided that the revision is unbiased. I, too, would like assurances about it.

The use of the wrong figures vitiated the intended convergent effect of the formula and has led some people to describe its proper working in future as the "Barnett squeeze". In Wales, we should be careful about that. Perhaps we should call it more endearingly the "Barnett hug" because we may benefit from its operation in years to come.

Criticism of the wide divergence in per capita spending across the UK should be levelled at the inherited underlying baselines rather than at the formula itself and at the bypassing of the formula by special items of government expenditure outside the block. Throughout the years there has been much talk about the need to base regional expenditure on needs assessment. Indeed, such a study was carried out in the late 1970s and it concluded that per capita expenditure in Scotland, Wales and Northern Ireland would have to be substantially higher than in England in order to provide a comparable level of service in the six areas examined in 1976–77.

I shall not quote those antiquated figures, except to say that Wales would have received more on a needs basis—that it did in 1976–77—and Scotland would have received less. Much has changed since those days. The problem—and I give due warning—of providing an acceptable needs-based formula has not diminished. As those who have had experience of local government finance know only too well, there would be endless arguments about the factors to be taken into account and the weighting attributed to them; for example, sparsity, morbidity and so forth.

Should the Government review the Barnett formula? I suspect that the Minister who is to reply will say that the Treasury is always reviewing its working. Since the year 2000 we have had expenditure figures for the English regions, which are not at all happy with the outcomes. If there is to be more devolution to the English regions, a funding formula will have to be found in order to ensure parity of treatment.

Personally, I should like to see a closer relationship between per capita spending by the Government and disposable household income per head. Regions with most income should have least government support and those with least income per head should have most support. That seems right to me. Such a correlation is currently lacking. Wales would come out of it well as, indeed, it would on a GDP basis, which is another possibility.

5 p.m.

Lord Radice

My Lords, I begin by thanking, noble Lords and the staff of this House for their very warm welcome. If this is the aristocratic embrace, then there is a lot to be said for it.

I say at the outset what a great honour it is to take part in a debate initiated by my noble friend Lord Barnett, at whose feet I used to sit when I was a rookie Member of Parliament and he was Chief Secretary to the Treasury in the Labour governments of the 1970s. I doubt, however, whether any of us, including my noble friend, ever imagined that one of his main claims to fame would be the so-called "Barnett formula". Incidentally, I note that it does not even rate a mention in his excellent account of his stewardship of public spending. Therefore, perhaps he was not aware of the controversy which would arise.

However, of course, it is now a matter of controversy. For example, in the North East, which I represented in Parliament for 28 years, there is a widely supported campaign if not to abolish the formula then certainly to reform it radically. The campaign for the English regions takes a similar position. It calls for a replacement of the Barnett formula and the establishment of a new mechanism to distribute public money on the grounds that the present system is over-generous to Scotland and discriminates against the English regions.

It may well be that some of the criticisms of the Barnett formula have been unfair, as was pointed out in the preliminary investigation by the Treasury Select Committee of which I was then chairman. As my noble friend pointed out, it is not always understood that the Barnett formula does not determine the overall size of the budget in Scotland, Wales and Northern Ireland; it is all about apportioning the increases in public spending on comparable programmes between the countries of the UK on the basis of population.

Of course, as a short-term solution, the Barnett formula made a good deal of sense because we believed that we were going to get devolution. It provided an agreed way of allocating increases without unseemly annual haggling. It was also expected to provide over a period of time a mechanism for convergence in spending per head between the countries of the UK. However, for a number of reasons which I do not have time to address at the moment, that convergence has not happened.

Therefore, partly as the result of an initial pattern of public spending and partly due to the way that Barnett has worked in practice, the spending differences between, on the one hand, Scotland, Wales and Northern Ireland and, on the other hand, England, including, of course, the English regions, has remained pretty well the same. Indeed, according to the latest public expenditure statistical analysis, if one takes UK expenditure as 100, England is 96, Scotland is 118, Wales is 113 and Northern Ireland is 133. If one then starts to place the English regions on the index, only London with 113, the North East with 109 and the North West with 104 are above 100.

Of course, there may be strong arguments for high public spending in Scotland, Wales and Northern Ireland. I shall not raise that issue. But many of those arguments apply also to the English regions. My own region, the North East, which I know best, has lower GDP per head, higher unemployment and greater educational problems. It is very difficult to justify the following pattern of educational spending: £686 per head in the North East compared with £863 per head in Scotland. Perhaps there are good reasons for that, but I believe that people in the North East would like to know what those reasons are.

I believe that the time has now come for a fresh appraisal. It should be possible to devise a mechanism which takes more account of needs and brings the English regions into the equation as well. Therefore, I believe that the exercise should draw on the experience of the standard spending assessment. We have a model for local government expenditure. It is based on population, but it takes additional needs into account.

I consider it to be essential both for the legitimacy of public spending and for the strength of the Union that all parts of the UK should believe that the distribution system is fair. That is the case for change which I believe the Government should now address. I thank noble Lords for their attention.

5.5 p.m.

Lord Forsyth of Drumlean

My Lords, I begin by congratulating the noble Lord, Lord Radice, on an excellent maiden speech. He has shown himself to be a member of a very select club of people who understand what the Barnett formula is about. Over a number of years I listened to his excellent contributions in another place, and I am sure that this place will benefit greatly from his wisdom and knowledge.

I also congratulate the noble Lord, Lord Barnett, first, on securing the debate and, secondly, on the very skilful and elegant way in which he indulged in what was—perhaps your Lordships will forgive me for describing it—nothing less than a political heist. The noble Lord is intent on doing what he set out to do when he was Chief Secretary to the Treasury; that is, to grab money from Scotland for the north-east of England. That was the game.

As the noble Lord, Lord Radice, pointed out, the intention of the Barnett formula was to produce convergence and to remove what was seen as an anomaly between expenditure levels in Scotland and those in the rest of the United Kingdom. The reason that the noble Lord is dissatisfied with the operation of the Barnett formula is that it has not achieved its purpose. Its purpose was to reduce expenditure in Scotland relative to England. Indeed, that is why the Barnett formula was kept secret for two years and was revealed only by accident in a parliamentary Answer at that time.

Of course, the effect is that, if public expenditure increases, the gap between Scotland and England narrows and, at times when public expenditure is cut—I suspect that we may be embarking on that if we are not to see taxes go up—it produces divergence. The noble Lord and others spoke of the necessity of a needs assessment. I would counsel caution on the part of those who speak for Wales. My understanding is that a needs assessment, if carried out on the devolved matters for Wales and Scotland, would produce some very uncomfortable results.

When I was in the Scottish Office, I was told by my officials that a needs assessment would probably result in the Scottish Office budget being cut by £2.5 billion. They believed that the Treasury considered that it could be reduced by £4 billion. If that is the idea of Members opposite of how to make devolution work in Scotland, I believe that we should think again. It is nothing less than an insensitive raid in the tradition of the Border reivers which is likely to produce a vigorous response from north of the Border.

I welcome the opportunity to discuss these matters if for no other reason than that the debate provides us with an opportunity to underline the very unsatisfactory way in which the Government introduced devolution in Scotland, the half-baked nature of the proposals and the failure to put in place a stable system of finance. Therefore, north of the Border Mr Henry McLeish is committing himself to paying teachers considerably more than they are paid in England for the McCrone proposals will result in expenditure of well over £0.5 billion, to introducing new standards of care for the elderly north of the Border, and to having different arrangements for tuition fees. At the same time, he is looking to England to continue to provide more relative per head of population than is the case in Scotland. That is bound to create the kind of tension which has brought the noble Lord, Lord Barnett, to his feet complaining about the position relative to Scotland and England.

The Scottish nationalists are arguing that the Scottish Parliament should determine its own needs and raise its own taxes. That would put us straight into an argument about who owns North Sea oil and the value of that oil, and would create the type of tensions and divisions which we do not need in our country at present.

I say to the Government that they did not think through the financing of devolution. That is why we are now in this mess. This afternoon we had yet another example of constitutional reform which has not been thought through and which threatens our democracy and the integrity of the United Kingdom. I say to the noble Lord that we should let the formula alone; in time it will do the job that he intended. To embark upon a needs assessment will set one part of the United Kingdom against another. The only beneficiaries will be the nationalists and those who wish to divide and break up our country.

5.10 p.m.

Baroness Ramsay of Cartvale

My Lords, speaking as a Scot, I cannot help thinking that the fact that the Barnett formula is simultaneously being attacked by some because it gives Scotland too much and by others—in Scotland—because it gives Scotland less than its due, means that the chances are that it might have got things more or less right.

The Barnett formula has provided stable settlements under successive governments for more than 20 years. It is fair because it gives the same overall increases for devolved programmes per head of the population in all four parts of the United Kingdom. It has for the past 20 years been the mechanism for determining changes in the assigned budgets of the three territorial departments, and it continues to operate under devolution. Within their assigned budgets, it is for the devolved administrations to determine their own priorities for allocating their budgets.

The Barnett formula automatically applies a population-based proportionate share of any increase in comparable English spending programmes during a spending review to the Scottish assigned budget, which was formerly known as the Scottish block.

I put it to noble Lords that it is very important to maintain continuity and stability in a period of rapid change. The commitment in the devolution White Paper, Scotland's Parliament, that the Barnett formula arrangements would not be changed without a full assessment of relative needs in the two countries reflects, as does so much of the White Paper, the conclusions of the Scottish Constitutional Convention. That convention brought together all strands of Scottish political and civic society except, for their own peculiar reasons, the SNP and the Scottish Conservatives—the SNP because it saw in the successful establishment of a Scottish Parliament its own nemesis, and the Scottish Conservatives because they considered a Scottish Parliament to be anathema.

I should declare an interest—I do so with some pride. I was the final co-chair of the convention, along with the noble Lord, Lord Steel of Aikwood. The convention worked from 1988 to produce, in 1995, the document that was the basis for the White Paper and the subsequent Scotland Act. Under the heading, "Secure and stable finance", it recommended the continuation of the principle of equalisation and of the Barnett formula as the basis for the allocation of Scotland's fair share of the UK's resources. It will come as no surprise to the noble Lord, Lord Forsyth of Drumlean, to hear that I do not agree with a word that he said about the way in which devolution was brought about in Scotland. The convention believed that those arrangements would help to guarantee the Parliament's income on a long-term, stable basis and that its income would not require annual negotiation.

That was good thinking then, and it is good thinking now. Nobody says that the Barnett formula is cast in concrete for ever—because it is population based, and because populations fluctuate, it is clearly not at all set in concrete. The Government's spending plans have been set down and agreed for the years until 2004. That includes the spending plans for Scotland, Wales and Northern Ireland. There seem to be no plans to change them or to scrap or review the Barnett formula. I am happy about that because it provides the kind of stability that is necessary in these early days of devolution and of seismic constitutional changes. I say to my noble friend Lord Barnett, with the greatest of affection and respect, that it seems to be madness, just over one year into devolution, to think about rocking the financial boat.

During the general election campaign, my right honourable friend the Prime Minister spoke in May of this year on radio in Scotland. He said: I support the Barnett formula. I think it is the right way in order to make sure we get a fair settlement for the UK. I have said we have no plans to change the Barnett formula and I have supported it because I think it is the best and fairest way to distribute resources". My Lords, I agree with him.

5.15 p.m.

Lord Morris of Aberavon

My Lords, there cannot be many instances of a debate that is initiated by a noble Lord on the need to revise a formula that bears his own name. I congratulate my noble friend on so doing.

When I was Secretary of State for Wales and my noble friend was Chief Secretary to the Treasury, I was one of his first victims, but I lived to tell the tale. The apportionment of public expenditure was done in a series of bilaterals, with each spending Minister. If one was a multi-functional Minister, as I was, one attended a kind of modern Spanish Inquisition, which involved if not death by 1,000 cuts then at least the perception of it. My noble friend's saving grace was that he did it all with a great smile. If his victim left his room also smiling, it was a smile of relief that my noble friend had not abolished his victim's offices and confiscated the seals of office.

When I was called to those painful meetings with my noble friend, there was no Barnett formula. It is not even discussed in my noble friend's most entertaining book, Inside the Treasury. I believe that we argued about means and needs based on history, as the Treasury puts it. Even if they were one-sided arguments, my noble friend records very faithfully in his book his victories and his defeats.

It is important to remember that the formula governs only changes in expenditure; it guarantees that Wales, for example, receives a population-based share of any increase—or, as I found in my time, decrease—in spending by a relevant UK department. However, the formula does not set the baseline for spending in Wales. That reflects the position before the formula was set up. In Wales, higher levels of public expenditure reflect longstanding problems of deprivation and poverty. It is vitally important to distinguish the two components in the allocation of money. The advantage of some kind of formula is that it is a means of calculating the lump sum that is given to the Assembly. Once granted—this is fundamental to devolution—the Assembly makes it own budgetary decisions within the financial framework. It no longer has to argue or haggle with the Treasury.

Without some kind of formula, the Assembly would be open to second-guessing by the UK Government. I have no objection in principle to reviewing or revising the formula, but I suspect that that would only be tinkering so far as concerns Wales. There has to be some kind of formula—otherwise, one is in danger of undermining the whole mechanism and philosophy of devolution.

The baseline of expenditure may well be over-ripe for examination. That is very important. The extent of the needs of yesterday are not necessarily those of today. As the baseline cannot be set in stone for ever there will come a time when either the UK Government and the Assembly together, or, after full consultation, some independent body will have to examine the baseline. We have referred to an example of overriding—indeed, of breaking—Barnett; it involves the provisioning of Treasury funds to trigger the EC provision for objective one. Objective one funding was simply the identification of need, accepted by the EC and not covered by existing expenditure allocations.

The only argument within Wales is about the extent of funding. That is against a background that public spending in Wales, through the Welsh block, is now growing marginally faster than public spending in general, including a total of £3.4 billion extra spending in the July 2000 review, which is important. The principle of objective one funding—the breaking of the Barnett formula—underlines the need for an examination of the baseline itself.

5.20 p.m.

Baroness O'Cathain

My Lords, the number of speakers who have put their names down to participate in this debate could be a measure of the enduring interest in the subject or a determination to understand what it is all about. The two words "Barnett formula" crop up on a regular basis in this House, in the more serious articles in the printed media and from time to time in the broadcasting media. I do not believe that I am unique in having been somewhat ignorant of what it is all about, but no longer. Thanks to the action of the noble Lord, Lord Barnett, in winning the ballot for this debate, we have all had to do a fair amount of research and to rid our minds of misconceptions about the formula.

In the interests of brevity, I want to make two points, ask one question and make one somewhat facetious observation. First, it seems quite incredible that there has been no needs-based assessment of the Barnett formula since 1978. That is quite unbelievable. That would be somewhat—but only somewhat—acceptable if the parameters of the formula were unchanging. In the case of the formula, the fundamental basis on which it was fixed; namely, the population relativities of the constituent parts of the United Kingdom, is ever-changing as the noble Lord, Lord Barnett has shown. I am sure that any sensible business organisation, on a regular, probably an annual basis, would consider disparities in its budget of a similar nature to the formula; for example, allocation of special sums to cover development costs or to attempt to iron out inherent discrepancies. The allocation of the national budget is even more important, not least in the quantum. It really should be reviewed on a regular basis. In 1998, the Treasury Select Committee of another place stated that it was, disappointed that no Government studies have been made in relation to the appropriateness of the Barnett Formula and how it relates to needs". Such studies are long overdue.

Secondly, the constitutional changes introduced by this Government in the area of devolution of Scotland and Wales should have led to a root and branch examination of what could be termed "grey areas". As that was not done, it should be done, and speedily, if only to remove the perception that the Government are less than even-handed in their treatment of the constituent parts of the United Kingdom. Several noble Lords have already drawn attention to the situation in the North East.

I now come to my question to the Minister. The very existence of the formula, working it out, managing it, dealing with parliamentary questions about it and updating statistics, probably does not cost much to administer. However, I am sure that a sole junior official in the Treasury or the Scottish Office or the Welsh Office does not sort it out alone. I would be prepared to bet that there are a series of meetings, papers prepared, arguments undertaken and rebutted all in the name of the Barnett formula. Has the Minister any idea of the actual costs of that on an annual basis? I would also like an idea of the opportunity costs, but I appreciate that that may be a little more difficult.

My somewhat facetious observation relates to the position of the noble Lord, Lord Barnett. I fear that he is in danger of slipping into oblivion if a review of his formula resulted in the said formula being abolished. Perhaps we should consider giving him a cross-party, inter-parliamentary task to ensure that his name shall continue to be attached to a concept that is difficult to understand, but which will be known by many for at least the next 25 years.

5.24 p.m.

Lord Peston

My Lords, Keynes had a general theory, Planck had his constant, Heisenberg his principle, Euler his equation, Fermat his last theorem and my noble friend has his formula. I ask my noble friend whether he has noticed that of the 19 Back Benchers who are taking part in the debate, 14 come from Wales or Scotland. I hasten to add, of course, that each of their contributions is entirely objective and dispassionate.

Should public expenditure be redistributed, especially as the British tax system no longer is? My answer is unequivocally yes. Fundamentally it should be redistributed between individuals and families. We have to ask whether that aim can be met by focussing on regions or other measures of area. The problem is that in concentrating on large regions one may miss important pockets of need within them. Moreover, without regional government we have no mechanism for concentrating on those important pockets.

Subject to that, it seems to me overwhelmingly obvious that a formula based on population is not satisfactory and in no circumstances could it possibly be satisfactory. My noble friend accepted that by saying that the formula was intended to be approximately population-based but that it was intended as a stop-gap until a needs-based system came into operation. Again, I entirely agree with him. It was intended to do that but it is about time we had the appropriate formula.

What criteria would be better? Clearly, regional GDP per head is one possible criterion. My view is that regional unemployment would be another to look at and regional poverty would be a third. I say that, although I also add the point that I am generally doubtful about the accuracy—if I can put it that way—of regional statistics. Indeed, any change that we make would, first, require major work on reassuring ourselves that the statistics are right. We need better statistics and appropriate criteria that turn out to be needs-based.

The criteria that I have mentioned give different answers. On GDP every noble Lord has pointed out that Scotland is above average relative to the median. On the other hand, it is also worth pointing out that Scotland is above average—in this case I mean worse—in relation to unemployment. If that is one's criterion, one would approach Scotland in a different way. Of course, Wales and Northern Ireland are both worse on the GDP figure per head and on the unemployment figure.

We then have the special case of the North East. Although prima facie on a needs-basis it does not receive enough public expenditure, that must be the result of central government policy rather than anything to do with the formula. It is probably an unintended result, but there is no doubt that it is a result.

My noble friend referred to the expression "identifiable general government expenditure". To use a rather crude phrase, that is a rather dicey concept on which to base a policy.

Like the noble Baroness, Lady O'Cathain, I intend to be brief. I have one suggestion about how to deal with the problem that concerns us all, which is a change in government policy of a different sort: namely, to restore full employment to the economy. There is still overwhelming evidence that the main cause of poverty in our country is long-term unemployment. I hope that a policy to remove long-term unemployment would commend itself to all noble Lords although in the end—I say this with great regret—it would mean that formulae like the Barnett formula became irrelevant.

5.28 p.m.

Baroness Maddock

My Lords, for most of my life I have lived in the South East of England, but now my home is in the North East. For the past two years I have been getting to know that part of the country. I have done that through reading local newspapers and listening to broadcasts. It does not take one long to realise that the people of the North East feel extremely hard done by when it comes to financial settlements from government. I live near the Scottish Border, so when I cross the Border I can see that the quality of local services are better.

When the Barnett formula was introduced, it was a temporary measure. Other noble Lords have detailed the figures for the North East, so I shall not repeat them. When the formula was introduced, Scotland had the lowest gross domestic product per head. However, it is a fact that the lowest GDP per head–77 per cent of the UK average—is now in the North East. If one considers other indicators alongside it, it is no surprise that there has been a real clamour in the North East for regional government. The North East has a convention based on similar arrangements to those described by the noble Baroness, Lady Ramsay of Cartvale, and is well on the way to arguing a very good case for regional government.

Just before and during the local elections, the Labour Party promised that in the first few months of the Government's second term there would be a Green Paper on regional government. I suggest that that will be a good opportunity to look at how to deal with the regional disparities that particularly affect the North East.

Last week saw the publication of a fairly damning report by the Regional Studies Association. It accuses new Labour of adopting neo-Thatcherite policies towards the North East and is a fairly devastating critique of the Government's record in that region. The noble Lord, Lord Peston, said that perhaps the problem in the regions was the policies of the Government. I do not have time to go into that in detail, but for me one of the most telling statistics in the report is the need for 180,000 jobs in the North East if employment levels are to match those in the South East. But the report also points out that on the basis of an annual increase of 0.5 per cent, which is the growth envisaged in this year's enterprise White Paper, it will take 35 years to produce those 180,000 new jobs in the North East.

I believe that the evidence in that paper backs all the demands in the North East for a better way to deal with the problems in that area. Hugh Morgan-Williams, vice-chair of North CBI, has called for money to be found from a reform of government spending rules. I do not have time to go into what we should do and how the formula should be replaced. I hope that my noble friend Lord Newby will have more time to say something about that. But I believe that all noble Lords in the Chamber agree that the formula must be needs-based and that we all recognise that needs change and that we must also look at other indicators, such as health, poverty and education. From my brief time in the region, I know that for those who live in the North East reform of the Barnett formula cannot come too soon.

5.33 p.m.

Lord Sewel

My Lords, there is little doubt that the Barnett formula has had a pretty bad press recently, although it has helped to keep my friend Professor Heald and others in gainful employment for some years. In Scotland it tends to be seen as a means by which Scotland's share of UK expenditure is being excessively squeezed. In some parts of England it is seen as a means by which Scottish expenditure is maintained at a higher level than can be reasonably justified, so there are very conflicting perceptions of the effect of the formula.

The truth is slightly different. The formula provides a means by which, admittedly over time, expenditure between Scotland and England can be made to converge in a way that avoids major disruption and dislocation. Part of the problem about the general debate, not today's, is the confusion about what the Barnett formula is all about. I believe that that has been cleared up very satisfactorily during the course of today's debate. But an important point to bear in mind is that it means in effect that although public expenditure in Scotland will increase it will do so more slowly than in England.

It is also true that convergence has not occurred at the rate originally expected. I believe that that is due to two major factors: first, the extent to which, particularly in the 1980s, it was necessary to bypass the formula to fund significant public sector wage settlements; and, secondly, Scotland's higher than expected population decline over the period. But we must remember that a decline in population does not of itself generate proportional cost savings.

A major component of the Barnett formula's bad press, which has emerged during the course of today's debate, is the belief on the part of some English regions that they are being short-changed as a result. But from the perspective of English regional expenditure to concentrate on Scotland's level of expenditure is very much a blind alley. Quite simply, any reduction in Scottish expenditure would make precious little impact on the amount available to deal with imbalances within England. Regional imbalances and the claims of the North East, North West and far South West are not a product of the Barnett formula or any Scottish-English debate; rather, they are essentially an internal English matter and are determined by decisions made within Whitehall departments.

If we are to move to a more needs-based approach—I share the caution of the noble Lord, Lord Forsyth, about pursuing that particular route—a good deal more work must be done. It is not as simple as it may seem initially. We must do more work on expenditure drivers, but the process of establishing the needs base will require a degree of credibility and transparency. Any approach must take into account such factors as geography, to which my noble friend Lord Barnett referred. Reference has also been made to sparsity, which is undoubtedly a cost driver; demography, particularly in the form of the relative size of the dependent population; and the differential participation in the major public services such as health and education.

Any needs assessment must carry a very high degree of credibility which I believe would arise only if it was done by an independent body. I am afraid that any exercise carried out by the Treasury would not carry that credibility.

In the short term it is important that debates like today's are better informed. It is here that I make a plea to the Minister. The present PESA figures are of little value. Their level of aggregation is too high to enable one to understand what is happening within programmes. At the same time, some lines, such as that concerned with housing, are virtually useless in trying to understand what is going on. Most importantly, as the debate deepens we shall require greater transparency. For example, we simply do not have a series of comparable English expenditure figures that allows us to follow through the numerical operation of the formula. That is a basic requirement of any such debate. I hope that the Treasury will loosen up to some extent and make such figures available in the near future.

By all means, the approach should be based on needs assessment, but let us do it carefully because there are significant pitfalls, both methodological and political, in going down that route. In the meantime, I believe that there is very little need to cast Barnett aside in the near future.

5.39 p.m.

The Duke of Montrose

My Lords, I also congratulate the noble Lord, Lord Barnett, on securing this debate. I have always thought that the noble Lord achieved the true mark of genius by reducing an extremely complicated matter down to a level that a Scottish farmer, like myself, might almost comprehend. I hope that I shall not become disillusioned as the discussion goes on. I declare my interest in farming. Noble Lords will see why as I proceed.

The noble Lord, Lord Thomas of Gresford, mentioned that the 1976/1977 Treasury study concluded that Scotland required funding that was 16 per cent higher than the UK per capita level. Unfortunately, as many noble Lords have pointed out, those figures do not translate into meaningful guidelines for the present day because so many things have changed. We possibly need to have a further look at needs assessment.

Professor Midwinter of Strathclyde University made a submission to the Treasury Committee's second report in 1997. He raised the point that the study did not include spending on agriculture, fisheries, food and forestry and that these now have to be included in the Scottish calculations, particularly following on from the devolution arrangements. He also stated that the per capita figures at that time included payments for social security and other items that were completely outside the Scottish block grant and the Barnett formula. Is that a change also from the time of the earlier assessment?

The noble Lord, Lord Barnett, referred to the Treasury's Public Expenditure Statistical Analyses for 2000–2001 showing that on a per capita basis Scotland's funding exceeds other regions and detailing several areas such as roads, environmental services, trade and industry. Agriculture, food and forestry are one of the major gaps. Given the current support levels for agriculture, there is a certain inevitability in that direction. I draw to your Lordships' attention the fact that agriculture's contribution to GDP in Scotland is 1.3 per cent whereas in England it is only 0.8 per cent. Similarly, the number of those employed in agriculture in Scotland is 3 per cent as against 1.7 per cent in England. If the Government want to revisit the question of Scottish funding, no doubt they will have to come up with an entirely new calculation of relative need.

My only worry about those tables is that I understand they contain moneys received from Europe. I question whether that should be taken into account for agriculture. Perhaps the Minister can say whether the Treasury has also included the payments received under the various European structural funds such as objectives 1, 2 and 5b.

My reason for inquiring about that matter is that these funds are not a direct cost to the Treasury. In some ways it is reclaiming some of the money we have already paid to the European institutions and should be regarded in a slightly different light from moneys which are a direct burden on the taxpayer. I ask the Minister whether the regional totals of EU money received can be made available so that this factor can be more easily understood.

5.43 p.m.

Lord Elder

My Lords, it is given to few, even in this House, to have the near immortality of a formula named after them. My noble friend Lord Barnett has that claim, but he has now made it clear that he would be happy to let the substance of the claim drop, even if he needs to keep the name itself. I intend to argue that he should be prepared to accept the fame it offers in its present form for some time to come.

I argue that the reasons that led to the institution of the Barnett formula are still there and valid; and that while there may be issues about the particular statistics used, they do not outweigh the advantages which the status quo allows.

I say in passing in response to the comment made by the noble Baroness, Lady O'Cathain, that during my period in the Scottish Office as a special adviser, I did not come across rooms filled with people beavering away and trying to work out what the Barnett formula was, or sending papers to anyone. However, if we go down the road—it may well be sensible—suggested by my noble friend Lord Peston, many people will be working very hard in such rooms in the Scottish Office. Perhaps even more significantly, many economists will be in work as well.

The Barnett formula was introduced to overcome the need for the bruising annual debate about the allocation of spending to the devolved administrations of Scotland, Wales and Northern Ireland. In those days, decisions about spending priorities were devolved to the appropriate Secretaries of State and the government departments who then oversaw a wide range of expenditures. It was always up to the Secretary of State to decide where that money was spent. It did not have to match expenditure in corresponding English departments. That system has been built into the present settlement of the devolved parliament and assemblies. Removing the Barnett formula would mean that some alternative would have to be found. We would need that if we were to avoid a return to the annual round of bickering. That would benefit neither side. The underlying problem that led to the creation of the Barnett formula over 20 years ago has not gone away.

The Barnett formula deals with changes. The bulk of the expenditure available to the Scottish Parliament comes from the underlying block, as it used to be known; it is the assigned budget now. That was originally decided on the basis of an assessment of need. That properly took account of the additional costs involved in providing services in remote parts of the country. It made proper allowance for the fact that more Scots chose to send their children to local authority schools, use the NHS and live in public sector housing than was the case, overall, in England. The overall intention was to achieve equality of service provision—not, it must be emphasised, equal expenditure per head—across the country. It has proved flexible, and, because it gives the same overall increases in expenditure for devolved expenditure matters across the country, it has been generally perceived as fair.

Where there are issues of fairness, I would argue that they relate not so much between Scotland, Wales and Northern Ireland on the one hand and England on the other, but between the richer and the poorer regions of the United Kingdom, wherever they are. Even taking account of that, there are now substantial payments—the most significant perhaps being housing benefit, although there are others such as the working families' tax credit—which mean that sometimes the basic underlying figures of Barnett need to be adjusted to give a more valid comparison. That is where the kind of work being talked about by my noble friends Lord Sewel and Lord Peston is so important.

The Barnett formula was intended, in time, to bring about a convergence in expenditure between Scotland and England. With substantial rises in public expenditure now flowing through, that convergence will become real in a way that was not the case when rises in public expenditure were more limited. Ironically, it is only now that Barnett has been given a chance to work that criticism of it has become so vocal.

During the general election earlier this year, the Prime Minister made his views clear, as was pointed out by my noble friend Lady Ramsay. I wholeheartedly agree with his support. The position has not changed since then. I believe that whatever the views of my noble friend Lord Barnett, his formula has much to recommend it and should remain for some time to come.

5.47 p.m.

Baroness Carnegy of Lour

My Lords, I agree wholeheartedly with the noble Lord, Lord Barnett, that the formula, even as adjusted over the years, simply is no longer suitable. I disagree with my noble friend Lord Campbell of Croy and with the noble Baroness, Lady Ramsay, about devolution. With devolution one cannot base block funding for the devolved administration on what Westminster decides for equivalent services in England. One simply cannot do that. For one thing, services will become less and less equivalent. In any case, as the noble Lord, Lord Barnett, said, there are many devolved functions which are not included in the formula.

I am told by colleagues who are Members of the Scots Parliament that their budget meetings when they allocate the block grant are unnecessarily difficult to follow for elected members, let alone for the public. So the Government now must produce a single method for the overall funding of devolved administrations, not just the part currently covered by Barnett. That system must be stable and one that will last for a number of years ahead.

In Scotland it should include surely the cost of the parliament, the running costs of the building and ancillary buildings, as well as the salaries of MSPs, civil servants, special advisers—of which there are now 11 and the number is rising—and other staff. Moreover, the figure should be adjusted for any change in the responsibilities of these devolved administrations resulting from decisions made at Westminster.

I shall cite only two examples to illustrate what I mean, although I wish there was time for more. I understand that the cost of Scotland's new parliament building is being met by a total freeze on new road building in Scotland, however great the need for those roads. Yet the choice of the expensive Holyrood site, as opposed to the far more economical Calton Hill proposal, along with the choice of architect and approval of his original plan, were Westminster decisions made before devolution took effect. The cost has now risen from the £10 million originally mentioned to something in the order of £300 million. Furthermore, one contractor has recently gone into receivership. That puts the Dome in the shade. The lack of control has stemmed from Holyrood, but the original costly decisions were those of Westminster. Will Westminster make any financial recompense to the Scots Parliament, or will it not? At present, we cannot tell.

My second example is one that was mentioned by my noble friend Lord Forsyth. The Scottish Executive wants to provide free personal care for the elderly, an exceedingly expensive plan whose costs will mount massively in the future. MSPs and the Scottish electorate need to know whether the proposal will be funded entirely from the Scottish block or whether some Westminster funding will be added because of the reduced need for attendance allowance, a Westminster responsibility. At present, the matter is in dispute and there seems to be no formula for resolving it. In any case, MSPs need to be clear on what future funding will have to be found, or what the increase on the basic rate of income tax—with its consequent damage to Scotland's economy—will have to be. MSPs need to know this, but at present they cannot tell.

The divergence of decision making brought about by devolution, along with the effect that Westminster decisions may have on the devolved administrations, means that an entirely new funding system is required. It should be one much simpler and more transparent than the Barnett formula. Unlike my noble friend Lord Forsyth and the noble Baroness, Lady Ramsay, I had hoped that the Government would have thought this through before devolution ever took place. It is absolutely vital to the system. If they have done so, the sooner they make clear their plans, the better. If they have not done so, then the sooner they make up their minds, the better.

5.52 p.m.

Lord Hughes of Woodside

My Lords, I begin by congratulating my noble friend Lord Barnett on raising this important topic for debate. I was brought up to believe that there are liars, damned liars and statisticians. All the statistics that have been referred to in our debate tell different stories, depending on how they are interpreted.

Other noble Lords have pointed out that, when the Barnett formula first came into being, Scotland's GDP was far lower than that of England. Now the position is reversed. But over that period Scotland has lost the motor car industry, the ship building industry, the mining industry and, I am sure, many others, yet the GDP is higher. I have to tell my noble friend Lord Barnett, fond though he may be of his formula, that it has little, if anything, to do with the improvement of GDP in Scotland. It may be that oil was the cause of it. Who knows? I simply point out that it may be one part of the equation which may not have been taken into account when examining this matter.

Many noble Lords have commented that the Barnett formula affects matters only at their margins. Nevertheless, the formula has become something of a totem. Depending on which year, the time of year and which part of the country is concerned, my noble friend Lord Barnett is cast either as the Good Fairy or the Wicked Witch. In some cases, he may be the Good Fairy and the Wicked Witch simultaneously. In Scotland, so long as it appears that its portion of the budget is not reducing, or is possibly increasing, then my noble friend is the Good Fairy. If the portion moves the other way, he becomes the Wicked Witch.

I understand perfectly the view taken by those in the North East and the North West of England, and even in parts of London. They deeply object to the difference per capita made available by the Government. Unfortunately, as was pointed out by my noble and learned friend Lord Morris of Aberavon, those objections are misdirected. It is not the Barnett formula at fault, but the baseline. Once we examine the baseline for the distribution of expenditure, boy, are we in trouble. The furore over reform of your Lordships' House would look like a storm in a teacup—a saucer—in comparison with attempts to re-examine the general basic distribution of public expenditure.

Nevertheless, it has to be done. No one who claims to be a socialist, as I still claim to be, can argue that things should never change. The whole point of instituting change is to direct help to where there is the greatest need. Paradoxically, even when circumstances are improved in Scotland, the North East or elsewhere, that does not diminish the amount of money needed to sustain such improvement.

Those of us who were councillors in Scotland some 40 years ago had absolutely no idea of the social deprivation being addressed by the local authority schemes that we were building at the time. We were right to start the work, but changed circumstances mean that those schemes need to be regenerated and renewed. The living standards of the local people are the most important consideration.

I believe that much of the rest of what I wanted to say has already been said, although my late and very dear friend Lord Shepherd used to say, "Ah, but not everyone has said it yet". I shall finish on this note: I hope that the House and the Government will not become bogged down in abstract arguments over formulas and statistics. We are all in government for only one purpose; that is, to try to improve the lives of the people of the different nations of the United Kingdom. If we bear that in mind, perhaps we shall get somewhere. However, I certainly do not believe that rushing in to bring about change without proper thought will do anyone any good.

5.57 p.m.

The Earl of Mar and Kellie

My Lords, as the ninth speaker from Scotland taking part in the debate, I am certain that everyone has already said all that is to be said. However, I want to talk about the effect the possible removal of what is generally known as the Barnett formula would have on Scottish sovereignty and the Constitution. The advantageous funding for government activity in Scotland which the Barnett formula seems to represent is the current manifestation of the constitutional set-up. In short, the treaties which led to the Union of the Crowns in 1603 and the Union of the Parliaments in 1707 ensured that Scotland would swap sovereignty for over-representation and economic advantage. Perhaps I should modify the term, "swap sovereignty", so that it becomes, "place sovereignty in a union state as a sovereign partner".

The ongoing evolution of that union state has led us to devolution, a finely balanced package of subordinated autonomy. The devolution scheme represents one of four options for Scotland, the others being a return to direct rule, a federal constitution and independence from the United Kingdom. The devolution package should not be tampered with. Its funding by grant from this Union Parliament must be maintained and must be generous. Otherwise, demand will evolve for federalism or independence.

Already there is talk of fiscal devolution; that is, the devolution of tax gathering beyond the limited tax varying powers which form part of the devolution package. I would argue that fiscal devolution is out with the scope of devolution. Fiscal devolution is in fact a part of federalism and, if adopted, would make the Scottish Parliament sovereign within its own scope and vires.

I believe that the people of Scotland, as sovereign partners, always have the right and opportunity to place their sovereignty wherever they wish. So far, those who seek to lead the people of Scotland away from the United Kingdom have only one valid argument: that Scotland has the right to leave the United Kingdom and should do so on principle. The second and more powerful argument, which is that Scotland would be better off outside the United Kingdom, is not valid and will not be so until the generous funding of government activity in Scotland comes to an end.

I believe that government activity at all levels in Scotland costs about £36 billion per annum, of which £20 billion is granted to the Scottish Parliament. I believe that Scotland raises about £33 billion in taxation. It is that shortfall of about £3 billion that separates from validity the argument that Scotland would be better off economically outside the United Kingdom.

Noble Lords will, of course, enjoy the irony of principle versus generous funding. They will also see the merit of not being too quick to kick away the devolution package and the consequent economic advantage that United Kingdom membership represents. If Scotland is reduced to some form of per capita parity with England, the separatists' second argument will begin to have validity.

The United Kingdom is one of Scotland's finest achievements. King James VI saw in the Great Britain over which he came to rule after 1603 huge advantages in terms of economy, trade and freedom from war, although I must acknowledge that the 1603 settlement did not work out and that a somewhat paranoid Whig government insisted on an unwanted parliamentary union in 1707 and backed their insistence with threats of force. Now King James's dream is the reality that we know. Let us be aware of the risks that are involved in populist tamperings.

6.2 p.m.

Lord Newby

My Lords, like other speakers, I congratulate the noble Lord, Lord Barnett, on initiating this debate. The number of speakers and the quality of their speeches demonstrate the tremendous interest in this subject in your Lordships' House. In the two and a half hours after this debate, the House will discuss such minor issues as mass destruction and global terrorism. It is notable that a much smaller number of your Lordships are interested in that matter, which is relatively secondary in comparison with the burning issue of the Barnett formula. I must also, of course, congratulate the noble Lords, Lord Radice and Lord Livsey, on their maiden speeches, which were excellent. We look forward to hearing from them further. I look forward particularly to having a discussion with the noble Lord, Lord Livsey, about the respective cultural heritage that we share in the brass band world and about whether the tradition is stronger in South Wales than in West Yorkshire.

The resilience of the Barnett formula demonstrates at least two things about the British constitution: first, nothing lasts longer than the temporary; and, secondly, the pillars of our constitution are most often non-statutory. Although, as many people have said, the Barnett formula is not much understood outside the Chamber, its success relates to its elegant simplicity. It starts on the basis of an assessment or allocation of expenditure between Scotland, Wales, Northern Ireland and England that substantially—even if not by universal agreement—reflects needs. Then, by relating changes to population, it both takes the annual argument out of the question of who gets what, and, at least in theory, reduces inexorably, but slowly, the disparity between the different territories of the UK.

What are the problems? They have been eloquently addressed this afternoon. I should like to mention four of them. First, the annual increases in expenditure are not related to need and do not even pretend to be so. Even if one accepts the initial allocation between the different territorial parts of the UK, the annual changes take one very far away from any needs-based system.

Secondly, the basis on which the figures are built does not reflect the changes in relative prosperity that have taken place since 1978. That applies especially to the growing strength of the Scottish economy. In 1999, Scotland's GDP per head was higher than that not only of Wales and Northern Ireland, but of six out of the nine English regions. That is a measure of the success of the Scottish economy, which has occurred for a raft of reasons, of which I am sure that the Barnett formula is only a part. That is a massive shift from the position in 1978 when the formula was established.

Thirdly, as we have heard, the formula has become more complicated. It has accreted barnacles, as it were, which make it less simple and therefore less elegant.

Finally, and perhaps most importantly in terms of politics, the combination of devolution to Scotland and Wales and the establishment of regional development authorities in England has thrown the whole question of territorial expenditure into a harsher light. The result is that everybody is complaining. In Scotland, the continued working of the formula is now being described disparagingly as the Barnett squeeze, as it was by the noble Lord, Lord Sewel. That must be distinguished from the Barnett hug mentioned by the noble Lord, Lord Roberts. The squeeze is a bad thing, while the hug in Wales may be a good thing, but the Scots are clearly worried about the effect of the formula over a period.

In the northern regions of England, people increasingly ask why they should receive substantially lower expenditure than Scotland when they are poorer, their education attainment levels are lower and, on the basis of a number of indicators, they are more needy. In the South East and in London, the questions are the other way around. People there ask why they should subsidise Scotland, Wales, Northern Ireland and the majority of the English regions when they are in need of higher rates of investment in transport, education and housing and when, in the case of London, there are pockets of extreme deprivation that are among the worst in the UK.

We now have a situation that the Barnett formula successfully sought for many years to avoid: namely, one in which all the regions and nations of the UK are at each other's throats about the level of expenditure that they are currently receiving. As we move towards devolution to the English regions, with elected regional assemblies, that cacophony will grow.

I think, therefore, that now is the time to be considering change. I disagreed very strongly with the noble Baroness, Lady Ramsay of Cartvale, when she said that it would be madness to rock the financial boat at this point. We may be only one year into the devolution settlement, but a number of English regions would argue that there have been 20 years of unfairness and that they have had enough of it. Certainly, I would have considerable sympathy with people from the North East who say that they are fed up with receiving more than £400 per annum less per head than their neighbours north of the Border. Even if such a disparity could be justified on the basis of need—and I do not believe that it could be—the current basis of allocating expenditure simply does not provide a justification for it. The question that many noble Lords have asked is this: if you are going to change it, how are you going to change it? Clearly, that is the most difficult part of the debate.

On these Benches, we have spent a considerable time trying to think of a way of making such change. Our view is that we need to establish a new institution, which we have called a finance commission for the nations and regions. It should have the question of allocating expenditure very much as its remit. We believe that it should be chaired by a new Secretary of State for the nations and regions, and that it should be composed of representatives of the national parliaments and assemblies of the UK, along with representatives of regional assemblies in England. Its job would be to establish a new revenue distribution formula, or RDS. That is a terrible and inelegant phrase; I suspect that we should call it Barnett 2. It would establish a Barnett 2 formula that would take account of the factors to which a number of noble Lords have referred: GDP per head, health, poverty and education indicators, demography and the problems of providing services in areas with widely dispersed populations.

I agree with the noble Lord, Lord Sewel, that getting it right is extremely difficult and that anything that is produced must be credible. Whether that means that it has to be produced independently of the Treasury I leave for another time.

Once you have decided on a new distribution formula, a key issue will be the timescale of implementation. To a certain extent, this is a reply to the noble Lord, Lord Forsyth, who was worried about cutting expenditure in Scotland. I do not believe that anyone would argue that we should cut expenditure. The aim would be for the whole country to achieve the high standards reached elsewhere, to be funded over a period by growth in the economy rather than by an increase in the tax burden or cuts in services. That will inevitably take time, but a phased change rather than a sudden, abrupt gear shift is the only way forward.

In the short term, and before we get to that point, the Government should allow the RDAs and, more generally, the English regions more flexibility in the way they allocate expenditure within their regions. The decision to have a single pot for the RDAs within England is a good move, but in whole swathes of expenditure—health and education are obviously the most prominent—there is absolutely no flexibility at regional level in how priorities are set and how regional strategies could be developed and implemented.

The debate has demonstrated the need for change. The Barnett formula has had a good innings but, frankly, it has not worn as well as its author. No one has claimed that finding a replacement will be easy, but a replacement must now be found. The debate has demonstrated the expertise in the House on this issue. I look forward to the debates we shall be having on devolution in England in the coming months, and the opportunities that that will give to look afresh at fashioning a Barnett 2.

6.11 p.m.

Lord Saatchi

My Lords, I thank the noble Lord, Lord Barnett, for initiating the debate and for sending me on a voyage of discovery to find the reasons for the enviable and, as the noble Lord said, surprising longevity of his famous formula.

I share the affection and respect that the noble Baroness, Lady Ramsay, has for the noble Lord, but I must tell him that when I first got involved in Treasury matters in your Lordships' House I was advised to steer clear of this topic at all costs. I was told that it was a treacherous sea with dangerous currents—and anyway the only person who knew anything about the Barnett formula was the noble Lord himself, so I should under no circumstances speak about it in case he may be listening.

I know that your Lordships will agree that we are very lucky in this House to hear from so many distinguished speakers who have such obvious expertise and experience in this subject. We have also been lucky to hear two wonderful maiden speeches from the noble Lords, Lord Radice and Lord Livsey, from whom I hope we shall hear much more in the years ahead.

Blessed is the man who has a formula named after him. Some men or women have streets or avenues named after them; some a park or a bridge or even a town square; for the lucky few, an airport; or, in the rarest cases, a city. But to have a formula named after one, as the noble Lord, Lord Peston, said, is very special. It is worthy of Galileo, Newton or Einstein—and there is the issue which perhaps lies at the heart of the debate today.

The noble Lord said that the formula is not strictly rational. But for something to be described as a formula at all gives it a disarmingly rational provenance; a scientific authority; a mathematical or mechanical certainty in which the noble Lord himself, as he said, is far too pragmatic to have ever believed.

The reality of regional funding is that it does not take place under laboratory conditions. That is why we find that, for some, the Barnett formula is the Holy Grail and is therefore untouchable, and for others—especially following devolution and especially in some of the English regions—the formula perpetrates a grotesque injustice and has legitimised an intolerable economic discrimination against some regions for more than 20 years.

The former Prime Minister, John Major, said that he always, feared that by exposing the reality of the favourable spending treatment given to Scotland, devolution would stir up latent English nationalist resentment, leading to a backlash". That seems to be exactly what has happened.

So, like the noble Lord, Lord Morgan, people look at, for example, the North's level of unemployment and its deprived areas, and see those as the price paid while successive governments over the years satisfied other UK regions' political priorities with the extra Barnett money. These critics say that Barnett has made possible over payments by Wales and Scotland to lure industry away from the North.

But, by contrast, as my noble friend Lord Forsyth said, some Scots would happily consign the formula to history in return for the reclamation of confiscated Scottish assets such as North Sea oil. The noble Lord, Lord Thomas, said something similar about Welsh tax payments to Westminster. Certainly, Mr Salmond of the SNP puts the annual subsidy from Scotland to the Treasury at £1.2 billion and says that the starting point for this debate should be, the indisputable fact that Scotland subsidises the rest of the UK—not the other way round". That is just the start of the disagreements that confront us in this debate. For some people, as the noble Lord, Lord Radice, said, the charm of the formula is that it will achieve convergence. I asked some statistical experts whether they could tell me when this convergence would take place. I got a range of opinions, from about three years to about 30 years. It would seem that views on Barnett convergence are as varied as views on euro convergence.

For others, the aim is precisely the opposite of convergence; it is to preserve, or even expand, the disparity because of a higher order good which the inequality is thought to serve. This, of course, is the unequal need of the regions, which they say the formula does, or should, or should better reflect.

Would it not be wonderful if political differences such as these could be settled by reference to a scientific formula? Sadly, that is not possible. It is an inconvenient and stubborn fact that outside Newton's universe, where rational formulae really do govern reality, the world of the Barnett formula is conditioned by perception. One of Tom Stoppard's characters explained that, although it appeared to a casual observer standing on the platform at Paddington station that the train had left Paddington, in fact, All the observable phenomena indicated that Paddington had left the train". We should remember Professor Popper's warning that even in the natural sciences there is no such thing as final proof of a formula because the closest approach to proof is a succession of unsuccessful attempts at falsification. There have certainly been many attempts at falsification of the Barnett formula, most of them, as we have heard in the debate today, based on the requirement for a definition of "need". I am not clear what a definition of "need" may look like. I am also not sure who we could trust to carry out such a task. Perhaps it would be the new commission that the noble Lord, Lord Newby, described. That would be better than the Treasury. In awe of it as I am, I believe the Treasury would have an agenda of its own which might worry your Lordships.

In any case, even if one could arrive at a definition of "need", some critics go much further than that. They argue that there can be no fair and final resolution until it is clear that total expenditure—the "baseline", as the noble Lord, Lord Hughes, put it—not only the increase, should be allocated according to relative need. For critics from that direction, the Barnett formula itself is not the problem. The problem is the size, for example, of the Scottish block itself to which the changed formula is applied, and also for those critics, the cost of the Scottish Parliament at its centre.

We have heard so many views. The noble Lord, Lord Newby, said that there was a cacophony outside. We are certainly not in a scientific laboratory. That is why we must look forward, with eager anticipation, to what the Government may say to give us a lead. I should like to end on what the Government may say in a moment or two.

Let me remind your Lordships of a ministerial answer in another place just before the 2001 general election. The Minister of State in the Scotland Office said of the Barnett formula that it provided a fair deal and, we have no plans to change it". —[Official Report, Commons, 6/3/01; col. 135.] Meantime, however, I gather that the Government were coming under pressure from some Labour MPs, particularly those from the north-east of England, to amend the Barnett formula. So, at about the same time as that statement was made in Parliament, John Prescott warned that the Barnett formula, was not written in stone". Peter Mandelson chipped in with the words: A review is timely". So what are to make of that?

Just before I entered the Chamber I was asked: "What will the Government say?". I hope that the Minister will not take this too badly. I am afraid that I said: whatever they say makes no difference to what they will do. I know that the Minister will forgive me. If the Government say "no review", that does not mean that no review will occur—only that today is not the day, and that this House is not the place where they have chosen to announce it.

These days, government policy is revealed to us in only two ways: by accident, when a newspaper discovers it and there is a need for a response; or by design, when a day is judged to be a good day to bury, exhume or review a policy. I hope that the House does not think that I am being too unkind to the Minister; I do not mean to be. This is certainly not a criticism of him. What little I have learnt about conduct at the Despatch Box, I have learnt as his shadow.

I am thinking of the description by Sir Richard Wilson, the Cabinet Secretary, of the way in which this Government work: Major news stories can trigger a process of policy assessment that might traditionally have taken three or four months and now have to be handled in a matter of days, or even hours, sometimes overnight". The Minister always sweetly and humbly says that he is his master's voice. The trouble seems to be that on this topic, as on so many others, his master speaks with two voices.

6.21 p.m.

Lord McIntosh of Haringey

My Lords, in 1860, Robert Browning was asked about a poem entitled "Sordello" that he had written in 1840. He said: When it was written, God and Robert Browning knew what it meant; now only God knows". I felt that way about the Barnett formula. I used to think that I understood it reasonably well—at least enough to answer casual questions in this House, when I could away with a sentence or two without having to go into detail. But the more I looked at the briefing available to me from the Treasury, and indeed from the Scotland Office, the more I realised that I did not understand it at all. I thought that for the benefit of those speakers who understand the subject a great deal better than I—it does the noble Lord, Lord Barnett, credit in more ways than one that he attracted many expert speakers to the debate—I ought to outline the fundamental characteristics of the formula. Some of the comments made do not entirely fit the facts.

First, the formula is used only to determine spending in devolved areas. Spending in reserved areas, such as social security, is determined by UK government departments in Westminster. The noble Lord, Lord Peston, talked about unemployment as being the objective. Yes, it is the objective, but it is addressed largely by reserved expenditure rather than by devolved expenditure.

Secondly, the formula is used only to determine changes in spending and not the level of spending inherited from the past. The original block was needs based, and needs change over a period of time. But the formula provides the devolved administrations with a population share of increases in comparable spending of UK government departments. It is a factual question, not one of formulae, and not even one of statistics. It is certainly not a question of what the noble Lord, Lord Barnett, called "strict rationality" as to whether that works in 2001.

Thirdly, the formula determines an overall increase in the assigned budgets of the devolved administrations. It is up to the devolved administrations how they allocate this to their programmes reflecting their policies and priorities—as the noble and learned Lord, Lord Morris, reminded us. That enables me to say to the noble Baroness, Lady Carnegy, that whatever she may say about the Scottish Parliament at Holyrood, I could not possibly comment. It is nothing to do with me or with this Parliament.

Baroness Carnegy of Lour

My Lords, it has a great deal to do with the Barnett formula. We are talking about the whole thing. In this respect, the noble Lord should comment.

Lord McIntosh of Haringey

My Lords, we in this House are not concerned with devolved expenditure.

If anyone thinks that this is a rigid formula, the coverage of the blocks determined by the Barnett formula has increased over time since its introduction. It now covers the bulk of the departmental expenditure limits of the devolved administrations. Again, that has an effect on the degree of flexibility.

Finally, for the minority of speakers in the debate who represented England, the Barnett formula is not used to allocate spending within England. UK government departments allocate funding within England on a basis appropriate to the spending programme. That is why it is not easy to make comparisons between regional expenditure in England and country expenditure in the devolved administrations.

I want to emphasise that there have been substantial changes. The noble Lord, Lord Thomas, referred to the "great correction" of 1992. He was referring to the population correction. Until 1992, but not after that, the original block was updated for inflation. That made a substantial difference to the changes.

I say to the noble Duke, the Duke of Montrose, that European structural funds are included in the public expenditure figures for the devolved administrations. However, it is not true to say that they do not cost the UK taxpayers money. The costs are reflected in the net contributions, which are not part of the devolved administrations' blocks, but in a charge to the UK as a whole.

What are the arguments about the Barnett formula to which we ought to pay attention? The first is one of convenience. A number of speakers referred to it Yes, it is true that it avoids negotiation during public spending reviews. The noble Baroness, Lady O'Cathain, asked what the actual cost of negotiation was nevertheless. The noble Lord, Lord Elder, gave a satisfactory answer: whatever it is, it is certainly a great deal less than if we had fundamental reviews of the formula or of any other formula each time we had a new public spending review, even though they are not now held every year. I do not underestimate the value of the transparent, durable and simple rule for reaching spending settlements without direct negotiation. That may be a government point of view rather than a national point of view, but it is not insignificant.

The second point that must be taken seriously, as it was by a number of speakers, is that the formula was the basis for the devolution settlement. If we were to start going back on it so soon after the devolution settlement, there are those who would accuse us of bad faith.

The noble Lord, Lord Forsyth, and the noble Baroness, Lady Carnegy, do not like the devolution settlement. They think that it was not thought through. The noble Earl, Lord Mar and Kellie, and the noble Lord, Lord Morgan, on the Government Benches, thought that it worked successfully and that it was a reasonable basis on which to assure the Scottish and Welsh people of what it was they were being asked to vote for. The funding arrangements, which include the Barnett formula, have been published in the statement of funding policy which was updated in July 2000 following consultation with the devolved administrations and agreement with the Secretaries of State for Scotland, Wales and Northern Ireland.

The noble Baroness, Lady Carnegy, wants a new, stable formula. I do not think that this is the time to ask for a new, stable formula when the existing formula has been the basis of a concordat, so to speak, in the past couple of years.

A number of noble Lords referred to the English regions. I have made it clear why it is difficult— although I do not understand fully why it is impossible—to make the comparisons that we should all like to make. It is clear, because of the difference between devolved and reserved matters, why it is difficult to make comparisons between regions. Certainly, the figures referred to by the noble Lord, Lord Radice, in his excellent and well-informed maiden speech—namely, for the total managed expenditure per head—are correct. Indeed, I should have been astonished had the noble Lord said anything that was not correct.

It is also the case that the convergence that some people seemed to anticipate with dread, and others with hope, has not happened in quite the way that was anticipated at the beginning. That is partly because for the bulk of the life of the Barnett formula the block was updated for inflation, and the block itself is more important than it might otherwise have been. It is also because there is not a fixed and predetermined convergence path built into the Barnett formula. The noble Lord, Lord Sewel, made that valid point. The so-called convergence characteristic simply reflects the fact that population-based increases represent a smaller percentage increase where baseline levels of spending per head are higher. That of course has been the case in Scotland and was the case in Wales at the beginning. Those considerations must be taken into account.

We are obliged to look at the results of the Barnett formula over a 20-year-plus period. I do not accept the attacks on statistics or statisticians. I always resist that anti-knowledge point of view whenever I hear it in the House. Nevertheless, it is not just statistics; it is a matter, as the noble Lord, Lord Saatchi, said, of perception as well.

The Barnett formula has survived because it is generally accepted as effective in determining the allocation of public expenditure in Wales, Scotland and Northern Ireland. It has produced public expenditure settlements that have been perceived as generally fair and broadly acceptable since it was introduced. It has been used without query or major change by both Labour and Conservative Governments—governments with different representation in England and the other three countries of the United Kingdom.

It is right for the noble Lords, Lord Newby and Lord Saatchi, to demand transparency, but surely the Barnett formula is relatively transparent, relatively straightforward, relatively durable and a simple rule for reaching spending settlements without direct negotiation. Compare it with local government spending assessments, which are renegotiated every year on a multi-variant analysis and are utterly incomprehensible to 99.99 percent of the population.

I have to play the game of saying what I intended to say, rather than what the noble Lord, Lord Saatchi, expects me to say. He wants me to say that there will be a review. We responded to the Treasury Select Committee in 1998 and published a statement of funding policy in July 2000. We set out the details of the funding arrangements fully and transparently, most of which, after two nights of falling asleep on, I think I finally understood. The position remains the same. We have no commitment to review the Barnett formula. On the other hand, it is not fixed in stone.

I say that not because we are putting two points of view at the same time, as the noble Lord, Lord Saatchi, would wish, but because we have been changing the Barnett formula at the margins. We have updated the population figures and the comparability factors used in the formula. The noble Lords, Lord Thomas and Lord Livsey—who made an excellent maiden speech— both said rather grudgingly that for Wales we had excluded the objective 1 payments from the Barnett formula. I do not know what is wrong with that. When it is necessary and appropriate, we take the opportunity to make decisions that supersede a part of the Barnett formula.

Lord Forsyth of Drumlean

My Lords, I am grateful to the Minister. Will he tell the House whether it remains the Government's objective to reduce the over-expenditure in Scotland, relative to England, which was the original purpose of the Barnett formula?

Lord McIntosh of Haringey

My Lords, my noble friend Lord Barnett will have to answer the point about whether that was the original purpose, although I never understood it to be so. I think that that was a bit of oppositionitis on the part of the noble Lord, Lord Forsyth.

Lord Roberts of Conwy

My Lords, can the Minister clarify whether there is a commitment to an annual revision of the formula and how it would work?

Lord McIntosh of Haringey

My Lords, there is no commitment to an annual revision, although changes have been made to the formula as and when necessary. A commitment to an annual revision would be a commitment to some other basis of making an allocation to the different countries.

The thrust of the debate has been that even those who want to abolish the Barnett formula, or replace it with some son or granddaughter of Barnett, are by no means agreed on what that replacement should be. I think that my noble friend Lord Barnett would accept that, having heard the debate.

Is it the case, as has been suggested, that Barnett has somehow run its course? Is Barnett worse now than in 1978? We do not accept that. It is still as relevant as in 1978. It is updated in each spending review to reflect current circumstances in each country, without a commitment to revise or review it. Of course it does not cause differences in GDP, which is one of the few misunderstandings that appeared in the debate. I think that the noble Lord, Lord Thomas, fell into that trap. As the large bulk of income-related spending is reserved, we cannot blame changes in GDP on the Barnett formula. The noble Lord, Lord Hughes, made that point successfully. Indeed, the noble Lord, Lord Roberts, referred to the degree of updating on population that took place. If we were to undertake a review with a particular view in mind—no particular view has emerged from this debate—we would be responding to partial criticisms of a system that has stood the test of time.

I know that we do not have constituencies in this House, but I looked at the origins of the speakers in the debate. Of the 19 Back-Bench speakers, nine came from Scotland and five from Wales. With the exception of the noble Baroness, Lady Carnegy, from Scotland, who honourably wanted to scrap the Barnett formula, I could have predicted not the arguments but the conclusions that everybody in the House reached. They were none the worse for that.

We have heard a wide range of somewhat conflicting views. We think that the formula served us well, but we shall continue to listen to the views expressed.

6.40 p.m.

Lord Barnett

My Lords, I, too, could have predicted my noble friend's reply to the debate. I am not too surprised about that. I would have been astonished had it been otherwise.

In the brief time that I have available, I should like to thank everyone who participated in the debate, including those with whom I disagreed as well as agreed. I have learnt a lot. I have heard about the Barnett squeeze, the Barnett by-pass and the Barnett hug and that I am either a good fairy or a witch.

I also wish to thank the two maiden speakers. I am glad to have provided the opportunity for us to hear such excellent maiden speeches. I have learnt how people have misunderstood the Barnett formula over all these years, even the noble Lord, Lord Forsyth. Incredibly, after all that I said—he surely listened—he had in mind that the formula would eventually converge. Nothing of the kind was intended; it was intended to make life easy by having a simple formula. That is what I said it was about. My noble friend accused me of referring to rationality but I quoted him. He may have forgotten that I quoted his words when he said it was not rational.

Lord McIntosh of Haringey

My Lords, he must have been right then.

Lord Barnett

My Lords, the important point that has been made time and again by a number of noble Lords is that the real problem—this is even more of a problem than the fact that the Barnett formula does not help convergence—is the need to look at the baseline. That is the crucial question that has quite rightly arisen because until you look at the baseline you are dealing only with the margins. That, I believe and hope, has come out of the debate.

The Whip, the noble Baroness, Lady Farrington of Ribbleton, may be looking at me closely. Perhaps she is not. In that case I shall carry on. She knows very well that I obey her every word—well, sort of. The debate has been in some ways an excellent one. We have heard some good speeches and, like the Minister, some of them have not surprised me too much when delivered by noble Lords from northern parts of the UK who think that the Barnett formula as at present constituted is doing a grand job. I see that the noble Lord, Lord Forsyth, nods. No one took any note of the danger of fighting an election on the basis of not changing the formula. The noble Lord, Lord Forsyth, did not say anything about that as he knows very well that it did not do anyone any good, but nevertheless it has kept going for some 23 years.

As I say, I have grown to like the name. I do not want to see any changes made to it. I have a formula; that is marvellous. The noble Lord, Lord Saatchi, made some kind remarks. I suppose that he has other suffixes after his name, but I have a formula after mine. Not many people have that. I am grateful for that but I am even more grateful to those who participated in the debate. I am told that if I press the Motion to a vote—I see that my Whip looks at me closely—and I win, hoards of paper will fall on my head. Therefore, for that and other reasons, I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.