HC Deb 18 December 2001 vol 377 cc23-46WH

11 am

Mr. Derek Wyatt (Sittingbourne and Sheppey)

First, I want to thank Timothy Edmonds, who did a prodigious amount of work and produced an excellent Library research paper on the Barnett formula, which I am sure that many hon. Members will quote. I also thank Professor lain McLean—a Scot—of Nuffield college, Oxford, who is currently working at Yale, and who helped me with the debate.

We have been given only 90 minutes for this discussion; the debate in the House of Lords in November was for more than three hours. That may, or may not, be a reflection of the importance of Joel Barnett.

The debate is topical; this morning a headline in the Financial Times stated: Scotland's fiscal deficit narrows to £4bn excluding oil revenues. I was going to quote the hon. Member for Banff and Buchan (Mr. Salmond), who said that it was bogus, but he is present. Statistics and the economy in Scotland are topical north of the border and today, for once, they may be topical south of the border.

The origins of the Barnett formula go back to the 1880s, to a Chancellor called George Goschen. Joel came to it in 1978, using it as an expedient because the Prime Minister at the time, James Callaghan, was caught short; he could not work out how to resolve a technical issue of how to spend our money in Wales, and, more especially in Scotland. Joel told me privately that he thought that the formula would last six months at best; in his speech in the House of Lords he said perhaps a year, but it was meant to be only six months. It has lasted 21 years, which is not bad for a temporary measure. Curiously, it is not a statutory instrument; perhaps we should bless Joel in one way but not in another.

My question is fundamental to how we, as Members of Parliament, work. How do we decide the underlying philosophy of how to allocate our people's taxes, which we sometimes call Government expenditure? Do we do it by head of population, by the needs of our population or by a compromise consisting of the two? I shall return to that issue shortly.

My question is more complicated because we have enacted several relevant pieces of legislation in the past four years—the constitutional reforms that gave Scotland a Parliament, Northern Ireland and Wales Assemblies, and London an Assembly, and the UK human rights legislation, which enshrines some human rights of European law into UK law. Shortly, we shall have the White Paper on regional assemblies; I am sure that there will be elected regional assemblies by 2005, certainly in the north-east, perhaps in the north-west, and possibly in the south-west if we can agree the boundaries. This is the right time to talk about the Barnett formula because England has never had a say on it, which is curious.

As the regional assemblies develop in England, they will all want to have a say and to change the way in which the formula is decided. The local government funding review announced last week has changed the way in which local government will be funded from 2003 onwards. It will be funded according to needs, which is a minor change, but a change nevertheless. The comprehensive spending review takes us up to 2004–05. Considering that block of legislation—some past, some to come—we cannot expect changes to Barnett until 2005–06 at the earliest.

I shall place on the record one or two quotes from the excellent Library research paper. On the mechanism of the Barnett formula, it states on page 9: The first key to understanding Barnett is to remember that the formula determines the amount of additional changes to the expenditure of Scotland and Wales. It applies to the margin, not to the bulk of expenditure as determined by past decisions. Secondly, Barnett only applies to some types of expenditure. In particular large expenditure areas such as welfare payments are outside of the formula's jurisdiction. Barnett has played very little role in the overall relative level of public sector provision, but simply produces a value for the increase in a single year. The next page gives the three parts to the calculation:

  1. "1. The change in planned spending in departments in England.
  2. 2. The extent to which the relevant English departmental programme is comparable with the services carried out by each devolved administration; and
  3. 3. The population proportion in each country."

Slight changes were made to the Northern Ireland part in 1998. The population of Northern Ireland used to be compared to that of Great Britain as a whole; now, it is compared to the population of England. Northern Ireland has therefore benefited slightly more in the last three years of the Barnett formula. If the Scottish Parliament ever exercised its tax-varying powers, the resources available to it would be adjusted up or down, according to the formula.

In my short period in the House, I have noted that the civil service would rather explore change within existing law or practice—I cite the Child Support Agency reforms as an illustration—than start to make changes from scratch. Therefore, I do not expect any Government to do away with Barnett, but it will have to change beyond 2005, especially as the regional assemblies come on line.

Why will the formula change? It is manifestly unfair to the English taxpayer—of course, I would say that. Those who represent English constituencies will all be able to quote their own figures, and I took mine from the Treasury's public expenditure statistical analysis for 1999–2000. Government spending for Scotland was £5,271 per head; for London, it was £5,035 per head. For the north-east, it was £4,837 per head, and for all England, it was £4,283 per head. The figure for the south-east, which includes my constituency, was £3,734, so I have some reason to wish for an analysis of the Barnett formula and for changes to be made to it.

Joyce Quin (Gateshead, East and Washington, West)

A few minutes ago, my hon. Friend quoted the excellent Library research paper, and he will know that the formula's supporters refer to it as a way of reaching convergence in spending over time. However, that paper quotes Professor Bell of Stirling university, who estimates that it will take at least 30 more years to reach any form of convergence. Does my hon. Friend have a comment on that?

Mr. Wyatt

I agree with my right hon. Friend. Joel's original idea was that the formula would provide convergence, but it never has and I doubt if it ever will, which is another issue for English taxpayers.

Adam Price (East Carmarthen and Dinefwr)

I am not clear whether the figures to which the hon. Gentleman refers are for identifiable public expenditure. However, he will be aware that most of the 25 per cent. of Government expenditure that is non-identifiable is spent in the south-east of England, whether it goes on central Government administration or military research and development. If we seek a fairer allocation of Government spending among the countries and regions of the United Kingdom, should we also be looking to redistribute that non-identifiable element and decentralise much of central Government administration to the regions and nations of the UK?

Mr. Wyatt

I think that that will happen once we have regional assemblies in England. As I said, wherever we happen to look, statistics are an issue. Of course, everyone argues their point from their background—that is what we are here for—but I shall resolve the statistics issue in a moment and return to the hon. Gentleman's question.

I hope that I have read all the papers on the Barnett formula. There seem to be more from the north of the country and certainly north of the border. I have noticed that there have been many more front-page stories on the issue this year in Scotland than anywhere else in the United Kingdom. Whatever figures are produced, it is apparent that the Barnett formula favours Scotland. Martin Wolf of the Financial Times suggested that Scotland enjoys Scandinavian services in exchange for British taxes.

Hon. Members from Scottish constituencies will want the Barnett formula to remain: that is understandable. We need to find a consensus on the issue after 2005, but I would like to suggest a way forward between now and then—not the Barnett formula 1.1 or 2.1 but the Wyatt suggestions. Whoever delivers statistics is not trusted among the regions of Scotland, Wales and Northern Ireland. How can we trust the figures, and which Members of Parliament would we choose to ensure that the statistics were fair? Would we trust a Bank of England committee to study the Barnett formula? Would we trust a royal commission, or a special commission such as Lord Wakeham's on House of Lords reform? I suggest that Parliament should do it. My first suggestion is that a joint House of Lords and House of Commons Select Committee be established next year to consider the future of the Barnett formula.

Mr. Alex Salmond (Banff and Buchan)

The hon. Gentleman suggested a House of Lords and House of Commons Committee. Does he want such a joint Committee to encompass the Scottish Parliament and the Welsh Assembly as well, or is he trying to rig the game before it starts?

Mr. Wyatt

The hon. Gentleman should have let me finish. Evidence would be taken throughout the United Kingdom. The Select Committee would visit the Scottish Parliament, the Welsh Assembly, and the Northern Ireland Assembly and take evidence in London. The Committee could be formed next year and report in 2003.

We have to resolve how we divvy up the money. I side with Professor Iain McLean's research. He suggests creating a commonwealth grants board, which should agree the apportionment of regional public spending by a qualified majority vote (that is, with the support of more than half the regions represented). Two extremely important questions remain. How large a qualified majority? And what if they fail to agree? The two are linked … Unanimity gives each and every region a veto over any scheme. So the region with most to lose from any change would veto it, and the result would be failure to agree to any settlement at all. Then what matters is the 'default'. What if the inter-regional body fails to agree by the deadline for an agreement? If the default is the status quo, then all who can see that they are better off under the status quo than under any change will tend to block that change. McLean suggests two rules for a commonwealth grants board: first, any formula it recommends must be supported by at least two-thirds of the regions and secondly, that the default, if the Board fails to agree, is that each region gets the reciprocal of its relative GDP per head.

Mr. Bill Tynan (Hamilton, South)

Would the decision of that proposed Select Committee be binding on Parliament, or would it be debated in the House?

Mr. Wyatt

It would have to be debated in the House. If we were to effect change, some sort of statutory instrument would probably be necessary.

I have started the debate, and I am sure that that will not be the end of it, but it is the first time that we have debated the matter in 23 years in the House. I look forward with interest to the rest of the debate.

Several hon. Members

rose—

Mr. Frank Cook (in the Chair)

Order. Hon. Members seem to be engaging in a conversational style. Comments must be addressed through the Chair. No accusations should be made to the Chairman, although I have allowed them to pass until now. For those who are not familiar with proceedings in Westminster Hall, the winding-up speeches start 30 minutes before the debate concludes. That means that the three Front Benchers must begin their exchanges at 12 noon. Seven hon. Members are seeking to catch my eye to make speeches and 45 minutes are available, so I appeal to hon. Members to help me to help them by making their remarks clear, concise, pertinent and respectful.

11.15 am
Adam Price (East Carmarthen and Dinefwr)

I am grateful to the hon. Member for Sittingbourne and Sheppey (Mr. Wyatt) for securing the debate. We live in an unequal state, and territorial justice is at the heart of current political issues. There are issues of regional equity in England and, as demands for democratic devolution develop in England, the concerns are rightly coming to the fore of English democratic debate.

I will focus on the relationship between Barnett and public expenditure for Wales. Plaid Cymru has some principal concerns about the Barnett formula, which is not needs-based but population-based. As the hon. Member for Sittingbourne and Sheppey says, it is a stop-gap measure, which remarkably has survived for 21 years. In the case of Wales, it is a short-term political fix to prevent bickering, rather than a real attempt to allocate resources fairly according to need. We last had an official estimate of needs in 1979, and it was found that expenditure in Wales should be 9 per cent. higher than in England according to need. The actual expenditure was 6 per cent higher. There could be at least a tentative conclusion that Barnett has short-changed Wales. There has been no needs assessment since then, so let us have the research that Plaid Cymru has been requesting for some time; we can then consider a different needs-based assessment for Wales.

As the hon. Gentleman points out, Barnett is a convergence formula. The Wales Office estimates that convergence has been happening at a rate of 2 per cent. per annum from 1999 to 2002. One effect is that the rate of increase in spending on a core area such as education will rise by 3.2 per cent. in real terms per annum for Wales over the comprehensive spending review period, compared with 5.6 per cent. per annum for England. So the convergence effect—the Barnett squeeze—is beginning to have a real effect on the rate of increase in public spending.

There is also the problem of the Barnett block. The change in funding for the devolved Administrations arises perversely from an assessment by Whitehall Departments of England's needs. The resulting changes for Wales and Scotland are what are known in the jargon as consequentials—in other words, they are consequential to the assessment of England's needs. The political consequence is that every year there is an absence of negotiation between the Treasury and the devolved institutions on changes to the block grant. That is bureaucratically convenient, but it is hardly in the spirit of democratic devolution. More than half the entire block grant in Wales consists of Barnett formula adjustments, which are nothing to do with the needs base of Wales but are the product of decisions between Whitehall Departments largely in respect of England. To add insult to injury, those discussions occurred during the tenure of a Tory Government. Wales was effectively locked into a mechanistic formula for the reallocation of changes in public expenditure and locked out of wider debates about levels of public expenditure and spending priorities.

Since the introduction of the Barnett formula, Secretaries of State for Wales and for Scotland have been excluded from departmental spending rounds. Welsh and Scottish Members of Parliament cannot debate on the Floor of the House the need for more resources for health and education without immediately being told that those are matters for the Assembly. In reality, the size of the overall health and education budget in our countries depends on spending plans and political priorities drawn up exclusively in England. We are no more than passive observers of what happens to tax and public expenditure.

Change is never easy, but from my party's perspective, reform is long overdue. We require a needs assessment that examines a wider range of factors. Lessons about fiscal federalism or fiscal equalisation from Australia, Canada, Germany and other countries should be learned. To avoid disruption, any new system will have to be introduced over a long period. However, given the levels of deprivation in Wales, we have nothing to fear and much to gain by replacing an antiquated formula with a more progressive needs assessment for the UK as a whole. A new public expenditure settlement is more important than objective 1 funding and should be one of the central goals of all who are committed to democratic devolution. Without it, the constitutional settlement that we won in the referendum on devolution will be undermined.

11.21 am
Mr. Mark Lazarowicz (Edinburgh, North and Leith)

The operation of the Barnett formula and the general financial relationship between Scotland, England and the rest of the UK is often misunderstood. I must tell my hon. Friend the Member for Sittingbourne and Sheppey (Mr. Wyatt) that the very title of his Adjournment debate—the Barnett formula—shows how one element of the relationship between Scotland, Wales and the rest of the UK can be taken out of the picture, failing to present an accurate assessment of the real relationships. It is not the case that the Barnett formula gives Scotland—or Wales and Northern Ireland—any extra or unfair share of UK resources. Far from conferring advantage, its effect is to bring Scotland's expenditure into line with the rest of the UK.

In response to the question asked by my right hon. Friend the Member for Gateshead, East and Washington, West (Joyce Quin), my hon. Friend the Member for Sittingbourne and Sheppey referred to the work of Professor Bell on the Barnett formula and needs assessment. A reference to Professor Bell's full work would show that, under present spending trends, the Barnett formula will bring Scotland's expenditure into line with the needs assessment within a mere eight, not 30, years.

Mr. Salmond

Is the hon. Gentleman aware that the paper by the Cuthberts suggests an even more rapid convergence than—

Mr. Frank Cook (in the Chair)

Order. I make a plea to all hon. Members to address the Chair at sufficient volume for the Chairman to judge whether remarks are in order. Will the hon. Gentleman please repeat his inquiry?

Mr. Salmond

I was asking whether the hon. Gentleman was aware of a paper produced by the Cuthberts, two prominent Scottish economists, which suggests a more rapid convergence than that suggested by Professor Bell.

Mr. Frank Cook (in the Chair)

I am much obliged.

Mr. Lazarowicz

I am sure that that is so. The spending policies of the present Government also underpin the greater trend towards convergence. Indeed, some people in Scotland have suggested that the current formula leads to a Barnett squeeze which they say works against Scotland's interests. The hon. Member for Banff and Buchan (Mr. Salmond) and his colleagues have at times criticised the Barnett formula precisely because it brings about a convergence.

Joyce Quin

Does my hon. Friend agree that the fact that the Barnett formula has been in existence for more than 20 years means that, in terms of deprivation in the English regions, it has been a poor way of getting any convergence at all?

Mr. Lazarowicz

If my hon. Friend is suggesting that an assessment of the way in which expenditure is allocated in England as a whole is needed, that is well and good, but I do not think that it is a reason for taking an attitude to the Barnett formula and the allocation of spending between Scotland and the rest of the UK that does not reflect reality. As other hon. Members have pointed out, the Barnett formula and the base upon which it applies take no account of many elements of Government expenditure that undoubtedly benefit the London area. The subsidy for commuter travel in London, the channel tunnel link, the dome and all the expenditure that we see around Westminster are not reflected in the Barnett figures.

If hon. Members looked closely at the budgets of other Departments, they would find that their base figures were not chosen as the result of any scientific assessment. Why does my hon. Friend the Member for Sittingbourne and Sheppey think that Government spending in Scotland should be singled out for scientific analysis when that is not applied to other areas of Government expenditure? Even if the figures that he put forward were correct, the benefit to the rest of the UK would average out at only about £17 per head. I accept his concern about levels of Government expenditure in his constituency, but breaking down spending on a constituency-by-constituency basis inevitably leads to anomalies because large elements of Government expenditure are concentrated on certain constituencies. Moreover, the analysis takes no account of the contribution that constituencies make to the public exchequer.

My hon. Friend appears to have been swayed by those who paint post-devolution Scotland as a land flowing with milk and honey, enjoying Scandinavian levels of spending provided by lower levels of taxation. Those of us who represent Scottish constituencies know that that is not the case. He should not allow himself to be too strongly persuaded by those who point to areas where the level of spending on particular budget heads is higher, because spending per head in other areas of expenditure is often less than in the rest of the UK. It is misleading to pick out certain areas of Government expenditure to suggest that Scotland or Wales benefit.

I agree with those hon. Members who have said that the Barnett formula is not perfect. Certainly, there is no way in which the rationale for Government expenditure across Departments as a whole can be regarded as subject to scientific verification. As the UK moves towards regional government, there is a case for looking at the way in which the Barnett formula operates and for conducting a review. However, the suggested commonwealth board or a parliamentary Committee reflect all the metropolitan-centred thinking that has bedevilled debate on these issues over the years. My hon. Friend should not take a line that will destabilise the UK and play into the hands of the hon. Member for Banff and Buchan and his colleagues.

11.29 am
Mr. Alex Salmond (Banff and Buchan)

I find myself disturbingly in agreement with the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz), but I shall begin my comments by mentioning an article by Peter Hetherington in The Guardian today. It suggests that a review of the Barnett formula will begin early next year on behalf of the Treasury and the Department for Transport, Local Government and the Regions. Perhaps the Minister will confirm whether the hon. Member for Sittingbourne and Sheppey (Mr. Wyatt) has succeeded beyond his wildest dreams by provoking a review before he even made his speech. I am sure that the House would be interested in her answer, given the number of denials that have been made in recent weeks, not least by Scotland Office Ministers.

The Barnett formula is like the Schleswig-Holstein question, in that only three people understand it: one is mad, one is dead, and I have forgotten. On the basis of a recent television interview with Lord Barnett, I can report that he is among those who have forgotten how the formula was meant to work, noble and true though he is. The hon. Member for Edinburgh, North and Leith rightly said that Barnett was a convergence formula. It has been pointed out that Barnett has not led to convergence. However, significant changes in the past few years will provide convergence, much to the detriment of Wales, Scotland and Northern Ireland. The Barnett formula now operates as a population-based formula and is updated accordingly. Thus, there will be a severe squeeze on Scottish spending because any increase will now be relative to total spending.

The right hon. Member for Gateshead, East and Washington, West (Joyce Quin) suggested that convergence might take 30 years. I believe that she was reading a review of Professor Bell's paper and not the paper itself. In fact, Jim Cuthbert, the former chief statistician at the Scotland Office, and his wife Margaret estimated that the Barnett squeeze on Scottish public spending could be as much as £2 billion over the next three years. Barnett may achieve the desire of the hon. Member for Edinburgh, North and Leith to squeeze Scottish public spending and amass a huge £17 per head for his constituents, but the view in Scotland, Wales and Northern Ireland is that Barnett is not ideal.

Mr. Jim Cousins (Newcastle upon Tyne, Central)

I am following the hon. Gentleman's argument closely. If he is right, surely he would want a review of the Barnett formula and a proper needs assessment such as that advocated by the hon. Member for East Carmarthen and Dinefwr (Adam Price)?

Mr. Salmond

I am coming to that point. The difficulty that I have with many of those who argue for scrapping the Barnett formula is that they do not support a needs assessment, as the hon. Member for East Carmarthen and Dinefwr (Adam Price) suggested, or fairer distribution of resources. Their argument is about grabbing Scottish money. The comments that have been made by Conservative Members and by many Back-Bench Labour Members can best be described as anti-Scottish. There seems to be a desperate attempt to grab as much of Scotland's money as possible. I can suggest a better option.

I deprecate the motives of many hon. Members who rally against the Barnett formula. They do it not for the best or noblest reasons but to grab £17 per head for their constituents, who are south of the border. Perhaps the hon. Member for Sittingbourne and Sheppey does not have such a motivation; only he can clarify that.

The best way to proceed would be to give the Scottish Parliament fiscal autonomy. The hon.. Gentleman mentioned the Government expenditure and revenue in Scotland analysis, which was published this morning. If we accepted GERS, which I certainly do not—for no apparent reason it failed to take account of £1 billion of Scottish income tax in the past three years—and compared its analysis with current estimates of oil revenues, we would have a Scottish economy in fiscal surplus by £1 billion, even on the Government's figures for this year. The hon. Gentleman must explain why he has suggested cutting Scottish public spending, which was the essence of his comments, at a time when there is a substantial fiscal surplus in Scotland. It is unacceptable for the Scottish population to hear such a suggestion, and it should be equally unacceptable to have a squeeze, which is the effect that the Barnett formula is having on Scotland, Wales and Northern Ireland.

I have one difficulty with the hon. Member for Edinburgh, North and Leith, who otherwise made an admirable speech, including his many examples of non-identified public spending that are hugely concentrated in south-east England and London. Indeed, I have seen one survey that shows that London public expenditure is the highest by far of any area of the United Kingdom when all the factors that were mentioned by the hon. Gentleman are taken into account. My difficulty with him, and others who defend Barnett as the only possible formula, is that they do not take account of the considerable squeeze that it will cause in the next few years.

I am in favour of fiscal autonomy for the Scottish Parliament. It would provide the only secure protection from the efforts of the hon. Member for Sittingbourne and Sheppey and the many other Members who want to raid as much of Scotland's finances as possible. I suggest to him that if he wants a review, or if the Treasury Minister suggests one, it should be carried out on an equal basis. It would be unacceptable to have a review with a Joint Committee of the House of Lords and House of Commons at a time when the Northern Ireland Assembly, Welsh Assembly and Scottish Parliament are functioning. At the very least, the hon. Gentleman might have suggested a little more than a day trip to Scotland to take evidence from the very people from whom he is trying to filch money. Any review would have to be based on a position of equality, and the arguments for financial freedom and fiscal autonomy for the Scottish Parliament should be heard and should win through.

11.36 am
Mr. lain Luke (Dundee, East)

I congratulate my hon. Friend the Member for Sittingbourne and Sheppey (Mr. Wyatt) on securing the debate. I firmly believe that all areas of public policy and expenditure should be open to constant question and review. I have some concerns about the narrow nature of the press debate in this area, which I believe circumvents reasoned discussion on the allocation of overall expenditure in the UK and sets us at each other's throat. Taking a broad macro and brush-stroke approach clouds the issue when we should be examining micro-situations and what happens in different localities throughout the UK. It is often said that the devil is in the detail. We as politicians have a responsibility to examine that detail and to act accordingly.

In any debate on the Barnett formula, we should discuss the breakdown of expenditure under comparative budget heads relating to different areas of the UK, and review it on a needs basis. I agree with my hon. Friend that some English regions suffer levels of deprivation similar to those found in many communities in Scotland, Wales and Northern Ireland, and that they should receive similar financial assistance. If there is a failure in the formula or a breakdown in the mechanisms that weigh the vital indicators of need, we should take them in hand and put them right quickly. When the Minister of State, Scotland Office last answered questions on the topic only a few weeks ago, he made it clear that any identifiable regional differentiation in England that needed extra Government expenditure should be addressed, given the programme of increased public expenditure.

My hon. Friend the Member for Sittingbourne and Sheppey made a reasonable case about the national issues that affect us across the boundaries of the separate entities that make up the UK. We should consider, for example, the recent unemployment figures for north-east England, London and Scotland, which are comparatively similar at 6.9 per cent., 6.5 per cent. and 6.7 or 6.8 per cent. respectively. Those areas need Government funding and are addressed through the work of the Treasury and relevant Ministries.

On the micro-level, the Sittingbourne and Sheppey constituency is ranked 284th in the UK, 197th in England and has 3.3 per cent. unemployment. Compare that with my constituency, Dundee, East, which is ranked 40th in the UK, fifth in Scotland and has 6.8 per cent. unemployment. Those regional disparities must be addressed.

I was glad to hear the reference to the Scandinavian services that we enjoy in Scotland. I have travelled widely throughout Scotland as a local government councillor and as a private citizen, and I would be glad to discover where the Scandinavian services are, but ultimately—this is a contentious point—Scottish taxpayers are British taxpayers. They pay their contribution to the Treasury. The Government are increasing public expenditure against the objections of the European Commission year after year, and are committed in their manifesto to promoting social justice. The Government will not fail to address, where necessary, the issues of deprivation and poverty that arise in dealing with English regions. The central principle of the Labour party, to which the Government's programme rigorously adheres, was set by Nye Bevan when he talked about Labour Governments having to practise the science of priority.

I do not discount the arguments put forward by my hon. Friend in this welcome debate. If there is real need, based on personal experience throughout the UK, that must be addressed. The nature of the UK constitution means that it is imperative that the Westminster Government ensure that allocated spending is spread fairly throughout the UK, and that is what the Barnett formula attempts to do in a crude fashion, primarily on the basis of population. However, I agree that if the squeeze is on, or if convergence is not to be in place for 30 years, or if differentials apply throughout the UK, rigorous criteria should be laid down. Needs assessments should be carried out that are sensitive enough to upgrade the Barnett formula. If the factors of average earnings, population density and spread, peripheral locations and key social factors such as changing structures of industry, levels of poverty and conditions of housing and health, are properly and fairly assessed, they will show the case for the retention of the Barnett formula.

The Government strongly support that position, and that is reinforced by their decisions on how to spend the EU objective 1, 2 and 3 funds of the European regional development fund and social fund allocation. Large tracts of Scotland achieve access to those funds on the just basis of need, which has been identified through the criteria.

In summary, we need to consider the issue constructively. We should examine what is happening throughout the region. In considering how Government finance is handled, we must bear in mind the creation of the Scottish Office in 1926 and the increase in social policy spending in the 1960s and 1970s. The Barnett formula was devised in the 1970s, prior to an expected Bill on devolution that would have created a Scottish Parliament well before its eventual creation in 1999. We should consider the issue of the English regions, because that would provide the vehicle for assessing the needs of the different regions and for enabling the Government to fine-tune their spending policies. I am not arguing for retention without consideration of a needs element to the Barnett formula, but the union between Scotland and England is based on a collaborative effort to do what is best for Britain. The Barnett formula serves that end.

11.44 am
Mr. David Stewart (Inverness, East, Nairn and Lochaber)

I pay tribute to my hon. Friend the Member for Sittingbourne and Sheppey (Mr. Wyatt) for initiating the debate. As he said, it is the first time in about 20 years that the issue has been discussed in the House. His was a well-researched speech and a thoughtful and excellent contribution to the debate.

What we have been told about the Barnett formula today is well known: it is non-statutory and has been used since 1978. The history books show that Chancellor Goschen in the 1890s had a similar formula, which related to the allocation of probate duties between the countries of the Union.

I shall briefly explain my understanding of the formula and make some suggestions for the future. I think that there is some misunderstanding about how the formula works across the UK. As we have heard this morning, the method is based on population, sharing out changes in public expenditure plans between the countries of the Union. It is not used to determine overall spending levels: that is a key point. We are talking about the margins of expenditure, where changes and populations are reflected, not about the base budget.

People might say that I would be bound to say that where Scotland is concerned, but what Scotland receives is a population-based share of changes in spending in analogous programmes in England. Importantly, population factors have recently changed. In 1992, it was agreed that population changes evident from the 1991 census would be taken into account. Now, yearly changes based on figures from the Office for National Statistics are also considered.

I offer an example that was proposed in Library research paper 01/108 in November 2001. It is a good worked example, but I had to examine it carefully because statistics in maths was never one of my strong points. It examined what the figure for Scotland would be if, for example, £1 billion expenditure were allocated to health in England, and how that would be worked out. The figure for Scotland would be £103 million, based on 2001 figures. The formula would be £1 billion x 10.34 per cent. x 99.7, where 10.34 per cent. is the population of Scotland as a percentage of that of the United Kingdom, and 99.7 is the comparability of the English health services to Scotland's. That is a dense formula, and I am sure that my son, currently doing standard grade maths, would be interested in trying to work the figure out in practice. It is important to know where the formula comes from.

We have heard a lot about convergence, and there are differing arguments about whether it will come in eight years or 30 years. However, before we can make those predictions, we must ask what the formula for convergence is. It will of course depend on the growth of comparable spending in England on such things as health and education. It is also—I do not think that this has been touched on much so far—about the relative stability of population changes. For example, if Scotland's population declines relative to England's—it is at the moment, and it is predicted to continue to decline in the next decade—that will offset the convergent effect of the Barnett formula.

I quote figures from 1995–96, when expenditure for Scotland was approximately 19 per cent. and that for Wales about 12 per cent. above the UK average. As the House of Commons Library research paper on public expenditure states, this is not necessarily a simple relationship between the geographic area in which money is spent and the resident who benefits … it is also important to remember this analysis is not exhaustive and only covers around three quarters of total spending in the UK. The Barnett formula has nothing to say about the size of the cake; it is about how that cake should be divided up.

A further issue, which was touched on by the hon. Member for Banff and Buchan (Mr. Salmond), concerns identifiable and non-identifiable public spending. We could have a debate simply on that. We must examine hot-spot spending in, for example, growth parts of London—I am aware that there is great social need there—and Edinburgh. There are pockets of poverty and higher need throughout the UK. I have mentioned London, but there are such areas in the north-east, in Wales, in Northern Ireland and, as my hon. Friend the Member for Sittingbourne and Sheppey made clear to me last night, in the south-east.

However, academics such as Professor Midwinter of Strathclyde university have acknowledged that Scotland has higher expenditure needs relative to the UK average. It has higher morbidity rates, sparse population in remote areas, low pay, the islands—which we have not mentioned and where life is very expensive—remoteness and high service costs. I give an example from my own area in the highlands. We were one of the few areas in Scotland that qualified for the old objective 1 funding, because our economic spending was less than 75 per cent. of average European GDP. The problem is the extent to which need is greater, which is difficult to establish.

Following devolution, it is up to the devolved Parliament and the Assemblies to decide their spending within the block and formula grants system. The Office for National Statistics recalculates population shares annually, but the Treasury last carried out a needs assessment in the mid-1970s, in which it concluded that spending on the basis of need would result in per capita spending in Wales and Scotland being greater than average.

In its second report, the Treasury Committee agreed with Treasury officials, who stated that there is a long-established practice of looking at the allocation of spending across programmes and across regions to try and get the right distribution". The Government's response to the Select Committee's 1998 report was that there was no case for reviewing the Barnett formula, but the White Paper on Scottish devolution argued that any substantive revision to the Barnett formula would need an in-depth study of relative spending and full consultation between the Scottish Executive and the UK Government. Interestingly, exactly the same comments were made in the White Paper on Welsh devolution that established the devolved Assembly. The Barnett formula provides Scotland, Wales and Northern Ireland blocks with a population-based share of planned changes in equivalent English spending programmes.

We have not touched on redistribution, and time will not allow me to examine that issue, but the Government have addressed redistribution through programmes such as the minimum income guarantee, the working families tax credit and the pensioner credit, none of which are covered by the Barnett formula. The new deal, which is an anti-poverty and employment support measure, is also not covered by the formula. Those programmes are crucial to regional development and totally independent of the Barnett formula.

Today's debate must be accompanied by health warnings. We cannot directly compare spending across various countries and blocks. For example, the Scotland and Northern Ireland blocks include provision for water and sewerage services, which are not included in English spending. If we include non-block programmes such as social security, Scotland receives only 9 per cent. more than the equivalent figure in England.

Mr. Lazarowicz

Will my hon. Friend give way?

Mr. Stewart

I have just about finished. If the Barnett formula did not exist it would be necessary to invent it. I am not claiming that it is perfect, because it produces inequalities within regions and nations. Perhaps the time has come for a full needs assessment across the UK to deliver the son of the Barnett formula. Until that happens I say, "If it ain't broke, why fix it?"

11.52 am
Mr. Jim Cousins (Newcastle upon Tyne, Central)

I congratulate my hon. Friend the Member for Sittingbourne and Sheppey (Mr. Wyatt) on securing this debate, which comes at an important time. As he rightly says, we are about to consider regions and regionalism in England and that is bound to trigger a debate about the distribution of public spending across the UK.

I must speak with some caution, because I represent a city that was besieged and occupied by the Scots in 1644. Nevertheless, I say to the hon. Member for Banff and Buchan (Mr. Salmond) that this is not an issue over which anyone should develop a Tora Bora complex that leads them to retreat, dig in, hide in caves and hope that it will go away.

The hon. Member for East Carmarthen and Dinefwr (Adam Price) called for a needs assessment that would stretch into the non-identifiable areas of public spending. Many representatives of English constituencies will echo that approach, and it will certainly be echoed in my region. We would be happy to work on that approach when we discuss English regionalism.

Mr. Salmond

I am still trying to work out the relevance of the Tora Bora complex. Does the hon. Gentleman appreciate that many Scottish people would be suspicious of a review based on reducing Scottish public spending? He heard me say that financial autonomy for the Scottish Parliament is an entirely different matter, but does he support financial freedom for the Scottish Parliament?

Mr. Cousins

No, I do not. On this issue I am clearly a Unionist. We should try to hang on to the fiscal integrity of the United Kingdom, which is an important part of a proper sense of British Unionism. The hon. Gentleman should understand that many of us are asking for a proper needs assessment for the English regions not because we think that Scottish expenditure is too high and should be reduced, but because it would provide a benchmark against which we can compare the needs of our own regions. Neither I nor my right hon. Friend the Member for Gateshead, East and Washington, West (Joyce Quin) has ever said that Scottish expenditure is too high; nor have we regarded it as a pot to be raided to serve the needs of our own region. Such a description is a misrepresentation of our case.

In considering the so-called Barnett squeeze, it is important to bear in mind the fact that the Barnett formula was originally a makeshift needs allowance. As matters have progressed, more makeshifts have been added to it, so to prevent the Barnett squeeze the comparison of English and Scottish expenditure has itself been changed. Two years ago, London Transport expenditure was added to the comparison with Scotland. However, that addition was never properly explained to Parliament, and it proved very difficult to dig out of statistics. The Treasury does not have a history of replying clearly to parliamentary questions on the matter. The addition was a neat trick, which enabled Scotland, Wales and Northern Ireland to get more resources without a penny extra being spent on London Transport. Such a "makeshift within a makeshift" destroys the integrity—such as it was—of the Barnett formula.

Public expenditure is growing, so the time is right to address this issue and to consider a needs assessment. In paragraph 6.56, on page 114, the pre-Budget report states that the 2002 Spending Review will assess how departments' policies impact on different regions and seek to ensure that spending is fairly distributed and targeted at those areas where it is needed most". I look forward to hearing the Minister's explanation of what the regional spending review will mean. She is unfailingly helpful, so I am sure that she will not let us down. Will it be stretched to cover Scotland, Wales and Northern Ireland, or confined to the English regions? What form will it take and how can Parliament be involved in the decision-making process?

The Barnett formula is a makeshift that has run its course. The time is right to move to a needs assessment on the broad basis set out by the hon. Member for East Carmarthen and Dinefwr.

11.58 am
John Thurso (Caithness, Sutherland and Easter Ross)

I begin by adding my congratulations to the hon. Member for Sittingbourne and Sheppey (Mr. Wyatt) on securing this debate. As he said, this subject has not been debated in the House for some time, although it has been discussed in the other place on several occasions. Until the issue is resolved, I hope that it will receive the same treatment as the issue of post offices, which arises regularly.

A few days ago, I had the honour of being the first person to inform the hon. Gentleman that he had secured today's debate. I asked him the simple question, "Are you for or against?", to which he replied that he was against. I therefore thought that I would be able to quote "Julius Caesar", in saying that he had come to bury Caesar, not to praise him. However, he had slightly more praise for Lord Barnett than he had given me to understand, and it was more a case of burying with faint praise.

The Barnett formula has become shorthand for general discontent about various aspects of the financial settlement relating to the nations, and I deprecate the narrow nationalism that has crept in both in England and in Scotland. We need to reconsider what it seeks to achieve and how to achieve it.

The formula has been roundly attacked. On 7 November, Baroness Ramsay of Cartvale said in another place that it must have something going for it if it is attacked on one side for being too generous and on the other for not being generous enough. Lord Barnett said: 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."—[Official Report, House of Lords, 7 November 2001; Vol. 628, c. 225.] This mechanism, which was last only six or eight months, is still with us because a formula is required. That was made clear by Lord Campbell of Croy. He explained, on the basis of his experience as a Minister and Secretary of State, the difficulties that arose prior to Barnett, when negotiations had to be undertaken annually. The one aspect of the formula that can be defended is that it has provided relative stability and a framework. I come neither to bury it nor to praise it. We should accord it its due, but consider what to replace it with.

Any new formula must be needs-based. Given the diverse economy of the United Kingdom, we must consider the differing needs of the various regions and make available corresponding funding to match those needs. In fact, Barnett does no particular favours to some regions of Scotland. For example, the latest figures show that in 1998 gross domestic product per capita in the highlands and islands was some £9,000, whereas that for Scotland as a whole was some £12,000. Those figures are not reflected in expenditure. The area was compensated to some extent by objective 1 finance, but that has now been lost. Scotland has differing needs in terms of expenditure, as do England and Wales.

Mr. Salmond

I do not want to interrupt the flow of the hon. Gentleman's even-handed speech, but can he tell us whether the Liberal and the Labour parties in the Scottish Executive have a common position on the Barnett formula and, if so, what it is?

John Thurso

I have no idea of the position in the Scottish Executive, but I can clarify our position in this place. We felt that there was a strong necessity to maintain the relative stability that Barnett had produced and that that stability should be maintained by keeping the formula for the first two Scottish Parliaments, but that the underlying policy should be a review to produce a new formula to take account of needs. When asked what he would do about it, my right hon. Friend the Member for Ross, Skye and Inverness, West (Mr. Kennedy) put it very well. He said: Quite simply—reform it! We would review the current formula and replace it with a needs-based one which would look at the UK region by region giving each region the amount it needs. Therefore, places like the North East which need more funding, would be fairly treated. That is our position.

The formula should not be based only on population. In many regions—for example, the north-east and the highlands—per capita allocations for expenditure simply do not work. The formula should recognise that many areas of expenditure, such as roads, require a different basis. As was suggested by a number of hon. Members, we must examine existing needs in the diverse regions and economies of the United Kingdom and allocate a new formula that takes account of those needs, based on expenditure that is not currently part of the Barnett formula, expenditure that is best driven by population and expenditure that is best driven by other methods. That should be negotiated between the devolved Assemblies and the Treasury. I do not agree with the hon. Member for Sittingbourne and Sheppey that the best way of doing that is through a joint Select Committee of both Houses. It must be properly negotiated, and the relationship must be akin to that between our Ministers and their European ministerial colleagues. With our devolved settlement, it is impossible to imagine devolved Parliaments and Assemblies being excluded from the process.

The hon. Member for Banff and Buchan (Mr. Salmond) referred, as he is wont to do, to the squeeze. The point about the squeeze is that it is a reduction not in Scottish expenditure but in the increase in Scottish expenditure compared with that in England. He cannot call for fiscal autonomy and boast of a surplus in the Scottish economy while at the same time saying that it is foul and unfair that there is a squeeze. He cannot have his cake and eat it. The hon. Gentleman suggested that the appropriate way to deal with the problem was to give Scotland fiscal autonomy.

Mr. Salmond

I am tempted to say that Liberal Democrats can have their cake and eat it in almost any place I could mention. It is fair to argue for fiscal autonomy—he may not know this, but some members of his party have argued for it in the Scottish Parliament—while at the same time being concerned about the review of the Barnett formula, which, in the minds of some people, has as its prime objective further squeezing of Scottish expenditure. Is that not a fair and consistent position?

John Thurso

I was talking about fiscal autonomy. I feel strongly that fiscal autonomy would bring with it almost as many difficulties as the Barnett formula. Where exactly are the borders of fiscal autonomy defined? Does one say that defence is included, but foreign policy is excluded? When looking for provision for the needs and economies of Scotland, fiscal autonomy holds out no greater hope of benefit than the current system. We need to reform the current system. We need to recognise the relative stability that having a formula has delivered, and to recognise that any new formula must be based on needs.

The Barnett formula has stood the test of time in one sense. It has provided relative stability. However, to ensure that expenditure is fairly allocated across the whole of the United Kingdom, we need to change to a formula that recognises the varying needs of the various parts of the United Kingdom. To achieve that, we need to be able to—

Mr. Nicholas Winterton (in the Chair)

Order. I appreciate the hon. Member's inconvenience and discomfort, but time is being squeezed.

John Thurso

Then I leave it at that, Mr. Winterton.

12.10 am
Mr. John Bercow (Buckingham)

Thank you, Mr. Winterton. It is a pleasure to welcome you to the Chair, and I am sure that we can anticipate that combination of gravitas and panache that you invariably bring to our proceedings.

I congratulate all hon. Members who have taken part in the debate, not least the hon. Member for Sittingbourne and Sheppey (Mr. Wyatt). I do not think that he has resiled from his opposition to the way in which the formula works. The hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) should recognise that the hon. Gentleman was just making his argument in his usual gentlemanly and understated way. His message was certainly pretty clear to me; he is not entirely sanguine about the way in which the formula works.

I also congratulate the hon. Members for East Camarthen and Dinefwr (Adam Price), for Edinburgh, North and Leith (Mr. Lazarowicz), for Banff and Buchan (Mr. Salmond), for Dundee, East (Mr. Luke), and for Inverness, East, Nairn and Lochaber (Mr. Stewart), not to mention what I might describe as the representative of the north-east, the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins). I think that I am right in saying that he speaks also for the right hon. Member for Gateshead, East and Washington, West (Joyce Quin), who spoke on this subject on 19 July in Treasury questions. She signalled her growing disquiet about the way in which the formula operates to the disadvantage, as she sees it, of the north-east of England.

There is a tendency for positions to be polarised in this debate. My starting point is to observe that the Barnett formula is neither a godly blessing nor the devil's curse. It is rather curious that it has subsisted for the best part of 22 years. As a number of hon. Members have observed, Lord Barnett expected that it would last perhaps six months, possibly a year, but was very unlikely to go beyond that. The fact that it has lasted for as long as it has might suggest that it has benefits. That is not of itself justification for its continuance. One commonplace and truism that I can utter without dissent from anyone who has taken part in the debate is that successive Secretaries of State for Scotland representing both parties have judged that the formula has merits. It has merit in terms of stability, merit in terms of flexibility, and merit for the people of Scotland.

Secretaries of State for Scotland have been spared the annual ordeal of having to negotiate with the Treasury, which is not something that should be taken for granted. For example, I was interested to learn on studying the debate in the other place that Lord Forsyth of Drumlean was himself a supporter of the Barnett formula, and he remains so. Anybody who knows the noble Lord will testify that he is not exactly scared of confrontation: he is always prepared to argue his corner. However, he is of the view that the merit of being spared that annual negotiation and the stability that the formula has brought about in the past 20 years are not inconsiderable benefits.

There is some misunderstanding about the purpose of the formula. It is to ensure not a cut in Scottish expenditure, as the hon. Member for Banff and Buchan unworthily and inaccurately suggests, but simply to secure a reduction in the differential between per capita expenditure in Scotland and England. We can argue the toss about whether and to what extent that objective has been achieved, but it is important not to misrepresent the initial purpose. The idea is to ensure that, in relation to expenditure that is comparable between England and the rest of the United Kingdom, proper provision exists for Scotland based on its population and what is admittedly a grossly outdated assessment based on 1976–77 figures for local needs.

Mr. Salmond

In the interests of not being misrepresented—no one wants to suffer that—I would like to ask a question. On 7 February this year, the shadow Leader of the House, who was then a Back Bencher, charmingly asked the Prime Minister: When will the Prime Minister end the scandal of English subsidies for Scottish benefits?"—[Official Report, 7 February 2001: Vol. 362, c. 928.] Does that represent the view of the Conservative Front-Bench team or any significant part of it?

Mr. Bercow

I am disappointed in the hon. Gentleman. I have made many speeches over the years that have attracted vociferous criticism and complaint, but when I have sat down to discuss my views with people, they have rarely been in any doubt as to my position. My right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth) is now a distinguished member of the Opposition Front-Bench team and, as shadow Leader of the House, he accepts collective responsibility. I will tell the hon. Member for Banff and Buchan the exact position taken by my right hon. Friends the Members for Bromley and Chislehurst and for Haltemprice and Howden (David Davis), the chairman of the Conservative and Unionist party. We are all engaged in a thorough-going and heart-searching review of policy across the field and we will report on our findings in due course.

It is fair to point out that there has been a significant downwards change in the population of Scotland during the intervening 22 years. That can be cited by hon. Members for English constituencies, including those for constituencies in the north-east, but it has not been reflected in public expenditure. Similarly, it is a fact that gross domestic product per head in Scotland is £12,512, whereas it is £10,449 in Wales and only £10,024 in the north-east of England. That is not reflected in expenditure per head, which is greater in Scotland at £5,271 than in Wales at £5,052, or in north-east England at £4,837.

In the past, the right hon. Member for Gateshead, East and Washington, West has pointed out that six of the nine English regions receive less funding per head than Scotland. That must be taken into account. Seven Back-Bench speeches have been made today, whereas 22 speeches were made during the 7 November debate initiated by Lord Barnett in the other place. It would be an exaggeration to say that there were 22 differences of opinion, but a miscellany of different views were expressed. It is fair to say that most reasonable people in Scotland—it would be rash in the extreme to include the hon. Member for Banff and Buchan in that category—judge that the formula has worked well for Scotland. The leader of the Conservatives in the Scottish Parliament, Mr. David McLetchie, has said that the financing arrangements have served and continue to serve the people of Scotland well.

I agree with Lord Barnett that there is a compelling argument for a review of his formula. An undeniable and unanswerable case exists for a thorough needs assessment in 2001; we should no longer depend on the hotch-potch that resulted from an examination of the situation 24 years ago. Any review should be wide-ranging, all-embracing and thorough. In the context of the formula, I note a slight difference between the position enunciated at the last Scottish questions in the Commons by the Minister of State, Scotland Office and that expressed by Lord McIntosh in the other place. The Minister of State said that the system was stable, fair and flexible and that the Government had no plans to review it. There was a difference, at least of tone and nuance, during the debate in the other place, when Lord McIntosh of Haringey splendidly said: We have no commitment to review the Barnett formula. On the other hand, it is not fixed in stone."—[Official Report, House of Lords, 7 November 2001; Vol. 628, c. 262.] That is a splendid example of the two-handed lawyer.

We should have a thorough review. It should be systematic and comprehensive. It will necessarily take some time. There is a strong case for the creation of a royal commission to consider all the arguments as far as the people of Scotland, Wales, the north-east of England and the other English regions are concerned. After that detailed and thorough consideration, which the Opposition favour, I will be able to enunciate my party's conclusions with the clarity and specificity that the hon. Member for Banff and Buchan requires.

12.20 pm
The Economic Secretary to the Treasury (Ruth Kelly)

It is a pleasure to see you in the Chair, Mr. Winterton. I congratulate my hon. Friend the Member for Sittingbourne and Sheppey (Mr. Wyatt) on securing this important debate. It is a topical issue and I am delighted to be here to debate it. My hon. Friend's contribution was well researched and interesting. As various hon. Members pointed out, Lord Barnett himself did not expect that the formula that bears his name would last so long. The longevity of the Barnett formula is a tribute to its effectiveness in determining the allocation of public expenditure to Scotland, Wales and Northern Ireland. There are at least two reasons for that longevity.

First, although no formula is perfect or above criticism, the Barnett formula has produced what have been perceived as generally fair and broadly acceptable distributions of public funds since it was first introduced. It has been used by both Labour and Conservative Administrations. It underpinned the devolution settlements with Scotland, Wales and Northern Ireland and is not perceived to be politically biased. Secondly, as the hon. Member for Buckingham (Mr. Bercow) pointed out so eloquently, the formula has avoided the need for separate negotiations between Treasury Ministers and their counterparts in Scotland, Wales and Northern Ireland during public spending reviews. It has provided a transparent, durable and simple rule for reaching spending settlements without direct negotiation.

A frequent misunderstanding is the widely held impression that the Barnett formula is responsible for determining the level of spending per head on services in Scotland, Wales and Northern Ireland. That is not the case. The formula is a device to allocate to the devolved Administrations a relative population share of changes in planned spending on comparable UK Government Departments' programmes. The formula was not used to determine the initial baselines, which have been inherited from the past. Furthermore, the Barnett formula is used to determine only the overall increase in the assigned budgets of the devolved Administrations. It is for the devolved Administrations to decide how they want to allocate their budgets to individual programmes. The UK Government do not determine the levels of spending per head on devolved services such as health and education.

Mr. Bercow

In order to remove one bogus argument from the agenda, will the Minister confirm that use of the tax-raising power by the Scottish Parliament could in itself raise only £450 million, which is just 3 per cent. of the total allocation of funds to Scotland? Therefore, it is a complete red herring to suggest that the use of that power could make a dramatic difference to Scotland. Manifestly, it could not.

Ruth Kelly

Of course the use of the tax-raising power is up to the Scottish Parliament itself. It is an important tool that it may choose to use at a particular time, but I do not suggest that it is particularly relevant to the Barnett formula.

We have heard a wide range of views in today's debate. Questions have been asked about the comparison of per capita public spending in Scotland and the equivalent figures for English regions such as the north-east or the north-west. However, the Barnett formula does not determine the allocation of resources within England—which is generally a matter for English Departments and reflects Department's various needs-based allocation systems—or baselines inherited from the past, or non-devolved spending in Scotland, Wales and Northern Ireland.

Mr. Salmond

It is reported in The Guardian today that Ministers are moving towards a full review of Whitehall spending throughout the UK. Will the Minister endorse that as a "report", or knock it on the head as a "story"?

Ruth Kelly

Even though I used to work for that newspaper, I am reluctant as a Minister to endorse every single line written in it. We have neither a commitment nor any plans to review the Barnett formula, and there is no tension between that position and the fact that the Barnett formula is not set in stone. We have to review it in the run-up to spending reviews and it changes according to population shifts, so reviewing the detail is an on-going process.

A comparison between spending in Scotland, Wales and Northern Ireland and in the English regions shows that there is a substantial variation in need within regions as well as between them. Outside London, the north-east has the highest level of public spending per head in England.

The Government are committed to improving prosperity in all regions and countries within the UK. Since the 1997 election, youth unemployment has greatly declined and long-term unemployment has been reduced. All regions are benefiting from the new deal, the working families tax credit, the introduction of the minimum wage and cuts in corporation tax and capital gains tax.

My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) asked about the reference in the pre-Budget report to public spending decisions being fairly distributed and targeted at those areas where it is needed most". It might be helpful to put that in context. At the time of the pre-Budget report the Government published a paper on "Productivity in the UK: the Regional Dimension" which sets out the economic analysis underlying the Government's approach to regional economic policy and the institutional framework necessary to deliver it. Working in partnership with the Government, regional development agencies and other local and regional economic bodies have put in place a substantial programme of policies designed to tackle economic failure—at every geographical level—and deliver sustained improvements in the UK's economic performance.

The forthcoming spending review provides an opportunity for the Government to consider the lessons of the first years of this new regional economic policy and incorporate the analysis into our evidence-based approach to public spending. Reference is made to public spending that takes place in England, but that does not imply any fundamental rethinking of the Government's approach to the Barnett formula. It is all about learning from experience and building up an evidence base to inform public spending within the overall context.

There has been criticism from some in England that the Barnett formula is too slow in delivering convergence in per capita total identifiable spending between the four countries of the UK. I would point out that the speed of convergence is affected by a variety of factors, including the rate of increase of comparable English programmes, changes in relative population between the countries of the UK, and changes in relative public spending per head on programmes that do not fall within the Scottish, Welsh and Northern Ireland assigned budgets.

On the other hand, there has also been criticism in the opposite direction that spending percentage increases in Scotland and Northern Ireland are lower than elsewhere in the UK—sometimes referred to as the Barnett squeeze. In fact, no fixed or predetermined convergence path is built into the Barnett formula. The so-called convergence characteristic simply reflects that fact that population-based increases represent a smaller percentage increase where baseline levels of spending per head are higher.

The Government's policy on funding the devolved Administrations, including the Barnett formula, is set out in the statement of funding policy published by the Treasury in July 2000. The statement fully and transparently sets out the details of the funding arrangements, and was agreed with the Secretaries of State for Scotland, Wales and Northern Ireland, following consultation with the devolved Administrations. It allows for operational change. We have updated the population figures, for example, and the comparability factors are kept under review.

We have heard a wide range of—sometimes conflicting—views. The Barnett formula has served us reasonably well, but we will continue to listen to various representations.

Mr. Nicholas Winterton (in the Chair)

I regret that time is up. We thank the Minister for her reply. We move to the next debate.