Lords say Barnett is ‘arbitrary and unfair’

Eurfyl ap Gwilym on the implications of the Lords’ report into the Barnett formula:

Hard on the heels of the first report of the Holtham Commission on funding devolved government in Wales, which was published on July 7, the House of Lords Committee on the Barnett Formula published its report on July 17.

The two committees offer contrasting but essentially complementary reports. The Holtham Commission was concerned essentially with the position of Wales within the UK but will, in its two reports, look both at the current funding arrangements through the Barnett mechanism and also taxation and borrowing powers. The House of Lords remit was limited to the Barnett Formula and its possible replacement but covered in detail the position of all three devolved countries.

Another key difference is that the Holtham Commission comprised three independent experts while the House of Lords Committee was composed of a set of peers many of whom have had extensive experience of government including a former Chancellor of the Exchequer, Nigel Lawson, and two former Secretaries of State for Scotland, Michael Forsyth and Ian Lang. The differences in composition and approach mean that consideration of those findings and recommendations where the reports are in agreement should carry that much more weight.

The Lords committee concludes that ‘the Barnett Formula should no longer be used to determine annual increase in the block grant for the United Kingdom’s devolved administrations.’ The Barnett Formula takes no account of relative needs of any of the devolved administrations and a new system, which allocates resources based on an explicit assessment of relative need, should be introduced. The precise details of a new system are not defined in the report but there are some broad-brush indications of the approach that might be taken.

Importantly, the Lords report proposes that the process of reviewing the grant allocations and the range of functions needed to make the new system work should be carried out by a new independent expert body called the UK Funding Commission. The Commission would determine new baselines: this would address one of the fundamental weaknesses of the current system, which carries forward past misallocations of funds on a cumulative basis. The Committee recommends that a periodic review of the baselines, every five years, should be carried out by the Commission. The Commission would undertake an assessment of relative need, undertake periodic review, and collect and publish information on an annual basis. While the Commission should be advisory its advice would be published and its recommendations laid before the House of Commons for approval. Thus, there would need to be a very strong case for the recommendations of the Commission to be rejected by the government of the day.

Under the current arrangements the block grant is made to the Secretaries of State of the devolved territories and they then pass on the monies (after deducting the costs of running their own offices) to the devolved administrations. The Committee recommends that future grants be payable directly from the United Kingdom Government to the consolidated fund of each devolved administration. This is a welcome proposal and would be a further step in recognising the position of the devolved administrations as being the governments of their respective countries in the case of those matters that are devolved.

Unlike the Holtham Commission the House of Lords Committee does not attempt to quantify any possible funding shortfall or over provision for Wales but does draw the tentative conclusion that on the basis of their initial analysis ‘Scotland has a markedly lower overall need that Wales and Northern Ireland in comparison to England’.

The Committee recommends that the arrangements they propose will need to be embodied in statute, at least in general outline. The legislation should contain provision that the quinquennial reviews recommended by the Committee indeed take place. This is another welcome recommendation which will end the current practice where to quote the Holtham Commission the current arrangements are a ‘fudge’. They are also subject to ‘arbitrary decisions made by the Treasury’ (Calman report).

Taken together the Holtham and House of Lords reports provide a powerful critique of the current funding arrangements and point the way forward to a much more satisfactory funding regime in the future. The question now is whether there is the political will to make the required changes.

Eurfyl ap Gwilym is an IWA Trustee.

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