Select Committee on Treasury Minutes of Evidence



Examination of Witness (Questions 1-19)

PROFESSOR IAIN MCLEAN

WEDNESDAY 3 JULY 2002

Chairman

  1. Professor McLean, welcome. Could you, for the sake of the shorthand writer, formally identify yourself?
  (Professor McLean) Yes, I am Iain McLean. I am Professor of Politics at Oxford University and a Fellow of Nuffield College.

  2. This is the start, as you know, of our inquiry into these regional matters. Do you think that the Government overall has a coherent strategy for addressing regional economic imbalances?

  (Professor McLean) That is a very tricky question to throw at me straightaway, Chairman, since I am here as an academic and not as a political commentator. I think that most regional allocation to the English regions goes by formulae. Government may change the formulae from time to time, and each spending review gives Government an opportunity to change the formulae. The formulae are themselves based on conceptions of need which go back some years. The general view that I gave in my evidence is that the formulae in relation to the Health Service work reasonably well and the formulae in relation to local government services work not very well.

  3. In your paper at page 3[1] you do talk about assignment of tax revenues being done according to two incompatible formulae, do you not?


  (Professor McLean) I do, yes.

  4. So presumably you think there is a slight lack of coherence about the overall picture?
  (Professor McLean) Yes, I do. The awkwardness here, Chairman, is that what I presented to you as my evidence was a freestanding paper that I had written earlier about two subjects, one of them being about a forbidden subject of this inquiry beginning with the letter "B", and, as I understand it, this inquiry is not about the Barnett Formula. It is rather awkward for me to comment on the disparity between the formulae that apply to Scotland, Wales and Northern Ireland on the one hand and the formulae that apply in England on the other, but my paper does say that there is a disparity.

  5. Yes. Although the Barnet Formula is not a subject of our inquiry, we may be touching on it, you will be relieved to know. Given the number of spending departments involved, do you think there is an attempt to assess regional needs as a whole and to address them as a whole? Can we say that about British public policy?
  (Professor McLean) About British public policy, if you mean the public policy of the United Kingdom, I would find it rather difficult to say that there is an attempt to address it as a whole, because of the point that I make at that point in my evidence that the procedures for Scotland, Wales and Northern Ireland are so very different from the procedures for England. Within England I think, yes, that the Treasury and what I must now remember to call the ODPM and also DTI—all three of those departments—are interested in that subject.

  6. Is a region's share of public spending in England the sum of its share of individual spending programmes, each made without reference to the region's overall needs?
  (Professor McLean) I do not think that is entirely true, because there are programmes which go through the government offices of the regions, and I presume the Government attempts to assess those in relation to a region's overall needs. However, there are programmes which do not go through the government offices and they are, if you look at the public expenditure statistical analysis table, the majority of programmes. Those in turn fall into two categories: demand-led programmes, mostly social security, where there neither is nor I think should be any explicit consideration of regional needs, because if somebody is entitled to a benefit then they are entitled to benefit wherever they live; and on the other hand programmes where the bulk of the funding is delivered by the formulae as to health authorities, for instance, and to local authorities.

  7. You refer in your paper, fascinatingly, to the "losing" regions and the "gaining" territories. Is there a consensus as to who are the gainers and the losers under the current formulae, and have they changed over time?
  (Professor McLean) Yes, there is a consensus, because the data are quite clear. The three territories which are ahead of a normative standard are Scotland, Northern Ireland and London, and the nine which are below are all the other nine standard regions. I am sorry, Chairman, you had a second question which I have now forgotten.

  8. Have they changed over time?
  (Professor McLean) No, that has been a quite stable pattern. As the graphs at the end of my paper show, that has been a stable pattern for as long as the data enable us to go back, which is to about 1990 or so.

  Chairman: Thank you.

Mr Laws

  9. Professor McLean, in your paper which you gave us sight of you say that there are "good reasons both of efficiency and of equity" for some sort of equalisation arrangements in the way that the expenditure is distributed across the country. It might be fairly obvious why that should be the case for equity grounds, but why for efficiency grounds should there be a distribution of that type?
  (Professor McLean) One reason could be that public spending would be more efficiently distributed if it were redirected from areas or people in relatively less need to areas or people in relatively more need. Another reason would be that if there are, as I believe there are, formulae which contain perverse incentives in them—For instance, it is argued, not only by me but by other academics who have looked at the matter, that some of the ways that the SSA formulae (the Standard Spending Assessment formulae) for local authority spending are calculated, involve perverse incentives so that there is a risk that they will reward the inefficient. That was a view adopted by the DTLR itself in the Local Government White Paper back in December, where they gave—and I think I quote it in my evidence—what I regard as very clear examples of the inefficiency of their own formulae. So this is the Government itself making what I think I call in the paper "Maoist self-criticism of the arrangements".

  10. What you are saying, therefore, in terms of the allocation is that it might be more efficient to spend the money on health, education or deprivation in an area that had particularly bad characteristics in those areas, rather than putting a lot more money into an area that already had very short waiting lists, or better health or better education? Is that what you are implying by "efficiency"?
  (Professor McLean) That is part of what I am implying by "efficiency", but the case is different for health from local government services, because for health services it is probably not the case that inefficient hospitals cause bad health. Bad health is caused by many, many social and environmental factors, and so it is relatively straightforward to direct health spending to areas of bad health. However, for local government services it is much more difficult, and the Government I think admits that it has not found the solution, because for local government services your evidence as to, let us say, where it is expensive to buy childcare is simply the list of costs which each local authority incurs in providing childcare, but that may, as the Government itself has said, show not that in the bad areas the childcare is expensive, but that it is inefficiently run.

  11. My last question on this bit is that in this section of your paper you refer to the table—Table 1—which shows the way in which these allocations are made across the country, and you say that that table suggests that something odd is going on, do you not?
  (Professor McLean) Yes.

  12. Obviously we are going to explore those issues later on, but in a nutshell, what is the odd thing going on from your perspective?
  (Professor McLean) The odd thing going on is that there seem to be two countries within the UK, from the figures in my paper; that within a country consisting of the three non-contiguous territories of Northern Ireland, Scotland and Greater London there is a reasonable relationship between GDP per head and public expenditure per head—Northern Ireland is the poorest, Greater London is the richest, and the line goes the way one should expect it. Within the other nine territories of the UK the same is true that the poorest, which is the North East, gets not quite the most spending per head because Wales gets more, but at any rate what a statistician would call the regression line has the right property. The trouble is, when you put those two bits of the UK together, you get a pattern which is statistically of no association at all. If there is statistically no association at all between GDP per head and public expenditure per head in the territories of the UK, one has to conclude I think, as I say, that there is something odd going on.

Chairman

  13. Going back to the answer you gave me, you said that the three regions that had really done the best were London, Scotland and Northern Ireland. Your table shows London way out ahead. Is there a particular reason for that, or is it just a reflection of the higher costs in the capital?
  (Professor McLean) I am sure it is partly a reflection of the higher costs in the capital, although in the graph which we prepared—which, by the way, I have since updated for the most recent year's data—we tried to account for the higher costs factor by calculating the relative advantage and disadvantage after taking account of differential costs of living, and London is still ahead. It reduces the London advantage (if that is the right word) from about 1500 per head before you take account of cost of living to about 1100 a head after you take account of cost of living.

  14. They are still way out in front?
  (Professor McLean) They appear to be, yes.

  15. We would like to see that updated graph, if that is possible.
  (Professor McLean) Yes, with pleasure[2].

 

Kali Mountford

  16. The Campaign for the English Regions have told us that "plotting trends in regional spending is something of a fine art", implying obviously that it is difficult to do, and is therefore "more accurate with some programmes than others". Do you share that view? If so, could you tell us perhaps why you share that view, which programmes you think are more successful at looking at the trends, and why you think they are successful?
  (Professor McLean) Yes, I do share that view. In fact, I do not know if members of the Committee are all aware, so I will put it on the table now, that I hold a contract with the ODPM to investigate the flow of public expenditure into the English regions, which is aimed at precisely that question: are the data reliable, are they more reliable for some departments than others, what can be done to improve them? That is our commission from the ODPM. The contract has been in the field for a month out of a year, so it is very early days, but I can say that certainly there is strong evidence that the numbers are more reliable for some departments than for others. One anecdote which has become well known in some circles in the last few months is that in the PESA tables (public expenditure statistical analysis) up to last year, if you looked at the tables which give English regions' expenditure and you look at the line "Agriculture, Forestries, Fisheries and Food", you find that the spending per head is essentially identical in all nine regions of England, and in particular it is the same in London as in, for instance, the South West. I have heard it said that MAFF and now DEFRA justify this on the grounds that agricultural spending is to everybody's advantage and therefore it is quite right that it should be equal in London to what it is in the South West, but they appear, under pressure from the Treasury, to have abandoned that line, because in the PESA tables just out within the last month that line has been changed and London does, as one would expect and, I dare say, hope, have the lowest per head spend on agriculture, forestries, fisheries and food. So that is an example of a statistic which is clearly suspect. It is not a big programme, so it does not much affect the argument we had earlier about whether London is over-funded or not, but clearly the data are much more reliable for some departments than others. Our view at the moment, only a month into this project, is that the data are most reliable for those departments where you have individual claimants, so we expect them to be reliable for the DWP, for social security. They are relatively reliable for departments which have relatively meticulous records. We are not yet in a position to say which departments those are, but that is one of the focuses of our investigation.

  17. I have managed to glean from that answer that you do not believe there is a consensus really about how data is compiled and collected, otherwise there would not be such disparity. Do you think there ought to be consensus? What ought we to be looking at to make sure that the information that is available is not just accurate but also useful?
  (Professor McLean) The Treasury, the ONS and spending departments are all trying to work towards such a consensus. It may be helpful if I say how the process is done at present, which is that the Treasury issues to the spending departments a spreadsheet annually which contains the total English spending for their programmes, so education might be divided into under-fives, primary, secondary and so on. The department is asked to produce nine columns with a breakdown of these numbers for each English region, and the Treasury has set the software so that if the columns do not add up to the supplied right-hand column, the form is rejected. So there is a methodology there which departments are constrained to follow. That may be an approach to consensus, but I think we are not there yet.

  18. Yes, it is perhaps not a consensus that most of us would recognise, but I shall move on from there. What I would like to know about is that when we are dealing with these figures, the data that we get out of them could be skewed by what we include in the first place. Are there aspects of public expenditure that are currently missing from those columns, that you think ought to be included and, if included, would actually change the results of how we see spending overall in the regions?
  (Professor McLean) I do not think so. The data that I work from and that I think most people who look at this would work from is Total Managed Expenditure, as the Treasury calls it, which is all capital and current expenditure by central and local government. That seems to me to be the right total to look at. Perhaps you had an example in mind. Perhaps I am missing a question behind the question, or something which ought to be included but is not.

  19. I suppose what is in my mind, and maybe might come out of some of the reviews that are going on elsewhere, as you have touched on yourself, is the problem of what do we include in local government expenditure? From what is included, in my own experience previously as a councillor, we had some difficulties in what we thought was fairness and felt that there were aspects of expenditure that ought to be included to make matters fairer. Would you go along with that view?
  (Professor McLean) Everything that local authorities actually spend is part of this concept of Total Managed Expenditure, so if an authority, for instance, does not like its SSA or would like to spend, or chooses to spend, on things other than what the Government wants it to spend on, that is reflected in the total. So the totals that I am dealing with are the totals of money which has actually been spent and which counts as public expenditure, including all the money spent by all local authorities in the region.

 


1   Not printed. Back

2   See Ev 9. Back

 
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