Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 20-39)



  20. You also gave us some fascinating information about agricultural expenditure and how that was allocated, but what about defence expenditure? How is that accounted for? Heaven forbid that it should be spread equally.
  (Professor McLean) That is a good question and one which our research project is looking at. The defence expenditure does not appear in the tables in my paper because Government deems defence to be an example of what, in the jargon, is in but not for the regions. With permission, perhaps I may go into "in" and "for" briefly. The Government line, shared by all relevant government departments, Treasury and ONS in particular, is that there is a way of counting regional expenditure which looks at for whom the expenditure is to benefit, and that is the so-called "for" concept which is used in the PESA tables. There are classes of expenditure which are deemed not to be to the benefit of individuals or individual regions, and defence is a case in point, where defence expenditure is deemed to be for the good of the entire population of the UK. Nevertheless, it is obviously the case that defence expenditure takes place in the regions of the UK, and our project does involve looking at that, although it is not in the PESA tables. I have a colleague, a subcontractor, who is already talking to the Ministry of Defence about that, and we will, when we produce our final report in April of next year, be able to say something about the spread of defence expenditure around the regions of England.

  21. Obviously given that it is in the regions, there is a benefit to those particular regions, if only from the jobs and the impact on the economy and therefore on all of the other services?
  (Professor McLean) Yes, that is true. The MoD and the ministers in that department are very well aware of that, and that is indeed why we are told that a quango called DASA—Defence Analytical Services Agency. DASA keeps detailed records on these matters, and our project is going to check those records.

  22. Given that that figure is excluded from the TME and it does have an impact, and that we are looking at expenditure over the regions overall, what should we be looking at?
  (Professor McLean) I am sorry, my earlier answer was misleading. Defence expenditure is within TME, but it is not within that part of TME that is presented in the Chapter 8 of PESA which gives the English region breakdown.

  23. So you are telling us that we can be satisfied that at least the range is inclusive enough?
  (Professor McLean) I think you can be satisfied that the range of spending which is counted as public expenditure for the purposes of the regional allocation is satisfactory, yes.

Mr Beard

  24. When you were speaking about Table 1 and the public expenditure per head, you said that leaving Scotland, Northern Ireland and Wales out, there was a broad correlation. It is a very broad correlation. I was just about to say the line goes in the right direction. It is not really a correlation much at all, is it?
  (Professor McLean) No, if you take Scotland, Northern Ireland and London out it is a respectable correlation. My research officer and I calculated it and it looks statistically reasonable.

  25. Those figures there are built up from different formulae which are applied by the different departments, and certainly in some cases those formulae are only very vaguely understood by some of the recipients of the funds, are they not?
  (Professor McLean) Indeed.

  26. If not by some of the people who are actually doling out the funds. Does it not strike you that they are so obscure that people do not really understand the things that are influencing the answers?
  (Professor McLean) As to the people who are doling the funds out, I have talked to those in ODPM and my experience so far is that they do understand what they are doling out. I have not talked yet to the Department of Health, so I cannot answer in that regard. As to the recipients of the funds, indeed, that is a very fair comment. Almost nobody, for instance, even in the world of local government, feels that they fully understand that SSA system. That, I think, is a fair criticism. As I said earlier, the Government also itself accepts that that is a fair criticism of the local government distribution mechanism.

  27. Do you see your way round that? Do you see any way in which you can associate the money that is given to the actual region with the problems that are supposed to be influencing the allocation?
  (Professor McLean) It is quite difficult, I believe. You can attempt to do a statistical regression formula, which SSA is, but do it better, or you can abandon the regression approach and go for some, I would say, more data-poor indicator or information-poor indicator, but nevertheless one which may be no less equitable. In the paper I suggest inverse GDP as an example of such a thing, and I would be willing to expand on what I mean by that, should Members wish me to. I am not terribly optimistic that any government—I am not making a party point here—can do all that much better than the present SSA formulae if they stick to a regression formula, because there are some really quite severe statistical and methodological systems problems associated with it, which I set out in the paper. The essential one is the one that I mentioned in my answer to Mr Laws, namely that the data which determine need are themselves derived from the authorities which receive the grants, and there is a danger of circularity there.

  28. You have referred to the GDP per head, and that is in Table 1 of your paper. You say that the GDP per head per region is "another prima facie indicator of regional wealth and poverty". How do those differences between the English regions compare with the differences between similar regions in France, Germany and Italy, for instance?
  (Professor McLean) I do not have an immediate answer to that. I could check it and tell the Committee later[3].

  29. But is there a greater variety, a greater spread or a cluster?
  (Professor McLean) My impression is that the variety within the UK is fairly wide among the EU Member States, but that really is something I should not make a statement on when I do not really know the position. It is fairly easily checked from the sources.

  30. Would the GDP per head be a better way of looking at this problem than the allocation of regional funds?
  (Professor McLean) I believe that it might be, yes. That is one of the arguments in my paper, yes. One of the reasons for saying that is that GDP per head is a number which is not determined by government decisions, it is the product of all the actions of all the agents in the economy and it is measured as part of National Statistics under the protection of which national statistics have to be measured in a non-partisan way.

  31. How have other countries managed in trying to even up the prosperity of their different regions?
  (Professor McLean) Again, that is a question where I could commission a review of the literature, but I would be diffident to give an answer here and now which might make it sound as if I had more authority than I have. I think, though, that the countries which do it best are those that have an active intergovernmental body which oversees this matter. Australia, Canada and Germany I think are often mentioned in the literature as cases in point.

  32. Is there not a risk, if you conduct policy by putting more money into the regions that are most impoverished and less into the regions that are reasonably prosperous, that you are stunting growth overall? For instance, you might be putting money into a region that is entirely barren, meaning that resources in another region, which could be exploited for want of capital, are not exploited. Is there not a potential fallacy there, if you look at the well-being of the country as a whole?
  (Professor McLean) There is a deep question about what government expenditure is for there, which clearly political parties take different views on. Again, I would be diffident to get into political controversy about it. But for most of the programmes on which Government spends money I think it is always going to be the case, whatever the partisan complexion of the Government, that more money per head one expects to go to poor areas and less money per head to go to rich areas, because a very large proportion of public expenditure is always going to be on health and social security, and one has to expect that health would be worse and poverty greater in poor parts of the country.

  33. So you are saying that things are all right, and that this is the right way to do it, even if you may be holding the whole growth of the economy back?
  (Professor McLean) No, I am not saying that either, because I do not know—and I am not sure that any academic knows and nor, I think, does any Member or civil servant in the Government know—whether expenditure which might help economic growth, expenditure on industry, expenditure on communications, expenditure above all on human capital formation, is being distributed as efficiently as it can be. That is a huge question. Very probably it is not, but I cannot tell this Committee how it should be spent differently.

  Chairman: Now we are going to venture onto some of the forbidden ground.

Mr Cousins

  34. Professor McLean, the Barnett Formula was intended to be, by its designers, by its inventors, a convergence formula, but it has not converged. Expenditures between England and some of its regions, Scotland, Wales and Northern Ireland have not in fact converged. Why is that?
  (Professor McLean) My view is that it did not converge for the first 20 years or so of Barnett, but that it has started to converge now, and it particularly, in my view, has started to converge during the current spending review period that we are in. The reasons that it did not converge before that are many and various, and I give some of them in the paper. One is that the population relativities were wrong. Until 1992 the formulae treated Scotland as if it had a higher population than it actually did. A second reason—and I have to say, this is quite a political one, it is in my paper, but I believe it to be true—is that the Conservative Party after all certainly was until recently entitled the Conservative and Unionist Party, and it is by reputation the party which cares most strongly about the Union of the United Kingdom. John Major's manifesto in 1997 made great play of the fact that in his view the other three parties were intent on or had policies which would lead to damage to the Union. It is not surprising, in my view, therefore, that the Conservative Governments have been particularly keen to spend money in territories which pose a credible threat to the Union, and those two territories have usually been Scotland and Northern Ireland—not Wales, as I argue in the paper, because Wales has mostly not been a credible threat to the Union. I think that is probably the deepest underlying reason for the failure of Barnett to converge. If I have taken a potshot at Conservative Governments it is only fair of me to take a potshot at Labour Governments as well and say that a third reason has been that not the last two Labour Governments, but the Labour Government before the last two had been very concerned not to lose seats in Scotland because they needed Scottish seats to form a UK majority government. This has led Labour Governments also to be very sensitive to the needs of Scotland.

  35. Not being a Conservative, though possibly a Unionist, I cannot really follow you down that track. What I am looking for are the more technical reasons why the Barnett formula did not converge, did not produce convergence.

  36. Right. Restricting myself to technical reasons, I would say firstly the failure to adjust population correctly. Secondly, there has always been liberty to spend outside of Barnett, and I believe the Conservative Secretaries of State for Scotland did so with considerable freedom in the years up to 1997. This did not ever operate to the benefit of Wales until 2000 and the row about the Objective 1 status of West Wales and the Valleys and finally the granting of matching funding to that area, which went outside Barnett. So I would say—and I think most others who have studied Barnett would say—that the technical reasons for the failure to converge are mostly those two. There is a third highly technical reason to do with whether Barnett operates on nominal or real expenditure. Up to about 1985 Barnett operated on increases in real expenditure, so that if there were to be an increase in real expenditure in England then there would be a proportionate—proportionate, that is, to population—increase in real expenditure offered to Scotland, Wales and Northern Ireland. But in the 1980s, years of relatively high inflation and in aggregate no real growth in public expenditure, as there was no real growth there was nothing for the convergence mechanism to bite on. In the mid-1980s, for reasons essentially unrelated to Barnett, for reasons of changes in cash planning and so on, the formula changed to operating on nominal increases, and then that meant that although it was not the case that every year there was a real increase in spending in England on public services, it was always the case that there was a nominal increase in spending in England on public services each year, and thereforea proportionate nominal increase, proportionate to number of population, was applied to the other three territories. It is probably difficult for Members to keep this in their heads without the advantage of—If you can do differential equation systems in your head, then what I am saying I hope is sufficiently clear to follow, but if not it might be easier on paper. Let me simply assert what is, I believe, mathematically true, which is that once Barnett starts to operate on nominal and not on real targets, then convergence is potentially faster.

  37. Faster?
  (Professor McLean) Yes, faster.

  38. Can I turn very briefly to the other aspect of the Barnett Formula, which is what you described as being an anti-rounding-up device—that is to say, it produced a block of spending, a block of money, rather than trying to piece together a whole series of items which were separately calculated—and that, because it was a block item, provided greater discipline, if you like, than building it up from a series of individual blocks. You commend in your paper that particular feature of the Barnett Formula, do you not?
  (Professor McLean) Yes.

  39. Is the implication of that that you see that feature of the Barnett Formula—that it works through a common allocation, with its own internal allocation disciplines—as being something that might be an advantage when we are looking at resource allocation systems between the English regions?
  (Professor McLean) In a word, yes. I think the move to a block from the previous arrangement where, under Goschen formulae or under simply programme by programme bargaining between what was the Secretary of State for Scotland and now the Treasury Chief Secretary, the Scots could always claim a Goschen proportion, as it were, and if they were good at bargaining they might claim something more than Goschen, so they were always in a position, so people, including Joel Barnett and his civil servants at the time complained, that they were able to get an even higher share of public expenditure than if a Scottish block were offered. In that regard to a great extent I regard Barnett as having been a success. It did offer a block, and this does impose some financial discipline on the Scottish, Welsh and Northern Irish spending departments.


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