The last couple of years have seen a huge amount of work on the financing of devolution, with the Calman Commission in Scotland, the Holtham Commission in Wales and the Lords Select Committee on the Barnett Formula at Westminster. Taken as a whole, it’s the most comprehensive scrutiny that the financing of devolved government has had, not just since the creation of the devolved legislatures in 1999, but for much longer despite the long tradition of administrative devolution. The UK Government’s response to the Barnett Formula Select Committee hasn’t yet been published, so it’s not fair to make assumptions about that. But the general position is pretty clear if Peter Hain’s Commons statement on Thursday 26 November, and the Scotland’s Place in the United Kingdom white paper published on 25 November are taken together.
It’s common ground between Calman, Holtham and the Barnett Committee reports that grant funding will remain by far the largest element of funding the devolved administrations. All agreed that ‘need’ should be the basis on which a grant is allocated (as did the Commons Justice Committee). The Lords Committee pointed out the obvious flaws in Barnett – the way in which it distributes funds doesn’t relate to need, and the Treasury is left in sole charge of all decisions about how funds are allocated, which reflect only its priorities and are often seen as being taken unfairly. Holtham pointed out that, by standards used in England for needs-related formulas that cover the bulk of services which are devolved in Wales, Wales is under-funded; it should receive 114 per cent of funding in England, but actually gets 112 per cent.
What we have seen, however, is an adamant refusal to change the system in any key respect. In the Scotland’s Position white paper, the Government says that the block grant to Scotland ‘means that the budget available to the Scottish Parliament relates to overall levels of public expenditure across the UK’ (it doesn’t; the underlying baseline has nothing to do with that – the relationship only comes in with changes in spending); that the distribution of funding delivered by Barnett is ‘broadly fair’ (a contention challenged by the Holtham Commission as well as the two Westminster committees); that this supports a ‘broadly comparable welfare state’ across the UK as an element of the social union, and that this enables ‘national [UK] government the scope to ensure a broadly comparable level of public service provision in Scotland and the rest of the UK’. (These quotes are from paras. 2.11 and 4.7.) The last point is particularly interesting – not only is it new (to my knowledge), but it runs counter to the position hitherto taken that the block grant enabled the devolved administrations to develop their own policies, and therefore supported rather than restrained policy divergence. The white paper itself, in para. 2.9, claims ‘Scottish Ministers and the Scottish Parliament have virtually complete freedom to determine spending priorities.’ The first statement is more correct than the second – the spending freedom conferred by Barnett assumes that there is a similar general structure of public services in Scotland, Wales and Northern Ireland as in England, and it only operates incrementally at the margin. In practice there’s good evidence that Barnett consequential payments are usually applied by devolved administrations to the policy area which triggered them, through increased spending in England. That’s particularly strong for health, the largest devolved function in financial terms.
The upshot of this is the declaration that there are ‘no plans to review the Barnett formula itself’, as the formula ‘has proved robust and durable’. (The quotes are from paras. 4.7 and 4.24.) The Calman recommendation to base the block grant on need is therefore ditched, as are the recommendations of the Lords Barnett Formula Committee.
To make up for the problems this causes, the UK offers a side deal to Wales, which is the main loser. Peter Hain’s statement is actually narrower than it might look. It relates just to the convergence effect of Barnett – an arithmetical property of the formula, which manifests itself as levels of public spending increase. Ultimately, the formula should mean that public spending in all parts of the UK, regardless of their needs, converges on that applying in England. There is a commitment to a ‘full assessment of the extent of convergence’ at each spending review, and a further commitment to ‘to take action if appropriate to ensure Wales is not disproportionately disadvantaged’. Although this has been welcomed by Gerry Holtham, in reality it’s not worth very much. Given the constraints to which public spending will be subject in the coming years, convergence is unlikely to manifest itself to any marked degree. And in any case the commitment only applies a) if a Labour UK Government is returned, b) if the subjective test of ‘disappropriate disadvantage’ is satisfied, according to UK Government (who exactly? The Secretary of State? HM Treasury? The Cabinet?), and c) at a spending review, which only takes place every 2 or 3 years – not in between.
Northern Ireland has already been offered its own deal for financing the devolution of justice and policing. That deal involves a largely unlimited right of recourse to the UK Reserve, not just to cover ‘legacy’ costs such as pensions and hearing-loss claims from former police officers for injuries sustained during the Troubles, but future ones if there should be an increase in disorder or violence there. That means that there are no financial pressures on politicians in the North to ensure that there is no upsurge – they can come to London if there should be a problem.
This was is a chance – in reality, the last chance of this Labour government – to restructure the grant element of financing devolution. The challenge was to find a way of structuring territorial finance so that it reflects the sort of social democratic values and in particular principles of inter-territorial equity that Labour claims to advocate, and to do so in a way that would be politically acceptable across the UK. In particular, it could have tried to defuse senses of grievance in England on which various interests (including the Conservatives) can be expected to capitalise. That chance has been ducked. Instead, we have a set of pragmatic ad hoc adjustments calculated not to cause disruption in Scotland and to offer a modest something to Wales. These will make the existing confused and pretty centralised system a bit more workable, but not deal with complaints of injustice coming from various parts of England. They won’t create a thread of ‘fairness’ to underpin how devolution works. And they don’t address the problems of a lack of clarity and transparency in the present arrangements either. It’s a missed opportunity.