Funding Formula

Tuesday 18th January 2011 Westminster Hall

Motion made, and Question proposed, That the sitting be now adjourned.—(Miss Chloe Smith.)

09:30

[Andrew Selous (South West Bedfordshire) (Con)]

I am grateful to Mr Speaker for allocating me this important debate. It is a particular pleasure to serve under you, Mr Dobbin.

I have wanted to make this speech for a considerable time. As a member of a governing party with a bold and reforming agenda across large parts of Government, I hope that that spirit of boldness will also be applied to this issue and that it will be allied to a keen sense of fairness and justice so that we do the right thing by every part of the United Kingdom.

I speak as a committed Unionist and I want every part of the United Kingdom to be treated absolutely fairly as far as central Government funding is concerned. However, the formula that currently allocates funding between England, Wales, Scotland and Northern Ireland for large parts of public expenditure is broken. Even the man after whom it is named, Lord Barnett, wants to get rid of it and speaks against it. It really is time for us to look at it, as I shall try to show in my remarks.

The formula dates back to 1976. It was decided, across certain parts of Government spending, to allocate 85p in every pound to England, 10p in every pound to Scotland and 5p in every pound to Wales. That was done on the basis of population figures from the mid-1970s. Those figures have never been changed; all that has been changed over the years are the annual increments. We are therefore working on a population baseline from the mid-1970s that bears no relation to the significantly increased population in England or the increased population in Wales. At the same time, the population in Scotland has remained broadly static. In the excellent debate on the Barnett formula in the House of Lords, Lord Sewel, a Labour peer, referred to

“a series of fantasy populations”—[Official Report, House of Lords, 11 March 2010; Vol. 718, c. 381.]

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

I am grateful to the hon. Gentleman for bringing this important subject for debate, but his comments about the starting point for the Barnett formula give the impression that the 85%, 10% and 5% figures reflected the populations of the different parts of the UK at the time. Surely, that was not the case. Even at that stage, the formula reflected the different needs in the different parts of the UK by giving Scotland and Wales a slightly higher allocation per head. Population did not define the breakdown in different parts of the UK at the start.

[Andrew Selous]

The formula was fundamentally on a population basis. If the hon. Gentleman reads the excellent report by the House of Lords Committee on the Barnett formula, which came out in July 2009, he will see the significance of the population issue. I propose that we move to a needs-based formula, and that was the Committee’s unanimous, cross-party conclusion, which was supported by its Conservative, Liberal Democrat, Labour and Cross-Bench members. I think I can assure the hon. Gentleman that I absolutely want to reflect the higher need that is clearly evident in Wales and parts of Scotland so that we are totally fair. The evidence is that we are not doing that now. The situation has become unfair, and that is a danger to the Union.

Let us see what the man after whom the formula is named has said. Speaking of the formula’s creation in 1976, he said:

“I just wanted to get through every day without too much trouble.”

He also said:

“I do not consider it is successful. I do not think it is fair.”

He added:

“I thought it might last a year or two before a government would decide to change it. It never occurred to me for one moment that it would last this long”,

or more than 30 years. Those who pray in aid the Barnett formula should be well aware that its author thinks that it is time we moved on to something that is fairer and that is built on a needs basis.

[Hywel Williams (Arfon) (PC)]

Will the hon. Gentleman refer to the Holtham commission, which looked at the nature of the funding for Wales? It identified that Wales has been underfunded historically to the tune of about £300 million per annum.

[Andrew Selous]

I will most certainly refer to the Holtham commission. What the hon. Gentleman says is quite correct. He should have no fear about what I propose. The Holtham commission came to the same conclusion as the House of Commons Justice Committee report in July 2009 and the excellent House of Lords Committee report, on which there was a good debate on 11 March 2010. The commission really said the same thing as those reports: we need to move to a needs-based formula.

The money given to Wales and Scotland is distributed on a needs basis across the Principality and Scotland. It should not, therefore, be too difficult to put together a needs-based formula to allocate the money. That is difficult to argue against, and as I said, leading members of the Conservative, Labour and Liberal parties came to the unanimous conclusion in the House of Lords Committee report that we should move to such a formula.

I want to spend a little time explaining why the situation is unfair for England. We sometimes look at the Barnett formula as if it is just about Scotland, Wales and Northern Ireland. As a committed Unionist, however, I think we also have to remember the English. I do not, in any sense, say that apologetically; I just think we need to be fair to everyone, because poor people in England have similar rights and should also be treated fairly.

Council tax in Scotland has been frozen for a considerable number of years. Many of my constituents have worked hard all their lives to buy the home they love, but some are forced to sell their homes because they cannot afford the council tax, which goes up year after year. Is that fair?

I also think of business rates. I represent a town called Dunstable, which recently had 56 empty shops in its high street. Many shopkeepers told me time and time again that business rates were driving them out of business. Hon. Members might therefore be interested to know that business rates in Scotland were reduced by 80% for businesses with rateable values of up to £8,000 in 2008-09 and scrapped entirely in 2009 and 2010. Business rates were cut by half for businesses with a rateable value of up to £10,000 and by up to 25% for those with a rateable value of up to £15,000. Of course, I commend the Minister for recognising that unfairness as far as England is concerned and for bringing some relief, although it is not as much or as generous as elsewhere. I thank her and her Treasury colleagues very much for what they have done, but there are businesses that would still be operating in my constituency and paying tax revenue to the Treasury had we applied that relief earlier and more fairly across the United Kingdom.

Since 2002, personal care in Scotland has been given without reference to need, whereas it is time limited and not available in the same way in England. Prescription charges are much lower in Scotland and will be abolished completely by April. They do not exist in Wales. Why should people in the same circumstances in England have to pay prescription charges? On hospital car parking charges, it costs £2.50 per visit to park at my local hospital. If someone on a low income has a family member in hospital for a long period, those charges will be significant. Again, such charges are not paid in Scotland.

This year, the situation with tuition fees and education maintenance allowance really was the straw that broke the camel’s back for a lot of people in England. English Members have been receiving lots of letters about education maintenance allowance and the fact that it is to be replaced by a discretionary grant; but of course it is being kept in Wales, Scotland and Northern Ireland. There will continue to be no tuition fees for Scottish students and there will be no increase in the fees for Welsh students, while those of English students will double. Therefore, in a few years’ time, a Scots graduate, a Welsh graduate and an English graduate, working in the same company and the same office, perhaps having done similar courses, and earning the same salary under the same taxation system, will be paying back hugely different amounts of debt. How are we supposed to explain to our constituents that that is fair? My children are already giving me considerable grief on the subject, as they look to the university fees that they will no doubt pay in a few years. It is frankly not fair, and I defy any Scottish or, indeed, Welsh Member to say that the system is fair to the English.

[Owen Smith (Pontypridd) (Lab)]

I am pleased that the hon. Gentleman got this important debate, and pleased to be able to contribute a little. There is a one-word answer to the question that he has raised: devolution. In the spirit of fairness in which he has framed his remarks I entirely agree that we need to move to a needs-based formula, and the Holtham report and all the other empirical data we have about Barnett point in the same direction. We need to move in that direction. I am encouraged to hear a Parliamentary Private Secretary thinking in such ways. However, is it not invidious to cherry-pick ways in which citizens in Wales may be better off, when they are less well off in other respects? The hon. Gentleman mentioned the relative deprivation in Wales and Scotland. That is reflected in the empirical evidence, which shows that a needs-based, deprivation-based formula would afford more money to Wales than we currently enjoy.

[Andrew Selous]

I am glad that the hon. Gentleman is with me in wanting a needs-based formula. He is right that the evidence of the Holtham commission, and the evidence that the House of Lords took, suggests that Wales would benefit from such a formula and that if it is to be applied fairly there should be some reduction in what Scotland currently receives.

I agree with the hon. Gentleman that it is up to the Welsh Assembly Government and the Scottish Government to spend their money as they see fit. What is not fair and right is the allocation of money in a block grant on a bust formula from 1976, whose author no longer thinks that it is fair, when there is clearly in many cases such an imbalance between what the English and the Scottish can be offered. That is an entirely reasonable case.

[Mark Lazarowicz]

Will the hon. Gentleman give way?

[Andrew Selous]

I will, but I want to finish my list—I have not got to the end of it yet—of what we do not get in England. It is really worth listing, because even the Library did not have a comprehensive list. I was adding to it as I went along.

Certain cancer drugs were available earlier in Scotland than in England—we are just catching up. Concessionary bus travel is more generous in Scotland. People can go on long-distance journeys there and take a companion, if they are disabled, which they could not do in England. I think that hon. Members who are fair and who consider the issue dispassionately and want to do the right thing by every part of the United Kingdom will agree that we cannot allow the situation to continue if we are committed Unionists.

[Several hon. Members]

rose—

[Andrew Selous]

I cannot remember who wanted to intervene earlier; I give way to the hon. Member for Edinburgh North and Leith (Mark Lazarowicz).

[Mark Lazarowicz]

I am grateful to the hon. Gentleman for giving way again, but it is an important debate. I welcome the tone in which he presents his case, even if I disagree with some of the conclusions. Would it not be better if he were to mention not only the areas where residents of Scotland and Wales appear to get a better deal, but those where, because of a choice made under devolution, spending is less? There is now a debate in Scotland and Wales about university funding and the effects of different tuition fee levels on university fee income. In some areas of health and transport, provision is less than in England. It is not right, as my hon. Friend the Member for Pontypridd (Owen Smith) said, just to cherry-pick the areas where Scotland and Wales seem to be doing well, without referring to choices that have resulted in different consequences, which can be easily pointed out as examples of relatively lower levels of service than in England.

[Andrew Selous]

I will now move on to what I think we should do about the situation. I am proposing a needs-based way of allocating the block grant, reflecting current populations and needs, which are worse in England in some cases than in Scotland, and significantly worse in Wales than in some parts of England. That should be recognised because there is a fair, open and transparent way of proceeding, but at the moment much of what the Treasury does is not transparent. Crossrail, for example, was at one moment a UK project, designated by the Treasury. The next minute it was designated an English project so that there could be a Barnett consequential, and Scotland could get an extra £500 million. That may or may not have been right, but what was the process? Was it open to transparent scrutiny so that people in Wales and England could see that it was fair? In one year, the Treasury suddenly said that there was a £900 million underspend for 2007; that was allocated to the Scottish budget. That may have been correct, but at the moment everything is done deep in the bowels of the Treasury. I do not say that there has not been fair play, but there is a need for the process to be more open and transparent. The Treasury is judge and jury in its own court, in a process that is not open to scrutiny. I do not think that that is right.

[Hywel Williams]

I agree largely with what the hon. Gentleman has been saying. I want to point out the value of considering not only differences between Scotland, Wales and England but the interesting regional differences in England. It would be very useful for hon. Members from the north-east, for example, to look at those. Perhaps the hon. Gentleman will refer to them later.

[Andrew Selous]

The hon. Gentleman is right. There are significant differences. I am an east of England MP, and that region has the lowest spending of any region in England. Perhaps that is why I get increasingly angry communications from my constituents on the matter.

Having outlined the problem and some of the unfairness, I want to talk more about what we can do. I direct my hon. Friend the Minister to the excellent conclusions of the House of Lords report of 2009 on the Barnett formula. The report looked across the world to Australia—I declare an interest in that my mother was Australian, but that does not affect whether I think the Australians have a fair and good solution, from which we could learn. In Australia, the Commonwealth Grants Commission is an independent body charged with the responsibility of dividing the cake between the Australian states and territories. It is an advisory body to the federal Government and its impartiality is completely accepted by the states and territories of Australia. I understand, and agree with Government colleagues, that we are not looking to set up extra quangos. If my hon. Friend does not want an extra quango my proposal is that we should add the specific responsibilities in question to the remit of the Office for Budget Responsibility. However, if she says that that is too much for the OBR, it is not fair to tell me that we should not have an extra quango. I would be happy to go either way, with whichever option seemed most sensible and would cost the Government less. We could add the responsibilities to those of the OBR, but if we wanted a separate body we could have one. Given the figures involved—the sums of public spending—it would be a serious body.

What the Committee in the House of Lords proposed was only illustrative. If the Government have other or better ideas, or if colleagues from either side of the House want to contribute ideas about what the needs-based formula should include, let us start the debate now. Let us get ideas rolling into the Treasury, so that we can proceed with total fairness.

[Mr Mark Williams (Ceredigion) (LD)]

I too congratulate the hon. Gentleman on obtaining the debate. I welcome the direction of travel that he has outlined, but I want to ask about timing. He has alluded to the impatience in England, whereas I and colleagues from Wales and Scotland would allude to the shortfall, such as that in education; there is £500 less per child in Wales than in England. There is impatience about that. The coalition Government have said that in a Welsh context a Calman-style commission will be set up after the referendum. What are the hon. Gentleman’s views on that? Do they reflect that impatience, or is he more on the go-slow track?

[Andrew Selous]

I am naturally quite an impatient person, and I want to get things done when I see something that I think is not right. However, we are in difficult times financially, and it will be incredibly difficult to move from one formula to another in these challenging times.

A sensible time scale would be for the Government to start doing the work now, setting out how we are to allocate money fairly between England, Scotland, Wales and Northern Ireland on a needs basis. Once we agreed on it, there would need to be a transitional period. We cannot get away from that, because we have to do such things fairly and in a way that does not cause undue difficulties in any part of the United Kingdom.

I would be a happy person at the end of this debate if I had a sense that the Government would move toward setting up a system that allotted funding on a needs basis, and that they would agree to create some sort of body to do that, and consider a transitional period. The beauty of that is that by then we would have got through these difficult financial times, and more money would be available as we started to implement such a system. It would also make the transition easier for the parts of the United Kingdom that did not benefit.

[David Mowat (Warrington South) (Con)]

rose—

[Andrew Selous]

I shall give way for the last time; I have been generous in giving way, but I need to move on in order to let others speak.

[David Mowat]

I thank my hon. Friend for giving way. What he says about the time scale is important, particularly vis-à-vis Scotland. Next week the Scotland Bill is coming before the House. In my opinion, it will enshrine the current level of the Barnett settlement for ever, as it will link the Barnett amount that Scotland receives directly to the level of income tax paid in Scotland. As a consequence, future reforms will be difficult. I am not sure that time is on our side.

[Andrew Selous]

I hear what my hon. Friend says. He refers in part to the Calman commission and the fact that the block grant in Scotland will be reduced to 65% and that Scotland is to raise 35% of its income through tax-raising powers given under the Bill. What I am talking about will still apply, however, as 65% of Scotland’s public spending will be allocated. Everything mentioned in this debate is relevant, although we can argue about the time scale. I shall listen carefully to what the Minister has to say. I have outlined a possible way to proceed.

I touch again on the different needs that the House of Lords Committee found. They are four: we should move to an assessment method that takes account of the age and structure of the population, as a significant number of older people require extra spending; we need to consider low incomes; we should take account of ill health and disability; and we should consider economic weakness. All of us would probably have some sympathy with those four indicators. There would be value in setting up an independent commission, as it would allow people to make representations, and extra factors could be taken into account to deal with the particular situation in Wales or Scotland. Indeed, it has been done successfully in Scotland.

The House of Lords debated the Barnett formula report on 11 March 2010. Lord Moser, a former head Government statistician who was appointed by a previous Labour Government, said:

“We emphasised repeatedly that, especially in the hands of an independent body, backed by thorough and on-going research, this was an eminently practical task. It is just not true to say that it is difficult or too time-consuming or too complex—that is not so.”

He was talking about the task of setting up a new needs-based commission.

Baroness Hollis, a distinguished Labour peer, spoke of the differences in funding for personal care:

“What could be more unfair…than an elderly, frail person in East Anglia receiving perhaps only two-thirds, in public expenditure terms, of what an equally elderly, frail person in Scotland receives, even though the person in East Anglia is poorer, because we are hanging on to an unfair population basis of estimating subsidy?”

Lord Newby, a Liberal Democrat from Scotland, said:

“In terms of gaining public acceptance for a conclusion which will inevitably mean funds being taken away from Scotland, it is interesting to note that within the Lib Dems we had quite a spirited discussion with our colleagues in Scotland when we first proposed this, as you can imagine. In the end, the argument that fairness is the only long-term sustainable basis for allocating expenditure won the day, as I am sure it will in future as this case is made more widely.”

I note that Lord Davies of Oldham, then a Labour Treasury Minister, wound up the debate by saying of the report’s authors:

“They have created a framework within which the disadvantages of the Barnett formula are such that a reforming Government would need to look at them.”

That brings me back to my opening remarks. I am proud to be part of a reforming Government, and I hope that we will not be dilatory in this matter.

Baroness Noakes, then our shadow Treasury Minister, said in response to the debate:

“In principle, this is something which my party supports. We also support the transparency advocated by my noble friend Lord Trimble.”

She also spoke of

“an inevitable conclusion that change is necessary.”—[Official Report, House of Lords, 11 March 2010; Vol. 718, c. 371-404.]

I thank all Members who wish to contribute to the debate, and I shall listen with interest to what my hon. Friend the Minister has to say in response.

[Jim Dobbin (in the Chair)]

A number of hon. Members wish to speak. I remind the House that the wind-ups will start at 10.40 am, so I ask Members to keep their contributions brief.

09:56

[Alun Cairns (Vale of Glamorgan) (Con)]

It is a privilege to serve under your chairmanship, Mr Dobbin. Before the debate started, I forewarned you that I may have to leave early because of my Select Committee responsibilities, and I apologise for that.

I congratulate my hon. Friend the Member for South West Bedfordshire (Andrew Selous) on securing this debate. I recognise and support the spirit in which he has raised this sensitive matter, which affects all the nations and regions of the United Kingdom. He has underlined the point that we have a reforming Government and that bold steps need to be taken to come up with a formula that will serve all the nations and regions in a positive and constructive way that is dependent on need. The debate has been going on for some time in Wales. Even before the evidence was as stark as it is now, there was a view that relative deprivation in Wales meant that the Barnett formula was not serving Wales well.

A mathematical formula, such as the Barnett formula, offers significant advantages. The first advantage is that it offers a guarantee of funding, particularly to devolved Administrations, who need such a guarantee to plan, which prevents, for example, the Welsh Assembly Government, or the Wales Office on its behalf here in Westminster, becoming involved in horse trading year on year. Such a mathematical formula obviously offers that guarantee. The second advantage is that in times of limited or reduced spending, the Barnett formula offers protection to the devolved Administrations.

On the other hand, there are significant disadvantages with the formula being so far out of date, and I regret the time that it has taken to get to this point. The previous Government should accept their responsibility for leaving it so long. Despite Lord Barnett’s strong view that the formula needed reform, it was not accepted. He plainly said that the formula was unfair.

[Hywel Williams]

My memory of that slightly pre-dates the hon. Gentleman’s. I draw his attention to numerous debates over many years when Front-Bench spokesmen on both sides used the formulation, “The Barnett formula serves Wales well.” The hon. Gentleman should concede that both Conservative and Labour Governments were staunch defenders of the Barnett formula. My party, of course, took another view.

[Alun Cairns]

I shall square that point in a moment, but I do not want to let the previous Government off the hook for their delaying tactics in resolving the matter because of its sensitivity. Whereas Lord Barnett plainly said that it was not fair, the then Chief Secretary to the Treasury said that it was fair enough. That certainly was not good enough for Wales. I regret to say that despite 13 years in office, the previous Government did not have the opportunity to resolve the formula.

[Guto Bebb (Aberconwy) (Con)]

It is important to point out that back in 1999 and 2000, Wales, on average, received £125 for every £100 in England. In 2010-11, Wales receives around £112 for every £100 in England. Therefore, the Welsh treatment under the Conservative Government is significantly better than it was under the Labour party, when there was a significant decline in funding for Wales.

[Alun Cairns]

I will come on to the convergence in a moment. None the less, it is a point that is well made and that should be recognised by the Labour party. It is important not to confuse freedom of devolution, which enables nations to pursue their own policies, with funding. There is naturally a link, but because there is a policy, subsidy or generosity in one particular area, it should not then be used as proof or evidence of over-funding when we consider the whole context.

[Owen Smith]

I was rising to make precisely that point. Does the hon. Gentleman fear, as I do, that the hon. Member for South West Bedfordshire (Andrew Selous) will not be happy when we have a needs-based formula, because those examples that he cherry-picked earlier will still exist? The politics of envy, which underpins some of his concerns, will still play into this debate.

[Alun Cairns]

That point only demonstrates the hon. Gentleman’s misunderstanding of the spirit and tone of the debate presented by my hon. Friend the Member for South West Bedfordshire. My hon. Friend identified the differences, but recognised that that freedom needs to take place when we consider devolution. The obvious things in Wales are free prescriptions and—this one has focused attention of late—tuition fees. To those hon. Members who are critical of the Barnett formula because it is advantageous to Wales, I say that our NHS waiting lists are much longer and that the cancer drugs fund does not apply, so there are considerable drawbacks, and they need to be taken in the context of the whole funding settlement. It is far too easy to pick a policy that has been prioritised by the Welsh Assembly Government without accepting the areas that may not have been prioritised. Health is the obvious one. In England, for example, there is a guarantee of no cuts in NHS spending, whereas in Wales there will be real-term cuts and financial cuts to the health service. That point should be recognised in the debate.

My hon. Friend the Member for Aberconwy (Guto Bebb) has referred to the positive contribution of the Holtham commission. The two volumes of the Holtham commission can be brought down to a few figures. At the moment, Wales receives £113, which will drop to £112, for every £100 that is spent in England; Scotland receives £120; and Northern Ireland receives £124. Holtham concludes that Wales needs £115, which is marginally more than it is currently being awarded; Scotland needs £105, which is a significant reduction from its £120 now; and the figure for Northern Ireland is not far from what it already receives. That is the first needs-based assessment that has taken place. If that is not accepted in general terms, it is certainly an exceptionally useful starting point of where the needs lie.

The hon. Member for Arfon (Hywel Williams) has said that, historically, Wales has been underfunded by £300 million, but that fails to understand the convergence that has taken place over the past 13 years or more. That £300 million is the current level, and it would have been a much smaller level in the past.

A very good point has been made about Crossrail. Despite the view that the Labour party in Wales is taking at the moment, we can compare the spending on Crossrail with that on the Jubilee line. The spending on the Jubilee line was Barnettised, but the spending on Crossrail by the previous Government was not, which highlights another way in which Wales was treated unfairly by the previous Administration. It is far too easy to point the finger, when a real debate is taking place on satisfying the needs-based requirement.

My closing points—I am conscious of the time—relate to the way forward. All the nations and regions need to engage in the debate about this extremely sensitive area. Those who are allied with the Scottish National party are a block not only to any form of debate—that position is natural, because of the way in which Scotland would lose out—but to changes elsewhere in the United Kingdom. As the hon. Member for Arfon builds up a strong relationship with the Scottish nationalists, he must recognise that that is blocking reform in Wales, because every part of the UK needs to engage in this debate if we are to come up with a needs-based formula that satisfies all the nations and regions of the United Kingdom.

10:06

[Owen Smith (Pontypridd) (Lab)]

I am grateful to serve under your chairmanship, Mr Dobbin. I will make a few brief remarks, because I, too, am on the Select Committee to which the hon. Member for Vale of Glamorgan (Alun Cairns) has referred. I must leave early, for which I apologise.

I welcome today’s important debate. Although the issue has been debated many times in this House—there was a recent debate in the House of Lords, which produced an excellent report that is well worth reading—it is worth debating again. The issue was not resolved by the Labour Government. I accept that we were tardy in addressing the issue. Once we saw the firm evidence in the Holtham report on convergence—the so-called Barnett squeeze that resulted in a reduction in the relative benefits to Wales over the past 10 to 15 years—we responded to that at the last election. The previous Labour Government were keen to see fair funding for Wales, and we went into the last election fighting for that pledge. Had we won, we would have delivered fair funding. I hope that this current Government will be true to their word and look to deliver a different form of funding for Wales and the other devolved nations and regions of the UK, and I hope that it will be needs-based, as the hon. Member for South West Bedfordshire (Andrew Selous) has said.

My caveat—I did not mean to personalise the debate earlier in referring to the politics of envy—is that at some level, the hon. Gentleman’s underpinning concern is that parts of England do not benefit. In particular, he points to the fact that historically the east of England, which he represents, has featured towards the bottom of the league table of public expenditure over a long period. That is, in itself, reflective of the relative needs of the east of England. We have for the English regions, as Holtham and others have pointed out, a needs-based formula. Indeed, one of the conclusions of the excellent House of Lords report is that a quick interim measure would be for Wales and Scotland to go to a needs-based formula based on the English version.

As the hon. Gentleman has pointed out, aspects of policy in the devolved nations and regions can foment a sense of envy. When one looks at the responses in the Daily Mail and The Daily Telegraph on tuition fees, which range from outrage that the Welsh are doing something different through to incredulity that such a policy can be afforded in Wales, one sees that they reflect the lack of understanding that persists across the House about the way in which devolution works.

Current Government Members, such as the hon. Gentleman, have highlighted examples of how Wales and citizens in Wales appear to benefit financially from the devolution of powers and the policies that are pursued in Wales, whereas hon. Members from Wales have highlighted other areas, such as the health service, where—according to those hon. Members—people in Wales are not benefiting.

[Andrew Selous]

The evidence from Holtham and from the House of Lords Select Committee is that Wales would gain from a needs-based formula. So there is no part of what I have said that would cause problems as far as the Welsh are concerned. It appears that Scotland is more generously funded than a needs-based formula would suggest, but that is what we need to set up a commission to look into.

[Owen Smith]

I am grateful to the hon. Gentleman for that intervention and I fully appreciate that point; I heard him say very clearly that Wales would benefit. My point is simply that I fear that in much of the debate on this subject there is a concern that English regions do not benefit where other parts of the UK, particularly the devolved regions, do. Traditionally English Members from both Houses have expressed that view, which underpins and unfortunately colours debate on this subject.

[Mark Lazarowicz]

Is it not the case that moving to a needs-based formula would receive universal support, would be value-free and would not allow any political interference is an illusory hope, because even with a needs-based formula the question arises of how one assesses needs? For example, how much importance should be given to rural diversity and to the length of communications in Scotland? If a high priority were given to ferry links to the Shetland Isles and Western Isles, there would obviously be a high result there. When it comes to funding that depends on age, there are some parts of both Scotland and Wales where unfortunately, because of ill health, some people do not live to an older age, which would not be reflected in the formula. The idea that we can move to a value-free system with a needs-based formula is somewhat illusory. Will my hon. Friend comment on that?

[Owen Smith]

I agree with my hon. Friend—that is essentially what I was trying to say a moment ago. An arm’s-length independent organisation, which Holtham considered—whether it is the Office for Budget Responsibility or whether it is some other body—is an excellent idea that we should take account of.

[David Mowat]

The hon. Member for Edinburgh North and Leith (Mark Lazarowicz) has said that it is not easy to conduct a needs-based analysis, but that does not mean that it should not be tried. He has raised the issue of sparsity in Scotland and the fact that many people live in the Western Isles, Orkney and such places, which makes a difference. There is a precedent for such an analysis, which was carried out by the Scottish NHS and which is referred to in the report by the House of Lords Select Committee on the Barnett formula. The cost was about 15% extra for that component of the population. However, the point is that that component of the population is very small and the overall impact is less than 1.5%. So it is right that that factor is taken into account, but it is not material to what we are discussing.

[Owen Smith]

The point that my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) has made—that it will be very difficult to introduce a needs-based formula—is valid. The aspects of a needs-based formula that ought to be taken into consideration and the weighting that ought to be placed on those aspects individually will not be incontestable. So it is easy to bracket them under “deprivation and sparsity”, or “deprivation” and some other criterion. Within that, there will be all sorts of eminently contestable notions related to the number of children in a country, the number of older people who are dependent, sparsity and all sorts of other aspects, which will be eminently contestable.

The simple point that I was trying to make is that even if we shift to a wholly independent—or ostensibly independent—and wholly needs-based formula, we will still see divergences and differences between the relative spending priorities and the relative quantum spent on individual aspects of public services across different parts of the country. That will still fuel a sense of resentment in certain quarters, when parts of the country are perceived as doing better than others. I therefore caution that we would not all be happy with a needs-based formula and I suggest that the hon. Member for South West Bedfordshire—

[Andrew Selous]

We would be happier.

[Owen Smith]

“Happier”—okay, well perhaps we would be “happier”. I, too, would be “happier” if we went to a needs-based formula; I will concede that much.

In conclusion, I simply add that at last we agree across this House that a fairer funding formula ought to be pursued and that Barnett has seen its day. I therefore commend the Government for considering how we might do something important about it in the future.

[Jim Dobbin (in the Chair)]

There are still three hon. Members who want to contribute, so I remind hon. Members of the time.

10:14

[Guto Bebb (Aberconwy) (Con)]

I will be very brief, Mr Dobbin. Thank you very much for calling me. It is a pleasure to serve under your chairmanship this morning. I also want to apologise in advance for the fact that I might have to leave before the conclusion of the debate, because of Select Committee responsibilities.

I congratulate my hon. Friend the Member for South West Bedfordshire (Andrew Selous) on securing this debate. In my view, the debate has been very positive and the spirit in which it has been conducted is something that we should be proud of, because it has not been a case of people complaining about the unfairness of the funding system in relation to England. Instead, the debate has highlighted real concerns about the fact that the current system is possibly unsustainable, because we are creating anomalies that are very difficult to justify in the long term.

I concur with my hon. Friend the Member for Vale of Glamorgan (Alun Cairns), inasmuch as the fact that some of the examples that have been given about the differences, for example, between Wales and England in terms of spending is in danger of confusing the issue of Barnett with the actual effect of devolution. As a Member from north Wales, where one can get to Cheshire in less than an hour along the A55 on a good day, I am very aware of the fact that, for instance, the decisions made by the Welsh Assembly during the past 12 years have resulted in spending on education being significantly less per head in Wales than in England. That is a real concern for people in north Wales, because we can actually see the differences between spending in Cheshire and the spending in north Wales. That is an effect not of Barnett but of the decisions that have been made and the priorities that have been set by the Welsh Assembly. As I said in my contribution to the debate on the issue of student funding, I personally feel that the decision made by the Welsh Assembly, within the Barnett block grant, in relation to funding student fees in future is actually an attack on the Welsh university system, which will be disastrous in the long term for Wales. Again, however, that is a decision that has been made within the funding formula. It is important when we have this debate on the funding formula to be aware of the fact that, on some clearly beneficial spending priorities established by the Welsh Assembly, there are counter-arguments, in terms of examples of spending decisions made in Wales that are actually quite damaging.

There are things that we need to be aware of about Barnett. In the Welsh context, there is concern that there has been a real change in the way in which Barnett works in Wales. I have already highlighted the fact, in an intervention, that in 1999-2000, Wales received on average about £125 for every £100 spent in England. That figure has reduced to about £112 for every £100 spent in England and obviously that reduction has been highlighted in Wales regularly. Therefore, I genuinely applaud the Welsh Assembly for commissioning the Holtham report, because the argument that Wales was underfunded and was being unfairly treated in some way was one that we had heard a lot about. I think that the Holtham report gave a very secure background to that debate and explained that Wales was, in comparative terms, being underfunded, if one takes into account the needs of Wales. That point has been acknowledged in this debate by my hon. Friend the Member for South West Bedfordshire, so it is a genuine issue.

Therefore, there is now a growing need to address the fact that the Barnett system is out of date and is creating a real problem. That situation has been made much worse by the implications of the Barnett squeeze; because of the way that the system works, as spending was increasing, the allocation to Wales on a pro rata basis was not increasing at the same rate.

That brings us to another important point. It has been highlighted by Holtham, and I do not think a single Member of this House would argue against this fact: most analyses of the Barnett formula seem to indicate that, if we try to move to some needs-based formula that is not dissimilar to the one used in England, the effect will be to increase the funding to Wales slightly—even if it is only a slight increase, it would be most welcome—but there would be a significant difference to the funding for Scotland.

That is an issue that we need to think about very carefully, because as my hon. Friend the Member for Vale of Glamorgan pointed out there is currently a block on consideration of the issue. Quite clearly, the Scottish Parliament is not looking to implement any changes, because the advantage is given to it by the current system.

Nevertheless, in my view there is a real issue here, which is the continuation of the happy relationship between the four component parts of the United Kingdom, because ultimately an ongoing sense of unfairness, which has been highlighted from an English point of view, is not compatible with the sustainability of the Union. There is a genuine need to consider coming up with a new formula that will replace Barnett and that will try to be fairer to all parts of the United Kingdom.

The hon. Member for Pontypridd (Owen Smith) made the point that no new system would necessarily result in everyone being happy, but that is not in itself an argument against sticking with a system that was implemented in 1976. Ultimately, it is important that the present Government take the issue in hand, to ensure that we have a system that is fairer to all parts of the United Kingdom.

Finally, I need to make a point about the Welsh context. The hon. Member for Arfon (Hywel Williams) is a Plaid Cymru Member, and his party has certainly been very vocal about the unfairness of Barnett. I think that it is fair to say that when the Holtham report was published there was genuine disappointment among some members of Plaid Cymru that the highlighted shortfall of £300 million was significantly lower than some of the figures that had been bandied around. Shortly after the publication of the report, I took part in a debate in Bangor university with the former president of Plaid Cymru and, in view of the evidence that had been collected, he could not argue that Wales was extremely hard done by under the current system.

[Hywel Williams]

Did I hear the hon. Gentleman say that the possible £300 million increase in funding for Wales was minor?

[Guto Bebb]

It is minor in the context of the unfairness that has been claimed by the hon. Gentleman’s party in the past. Currently, we spend about 112%, compared with the Holtham recommendation of 115%. In view of the fact that in 1999-2000 we were spending 125% compared to 100%, I think that my description is fair. The important point is that it is odd, to say the least, to hear a nationalist party, which now advocates independence, arguing very strongly for a needs-based formula that takes into account the need for transfers from England to subsidise the situation in Wales. I would fully subscribe to that. One of the hard lessons that I have learnt in life is that Wales is part of the United Kingdom, and as a result we accept that there can be transfers between the regions and nations of the United Kingdom to reflect their different needs. I find it odd that a party that advocates breaking that link can also stand up and argue for increased funding from the English taxpayer, to subsidise the situation in Wales.

[Hywel Williams]

I do not want to engage in what might be an internecine struggle, given the hon. Gentleman’s previous membership of my party and his strong advocacy of our policies, many years ago before he jumped ship—apparently on the matter of the currency. Does he accept that the Holtham report makes a three-step recommendation: first, a floor is established; secondly, there is then a needs-based formula; and thirdly, which is the point that the hon. Gentleman mentions, a differential taxation system for Wales is considered? The snapshot that he presents as our policy is certainly not our policy; it is one point on the journey.

[Guto Bebb]

The problem with the hon. Gentleman’s point is that it would require the agreement of the Scottish Parliament and we would have to look at the matter on a UK-wide basis. He is perfectly right to highlight my background regarding the single currency. The crucial issue was that one of the arguments against a single currency was that it was difficult to see how transfers from Germany to Greece, for example, to subsidise that currency could be justified. We now see that situation, and it has been highlighted in a book by my right hon. Friend the Member for Wokingham (Mr Redwood). My view is that we can still justify transfers within the United Kingdom to the different regions of England and to the nations, on the basis that we have a shared heritage and a shared belief that we are part of the United Kingdom. I was of the view that that shared heritage would not be there at European Union level, and we might see that issue tested to destruction this year. I do not want to see the situation that we have in the United Kingdom, with transfers within the Union, destroyed by a clear unfairness in the system. Wales will probably benefit from a needs-based system, but we certainly need to look at the issue during this Parliament because I think that otherwise there will be a growing disenchantment with the system on the part of the English taxpayer, and that would be bad for the needs of people in Wales.

[Jim Dobbin (in the Chair)]

Hon. Members might be interested to know that Lord Barnett was a predecessor of mine. I did not realise that my constituency had such an impact on Government funding.

10:24

[Hywel Williams (Arfon) (PC)]

I very much welcome this debate, and I congratulate the hon. Member for South West Bedfordshire (Andrew Selous) on securing it. The issue has been possibly an obsession of my party for many years, and so I am glad to see other people sharing that obsession—or disability.

I should like to focus briefly on the Barnett formula and on Wales, rather than on the English regions, because there are clear implications for the English regions, as I have already said. There are great differences between the funding for the regions within England, and the debate on that can be informed by looking at what has happened in Wales for many years. We have already heard that the Holtham report points out the requirement for Wales now to have a needs-based assessment. In fact, such assessments have been needed in Wales for many years, and they are already carried out in some English regions. The Barnett formula was developed in the ’70s and implemented in 1978—not in 1976, as has been said. It was based on historical spending and the size of the population—basically on the success of Ministers in extracting money from the Treasury pre-1978. It is a converging formula, and we have seen it in operation for many years. Between 1999 and 2007, public spending in England rose by 33%, and in Wales by 28%. That is the nature of convergence: public spending rose, but less quickly in Wales.

[Mark Lazarowicz]

The hon. Gentleman’s point needs to be underlined, because although many people suggest that the Barnett formula gives an unfair bias towards Scotland and Wales, it is in fact designed to level their expenditure down to the English average. It is not in any sense a formula that protects Scotland and Wales.

[Hywel Williams]

The hon. Gentleman makes a good point, but my point is that it is a converging formula, and that Wales is gradually losing out. Jumping forward to one of my later points, Holtham called for a floor to be established, and the right hon. Member for Neath (Mr Hain) referred to that before the election. We have consistently called for public sector funding in Wales to be based on needs, and our calls have been ignored and rejected. I do not know how many times I have heard the right hon. Member for Neath, and current Government Members, saying that the Barnett formula has served Wales well. Joel Barnett himself said, in a statement on 11 January 2009:

“I only meant the Barnett formula to last a year, not 30…One of the problems is that it was not based on need. It determined on the basis of population how much more or less funding Scotland should receive when cuts or increases in public spending were being made across the United Kingdom.”

I note, however, that the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) used his appearance at the Wales Labour pre-election conference last year to call Barnett a needs-based formula. It is, of course, no such thing.

The report produced by Gerry Holtham has received the support of all the main political parties in Wales, and I am glad there is a measure of cross-party consensus this morning. The report calls for a floor to prevent further erosion of Welsh funding, for the reform of the formula to make it a needs-based one, and to at least stop, if not necessarily correct, the historical underspend on Welsh services. It then calls for differential taxation to be considered, to ensure that the Welsh Government take greater responsibility for their own spending. As I have noted many times in speeches in this place, the Welsh Government get a very large amount of money and are responsible for raising not a single penny piece of it, which is, I think, a fundamentally bad situation.

The underspend in Wales has been recently estimated at around £300 million—a significant sum—and there has been a knock-on effect on the private sector, as I am sure the hon. Member for Aberconwy (Guto Bebb) knows. The public sector in Wales is so large and is such a significant purchaser of goods and services, that if it were to have more money there would be a knock-on effect on the private sector. Because the formula reflects an historical position rather than an assessment of need, it has put Wales in a fundamentally weak position. We are funded on the basis of proportional Government spending in England and Wales, or in Great Britain, depending on the circumstances. Spending in Wales has been largely subject to changes in Government priorities on an England, England and Wales or GB basis, so we follow those priorities. We now have a Government in Cardiff who cut the cake as they see fit, but of course the size of that cake always depends on other matters. Hospital parking and prescription charges have been referred to, so I will not pursue those issues given the time.

How to define need has been discussed somewhat. I point hon. Members to the Holtham commission’s report, which suggests six steps based on such considerations as the number of old and young people, rurality and so on. The point was made that that might be complex, but that does not mean that we should not do it. I point hon. Members to an interesting example: the Welsh index of multiple deprivation, which has replaced the Townsend index of poverty. The Welsh index is complicated, but it is very effective. It can be done.

The Government have been clouding the issue by considering Wales’s funding as something that can be postponed until the recession is over. It must be examined now, for good reasons of governance in Wales and to eliminate the reasonable feelings that the hon. Member for South West Bedfordshire mentioned. Will the Minister tell us when the Government intend to start considering the Holtham inquiry’s recommendations for Wales and, more broadly, for the rest of the UK?

10:31

[Anne Marie Morris (Newton Abbot) (Con)]

This is a timely debate, and I am grateful to my hon. Friend the Member for South West Bedfordshire (Andrew Selous) for securing it. I will keep my comments brief to assist one more Member to speak.

Public funding effectively comes in two chunks. The largest is spending through central Departments; the smaller comes through the grant formula for local government. The emphasis today has been on the application of the Barnett formula to the local government grant, but the reality is that Barnett has had a creep effect and has become the default mechanism for making decisions even in mainstream Departments. Reforming Barnett is about reforming it as it is applied not just in local government but elsewhere.

The particular problem in my south-western constituency of Newton Abbot, in Devon, is that we are one of the largest regions in the country. Consequently, we have huge transport challenges, but the sparsity effect is not taken into account when funding formulae are determined for our local authorities. Some 20% of the south-west is rural, and it is a well-known and well-researched fact that our rural deprivation is high, which carries a heavy cost: 22% of people in the south-west live on the state pension, the highest number in the country as a whole. We all know the impact of the elderly on local government spending. In the south-west, 10% of people are over 75. I am pleased to say that they have a high life expectancy, but unfortunately that does not help the coffers.

We were fortunate this time around. Devon county council suffered a spending power cut of only 1.77%; in Teignbridge, my district authority, it was 5.89%. For that, I am grateful, but looking forward, the issue must be addressed. As I said, Departments have used Barnett when considering health funding and other devolved sums of money, and as a result, the south-west has fallen down the league tables. In 2009-10, the south-west was allocated only £42 billion across Departments, the third lowest regional spend in England. It has caused an awful lot of problems. We have 12.5% of the population, yet only 12% of the spend, even before aggravating factors are considered.

Children in Devon are particularly underfunded. We are 146th of 152 in the spending league tables. It has been calculated that in health care, we are £12 million short of the figure that would have been fair. We have the lowest spend per head in England on transport infrastructure, yet we are extremely rural and 14% of the population have no car. I urge the Minister to consider seriously the request for a needs-based formula, as it is clearly the way forward. I commend the proposal made by my hon. Friend the Member for South West Bedfordshire.

10:35

[David Mowat (Warrington South) (Con)]

This has been an important debate, focusing more on Wales than on Scotland. There is a disparity in Wales—the figure of £300 million has been mentioned—but it is dwarfed by the Holtham estimate of the disparity in Scotland, which is £4.5 billion. Many English Members of Parliament, particularly those from the north, are being forced to go back to their constituencies and defend an austere budgetary environment. It is tough to do so when £4 billion a year over and above the needs-based amount is being sent to Scotland.

I have two quick points to make; I will finish by 10.40. We use the term “needs-based” a lot. The real issue is not need; it is population movement. We could continue to use the Barnett formula of 1976 if we adjusted it for the population changes that have occurred since then. It would be a simple arithmetical adjustment. It is true that a needs-based analysis could be complex, but that change is not required. We need only to adjust the formula for relative population movement, and it would eradicate two thirds of the current imbalances.

[Hywel Williams]

The hon. Gentleman is coming to the point that I wished to make. It is a converging formula, so there are issues other than population change to be considered.

[David Mowat]

It is not wholly a converging formula; I do not agree. For example, if the baseline population is not adjusted in arithmetical terms, it means that if the population of Scotland fell to one, that person would get all the money. We do not change it for population, which is indefensible. As I said, I regret the fact that there are no Members from Scotland here, unless I am misinformed.

[Andrew Selous]

There are two.

[David Mowat]

What defence of the situation is made in Scotland? I have heard two defences. We have heard the sparsity defence; I have also heard the defence in terms of oil revenues. It is argued that somehow, the £4.5 billion Barnett imbalance roughly compensates Scotland for the additional oil revenue that it has had to give up to the Union or whatever. That is a poor argument.

[Mark Lazarowicz]

Will the hon. Gentleman give way?

[David Mowat]

I will finish my point. Other affluent areas of the United Kingdom are liable for relatively higher levels of income tax, and we do not necessarily expect those areas to have better services.

Finally—I would like the Minister to address this point in her closing remarks—I am concerned that the Scotland Bill, as it is currently configured, will institutionalise the Barnett formula for ever by creating a link between income tax levels in Scotland and current levels of Barnett settlement. In other words, that extra £4 billion will be linked for ever to income tax levels in Scotland. What that means in broad terms is that in order for the Scottish income tax base to make up the £4 billion that Scotland receives over and above a needs basis, additional Scottish income tax of between 12p and 15p in the pound would be required. That will never happen.

For the same reason, it will be difficult to review the formula significantly after the link to income tax has been created. If that is the case, we seem to be stuck with the imbalance, which means that every constituent of mine—my constituency of Warrington, in the north of England, is not overly affluent—receives some £5,000 less over the lifetime of a Parliament than his equivalent in Scotland, which would not be the case if the funding were needs-based. That is not to say that England and Scotland should be the same. Holtham did not say that. The figure that Holtham used and that currently exists is 120% of the English settlement in Scotland, but 107% would probably be a fairer figure. That is not the same, but it is a lot closer than it is now. I am concerned that if the Scotland Bill passes unamended, we will institutionalise the matter for ever, which, frankly, will be bad for the Union.

10:40

[Kerry McCarthy (Bristol East) (Lab)]

As ever, Mr Dobbin, it is a pleasure to serve under your chairmanship. It is also a pleasure to see so many hon. Members present. Some have left to attend a Select Committee, but this has been a good debate in which a lot of people have had an opportunity to participate.

The hon. Member for South West Bedfordshire (Andrew Selous) is passionate about the issue and has raised it on a number of occasions in Parliament. I accept that the issue is complex and that it is worthy of debate. However, although it is easy to criticise the operation of existing mechanisms, it is more difficult to come up with an ideal solution. The hon. Gentleman stated that the Barnett formula is broken, and he has argued passionately for a needs-based formula. He is waving a hefty document at me. If he would like to pass me a copy, I will sit down and digest it with great enthusiasm at some point.

The Barnett formula has been criticised over the years and, as the hon. Gentleman has said, its inventor, Lord Barnett himself, has suggested that we might need to move towards a needs-based formula. The hon. Gentleman has highlighted arguments criticising the formula, but it is easy to conflate and confuse two issues: what happens in terms of spending within a devolved nation as a consequence of devolution, and what is a direct consequence of the Barnett formula. He highlighted the differences in devolved areas in relation to council tax, prescription charges, tuition fees, education maintenance allowances, hospital car parking and so on. However, I should like to question his comments on the differences in relation to bus travel. He said that it was not possible in England for the carer of a disabled person to travel for free with them, but that is certainly not the case in my local area. Perhaps it is up to local authorities to decide, but in my area people get free bus travel if they can show that they are in the company of someone for whom they are caring.

The issues raised by the hon. Gentleman remind us of the argument about whether devolution is about deciding the size of the cake or about allocating who gets which piece of the cake. As my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) said, Scotland misses out in other areas as a consequence of policies on prescription charges and tuition fees that differ from those in England. Moreover, the hon. Member for Vale of Glamorgan (Alun Cairns), who is no longer present, pointed out that waiting lists are far longer in Wales as a consequence of decisions taken, using devolutionary powers, to spend money elsewhere. He said that, as a consequence, there will be real-term cuts in the health service—in the cancer drugs fund, for example—in Wales.

We have to accept that our establishment of the devolved Parliament and Assemblies means that the basic principle of devolution will lead to differentials in spending. It may create a sense of unfairness, but I do not think that that is particularly germane to the issue of the Barnett formula and its grant.

[Andrew Selous]

I understand what the hon. Lady is saying and I do not disagree with her that how the Scottish Government and the Welsh Assembly Government spend the money they are given is up to them. I have no quarrel with that. However, as my hon. Friend the Member for Warrington South (David Mowat) has said, if Scotland is getting £4.5 billion more than a needs-based assessment might imply, does she not understand that that can fund additional services that are not available to her constituents and mine?

[Kerry McCarthy]

As I have said, the Barnett formula is not perfect. We have established the Calman commission and the Holtham commission to look at the more detailed issues of how devolution works and how we fund matters.

[Mark Lazarowicz]

As we have already heard, the Barnett formula is essentially based upon historical levels of spending, which means that the relatively high levels in Scotland and Wales reflect the decades of argument between Government Departments making the case for higher spending in those areas. It has not appeared from nowhere. Does my hon. Friend agree that it is a question not only of having to assess needs, but of the impact of Government spending? For example, there is no doubt whatever that the presence of Government in London is a major boost to the London economy. That does not apply to the Barnett formula, but it means that London benefits from Government spending in a way that other parts of the UK—not just Scotland and Wales—do not.

[Kerry McCarthy]

I agree entirely. Statistics are thrown around about public spending, its impact and who gets the most. It is not just about Government block grants, but about things such as welfare spending and the impact of locally raised funding, such as council tax, which is a separate issue. I think that people sometimes forget that.

The hon. Member for South West Bedfordshire argued that either a separate body or the Office for Budget Responsibility should administer and oversee the introduction of a needs-based allocations system. I agree that, if we are to move towards something like that, now is not the time to introduce radical change overnight. This is a difficult time economically, and the Scotland Bill, which is making its way through Parliament, will have a major impact on the tax-raising powers of the Scottish Parliament. There are decisions to be made about whether it will take up those tax-raising powers and the impact that would have on its spending. The impact of the comprehensive spending review settlements on the devolved nations is also an issue.

I accept—I think that there is cross-party consensus on this—that we need to examine the case for moving towards a needs-based formula. Some of my colleagues have said that, but it has to be done carefully. I do not want to return to line-by-line negotiations with the devolved nations whenever there is a spending round. There has to be a formula of some sort. I think that my hon. Friend the Member for Pontypridd (Owen Smith) said that a needs-based formula would be eminently contestable. It would be difficult to establish which needs should be taken into account and which needs should not.

[Andrew Selous]

Does the hon. Lady think that we are so much more pathetic than Australia? Queensland and New South Wales are at each other’s throats to get more funding, yet they have a settled procedure which they all respect. Does she really not think that we can aspire to and achieve that in this country?

[Kerry McCarthy]

I am saying not that it is impossible to achieve, but that it is difficult. The Barnett formula was established in the 1970s and people have said that the implication was that it was intended to be in place for only a year. A Labour Government operated under the Barnett formula for 13 years, but a Conservative Government operated under the same formula for 18 years, so this applies to successive Governments. Although there were criticisms, they were unable to find the ideal solution to replace it. Devolution has bedded in and there has been a call from the devolved Assemblies for more powers, which is going to throw the issue into the spotlight again. It is time to revisit it.

[Hywel Williams]

Is the hon. Lady, as a Front-Bench spokesman for the Labour party, saying that the Barnett formula is serving Wales well now? If that is not what she is saying, what is her argument for not changing it as soon as possible?

[Kerry McCarthy]

The argument for not changing the formula as soon as possible is exactly as I have said. At a time when spending cuts are hitting Welsh people, as well as people throughout the rest of the UK, and when changes are afoot and the Welsh Assembly is arguing for it to be given similar powers to those of the Scottish Parliament, we have to look at all those things in the round. There is no immediate solution or magic bullet that will sort the matter out. I accept the case made by my hon. Friend the Member for Pontypridd, who feels that a needs-based formula would serve the UK better.

I am conscious of the time so, to sum up, I shall just say that we accept that the Barnett formula is not perfect and that the situation needs to be reviewed. However, we would be very worried if there were a rush towards jettisoning the Barnett formula overnight. We must deal with the matter in a measured, considered way and with an acknowledgment that devolution is at the heart of the matter. There are devolved powers and we cannot expect Scotland and Wales to conduct their spending and financial affairs in exactly the same way as the rest of the UK.

10:50

[The Economic Secretary to the Treasury (Justine Greening)]

It is a pleasure to serve under your chairmanship, Mr Dobbin, particularly given your constituency’s links to the debate today, which became apparent during the discussion. I congratulate my hon. Friend the Member for South West Bedfordshire (Andrew Selous) on initiating an excellent debate. All hon. Members have made some articulate, well-argued points and I will do my best to try to respond to them during the next nine minutes. Given the fact that so many points have been made, if I do not cover all the issues, I will write to my hon. Friend afterwards to amplify them.

I shall start by being frank. As my hon. Friend is aware, the Government’s priority is to tackle the fiscal deficit. Although we do not have any current plans to review the Barnett formula, it is also fair to say that we accept it is not written in stone. Therefore, we look with interest at debates such as this one. The current statement of funding policy that we issued in October 2010 after the spending review was made in consultation with the devolved Administrations. Before I get on to some of my more detailed comments, I shall state a problem and then an observation about the issue. The problem is that, as the former Chief Secretary to the Treasury in the previous Government said, there is no money left. My observation on the debate is that I do not think anyone is arguing for a change in the Barnett formula on the assumption that their local community will come out of it with less money.

Those are the two challenges that we face. Hon. Members are absolutely right to make the case for the funding that their local communities need. The challenge is to ensure that we get the most out of the constrained pot that we have and to ensure in the future that the formula works effectively, whether that is at the Barnett level or at the England local government level, not just in terms of the absolute cash that goes in—there has been much discussion about cash per head and various Government policy areas—but critically in terms of what comes out. Despite today’s debate, we should never lose sight of the importance of discussing the quality of policy alongside the quantity of money that is going in. The cautionary tale is that the Barnett formula, which Lord Barnett said was only ever intended to be a short-term measure, has actually had a longevity that no one anticipated. It is worth while Ministers of today and tomorrow pondering the fact that, even if we think the decisions we take today are short-term, they might ultimately prove to be far more long term than we realise.

[Hywel Williams]

Is the Minister saying that underfunding in Wales will be addressed only when the economy grows and when we can afford to do so in a way that we currently cannot? Does she accept that that is irrelevant to the fact there is unfairness now?

[Justine Greening]

I shall make two points about the hon. Gentleman’s intervention. First, Wales is well funded. Secondly, let us consider how the Government have approached the spending review. It turns out that, because of how the formula works, the decisions we took to protect the NHS budget and the education budget in cash terms and in terms of schools has meant that the Welsh Assembly Government have probably received a more generous settlement out of Barnett than they would have if the previous Administration had stayed in office.

On the points raised today, clearly there have been a number of inquiries and reports on the Barnett formula and the devolution settlement. One such review is the Calman report on Scotland. As we have heard, the Scotland Bill is passing through Parliament and my hon. Friend the Member for Warrington South (David Mowat) is right to say that the legislation will devolve some of the financial management of income tax to the Scottish Government. However, I can assure him that it will not fix the Barnett formula in stone for the future. A further aspect to the Barnett formula is the Holtham commission, the findings of which illustrate the point I made at the start of my speech. The Holtham commission considered how a needs-based formula would work for Wales and said that such a formula would mean Wales got more, which would put more funding pressures on settlements for other areas. That shows that there are no easy answers to the debate.

[David Mowat]

On the point I raised about the Scotland Bill, it does not explicitly say that the Barnett formula can never be changed in future. The point I was making is that, once we link a baseline Barnett assessment to the level of Scottish income tax, it becomes extremely difficult to change. The £4 billion additional money that Scotland gets through Barnett is equivalent to 12p to 15p of income tax. In theory, the Scottish Government could reduce their income tax levels by 12p and go down to a needs-based analysis and it would be hard for us subsequently to change that.

[Justine Greening]

I understand my hon. Friend’s point. However, in many respects, the point of devolution is to allow more local decision making to take place across the different devolved Administrations.

Just to finish off the answer to the question asked by the hon. Member for Arfon (Hywel Williams), clearly there will be a referendum in Wales on whether primary legislative powers should be held by the Welsh Assembly Government. We will wait to see the outcome of that referendum before deciding how to take forward some of the points of the Holtham report.

On some of the specific issues raised by my hon. Friend the Member for South West Bedfordshire about transparency, the chapter and verse of the funding formula is in the current statement of funding policy. I admit that it is not the most riveting read in the world, but it does explain clearly how the various settlements are reached. The funding approach is agreed in consultation with the devolved Administrations of the rest of the United Kingdom.

On my hon. Friend’s suggestion about the needs-based formula, I can absolutely understand why people and hon. Members think that such an approach would be better. A needs-based formula allocates local government spending across English local authorities, but many hon. Members and different communities consider it to have flaws. That illustrates how there are no easy ways in which we can reform local government funding, whether in relation to local government across English local authorities or in relation to devolved Administrations. The common ground we have in the points made is that any changes should absolutely be approached with real caution over a period of time.

Of course, the Treasury has clear control over the process, as it deals with public spending issues. However, there are avenues through which disputes can be remitted to the Joint Ministerial Committee. Therefore, the Treasury is not always judge and jury. There is absolutely a process through which disputes can be resolved if the Treasury cannot do so. On the involvement of the Office for Budget Responsibility, that organisation is a forecasting rather than a policy-making body. My hon. Friend is right to point out that other countries, such as Australia, have a different approach, but they come with pros and cons. Yes, that authority may be independent, but there is no Minister such as me to stand in Parliament, listen to the issues and respond to them democratically and with some sense of accountability; Australia does not have that in the same way. There are still problems with how that authority operates and questions about whether it allocates funding fairly. Such an approach is not without its challenges.

In conclusion, although we do not plan to change the Barnett formula, we will continue to consider all aspects of public spending, how they operate and how effective they are. As I said, the points made today were highly relevant and interesting, and I have no doubt that the debate will continue over the coming years.