We now move on to agenda item 5. I am pleased to welcome Professor David Bell from the University of Stirling. Thank you for being with us today, and for the paper which you have submitted in advance. I am sure that you have had an opportunity to hear about, if not read, some of the evidence that we have taken already, and you will know all about the inquiry that we are involved in. It would be helpful if you could make some opening remarks, further to your paper.
I wish to start by thanking members of this committee for the opportunity to address them on this issue. The work that we have done forms part of a larger project which the University of Stirling is carrying out with the Leverhulme Trust. Alex Christie, who is with me today, has been instrumental in gathering a lot of the information that we have brought today.
Thank you. There are a number of interesting points in your written submission and in what you have said. You acknowledged David Heald's paper. Members might ask you about your opinion on aspects of what he said. I hope that is all right.
It was stated. We have discussed this at some length and we cannot quite understand why it is the case, but it has been stated.
By the Scottish Office or the Treasury?
The Treasury.
Did the inclusion of ERDF increase the additionality of funding?
I am at a loss to explain why that might have been the case. Additionality is a difficult concept to identify. It is a classic what if problem. The best that the UK Government has come up with is that there is a lack of subtractionality; in other words, at least you keep programmes where they were and do not bring them down. It seems that that is acceptable as a means of identifying additionality.
You state in your paper that that is what the EU takes as evidence of additionality—that there is no evidence of subtractionality.
Yes.
What happened prior to 1992-93? Was the change presentational, moving the beans about on the board?
As I understand it, there were disputes about British programmes. Specifically, in one coalmining case in Wales, it was deemed that there was a clear substitution of European funding for UK funding. As a result of that there was constant negotiation between Europe and the Treasury. This outcome was seen as a way of making what happened in the UK acceptable to the EU as far as additionality was concerned. Previous to 1992-93 there were a lot of disputes.
I will ask other questions, but I will bring some other members in first.
I thank Professor Bell for a very illuminating paper. There is little in it that many of us would contest. I will explore some of his conclusions.
That is correct, but it depends where you start from. If you assume that Barnett was originally a reasonably generous provision due to the fact—and I noticed this when I drew up this graph—that the trend line, or indeed the figures, stays above roughly 8.5 per cent, then that means that Scotland has always received more than its share of UK European funding. Remember that not all of that goes through the Barnett formula. The ERDF does, but structural funds do not. There are various other smaller schemes.
But when you said that Scotland receives more than its share—
Population share. In EU terms it receives the share that it deserves, based on relative need.
Would it be more accurate to say that Scotland is being allocated the share that it deserves? We are trying to explore whether it receives that.
Yes. The allocation within the United Kingdom is a question of how the Department of Trade and Industry allocates the single programming documents that it puts together and makes requests for the various component parts of the United Kingdom.
If we draw the trend line from 1994-95 and carry it on, it moves markedly upward. That suggests that if we were to start now or, indeed, in the previous Parliament, your conclusion would be reversed.
That is true. The reason that I feel that the trend line that I have drawn is more accurate is that there may have been backloading of the 1994 to 1999 programme in Scotland. It does not seem to me that a sudden reversal of the trend that I have set out is likely, given the prosperity of Scotland relative to that of the rest of the United Kingdom. It may level out.
There is only one outlier during that period—1998-99. Both trends are accurate; it is a question of which one is useful.
Can you explain what backloading is?
Under the single programming documents, a sum is agreed for a programming period of five years. When the money is drawn down depends on how particular projects come forward and how approvals for spending on those projects are made. It may well happen at the end of the period—that is what I refer to as backloading.
So we should look at the whole programme period rather than one year. That seems reasonable. On the basis of the information that you have or may be able to get, can you say in which years there has been a shortfall in the allocation of funding?
I was not examining the data at that time, but there is most likely to have been a shortfall in a year such as 1981, when we were getting more than 35 per cent of the EU funding. However, it should be remembered that that was prior to ERDF coming through the Barnett formula. If no specific allocation had been made at that time, the Scottish Office budget would clearly have been subject to severe constraints.
So there must be a threshold that determines whether we are in shortfall or getting too much. It would be very rare for us to get exactly the correct amount.
As Alex Christie underlined to me while we were sitting outside, we do not get too much, because what happens under the Barnett formula is that we get a provision to spend. We get an allowance that enables us to spend a certain amount in a specific period. Wales is worried that it is not getting sufficient provision to spend, given what it has been allocated. It is likely that, given the way that the Barnett formula works, we will have sufficient provision to spend to meet the requirements that the European Commission is laying on us. We do not get extra money. We get only what Europe has allocated to us. This is a fairly abstruse point, but the Barnett formula is not overgenerous. It is undergenerous to those areas where insufficient provision has been made.
So, leaving the scale to one side, under the current structure we will never get more than we need, but there could be a shortfall.
Yes.
This is something that we tried to explore with your academic colleagues from Wales. However, we lacked the information from the Treasury that would have enabled us to put a precise number on it. What information do you think we require a Treasury witness to provide us with, perhaps in advance of their coming here, for us to be able to get a detailed picture of the situation between 1975 and 1999 and of the forthcoming programme?
As far as the Barnett formula is concerned, a document—to which David Heald refers—was published by the Treasury earlier this year. The document lays out precisely which programmes are included in the Barnett formula and which proportions of those programmes are included. Some of the programmes cover areas that are relevant to European funding. It might, therefore, be worth finding out from the Treasury how that provision has worked in practice during the period in which you are interested.
On the Barnett formula, you used the argument, "If it ain't broke, don't fix it." What has been teased out in the meeting is that the Barnett formula has not operated entirely fairly in terms of allocations throughout the period. Is it not the case that we are holding on to nurse for fear of something worse?
There is an element of that. One might say that we have done worse in certain areas of spending, but in health or education, for example, we get roughly 20 per cent more per head than the rest of the UK. That is based on the Barnett formula.
I would like to follow on from Adam Ingram's point. My question might, in a sense, be inappropriate because it is more political than economic. Might we be forced into a debate on the Barnett formula as a result of pressures from the mayor of London or from the north-east of England? I accept the points that you and Professor Heald have made, but we might be forced into an examination of those issues because of a national UK debate.
Of course—that might happen. As I said in my introductory remarks, the operational bases of EU structural funds and of the Barnett formula are quite different. EU structural funding and the local authority spending assessments in England are based on need. A variety of indicators are examined for whatever programme is relevant and allocations to areas are based on perceived need.
It has the virtue of simplicity.
Exactly.
You said that Scotland receives no more because of the Barnett formula, but that it can receive less. Why is that? Is it because Europe says that we can receive X, but no more that that?
It is to do with the European regional development fund, which is the one that goes through the Barnett formula. A provision is made that England can spend, for example, £100 million. Scotland would receive provision to spend £8.8 million. If Europe has promised only £4 million, Scotland will not get the £8.8 million—it will get only the £4 million that Europe has promised. So, although there is provision to spend a further £4.8 million, it cannot be spent.
Is the money just lost?
It is not real money. It is a provision to spend, not cash.
Yes, but the Government cannot reclaim it.
No, it cannot be reclaimed.
It is money in Europe that has not been drawn down.
I want to clarify some things that you said in your introduction, which seem pertinent at this point in the debate. Early on, you made it clear that the money was an allocation or a provision to spend—whatever phrase we use. You then made a comment, which I took to mean that with a lower structural fund allocation, it is easier to get the matched funding. Does that mean that drawdown and completion of programmes are more likely to happen with a lower structural fund allocation than if you get a high structural fund permission figure, which you cannot use because you have nothing to draw in matched funding? Are you saying that over time Scotland has spent quite realistically on programmes?
Scotland has been able to do that because of the way in which the public expenditure system in the UK has worked. If there is a problem with getting sufficient provision for the programme, there will be an added problem with matched funding, because one has to dig into other spending programmes to get the provision—the money—that one needs to pay the contractors. Additional matched funding has to be found, the vast proportion of which comes from the public purse—enterprise companies, local authorities and so on—so ultimately, it all works its way back to the Barnett formula. If there is a shortage of funds to meet the allocation from Europe, there will almost inevitably be similar problems meeting the matched funding requirements.
Therefore, is it a three-stranded argument, rather than the simplistic Barnett formula and structural funds argument? Matched funding has to be thrown into the equation as well, with the complications across programmes.
Absolutely.
I asked for the purposes of clarification only. I thought that that was where you were leading us, but the point did not quite come out.
You made the point about the difference in interpretation of matched funding between the Government and Brussels. Brussels is quite clear that matched funding is public funding, whereas the UK Government does not care where that funding comes from. However, I presume that matched funding is still predominantly public funding, therefore the difference in interpretation is not a reason for great tension between the two. Do they accept each other's positions?
Yes, I think so. It would be possible for the Scottish Executive to set aside a fund for matched funding. That would save a lot of effort for a lot of people who have to try to cobble together all the bits and pieces to make up matched funding, because, ultimately, that funding comes from the same sources. Perhaps that would make the Executive think a little harder about the value of its projects and investigate them more thoroughly, as matched funding from whatever source will have to be scrutinised by the body that makes up that matched funding.
I should like to raise a technical point. I am not sure where it comes in, but I would like to explore it briefly.
I guess that that is true.
It is important, in terms of the exchange rate, to find out at what point the funds are exchanged into sterling. Does that happen when they are withdrawn or when they are deposited?
The single programming documents are written in euros but recompense is made if there is a swing either way, relative to the only other currency in Europe.
In your paper, you talked about, ideally, excluding structural funding from the departmental expenditure limits and ring-fencing them under annually managed expenditure. That suggests that you want to break down the Barnett formula, taking bits of it and tinkering with them.
Actually, I am retreating a little from that position. I know that the witnesses from Wales who previously came to the committee took that position. That would be a clean position—everything would be very transparent, and that might be the best course of action, if transparency were the ultimate goal. However, I suspect that if one is in a reasonably favourable position, it is not necessarily good tactics always to make everything completely transparent.
If I read you correctly, you were saying theoretically that, when setting up the system from a cold start, you would have preferred more transparency. However, you have considered the practicality of the delivery of funding, in relative terms to Scotland's needs, and concluded that the Barnett formula has not damaged that situation too badly—I think that someone else used that word. You are saying that, in realistic, pragmatic terms, that is why you think the formula should roll on as it is, without major change, although that is not to say that there might not be change or that change might not be suggested.
Yes.
If there were to be changes, what changes would you like?
Do you mean changes between London and Scotland, or—
Changes between any of them. You said that you have stepped back from your initial position in the paper, which was a statement of theory. If we said, "Right—that's not going to happen, but here we are in a new discussion, and you are our adviser," what options would you advise us to consider?
There might be an argument for discussions with the Treasury about the way in which the provisions are put together—about whether the way in which the provisions are sequenced meets clearly the sequencing that the Scottish Executive might desire. I am thinking of the five-year periods over which the projects are run. The Scottish Executive might decide that it did not want to back-load all the projects but would rather get things off the ground more quickly. At that point, one might discuss with the Treasury the sequencing of the provision to spend public money, to allow for a slight variation from the precise answer that the Barnett formula would give. It would involve only a slight alteration from the current position, but would allow a more even flow of project money rather than having great leaps from year to year.
You are suggesting that the Barnett principle is fine, but that having it annualised means that it gets out of step with the European programmes. You want it to be stretched, much in the way that the Executive is considering having a three-year rolling budget with spending carried over and so on.
I am sure that the Welsh would welcome that, too.
Would that be of benefit to Scotland?
I think so. It would not be hugely beneficial, but it would help to smooth out the variations in the programmes.
As I have followed your working statements on these matters with great interest, I can follow the logic of your paper perfectly, but I cannot follow the logic of what you have just said. Your stance seems to have altered.
We cannot gain in the sense that we can never spend more EU funding than Europe allocates to us. I would not describe that as losing. The slight change in my position towards the current situation is based on the view that, realistically, Scotland cannot expect suddenly to increase its share of resources from the structural funds. As a result, it seems that the problems of making the provision and of matched funding will not be that great. You point out that our European funding level is above our population share—although we are approaching a point where that will equalise. The general argument is about whether one wants to open up the Barnett issue because of a smaller issue. That is a political decision rather than an economic one.
Would it be feasible for us to do what you suggest in the paper and allocate the European funding external to Barnett, which would leave Barnett untouched? Why would the issue of the structure of Barnett automatically be opened up? There are consistent precedents for things being added into the Barnett formula, so why should there be a problem in taking things out?
That would require the agreement of the Treasury. It would have to go back to the EC and ask to take the European regional development fund out of the Barnett formula.
With respect, the European documents seem to be relatively clear that that is an internal matter. The statement from Commissioner Barnier suggests that the way in which the UK deals with that is a matter for the UK.
Obviously, this is a matter on which I am not clear. Perhaps you could explore the issue with the Treasury. The ERDF went through the Barnett formula because the European Commission insisted that that was a way in which additionality could be established.
I want to turn to some of the European issues that you mentioned at the end of your paper, because they may be more important than the minuet about how the Barnett formula affects us. Can you tell us about how the rebate system that was agreed at Fontainebleau acts as a disincentive to the UK accessing additional funds in Europe? There is great reluctance to access anything more than the dedicated spend, particularly in agriculture.
For the Treasury, transactions with Europe are just part of the gamut of public spending. In a sense we are making our contributions to Europe in the form of VAT, customs duties and so on; that is one side of the account. On the other side of the account there are our receipts from Europe; the common agricultural policy and the structural funds make up the vast bulk of that. There is a gap between those two—our net contribution to Europe. We also receive a rebate, which is related to the size of that gap. For every £1 reduction in the size of the gap, the rebate will fall by 60p. If we increase funding on cattle schemes or on building fishing boats and so on, effectively, that extra pound is being funded 40p by Europe and 60p by the Treasury. Therefore there is a disincentive for increased overall spending. Effectively there is a 60 per cent tax rate on such extra spending. It is difficult, because there is no direct experience of that apart from people's experience with the agricultural funds.
You are saying that the make-up of the extra spend on each pound is 60:40. That ratio has been quoted to us, by the Treasury, as 79:21. In my experience, in agrimonetary compensation, the argument has always been that UK taxpayers contribute 79 per cent of every extra pound because of the Fontainebleau agreement. Is that right?
The issue is complicated by the fact that we always make a contribution to our own spending. We are the third or fourth largest economy, so we contribute about 10 to 12 per cent of any spending. It is a question of whether we add in that 10 to 12 per cent. The figures tend to hover, depending on whether we take into account our contribution to overall European spending. I am sure we can be bump the contribution above 60 or 70 per cent.
Is it true that most other countries operate on a 50:50 basis on any additional spending?
Other countries do not have the rebate.
So the effect of the rebate is that we operate at a disadvantage.
Yes.
You suggested that there was a compensation mechanism to cover any programme funds that were eroded because of the exchange rate over the period.
I understand that to be the case.
How does that work? Does the Treasury top it up to the original expectation?
No, the European Union. My understanding is that the UK taxpayer does not contribute to that.
So the number of euros is increased?
Exactly. I suspect that they have increased somewhat more than was expected at the beginning of last year.
In your last paragraph, there is a throwaway line about the effects of enlargement. We are in transition with objective 1 and structural funds. Ireland will go from being a net gainer to being a net contributor to the European Community at the end of the six-year period. Is enlargement—allied with the threat to the CAP budget when the eight or nine countries that are joining the EU lobby for an allocation of that budget—one of the biggest threats to European funding for Scotland?
Imagine the position: we bring in a number of countries from eastern Europe while in Brussels the commissioners decide how much to spend on structural funds. There has been pressure to spend less on those funds, particularly from the UK. The pressure to spend less on agricultural funds has been even greater. Generally, however, one expects the sums that the current members would like to contribute to be tightened up.
Will that apply to the CAP funds?
I suspect so.
That is rather wider than our role in this inquiry, but it is an interesting answer none the less.
All one can do is a kind of thought experiment in which we ask, "Would the UK Government have spent money on this anyway?" Let us suppose that Europe was possibly going to fund a replacement bridge over the river Ness. Brussels would ask whether UK public spending would have built that bridge anyway. That is a question to which there would seem to be no obvious answer: it is hypothetical. Subtractionality is a little more concrete, as the figure that was spent previously on bridge projects can be cited. Additionality is not judged case by case, but at a UK level. If the amount of public funds that are allocated to construction projects have not been reduced, we can say that the funds that Europe provides are additional funds.
Surely that could be said only if the projected spend was on a downward curve and European funding maintained it at the same level. It would not have to be a forward projection of thought, but could be based on fact if there had been a proposal to reduce that funding internally within a state.
Yes. There are always public expenditure plans that one can go and look at, which might show what the chancellor thought ought to have been spent on the various components of public spending. There is a danger, though, that it may have been in the chancellor's mind that he could spend a little less on certain projects because Europe might intervene.
Thank you. I may have to read that over again in the Official Report.
It is a fine point that Professor Heald is making about a white paper and the weight that a white paper might carry. At the moment—this is a political view—the Barnett formula does not seem to be under serious threat. I am not sure what constellation of political events would need to occur for it to become more seriously threatened. I would take a more robust view than that of Professor Heald. He seems to be qualifying his view about the Barnett formula's longevity.
Thank you. Are there any further questions?
We have covered the Welsh situation and the questions of scale and the extension of objective 1 funding that it raises. The problem is more serious there; it is not every day a First Secretary loses their job over this issue. Wales benefits less from the Barnett formula than we do. Can you describe how that affects its position in respect of structural funds and having to negotiate even harder with the Treasury between now and July?
What you must remember about Barnett is that there are two bits to it. First there is the starting position and secondly there is the year-on-year change. We hear about the year-on-year change. If spending in England increases by £100 million, spending in Scotland will automatically increase by £8.8 million. I have forgotten what the precise proportion is for Wales.
That is another part of the country that might have a vested interest in reopening the Barnett formula, particularly given what it has gone through, but you still do not think that the formula is under threat. You take a more robust position. We have had the mayoral election in London and we have seen the Welsh situation over the past six or seven months. The north-east of England is beginning to debate devolution and there is a general election coming up, at which those issues may be debated. Do you still not think that it is under threat?
I acknowledge what you say. I am making a judgment based solely on the inertia of the formula system over the past 100 years, starting with Goschen. It has been going for a long time. It is clear cut and does not reflect need, but I suspect that many politicians would find it easier to make small adjustments than throw out the whole mechanism, which would get us into annual debates about whether lung cancer is worse than another health priority, for example. You can see where that might lead.
Professor Bell, thank you for your assistance. We appreciate your evidence, which will form an important part of our report.
Meeting closed at 14:53.
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