My Lords, Amendment 1 is in my name and that of my noble friend Lord Dodds of Duncairn.
Clause 2 of the Bill is concerned with:
“Advice and information on options for raising public revenue”.
My amendment requires that the advice should be expressly required to cover the Northern Ireland Fiscal Council report, Updated Estimate of the Relative Need for Public Spending in Northern Ireland, published on 2 May this year, and the precedent arising from the December 2016 agreement between the Welsh Government and the United Kingdom Government on the Welsh Government’s fiscal framework.
Some might suggest that all relevant things can and should be taken into account and it is not necessary to specify these two documents. However, they are of such central importance to the situation in which Northern Ireland finds itself that it would be a dereliction of duty not to put them front and centre of advice and information on options for raising public finance. I will consider both, starting with the agreement with the Welsh Government.
In 2007, the new Welsh Government’s programme for government identified the need to address the problems relating to the Barnett squeeze on the funding available for services for UK citizens living in Wales. To understand this, it is important to remember that before 1979, when the Barnett formula was introduced, the union was treated as a unit and funding allocations were made within that unit on a basis that was alive to need. The reason for considering a change in the funding formula at that time was devolution, which the then Government hoped would be delivered by referendum that year.
The initial proposal was that the funding formula should be needs-based. Treating England as 100, the Treasury claimed that on the basis of need, Northern Ireland should be rated at 131, Scotland at 116 and Wales at 109. However, a decision was made to delay
the introduction of this new system and to use instead a simple interim model that allocated monies to Scotland, Wales and Northern Ireland based on their relative populations as a proportion of that of England. This temporary formula came to be known as the Barnett formula. Here we are 44 years later, and it remains in place, notwithstanding the 2009 report of the House of Lords Select Committee on the Barnett Formula, which called for its replacement with a needs-based formula, and a number of robust exhortations to the same end from your Lordships’ Constitution Committee.
When the Barnett formula was first applied, it was to a pre-existing level of spend that had been cognisant of need and thus with more money per head going to Northern Ireland, Scotland and Wales than to England. However, the challenge remains that all subsequent increments in funding from the introduction of the Barnett formula have not been based on need in Wales, Scotland and Northern Ireland, but have simply been the appropriate and proportionate fair share of what had been spent in England. Mindful of the populations of Wales, Scotland and Northern Ireland, that means that although incomes keep increasing, funding does not increase as much as it would if monies were allocated from the centre on the basis of need—as if the UK operated on a UK-wide rather than just an England-wide notion of need.
The spending differential between Northern Ireland, Scotland and Wales, on the one hand, and England, on the other, has reduced, and in the absence of correction, there would ultimately come a time of convergence, when spend per head in Wales, Scotland and Northern Ireland would be far below need. This downward pressure towards convergence is called the “Barnett squeeze”.
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The first part of the UK to really feel the Barnett squeeze was Wales. As a result of the 2007 Welsh Government coalition agreement, Professor Gerald Holtham and other experts were appointed to form the Holtham commission to examine the impact of the Barnett squeeze on Wales and to make recommendations. The Holtham commission performed two critical tasks: first, it showed the clear negative impact of the Barnett squeeze on Welsh funding from the advent of devolution in 1999 until the time of this research in 2009; secondly, the Holtham commission devised a means of assessing how much money per head of the population Wales should receive in order for needs to be met to the same standard as in England.
The findings demonstrated that spending per head of the population in Wales actually fell below need in the financial year 2009-10. The commission made two key observations: first, this meant that Wales was being underfunded and that the UK Government should intervene to restore the level of spend, so that it would secure the same level of services afforded to England on a comparable basis—namely, £115 per head; secondly, the impact of the Barnett squeeze was such that, if spending patterns continued as they had in the 1990s, the problem would become progressively more acute over time, as Welsh spend per head of population fell further relative to that of England. The commission recommended the introduction of what it
called the “Barnett floor”—a spending floor of £115 per head of population, below which spending should not be allowed to fall, so funding could never be below need. The UK Government responded positively.
In the 2011 Budget, the UK Government stated that they were
“committed to fair and accountable funding for Wales, including taking forward discussions on all aspects of the final Holtham report”.
The 2015 spending review accepted the Holtham formula’s definition of need, stating:
“The government is introducing a floor in the level of relative funding provided to the Welsh Government at 115% of comparable spending per head in England.”
This was followed by the Agreement between the Welsh Government and the United Kingdom Government on the Welsh Government’s Fiscal Framework, cited in my amendment. I have a copy of that agreement with me and it contains two key Barnett components: first, the provision of a transitory uplift for the purpose of slowing the Barnett squeeze; and, secondly, at the point at which spend per head falls to the nearest 0.1% below 115.05%, the provision of a full needs adjustment so that spend per head never falls below need.
At present, the block grant transparency document shows that Welsh spend per head is £120, compared to the Holtham formula definition of need at £115, so spending per head is above need now. In this context, Wales benefits from the 5% needs adjustment that is designed to slow down the journey of spend per head to £115, from which place the full £115 needs adjustment takes over.
This is hugely important for Northern Ireland because, on 2 May this year, the Northern Ireland Fiscal Council published a report that used the Holtham formula to assess needs for Northern Ireland on exactly the same basis that was applied to Wales. This is the other critical report cited by my amendment, the Updated Estimate of the Relative Need for Public Spending in NI. Again, I have a copy of it with me. The document demonstrates how the application of the Holtham formula to Northern Ireland results in a need figure of £124 per head. This is hugely consequential, because the block grant transparency document shows that spending per head in Northern Ireland for the current spending review, 2022-25, is just £121 per head.
To put this in context, the crisis that Wales faced, which resulted in the UK Government agreeing to intervene to ensure spend per head could never again fall below need, involved going £2 per head below need in 2009-10, £113 rather than £115. By contrast, in Northern Ireland, we were £3 below need last year, are £3 below need this year and will be £3 below need next year. If the Barnett crisis that Wales faced merited government intervention to ensure spend per head never again fell below need in the aftermath of it having fallen below need for one year by £2, how much more so Northern Ireland which has already experienced one year of funding that was £3 per head below need, is now experiencing the same this year and will on the basis of current spending commitments do the same next year?
It is therefore no surprise that Northern Ireland is currently in the midst of a very serious funding crisis with Stormont departments having to make cuts left,
right and centre. Today, Northern Ireland is the only part of the UK to be in receipt of below-need funding. In this context, it is extraordinary for the Northern Ireland Office to be asking, through this Bill, how it can raise additional local taxes in Northern Ireland. The UK Government never did that to Wales when it briefly went £2 below need. It is quite extraordinary that the Secretary of State should have contemplated doing this. The reason why Northern Ireland is facing a funding crisis is structure, and it is a problem for not the Stormont Executive but the Treasury, which receives Northern Ireland’s tax receipts. In this context, the key question to ask is not one for Stormont but for the UK Government, Downing Street, the Treasury and the NIO. It is quite simply: what are the UK Government going to do to fix the funding crisis in Northern Ireland resulting from the block grant dysfunction arising from the Barnett squeeze?
If the Government had not responded to Wales in the manner that they did, the Minister’s response to my Second Reading speech would have been a little easier to understand, but in that context it was unsustainable. It cannot be the policy of a unionist Government to favour one part of the union with a special intervention to ensure that its funding per head never falls below need while they insist that funding for another part of the union goes below need. The current situation is quite simply completely indefensible.
The Government must stop trying to put the blame on our rates system. That is a simple distraction. As the Fiscal Council observes, Northern Ireland average rates are well below council tax levels for some parts of England and even if one were to increase them by 107% this would yield only a 5% increase in the overall budget. The real problem is the impact of the Barnett squeeze on the block grant.
In this context, there is now an argument for the need to intervene to provide the requisite needs adjustment, backdating it to the beginning of 2022-23 when our level of spend fell below need. The cost of that needs adjustment over the three years of the spending review is, according to the Fiscal Council, a little over £1.2 billion. Put another way, Northern Ireland is currently being asked to function at £1.2 billion below need. This cannot continue a moment longer. I beg to move.