Breakout Session 4: Expenditure Slide 1

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Regional Policy What Works?Ramside Hall,
Durham, 16 November 2004

• Professor David Heald
• (Management School, University of Sheffield)
• Breakout Session 4 Expenditure

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The Latest PESA Data, 2002-03
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A If there is a UK territorial finance
problem, what is it?

• Many suggestions that the present devolution
  funding system is unsustainable (there must be
  something better), though these criticisms come
  from opposed positions.
• Opinion in all the territories (ie Scotland,
  Wales and Northern Ireland) believes they are
  badly treated, yet opinion in England (and in the
  London and English regional media) considers them
  feather-bedded. The Barnett formula is
  criticised from all angles. There are legitimate
  concerns about the fiscal accountability of
  sub-national politicians, but canvassed solutions
  often lack credibility and practicability

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• Learning to cope with the rough and tumble of
  intergovernmental fiscal relations, and not to
  regard every incident as a terminal crisis
• How the political system copes with party and
  financial asymmetry, especially when it is no
  longer possible for the UK government to close
  down the debate about money
• Limited capacity and willingness to absorb
  lessons from other jurisdictions - but working
  out which are the correct lessons is more
  difficult than it seems

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• The impact of the 1997 Labour Governments public
  expenditure strategy two years of (overstated)
  famine followed by five years of (initially
  exaggerated) feast (NB UK priorities now pushing
  unexpected amounts of money through the Barnett
  formula mechanism)
• Continued lack of transparency comparable
  English expenditure to the devolved Assigned
  Budgets is still not available despite improved
  explanations in the Treasurys Funding Policy
  document (original in 1999, now revised after
  each biennial Spending Review)

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B How England is Affected

• What would happen in England after devolution in
  the territories?
• nothing
• stronger (in a political sense) English regions
• England asserts itself as a political unit
• At what spatial level, and by whom, should
  expenditure-switching discretion be held? The
  territorial blocks were important precursors of
  devolution, ironically being formalised after the
  1978 scheme fell

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• English regional devolution, if embracing
  expenditure on, say, education and health, would
  be much more radical than in the territories
  where existing administrative structures and
  territorially- engrained political loyalties
  could be built upon
• There is some evidence that, looking at the
  relevant expenditure aggregates (ie not
  identifiable expenditure as a whole),
  convergence is occurring (Goudie, 2002). If
  evidence of rapid convergence in the territories
  emerges, decisions will have to be taken on
  formula modification (the Barnett formula was
  never intended to drive relatives to UK 100).
  If there is a Needs Assessment for the Devolved
  Administrations, it is likely to also involve
  examining need at the English regional level.

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• Explicitly for 25 years (and there were echoes of
  the Goschen formula before that), there has been
  a mechanism for regulating changes in the
  territorial blocks with reference to changes in
  total expenditure in England on comparable
  services. However, the regional pattern of
  spending in England has never been planned, being
  a by-product of within-England distribution
  systems for particular services (eg health and
  local government). Expenditure-switching
  discretion operates within London-based
  functional departments, not at the regional level
  (where Government Offices for the Regions have
  limited functions and status)

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C Why Expenditure Data Went Missing

• John Shorts seminal 1970s work on English
  regions, including the In and For distinction
• Note Shorts unsuccessful 1985 attempt to revisit
  the data and the Treasury Civil Service
  Committees unsuccessful prompting of the
  Treasury in 1989
• Heald and Shorts (2002) concern that English
  regional data had gone backwards from the 1970s.
  Without political pressure and/or a supportive
  administrative structure, unlikely to get good
  regional data. Conditions existed in territories,
  but not in English regions

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D The Prospect of Better Regional Data

• Now connected into a substantive regional policy
  agenda, in which differences in regional economic
  performance are presumed to have cultural,
  demographic and geographical roots - therefore
  getting ministerial and policy-makers attention
• McLean Report has raised the profile of English
  regional data as a policy issue, reinforcing the
  impact of the Allsop Review
• A momentum of improvement may now develop, but
  the absence of English regional political
  institutions means that continuity of attention
  will depend heavily on officials

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D1 How the Treasury Referred to McLean Report in
Spending Review 2004 (para 4.43)
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D2 How ODPM Responded to McLean Report 1

• All Departments that make returns in the PESA
  exercise should study good practice across
  government. DONE. The Treasury have circulated
  examples of good practice as part of the guidance
  for departments for the next regional data
  collection exercise
• ODPM, in conjunction with HM Treasury and ONS,
  should arrange seminars for senior departmental
  managers to explain why data on the flow of
  domestic and European public expenditure into the
  English regions are needed and how they should be
  collected. DONE. The Treasury have led in
  organising a series of seminars for this purpose,
  in advance of the launch of the regional data
  collection exercise for PESA 2004. Principal
  Finance Officers (PFOs) and Statistics Heads of
  Profession (HoPs) were invited to attend, or to
  nominate representatives

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D3 How ODPM Responded to McLean Report 2

• The Treasury should amalgamate the present TA
  (Territorial Analysis) and RA (Regional Analysis)
  exercises, and give departments more time than at
  present to produce their returns. DONE. These
  exercises have now been combined and renamed as
  the Country and Regional Analysis (CRA) and will
  be run together in this way in future, beginning
  with the CRA exercise for PESA 2004 ...

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D3 How ODPM Responded to McLean Report 3

• Each Department's Head of Profession for
  Statistics should draw up a protocol for the
  collection and return of territorial and regional
  expenditure data for the Department, and the
  Department should ensure that a senior manager is
  in charge of the process. AGREED AND DONE IN MOST
  PART. As part of a campaign to raise awareness
  in departments of the issues regarding their
  regional public spending data, prior to the
  launch of the next regional data collection
  exercise, the Treasury Managing Director
  responsible wrote to all PFOs, informing them
  about the forthcoming exercise and the programme
  of seminars, explaining the importance of good
  regional spending data in the context of the
  Government's regional policy agenda, and
  reminding PFOs of the research report and its
  findings Treasury passed the idea of a protocol
  on to departmental HoPs, but it is for individual
  departments as to whether or not they implement
  this idea

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D3 How ODPM Responded to McLean Report 4

• The Treasury and ONS should jointly produce a
  memorandum on the rules for coding expenditure as
  for and in and publish it for consultation
  with users of National Statistics on the
  technical issues involved in the definitions of
  expenditure in and for, in but not for and
  neither in nor for a particular region. AGREED
  AND BEING DONE. The Treasury and ONS are
  producing a memorandum on measuring government
  expenditure by region, and Treasury have drawn on
  the draft of this memorandum in compiling the
  detailed guidance on concepts and definitions
  which has been circulated to departments for the
  2004 CRA data collection exercise...

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D3 How ODPM Responded to McLean Report 5

• Each Department should ensure that all regional
  boundaries used for reporting its own and its
  agencies expenditure conforms to the NUTS
  (Nomenclature of Units for Territorial
  Statistics) hierarchy. AGREED AND TAKEN FORWARD,
  but any action is for individual departments.
  Treasury letters to PFOs and HoPs drew this
  recommendation to departments attention, and
  made it clear that, whilst we recognise that
  administrative boundaries may vary, the Treasury
  nevertheless expects all departments to be able
  to supply regional spending data conforming to
  NUTS1 regions

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D3 How ODPM Responded to McLean Report 6

• ONS and other contributing departments should be
  fully funded to produce regional statistics of a
  quality sufficient to enable the productivity
  performance of the under-performing regions of
  England to be measured and analysed accurately.
  AGREE IN PRINCIPLE, and in respect of all
  regions, not just the underperforming
  regions...

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D3 How ODPM Responded to McLean Report 7

• The UK Government reviews the responsibility for
  the monitoring of the flow of European public
  expenditure into the English regions, with a view
  to locating the responsibility in just one
  Department. DISAGREE. Monitoring flows of EU
  spending into regions is the responsibility of
  the department with lead responsibility for the
  policies that EU funding supports, eg. DEFRA for
  CAP and DTI for Structural Funds. Treasury is
  responsible for monitoring and reporting
  aggregate flows between EU and UK, ie net
  payments to the EC. ODPM and H M Treasury do not
  see any strong reason for changing the present
  arrangements

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D3 How ODPM Responded to McLean Report 8

• The European Commission decides which of its DGs
  is responsible for monitoring the additionality
  of European funds spent by general governments in
  Member States and to make that DG responsible
  for producing annual tables of expenditure
  outcomes for each programme in each Member State.
  DISAGREE the arrangements on additionality in
  Structural Funds programmes were agreed in 1999
  and will apply for the rest of the existing
  programming period to 2006. However the UK is
  keen to see Structural Funds programmes
  simplified and better concentrated on key policy
  objectives in future, and we have put forward a
  wide-ranging approach to reform (the proposed EU
  Framework for Devolved Regional Policy) that we
  feel would achieve the necessary flexibility and
  outcome-focus...

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E What does the future hold?

• Undoubted prospect of better data for English
  regions but note need for caution
• While the concept of public expenditure "for" a
  particular area is straightforward enough in
  services of a personal nature, and in some
  clearly local services (such as refuse
  collection), there are conceptual difficulties as
  to who benefits from other services such as
  transport,agricultural subsidies, tertiary
  education and some public order and safety
  services
• Regions involve a lot of internal averaging - eg
  impoverished parts of inner London and superior
  performance within Yorkshire Humberside of
  Leeds and York over Bradford and Hull
• But the smaller the geographical area, the
  greater the incidence of cross-border flows in
  personal services and the more disaggregated
  the functional split, the greater the risk of
  misallocation (or real difficulty in allocation)

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• Relationship of the difference between In and
  For to political debates. Much political
  concern is about the employment (and expected
  multiplier effects) of where expenditure is
  incurred. In questions were simpler to analyse
  when there was less out-sourcing by government
  and by its suppliers. This is where regional
  policy becomes involved both with UK Government
  efficiency agendas (eg Gershon) and with EU
  competition policy (eg liberalisation of public
  procurement)

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• Institutional structure of England
• whether rejection of political devolution in the
  North East leads to continued centralisation of
  expenditure authority in London or to
  explicit/implicit English regional blocks
• the creation of some sort of accountable
  administrative structure is a necessary
  precursor. Whoever has expenditure-switching
  discretion must have accounting responsibility
  for that expenditure
• Government Offices for the Regions are not
  equipped for that role. UK departments
  effectively have had expenditure blocks since
  1992 and a wide degree of discretion over
  allocation (though just at the planning stage, as
  was the pre-devolution position with territorial
  blocks) amongst sub-functions. These blocks are
  not formula determined, and only operate for
  major functions. It is arguable that resulting
  departmental freedoms have been eroded by Public
  Service Agreements, which have reinforced
  vertical accountability

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• Continuing controversy about expenditure per
  capita within England and in relation to the
  territories
• what is the proper basis of comparison - London
  performs functions on behalf of other English
  regions that are self-contained in the
  territories?
• whether rejection of political devolution in the
  North East leads to continued centralisation of
  expenditure authority in London or to some form
  of explicit/implicit English regional blocks
• whatever the merits of the criticisms of the
  Barnett formula in terms of levels of regional
  expenditure (cf Iain McLean of Oxford University
  and Arthur Midwinter of Strathclyde University),
  expenditure-switching discretion definitely
  advantages the Devolved Administrations