Official Report: Minutes of Evidence

The Chairperson (Mr O'Toole): I welcome to the meeting frequent fliers, but you are welcome again: Tony Simpson, deputy secretary for strategic policy and reform; Aidan McMahon, director of the fiscal policy division; and Eamon Graham, an economist in the fiscal policy division. You are all very welcome. Tony, if you would, give us an opening statement, please, and, members, indicate if you want to ask a question.

Mr Tony Simpson (Department of Finance): Thank you, Chair, for the opportunity to brief the Committee on Northern Ireland's relative need and funding position. The briefing paper that we submitted provides the Committee with the calculations that underpin the comparisons of relative need and funding across the devolved Administrations (DAs). With your agreement, Chair, I will provide a brief overview of that work, and we are then happy to take any questions that members may have.

The Chairperson (Mr O'Toole): OK.

Mr Simpson: In calculating Northern Ireland's relative need and funding compared with Wales and Scotland, we started by establishing relative needs across the nations. Northern Ireland's level of need as recognised by the UK Government is 124% of that in England on a per capita basis. That is as agreed in the interim fiscal framework from May 2024 and was based originally on the report from the independent Fiscal Council. That is, of course, notwithstanding further discussions to be had with the Treasury about the application of Professor Holtham's 2025 report, which suggested that our level of need should be 128%, with agriculture included.

The Chairperson (Mr O'Toole): Were agriculture not included — obviously, it is not included now — the difference between the 124% and the 128% would be more than just agriculture; is that right? Am I right in saying that, or is it entirely because of agriculture?

Mr Simpson: It is primarily because of agriculture.

The Chairperson (Mr O'Toole): OK, go on ahead.

Mr Simpson: The relative need estimates for Scotland and Wales have been taken from the 2010 report of the Independent Commission on Funding and Finance for Wales, known as the Holtham Commission. While its work in 2010 concerned Wales, the same methodology was used to produce an estimate of relative need for Scotland. As you will see from table 1 in the paper that we provided to the Committee, relative need differs substantively across the devolved regions. As we said, Northern Ireland sits at 124% , while Scotland is at 105%, and Wales is at 115%, when compared with England. It is clear that our need is significantly higher than that of the other devolved Administrations.

Turning to funding, the Treasury provided relative funding per head figures for each of the DAs at the autumn Budget in 2025. Those are also presented in table 1 in our paper. Simply put, by taking the relative funding figure minus the relative need figure, that provides a percentage point figure for each of the DAs for how much above need they are funded at that point in time. It shows that, on average, Wales is funded some 8 percentage points above need over the spending review (SR) period, whereas Scotland is funded, on average, some 20 percentage points above need in the same period. In contrast, based on the figures that were provided at the autumn Budget, we are funded only slightly above the level of need over the SR period by less than a single percentage point.

Earlier, Chair, you referred to the report from the Fiscal Council. That analysis, which was published yesterday, suggested that due to recently published population data, we may now be funded slightly under our current level of need to the tune of some £170 million. Members may, no doubt, wish to discuss that a little bit further. We made a comparison in order to consider how much additional funding Northern Ireland would have received over the SR period had we been funded above need on a similar basis to Wales and Scotland. In order to do that, we estimated what 1 percentage point of need is worth in pounds. By taking Northern Ireland's total spending, as reported by the Treasury at the autumn Budget, which was £18·552 billion, and dividing it by our relative need factor of 124%, the estimated monetary value of 1 percentage point of need amounts to £149 million.

In conclusion, that analysis suggests that were we to be funded in the same way as Wales, we would get an additional £1 billion per annum. Were we to be funded like Scotland, that could amount to an additional £3 billion per annum. The Fiscal Council's report, which was published yesterday and contained its separate, independent analysis, found similar results by using a variety of different approaches. The Finance Minister has been highlighting that issue repeatedly as he continues to make the case to the Government for a more equitable and sustainable funding model for public services here. With that Chair, I am happy to take questions from members.

The Chairperson (Mr O'Toole): Thank you very much. I am sure that there will be questions, as it is a very important subject. In many ways, it is the most important subject, to the extent that it is clearly one of the issues that is preventing the Minister or the Executive — the Minister says that it is his or the Executive's reason — from setting or not agreeing a Budget. You are right to say that yesterday's Fiscal Council's paper, in effect, at least endorses that calculation or comparison with Scotland and Wales and the need differential.

First, I want to put a couple of positions to you. I presume that you have already said this directly to the UK Government in various ways, but what do they say back when you point out the Scotland and Wales differentials?

Mr Simpson: We make the case in the back and forth between officials. They have not been disputing those figures with us. There are different ways of calculating them. I would not want to presuppose what they are saying, but their position to us is, "Well, you are funded at need; you have an estimated relative need factor of 124%, and you are funded at that, notwithstanding what the Fiscal Council has said.". That position is being articulated to Treasury, and discussions are ongoing about what sustainable funding for us might be, but those have not concluded yet.

The Chairperson (Mr O'Toole): I want to come on to where the negotiations might, or might not, be. Treasury's position, effectively, is that the precise amount to which Scotland and Wales are funded above their levels of need is not relevant to our conversation. Is that what it says, or does it acknowledge and endorse what you are saying before it says, "Yes, but"? It is really important to people, because we do not have a Budget, and the Minister says that we should not agree a Budget until the Treasury moves. In one sense, there is a logic to that, but there is also a very real risk, as we heard in our previous session, to public services and, indeed, the legal position for civil servants and all sorts of things. We need to understand exactly what stage those discussions are at.

Mr Simpson: It is difficult for me to give a live commentary on ongoing discussions between us and the UK Government (UKG). Our role in my part of the Department is to undertake the technical work. Much of the direct discussions between the Minister, UKG and the Northern Ireland Office are supported by colleagues in the public spending directorate. I am not personally in the room or involved in some of those discussions, so I cannot comment on them. It would not be helpful, given the sensitivities of the ongoing discussions, for me to comment on them, even were I in a position to do so, but we are articulating the position very firmly.

The Chairperson (Mr O'Toole): I want to go back to the position. The numbers to do with Scotland and Wales that Holtham used are from 2010. Holtham produced a figure of £105 per head for Scotland's relative level of need, and, for Wales, it was, I think, £121.

Mr Simpson: It was £115 for Wales.

The Chairperson (Mr O'Toole): My apologies.

Mr Simpson: We were £121 in the Holtham work, but that did not account for policing and justice.

The Chairperson (Mr O'Toole): OK, that is why that popped into my head. We are now at £124.

The Fiscal Council report, which was published yesterday, said that, in previous years, Northern Ireland was funded way above its level of need. It has, obviously, come down. At one point, we came down to being funded below our level of need, which was very frustrating and challenging. Do we know how many years we were funded above need for and how long it has taken to come down to where we are now, which is kind of just at our level of need? The Fiscal Council says that, in 2019, we were at about 150%.

Mr Aidan McMahon (Department of Finance): It was about 140%.

The Chairperson (Mr O'Toole): Yes.

Mr McMahon: I suppose that it depends on the settlement in a particular year. When the Barnett formula was first settled in the late 1970s, there was a premium for Northern Ireland, as there was for Scotland and Wales. That has been eroded over time through the Barnett squeeze. In individual years, we were funded at different levels at different times, but we do not have a running figure for that because Treasury does not regularly publish that information. It did not have the level of importance that it now has. That came about particularly in 2010 and the end of 2016 for Wales, because it was feeling the pinch back then. It is now happening to us 10 years later and, perhaps less so to Scotland. There are no running numbers to show over time our relative need position versus our relative funding position.

The Chairperson (Mr O'Toole): Is it because we have had so many one-off pots, where because of negotiations, we got a pot to spend on something and that then —?

Mr Simpson: That is an element of it.

The Chairperson (Mr O'Toole): I think of the Fresh Start package or any number of packages that happened.

Mr McMahon: Even if we look at Treasury's figures in the open-book assessment, you will see years, particularly recently, where we have been underfunded in relation to the 124% level. The additional funding that we got as part of political agreements is what has taken us up and over the 124% level. There were years in which it was 121%, but the additional money from, for example, the Hillsborough talks, brought our relative funding level above 124%. That was required, and the Finance Minister has said that we have ended up needing those additional one-off packages to bring us over that level of need.

The Chairperson (Mr O'Toole): I am not necessarily asking you to endorse this statement, but one might say that that reinforces the cycle of dysfunctionality, whereby there has to be a political crisis to generate a funding package, but the way that the funding package happens does not really inculcate good practices or strategic planning. The political dysfunction then reinforces the budgetary problems, and the budgetary problems reinforce that etc. That is a statement, rather than a question, I suppose.

In relation to the calculations, is there any concern that the Wales and Scotland numbers are now quite old? They are from 2010.

Mr Simpson: The Wales figure, for example, is used for the current funding arrangements. Treasury continues to use that for Wales. Given the components of a need estimate, it will move gradually over time; it is not volatile. Those are not, therefore, unreliable figures. That is not a concern for us.

The Chairperson (Mr O'Toole): OK. That is helpful.

Ms Forsythe: Thank you all very much for being here. At the last session with Joanne, she touched on some of the work that you are doing, so it is good to have you here to speak about it.

The Chair touched on this already, but I want to bring it up again. When we compare the figures in the table, we see that the figures for Scotland and Wales are from 2010 and that the figures for Northern Ireland are much more recent. Have the UK Government given any thought or consideration to reviewing those figures on a particular cycle? There is a big difference in time between 2010 and 2023-24.

Mr Simpson: There has been no discussion or indication from the UKG that they will look at that. The Holtham work was done primarily to inform the Welsh fiscal framework, so it was done with a purpose. To illustrate the point on how relatively stable those figures are, in the original Holtham work back in 2010, Northern Ireland's level of need was estimated to be 121, without policing and justice; when Holtham did his work for us recently, the comparable figure in the latest analysis was 120. That moved by only one percentage point over that 15-year period. When we add the policing and justice need, that brings it up to 124. Treasury's position is that the Barnett formula is the mechanism to allocate funding. I therefore do not see it having any appetite to reopen that.

Mr McMahon: On top of that, the fiscal framework for Wales, which was signed in 2016, states that the Governments do not intend to look at it on a regular basis. They assumed that it would be set for quite a significant time. There is no specific date or time, but they did not expect to go back and look at it on an annual basis, for example.

Ms Forsythe: When you set it out in the table in those simplistic terms, what do the UK Government say to you?

Mr McMahon: As Tony alluded to, it is probably not overly helpful to get into the sensitivities of it, but you do not expect them to say, "Oh yes, that makes total sense". They will see it; they will digest it.

Ms Forsythe: Given that there is such a disparity in some of the figures, you would think that they would look at it and say, "We must look at those 2010 figures again".

Mr McMahon: They might look at it from our perspective and think that we have a particular motive. It is quite helpful that the Fiscal Council is coming up and reinforcing the figures that we and the Finance Minister have been using for the last x number of months.

Ms Forsythe: It is disappointing when you see the figures set out in that way, because it looks as though it is not a fair position when compared with that for others. However, I appreciate that every government operates in a different way.

The level of need was reviewed, and there was an uplift. There was the financial settlement that effectively wrote off £559 million of overspend over the two years at the start of the spending review period. However, that was not really an overspend. It is probably what the spend would have been had the uplift in the level of need gone back those couple of years. Is that conversation closed? There is half a billion pounds that, I feel, had this been applied in its true and full form, giving us that level of need over those two years, we should have had here.

Mr Simpson: Certainly, in the discussions at the time when the Executive were restored, very clear arguments were put forward on the Northern Ireland side that that should be baselined to the extent to which we were below need. That is not the approach that was, ultimately, arrived at. However, the discussions about what fair and sustainable funding looks like for Northern Ireland are still very much live.

Ms Forsythe: That is good. I am pleased to hear that those discussions are live. I appreciate the sensitivities, as you say; the Minister is talking to the UK Government and Treasury, and there is only so much that you can say. However, if there is anything that the Finance Committee can do through its work to provide engagement or to highlight things, or if there are any exercises that we can do to support that, we would be keen to do it. The Executive have a united voice on this. Everyone wants it to be looked at. When you see the numbers set out, the case looks fairly simple, and it should be looked at. The current situation is a bit frustrating because we do not have a Budget. We cannot sign up to a Budget in its current form without signing up to make catastrophic cuts in the current year. It is a terrible position to be in. Obviously, the Labour Government are in a difficult position at the minute. Do you feel that you have their attention?

Mr Simpson: Your opening point about the focus on it is helpful. A number of months ago, our team conducted work to arrive at the £1 billion and £3 billion estimates. The fact that the Fiscal Council looked at it and the Committee is drawing attention to it can only be helpful to us.

The discussions with the UK Government, the Treasury and the NIO are ongoing. We are having discussions, and colleagues on the public spending side are highlighting the very severe pressures that Departments are under, so the Treasury is aware of the financial position of Executive Departments.

Ms Forsythe: OK. Thanks very much. I appreciate all the work that you are doing. If there is anything else that you need, the Committee would be keen to support you.

Mr Kingston: Thanks for your paper and for your attendance.

Table 1 is very helpful, and it is the first time that I have seen it set out like that. I know that the Minister has referred to it. Is the information contained in table 1 the work of the Department of Finance? Diane asked the question, but what is the Treasury's view of it?

My second question is also a bit of a repeat question. The table shows that, effectively, the three devolved nations are getting quite similar amounts of money per capita, whereas the level of need in Wales and Scotland is meant to be lower. Is it just that they have not updated the figures for more than 15 years?

Mr Simpson: The table was based originally on our own internal work. It uses Treasury figures, so the spending figures and need figures were done independently. It is not our estimates of levels of need or our estimates of relative funding. Official Treasury estimates were used. The components of the calculation cannot be disputed. The fact that the Fiscal Council has looked at it and independently arrived at a similar point is very helpful to us.

You asked about the Treasury's view of it. Our view is that, particularly with the Fiscal Council coming and independently looking at the figures, and when you think of the status and calibre of the people on the council, the figures are beyond dispute. The question really for our colleagues in the UK Government is what is their response to it when they can see very clearly that there is an inequity in how the devolved Administrations (DAs) are treated. The Secretary of State previously said that Northern Ireland is funded at need. That is correct, setting aside the publication yesterday that says that we are slightly below need. We are around 124%. The bigger question is this: is that level of funding sustainable?

I might be helpful if I explain what relative need means. It means that we need 24% more to deliver comparable services to those in England, but that does not pass a judgement on whether the quality of those services in England is at the level that citizens there would expect. In the public discourse in England, there are concerns about the quality and level of public services. The fact that we were funded at need does not mean that things are fine and that we have enough money to deliver public services. That estimate gives you the equitable position with England. Scotland and Wales have the buffer of being significantly more above need. The historical funding premium that they have received perhaps helps them to offset the constrained funding position that they are facing.

Mr Kingston: Do they get regular updates on the actual level of need? Maybe they do not like using that term.

Mr Simpson: No, I would not say that. I am sure that colleagues could list them off better than I can, but the components of the need calculation involve six domains. They include demographics or age profile — how many young people and old people there are — levels of deprivation, levels of sickness and levels of rurality. Those sorts of things do not change materially over time, so you do not need to update that every year. The thing that we look at more readily is the funding position. We are accepting that the methodology that Professor Holtham developed is as good as you are going to get in order to estimate how the regions compare on relative need. It is not that the Treasury is saying that it is not going to look at need again and is not going to reopen that. It is that there is a methodology now. As I said in response to Diane, the question is one of how it responds to that, and then there are some wider discussions that we want to have on some of the mechanics around how the formula works when it is being applied to Barnett. As we have seen in the Fiscal Council's latest work, we have dropped slightly below need. We have talked about whether there should be a bigger buffer zone. You get 124% when you are 0·5% away from need. We think that that buffer zone should be bigger. There are therefore some discussions that we need to have with the Treasury as part of the discussions on the wider fiscal framework once we get through this immediate funding pressure, which is where our main focus as a Department is.

Mr Kingston: The Treasury has not given any official response. Are you saying that it is just feeding into the ongoing negotiations?

Mr McMahon: As I said before, you probably would not expect the Treasury to say, "Yes, we agree with your analysis, and we need to do something about it". It is absolutely aware of it, and, as I said previously, now that the Fiscal Council has come out and reinforced that, that is quite helpful for our arguments with it. One point that it made before when the First Minister quoted some of those figures in the media — I think that it was on 'The Nolan Show' — is referenced in the Fiscal Council report. The Treasury came out and said that Scotland does not have a formal agreed level of need that the UK Government recognise. Interestingly, in some of the documents that the Government have produced, for example the open-book exercise or the spending review last year, they talk about all the DAs being funded above their calculated level of need. So, obviously, in Treasury, there is some sort of perspective on that, and the only assessment that we have ever seen is from Holtham back in 2010.

Miss Hargey: Thanks very much. The table is important, and it shows something that the Finance Minister, the Department and, indeed, the Executive have been saying for some time. It is good to see that the Fiscal Council has confirmed what we have been saying, because, for too long, consecutive British Governments have been gaslighting the people here. Not only are we being treated as second-class citizens but as third- and fourth-class citizens. I see that you use Scotland and Wales, but, when you look at the recent injection of money into the baseline in England through local councils, which deliver a lot of the services that Departments here deliver, you see that in the region of between £5·6 billion and £6·34 billion of additional money has gone in as a baseline. What analysis is being done there? We are being treated differently.

The commentary here is that the Executive have the begging bowl out again and want another bailout. In fact, it is the opposite. You see that when you start to look at that table and compare us with those other parts; England, Scotland and Wales. I think that Westminster is gaslighting us on this, so I am glad that that is out. My question is around your experience on whether looking at that increased baseline budget for English councils could be included in the table, because, again, that further strengthens our case that we have been making here. Where there has been money, they try to play that it is increased spend to the Executive. That has been cash. You talked about the importance of setting a baseline for spending in our Budget. Can you say a bit more about that?

Mr Simpson: On the point about the councils in England, you are totally right that they deliver different services from ours. We have been at pains to make that point in regular discussions to say that, in response to some of the things in the open-book exercise and so on, where very stark comparisons are made between services delivered here and services delivered across the water, you are not comparing like with like. The pressures facing services here, including on those that are delivered through Education, are on the very services that are delivered by local authorities in England, which have had to have support because the councils have been in very difficult financial positions. That is clearly a part of it. We do not, unless colleagues correct me, have separate estimates of what that might mean for Northern Ireland.

Mr McMahon: We have not looked into it. If there is to be additional Barnett, such as what Northern Ireland got as a result of increased SEN funding in England, public spending directorate colleagues will look into it to ensure that we get the appropriate amount.

Miss Hargey: But, as you said, it is about the baseline and why that injection went in. It is not that England's level of service is good; it is crumbling, which is why it had to have a huge injection of money into its baseline. Comparing us with England is not a good system to begin with, given where public services are.

Mr Simpson: Certainly, that is the position that the Minister takes when he meets his colleagues. Finance Ministers across the DAs are strongly making the case that public services need more sustainable funding and that the settlement from Westminster does not provide that.

Miss Hargey: Recently, there has been a lot of talk at Westminster about increasing defence spending and some about decreasing social security spending. Are you picking anything up about that? If money were to be shifted out of social security, for example, into military spend, what impact would that have here?

Mr Simpson: It is about how Barnett works. The comparability factor for defence is zero — if it is not zero, it is not far off it — so additional spending on defence would not have the same impact as money going into health or education, a consequence of which would be that we get a Barnett uplift. A decision made in London to skew money towards defence would not provide us with the benefit of a significant uplift.

Miss Hargey: But, if that takes money from social security —.

Mr Simpson: That would be under annually managed expenditure (AME). Subject to any decisions that we make, yes, changes to the social security system will impact on the money that is available.

Miss Hargey: Thank you.

The Chairperson (Mr O'Toole): We are having a conversation about need that is really useful and provides helpful clarification for the purpose of the debate, but it seems to be difficult to understand what the Treasury is actually saying. We have tried and will probably try again to have the Treasury give evidence to us so that we can understand its fundamental position on need. It does not treat need in the way in which it is treated by the devolved Administrations. It acknowledges it and now refers to the devolved Administrations as being funded at need, albeit Northern Ireland is funded at its level of need and, on the basis of the 2010 numbers, Scotland and Wales are funded well above theirs or, certainly, significantly above where we are.

What I am trying to establish is this: fundamentally, the Treasury does not totally engage with the idea of need. It just says, "You're at it, and that's it", because the fundamental funding mechanism is the Barnett formula. The Barnett formula provides the allocation, and, after that, things are done, hopefully, to get you to your level of need, but no guarantees are set out. The statement of funding policy, for example, does not say that any devolved Administration should be at its level of need or above it.

Mr McMahon: The fiscal framework is the framework for the agreement on funding. Barnett is in the statement of funding — that is the core and the basis — but, for Wales in 2016 and us in 2024, there was an additional mechanism, if you like, to try to ensure funding at or around the level of need.

Mr Simpson: Far be it from me to defend the Treasury, but in response to your question about whether it recognises need, I will say that Wales's fiscal framework is based on relative need and that the Minister's predecessor agreed an interim fiscal framework of which need is an element. Is there a recognition in Treasury that it needs to fund us at need? Yes. We have our interim fiscal framework and Wales has the same sort of thing. There is not a pressure to have that in Scotland.

The Chairperson (Mr O'Toole): It is funded well above its level of need under how the Barnett formula works.

Mr Simpson: Clearly, yes. The question now is a broader one. What is the necessary level of funding? You can work out what your need is, but what level of funding is required across the Administrations?

The Chairperson (Mr O'Toole): We have the interim fiscal framework, and you guys worked hard in achieving that. When will there be a final fiscal framework, and do we expect to see one alongside a Budget? Do the two have to go together?

Mr Simpson: No. A fiscal framework is a much broader piece.

The Chairperson (Mr O'Toole): I accept that, but the Minister's current position seems to be that, even if we accept that, in relative terms, we are not funded as well as Scotland and Wales, based on your and the Fiscal Council's analysis, as the Fiscal Council stated yesterday, we have no guarantee that, though we might object to that position, the Treasury is going to engage meaningfully on that discrepancy. The negotiation leverage of the Executive is, therefore, not to set a Budget. Are we holding out on agreeing a Budget in order that it agrees a different fiscal framework with a more generous — or, you might call it, equitable — need calculation?

Mr Simpson: I would not describe it as holding out on a Budget. The Minister put out a draft Budget at the start of the year based on his responsibility to do so and the available funding. Feedback from Ministers across the Executive was that it was not sufficient and they could not live within that. It is the Minister's intent to put a multi-year Budget in place as soon as possible. Given the financial position, however, the focus at the minute is on reaching agreement with the UK Government on a more sustainable funding arrangement.

Funding is one element of a fiscal framework. It is the most immediate and pressing one at this time. There are other elements, such as the devolution of additional fiscal powers, and the Minister is pressing strongly that that needs to be part of the package. The focus at the moment, however, is on dealing with the immediate Budget pressure. Once we are through that, we expect broader discussions on issues such as tax and the technicalities on how that would work. We talked about the buffer zones.

The Chairperson (Mr O'Toole): We will come to the devolution of tax powers afterwards, but, on where we are right now, you are saying that, obviously, there is an immediate and pressing desire to get a Budget agreed. We are certainly pressing for that. If the Executive do not agree a Budget, their legal spending totals will be well below need, because it would be a 5% cut on last year's Budget, and that is significantly less than need.

Mr Simpson: You are taking that right to the outcome that would be arrived at at the end of the year if no agreement was reached, but all the efforts of the Department are focusing on the engagements with the Treasury to enable us to get a Budget in place that will enable full spend.

The Chairperson (Mr O'Toole): OK; fingers crossed.

My final question is on the devolution of fiscal powers. Basically, you are saying that that is a priority but one on which there has not yet been detailed engagement with the Treasury because you are still in discussions about the need calculation.

Mr Simpson: The focus has been on funding. As was maybe said when we were here previously, the Minister set out to his Executive colleagues what he saw as a pathway towards a full fiscal framework with devolution included. There will need to be discussions with the Executive and the UK Government. What my team is doing, within the capacity that we have, is to advance the preparatory work that we can do to inform any discussions at the Executive table, which is where the first discussions would need to be, before any agreement would be reached by the Executive on any powers.

The Chairperson (Mr O'Toole): That is preparatory work for discussions within the Executive, which would come in advance of discussions with the UK Treasury, but it is not preparatory work about hiring tax collectors and things like that.

Mr Simpson: No.

The Chairperson (Mr O'Toole): OK. We are a long way off that.

Mr Simpson: It is internal research.

The Chairperson (Mr O'Toole): It seems as though it has been at that stage for a while, but I recognise that some of those are political blocks and not yours.

Thank you very much for coming to give evidence, and we may come back to you with questions. The evidence on the need calculations and other stuff was particularly useful. Thank you very much, Tony, Eamon and Aidan. We appreciate your time.