Gerald Holtham explains why Wales has taken a bigger percentage cut in public spending than Scotland and Northern Ireland

November 2nd, 2010

The reason that Wales has taken a bigger percentage cut in public spending than Scotland and Northern Ireland is not at all mysterious – but it is rather involved to explain. So bear with me!

And what emerges is not that Wales has been diddled. If once you accept the Barnett formula, it has been applied to Wales in a straightforward way. What has happened is that Scotland and Northern Ireland have benefited from an oddity in the formula’s application and have taken a smaller cut than, arguably, they might. This continues a pattern whereby UK governments are extremely sensitive to the reaction of  Scottish and Northern Irish politicians and give them the benefit of most doubt – for reasons that I cannot go into here.  Those reasons are evidently lacking in the case of Wales.

Now for the explanation: take a deep breath. The difference in outcome is a result of the treatment of the budget for the Department of Communities and Local Government. The Barnett formula works by considering changes in the spending per head in England of each government department. An estimate is made of the proportion of that department’s spending that is for functions that are devolved in Scotland, Wales or Northern Ireland. This proportion – termed a ‘consequential’ in the trade – is then applied to the change in spending per head and the product (change in spending per head times consequential) is applied to the devolved authority’s block grant.

How is the consequential derived? By going line by line through the Department’s spending on different activities and assigning a consequential to each. Those individual consequentials are then combined, as a weighted average, to get the consequential for the Department as a whole.

The Department of Communities and Local Government makes payments to local government authorities in England. Some 82 per cent of those payments are the redistribution of Non-domestic Rates (NDR), the property taxes paid by businesses. This used to be a local authority tax but since the Thatcher era has been set by central government and the proceeds then redistributed to local authorities according to a needs based formula. The UK government also sets the Non-Domestic rate in Wales so its payments to local authorities are echoed by a payment to the Welsh Government as part of the block grant, driven by the Barnett formula. In other words the Barnett consequential for Wales is 100 per cent for Non-Domestic Rates. For Scotland and Northern Ireland it is zero because there Non-Domestic Rates are fully devolved; the devolved authorities set the rate and keep the money, or hand it back to their local authorities according to their own formulae.

Every other line of the Department of Communities and Local Government’s expenditure apart from Non-Domestic Rates is the same for each of the devolved authorities. They all have a consequential of 100 per cent for all those lines. You can see the effect of all this on the consequentials for the departmental spending. Wales has an overall consequential of 100 per cent.  But the other two have 0 times 82 per cent plus one times 18 per cent to give an average or overall consequential of about 18 per cent (17.3 per cent to be precise).

Now the Department of Communities and Local Government budget got a caning in the expenditure review – down 27 per cent over four years. Wales took the full hit but the other two devolved authorities took only 17.3 per cent of it. This, a consequence of Non-Domestic Rates being devolved in those areas, is more than enough to explain the whole difference between the Welsh total fall of 7.5 per cent in public spending, Scotland’s 6.8 and Ireland’s 6.9 per cent reduction.

But here is the anomaly. None of the 27 per cent cut the government announced has been allocated to Non-Domestic Rates. Other government projections have been for a continued rise in Non-Domestic Rate receipts. So all the cuts are coming in areas where the Scottish and Irish consequentials are the same as Wales’ – 100 per cent.  If the consequentials had been applied line by line within the Department, they would have taken the same hit as Wales. The averaging procedure reduced their exposure to the cuts. Logically, the fact that Non-Domestic Rates are devolved in Scotland and Northern Ireland should have had no effect on their cuts; it is irrelevant because Non-Domestic Rates themselves are not being cut. Everything in respect of which they get a payment is being cut.

Got that? If not try reading it again!

Now it is perfectly true that Barnett traditionally has been applied at the Departmental level but when you get an extraordinary result like this, where devolved authorities are being shielded from over 80 per cent of departmental cuts because of an irrelevancy you might think the Treasury would change the procedure and go line by line. After all Barnett is not governed by legislation. Broadly speaking the UK government and the Treasury can do as they like. In this case, by applying the formula in a mechanical way they gave Scotland and Northern Ireland cuts several hundred million pounds less than they might have been.

Would they have done the same if Wales had been the beneficiary? Impossible to say so I leave it to your conjecture. What is not disputable is that Wales is by far the politically least influential part of the UK, with no credible threats to the centre, no senior politician in the coalition government, few Parliamentary seats, fewer marginals and the number of seats likely to be sharply reduced.  The longer Wales complains about unfairness, the more firmly established will be its reputation as a collection of whingers. The requirement now is not for a better line in whinging but a plan to improve the situation by our own efforts.

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Gerald Holtham chaired the Welsh Government’s Independent Commision on Funding and Finance. He is a trustee of the IWA.

2 Responses to:“Why Wales has been hit”

  1. Jeff Jones says:

    An article which should be read by every politician who has been peddling the ‘Wales the victim’ nonsense in the last few weeks. They should also wake up to the fact that by 2015 the UK Coalition in order to build up a war chest for possible taxcuts is not going to hand back all of the NDR to local government in England. Assembly politicians who moan about the settlement should realise that it could have been far worse if the UK government had not decided to ring fence health. I hope that this article has a really wide circulation so that we can at least get a mature debate on the policy decisions required in the next few years. As it stands and Gerry Holtham raises this issue there is a real danger of Wales drifting into a sort of political limboland with no real influence over where power really lies and that is still Westminster. Welsh politicians also have to develop a bit more political nous and realise that the devolved adminstrations do not have the same interests when it comes to trying to influence UK governments of whatever political persuasion who control what really matters which is the purse strings.

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  2. MH says:

    I have to admit that I had to re-read this a few times, and in the end had to get a friend to explain it to me.

    So just in case I am not the only one in this position, I’ve put a simplified version here.

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