Mike Hedges questions why Wales is being treated differently to Scotland and Northern Ireland on borrowing powers

May 29th, 2012

With the new Scotland Act which has recently been given Royal Ascent, the position of Wales and its inability to borrow for capital expenditure becomes increasingly more anomalous. Under the new Scotland Act 2012, Section 66 of the 1998 Scotland Act (borrowing by the Scottish Minister etc.) is amended. Subsection 1, relating to borrowing powers, has now been replaced with the following:

1A. The Scottish Minister may, with the approval of the Treasury, borrow by way of loan any sums required for the purpose of meeting capital expenditure;

1B. A sum required for the purpose of Capital Expenditure if the expenditure would be capital expenditure for the purposes of accounts under Section 70.

The command paper identifies a borrowing limit of up to 10 per cent of the Scottish capital budget. This is currently approximately £230million, with an overall aggregate limit of £2.2 billion. In addition there is ability for the aggregate figure to be increased but not decreased from £2.2 billion.

This effectively gives the Scottish Government the power to borrow directly for expenditure on items such as roads, schools and hospitals.

In Northern Ireland, the Stormont Executive has had borrowing powers since 2002 as stipulated under the Reinvestment and Reform Initiative. This is subject to an annual limit imposed as part of its spending review engagement with the Treasury, currently around £200million per annum.

In addition to the £200 million limit on Reinvestment and Reform Initiative borrowing in 2011-12, there was permission for an additional £175 million borrowing for the Presbyterian Mutual Society.  This was an additional special provision and did not impact on the usual £200 million a year limits.

The following figures identify the actual borrowing since the Reinvestment and Reform Initiative commenced:

2003-04 £79.4m
2004-05 £168.7m
2005-06 £162.9m
2006-07 £214.6m
2007-08 £97.6m
2008-09 £16.6m – plus £243.3m of borrowing power used to offset on-balance sheet PFI projects
2009-10 £185.3m – plus £60.7m of borrowing power used to offset on-balance sheet PFI projects

As is seen from these figures, on some occasions the £200 million annual limit has been exceeded.

From the Public Income and Expenditure Account for the financial year ending on 31st March 2011, the interest payments of advances from the National Loans Fund in respect of the Reinvestment and Reform Initiative were as follows:

2009-10 £33.3m
2010-11 £36.4m

The Strategic Investment Board, which falls under the purview of the Office of the First Minister and the Deputy First Minister, was established as a company under the Reinvestment and Reform Initiative in 2003 to address the legacy of under-investment in Northern Ireland’s infrastructure. It has three main roles, to:

  • Help deliver key investment programmes and projects.
  • Support reform of public services.
  • Build a ten-year investment strategy for Northern Ireland.

The Strategic Investment Board covers infrastructure development across education, health, transport, water, waste, housing and regeneration and ICT.

All this means that from 2013 Wales will be the only legislature in the United Kingdom unable to borrow for capital investment. Of course, there are ways around it such as local authority prudential borrowing powers, which will be enacted as long as they have a good rate support, grant settlement. And there is always the private finance initiative. However, I would urge caution with the use of that or the not for profit distributing model as implemented by the Scottish Futures Trust.

The question of course is why Wales should be treated differently to Scotland and Northern Ireland in relation to authorised borrowing?

Local authorities including those in Wales are in an even better position to the Scottish Government and the Northern Ireland Executive in that they can borrow to a prudential limit. In practice, this is the limit deemed acceptable by the Council’s Chief Finance Officer.

So why is Wales treated differently? What it means is that the Treasury is treating the Welsh Government as though it were another Whitehall department rather than the responsible democratically elected body representing the nation of Wales.

There is a desperate need for capital expenditure in Wales on roads, hospitals and educational establishments that would also help reflate the economy and get people back to work.

In the 2010 Holtham report, Fairness and Accountability: A new funding settlement for Wales, the following recommendations were made in relation to borrowing powers:

“Limited powers to borrow in order to finance capital expenditure should be devolved to the Assembly Government.

“Borrowing should be undertaken via the YU’s Debt Management Office. A borrowing framework should be agreed between the Assembly government and HM Treasury, and a ceiling should be placed on the total amount of debt that the Assembly Government should be able to carry.

“At present, the Assembly Government has a maximum three years of certainty about its capital budget at any one time, and in practice is constrained in undertaking very large projects. Devolution of limited borrowing powers for capital purposes would enable planning horizons to be extended, and would make it easier to align capital expenditures with Welsh priorities.

“We recommend that limited powers to borrow in order to finance capital expenditure should be devolved to the Assembly Government. Borrowing should be undertaken via the Debt Management Office. A borrowing framework should be agreed between the Assembly Government and HM Treasury, and a ceiling should be placed on the total amount of debt that the Assembly Government should be able to carry.”

If this was true in July 2010, then almost two years later, with Scotland having been given borrowing powers of up to £2.2 billion and Northern Ireland continuing to have borrowing powers of £200 million a year, then there is no reason why Wales should not be treated the same.

It is time the Westminster Government and the Treasury entered the post-devolution world and granted borrowing powers to the Welsh Government. If it is appropriate for Northern Ireland and Scotland, then it is appropriate for Wales.

It’s worth remembering that the Welsh Government does not need new legislation to enable borrowing powers. The Treasury just have to consent to widening the powers of the Welsh Development Agency Act 1975. This created the now defunct Welsh Development Agency prior to its merger with the Welsh Government in 2006. Thus a simple administrative action would provide Wales with a huge opportunity as well as allow the Welsh Government to invest adequately in our national infrastructure. In turn this would create more jobs and growth.

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Mike Hedges is Labour AM for Swansea East

6 Responses to:“Treasury should treat Wales as a nation not a Whitehall department”

  1. Alex Powell says:

    Why should the Welsh Assembly need to borrow more money when they have been given such large handouts by the EU development fund? Maximum funding again is a disgrace not a badge of honour, and as a result we have a median wage lower than the rest of the UK: we were 98% of the average in 1997 and are now 74% of the average.

    All this funding and nothing has come from it with the exception of vanity projects and initiatives to save the Welsh language. Now they want to spend £400,000 more on duplicating documents in Welsh. What an utter joke. Is that what you want to use the money for?

    Infrastructure needs to be developed, yes, but why spend absurd amounts of money on making a road with a statue by a ‘famous’ artist, who nobody as heard of, then gardens around the road?

    Just build a road! The vanity can come when the country makes money and stops becoming a burden on the rest of the UK. I would like to point out that I am not a disgruntled Englishman, I am Welsh, have lived here and studied here all my life, but I am afraid sir, the shambles that is the Welsh Assembly need to take a step into the real world before they go asking for more power to wield like a child with his father’s gun, it is dangerous.

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  2. RTG says:

    Part of the problem is Labour’s refusal to face up to the reality that borrowing powers mean extra fiscal responsibility, ie taxation powers.

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  3. Ken Richards says:

    The answer to the lead question is a matter of history, e.g. the Acts of Union. At this point in the devolution process, and given the state of European economies, I would be more concerned about finessing the management of the funds that Wales gets now than attempting to play catch up with Scotland and Northern Ireland. The recent experience of Catalonia prompts caution.

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  4. mike hedges says:

    Northern Ireland has borrowing powers without taxation powers.
    Infrastructure means schools, colleges and roads.

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  5. RTG says:

    Northern Ireland’s borrowing powers stem from the fact that the NI executive is directly responsible for many functions handled by local authorities in the rest of the UK. The NI example isn’t really applicable to Wales in this context, Scotland is. Why is Labour so terrified of tax varying powers for Wales?

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  6. tredwyn says:

    European convergence funds have restrictions on them that mean they can’t be used, certainly can’t all be used, for some kinds of infrastructure. They don’t therefore remove the need for some borrowing for investment. Northern Ireland and some parts of Scotland also qualify for European convergence funding.

    All that said, there is reason to think that the Welsh government has not handled European funds as well as it might have done, both in turns of maximising the money we get – we leave some on the table – spending all that we are awarded and directing it to the best uses. This is not surprising when you look at the way we do it. Wales has an office dealing with European funds, WEFO, that was free-floating and is now under the Business department though its offices are separate. But surely to goodness it should be integrated with the capital budgeting process and be more rigorously accountable. It should obviously therefore be a department of the finance ministry of the Welsh government and the finance minister should be keeping a close eye on it and making sure it fits with budgetary priorities.

    Gossip has it that Rhodri Morgan nursed a dislike of the UK Treasury from his time in Westminster and decided that he didn’t want a strong Treasury in the Welsh government. We are still paying for this mistake with a lack of financial co-ordination in the government. WEFO running its own separate budgetary process is an egregious example.

    That’s why I agree with RTG. If the Welsh government were responsible for some taxes it would not only increase accountability to its citizens and give them a bigger incentive to vote, it would also force WG to strengthen its finance function to become a proper Treasury, with a big potential gain in the quality of public spending.

    PS Mr Powell is guilty of a factoid: the Welsh median wage was never 98 per cent of the UK average in 1997. Maybe it was 89 per cent, though I doubt it. It hasn’t been 98 per cent since about 1913. The performance of the Welsh government has been underwhelming and I’m happy to critique it but they can’t be blamed for structural economic problems that are a century old.

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