Gerald Holtham says the UK government and Treasury are living in shame but are apparently immune to embarrassment

June 23rd, 2012

The Independent Commission on Funding and Finance for Wales found that the country was under-funded relative to English regions, not to mention Scotland and Ireland. The criteria for that judgement were the needs-based formulae that the UK government used to distribute health, local authority support and, formerly, education spending around the English regions. If the Barnett formula were replaced with a needs-based formula reflecting similar distributional judgements to those embedded in existing formulae used by the government, Wales would get more public spending per head. When we factored in the formulae used within Scotland and Wales to distribute part of the block grant to local authorities, the distributional judgements were not much changed.

Those distributional formulae were very complicated, one might say unnecessarily so. But it was possible to find a much simpler needs-based formula that replicated their results and could therefore serve as a basis for replacing Barnett.

Need itself is an infinitely contestable concept but we finessed philosophical discussion by simply processing existing formulae. Our argument is not that the UK government’s preferences are right or wrong but simply that its treatment of Wales is inconsistent with the distributional preferences it has revealed elsewhere. Its procedures are therefore unfair.

Now, politicians have tended to seize on numbers in the report and brandish them in political debate – “Wales underfunded by £400 million a year” for example.  That is fair enough and Leanne Wood’s ‘updating’ of our numbers is in that tradition.  However, if we approach the report forensically rather than attempting to make (legitimate) political points, we notice aspects that have been underplayed.

First we produced a range of estimates of Welsh spending ‘need’ running from 114 to 117 per cent of the UK average, depending on which of a number of assumptions were made – all of them defensible. For example, does Wales ‘need’ bilingual schooling or is it a choice? How much adjustment should there be for different local-authority tax bases? Reasonable people could differ.

For illustrative purposes we focused on 115 as the ‘needs’ ratio – but making it clear that different, defensible political preferences could result in other numbers in the range. That range implied under-funding of between £300 and £750 million, given estimated actual expenditure in 2010-11 (out turn numbers for that year were not available when the report was published).

Commentary has tended to focus on the 115 estimate and the implied £450 million underfunding. But it is unnecessary to impart spurious precision to these estimates. We can say with some confidence that Wales is a underfunded by a few percentage points but there is no hard science that pins the number down very tightly. There is a fair-enough range within which legitimate differences of view can imply somewhat different outcomes. What we get is likely to be determined by our negotiating strength. Unfortunately all the evidence is that Wales remains in a weak bargaining position, whichever parties are in power in London.

Leanne now infers that actual devolved expenditure in 2010-11 was rather less than we estimated in relation to the rest of the UK. That is a surprising result because static or declining public expenditure in the UK would normally arrest convergence and lead to Wales’ relative share rising. In any case, the ‘revised’ shortfall she produces lies within our original range of estimates.

And while Leanne says our numbers have been widely accepted, that ‘widely’ does not encompass Her Majesty’s Treasury. They cannot justify any alternative numbers but unfortunately they don’t have to in order to simply refuse to accept ours. It is a shame the Treasury could not be lured into a sensible, honest debate on these matters. Yet I never doubted that if they were so lured they would find reasons, strong, weak or weaker still, to argue for reducing our estimates by a couple of percentage points.

The real moral strength of our position is this: we can haggle over the extent of under-funding but no reasonable needs-based estimate would find Wales relatively over-funded. Therefore, there is no justification whatever for a formula which reduces Wales’ relative share over time as nominal public spending grows. That is what Barnett does and that is why it should be dropped or at the very least amended.

The so-called Barnett floor that we proposed would prevent Wales’ relative share converging to the English level in defiance of relative need. The case for the floor still seems to me unanswerable and is resisted not by counter-argument but only by a pig-headed exercise of raw power politics. The UK government and Treasury are living in shame but are apparently immune to embarrassment.

And over a decade or two, as public spending resumes nominal growth, the Barnett formula would reduce Wales’ relative share and lead to cumulative under-funding of billions of pounds – numbers that will make discussion of whether the present shortfall is £400 or £500 million seem scholastic.

All Wales can unite around the proposition that Barnett convergence must cease and insist that is a cornerstone of fiscal reform.

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Gerald Holtham chaired the Commission on Funding and Finance for Wales and is a trustee of the IWA.

5 Responses to:“Wales suffers from raw power politics”

  1. Mary Jones says:

    Read no further, the title tells it all ‘Wales Suffers’! Until we release ourselves from the ‘overlords and serfs’ mentality, and the negative energy this demands, we shall remain at the bottom of the international pile. Wales should seek to release itself from a dependency ‘needs based’ culture and consider how we can compete as a vibrant and viable independent country. When times were tough in the inter and post-war years, my father’s brothers and cousins didn’t sit and wait for the state to sort out a job, nor did they take to their bikes, they took to the boats, to America and Australia, to make new and rewarding lives. My own son did this six years ago, with 12 GCSE’s, 4 A levels and two degrees, finding little or no opportunity in Wales, barriers around nepotism and the Welsh language constructed so high he could not see over or under them. In six years he has transformed his life in New Zealand and though his heart remains with us in Wales, he would not – could not – consider a return to a country dominated by the public sector, falling educational standards and an over-blown and inefficient health service. In New Zealand they systematically and routinely set about restructuring their public services, to keep them affordable and efficient, and my experience during visits to my son is of getting it ‘right first time and every time’…including a small payment for visits to the GP. Come on Wales, climb out of the trenches, and consider what ‘freedom’ really means!

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  2. Bill Chapman says:

    “All Wales can unite around the proposition that Barnett convergence must cease and insist that is a cornerstone of fiscal reform.” No, Wales can’t unite around this proposition. No one I have spoken to has shown the remotest interest in this topic, I’m sorry to say.

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  3. Jon Jones says:

    The long term economic success or failure of Wales is already largely in the hands of the Welsh Government. How they spend the block grant could lead to greater or lesser poverty in Wales. You can already see the Tory Government pointing to Welsh Labour policies and suggesting that these have resulted in failure in the education system, failure in NHS provision, failure to stimulate the Welsh economy. Wouldn’t a Needs Based formula be a reward for failure?

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  4. John R. Walker says:

    There seems to be some confusion between the words want and need here! It’s no surprise that the tax-and-spend state-control left wants a Barnett floor of 115%. But I can’t see any reason why a well run Wales needs more than about 104% of the ‘England’ average. When calculating the ‘England’ average London should be left out because it is a special case arising from its high labour costs and its position as a national ‘hub’.

    When you do this you find that the needs of Wales are broadly similar to the needs of the English shire counties. London weighting skews a whole raft of NUTS1 Regional figures including spending on education.

    Comparison between Wales, Scotland and Ulster isn’t really valid either since issues like law and order and water supply are not directly comparable.

    But one thing remains fairly obvious – the 4 highest spending NUTS1 Regions (Wales, London, Scotland, and Ulster) all have one thing in common. They are the 4 with elected legislatures, and all the overheads that go with them which simply duplicate existing UK executive functions. This arguably serves to illustrate that devolution is a more expensive, therefore less efficient, way to run public services. Which is why so many of us would rather the needs assessment for all the NUTS1 Regions was done in London by the same ‘team’ with access to the ‘best’ information – poor though it seems to be for a costing system that has been in place for so many years already.

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  5. Martin Jones says:

    “The long term economic success or failure of Wales is already largely in the hands of the Welsh Government.” I don’t support Labour but can’t agree with this. The decisions being mooted on benefits, rail electrification and tax by the UK Government this week will all have a greater effect on the Welsh economy than anything the Welsh Government is responsible for. Could you substantiate your comment?

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