Joshua Miles says a treasury function within Welsh Government would strengthen decision makingJanuary 16th, 2013
The linchpin of the argument for further fiscal devolution advocated by the Silk Commission is accountability. This is needed if borrowing powers for capital expenditure are to be devolved and used effectively. There must also be greater accountability within Welsh Government in order to ensure every penny of Welsh taxpayers money spent on capital expenditure is maximising Wales’ future economic prosperity.
Devolution special: the Silk agenda
This is the last of a series of articles we published this week on the future of the National Assembly
Two further changes at the heart of Welsh governance should go hand in hand with the move towards greater borrowing and fiscal responsibility. We need a more rigorous process for allocating capital expenditure in Wales combined with a step change in capacity to provide improved modelling of public decision making.
The Welsh Government has historically taken an approach to capital investment based on departmental priorities that has led to a relatively fragmented approach to the allocation of resources. This is recognised in the Wales Infrastructure Investment Plan (WIIP) which states:
“Historically the Welsh Government made decisions on infrastructure need and investment largely within departmental portfolios, each with its own framework of strategies and investment plans, published policies and programme management.”
The Welsh Government’s declining capital budget, shown in the chart below taken from the Government’s 2011 Draft Budget for Growth and Jobs has sharpened focus on producing value for money and prioritising capital spend on projects that bring real return to Wales.
One of the strongest elements of the WIIP is its stated preference for the use of the 5 case model approach to appraising the business cases of prospective capital investments. Developed in partnership with the UK Government’s Treasury, the 5 case model is taken from the Green Book approach to investment allocation and will surely help to further the Welsh Government’s stated aims:
“We will be supplementing departmental processes and building on previous mechanisms by strengthening cross-departmental procedures, including more rigorous, consistent evaluation and ranking of investment options…These new procedures will be used to inform decisions on allocating around £250m of capital reserves available in 2013-14 and 2014-15, details of which will be set out in the autumn..”
The UK Government’s Treasury is renowned for its rigorous approach to the allocation of resources. A simple replication of this in Wales would not necessarily be appropriate. However, a strengthened treasury function in Wales could go much further in applying the Green Book principles to the Welsh Government’s £1 billion capital budget across departments. Moreover, it could play a significant role in determining the priorities of any future capital investment from borrowing powers, should they be devolved as recommended by the Silk Commission, as well as windfalls from Barnett consequentials.
If the Welsh Government is to assume greater fiscal accountability then suitable resources must also be available within the Welsh Government’s Finance Department to model public policy decisions. As the Holtham Commission noted in its final report:
“We envisage that some enhancement to the Assembly Government’s Finance Department would be necessary once any tax-varying powers are devolved, though this is likely to comprise a fairly small unit of specialists, including economics and statistical expertise.”
Presently, there is little statistical data available to document how much revenue is likely to be raised from taxation in Wales, except for the important work carried out by the Holtham Commission in 2007-08 and the Silk Commission for the period 2007-11.
The Silk Commission’s published research papers highlight a number of alternative forms of fiscal federalism within an international context. For example, the Government of New South Wales Treasury forecasts and reports on revenue raised within the state and provides policy analysis to inform the fiscal policies of the NSW Government. Wales needs similar capacity, enabling more coherent planning of policy decisions regarding the Welsh tax base. It is therefore encouraging to see the Silk Commission recommend an emphasis on strengthening the Welsh tax base as a key element of a Welsh Treasury.
All nations in Europe hold public accounts in the form of Input Output (IO) tables; this is true of Wales where Cardiff Business School have managed IO tables for more than twenty years. However, it is necessary to go beyond this to ensure any fiscal changes in Wales are done on sound economic advice, particularly through the creation of a Computed General Equilibrium Model (CGE), something already in existence in Scotland. As Dr Crawley and Professor Munday of Cardiff Business School note in their response to the Silk Commission:
“…as yet there has been limited progress towards a full Welsh model. If Wales was to gain fiscal powers in respect of tax it would be difficult for economists to advise the Welsh Government on likely consequences without the construction of a specific Welsh Model.”
The Welsh Government should put in place similar capacity in anticipation of the further fiscal autonomy prescribed by the Silk Commission.
The other important economic measure, Gross Value-Added (GVA), is currently calculated annually with a significant time lag for the data meaning it is often out of date when it is published. For the business community, the relative decline in Gross Operating Surplus, the element of GVA relating to profitability, should be addressed by Welsh Government. This is particularly important as it could impact on revenue raised in Wales from taxation. A good start would be publishing quarterly statistics to enable civic society far greater capacity to scrutinise Wales’ economic performance.
Finally, by introducing the necessary precursors to fiscal autonomy the Welsh Government will also have the opportunity to influence the other cornerstone of financial independence in Wales, the Barnett Formula. It has long been argued that the Barnett formula has left Wales underfunded compared to her sister nations of the UK. Academic work in Scotland has sought to understand the practical workings of the Barnett formula and concluded that it is most effective when political influence is also included in bargaining discussions.
A new treasury could also model joint UK and Welsh Government policy interventions for Wales and aid in influencing decisions in a phased manner. Indeed the Silk Commission report on empowerment and responsibility proposes a similar approach:
“The Welsh Government and UK Government, and their respective Treasuries, should use both devolved and non-devolved economic powers to strengthen the Welsh tax base. The Bilateral Committee on Welsh Fiscal Devolution would provide a forum for creating a stronger bilateral focus on improving the Welsh economy”.