What the Holtham Commission’s interim report means

Eurfyl ap Gwilym examines the interim report from the Holtham Commission on funding Welsh devolved government:

When Plaid Cymru and Labour entered into a coalition government in the Assembly in 2007 one of the key elements of the One Wales agreement was to sponsor a study of the way the Welsh Assembly Government was funded and to identify possible alternative funding mechanisms including the scope for the Welsh Assembly Government to have tax varying powers as well a greater powers to borrow.

As a consequence of this decision a commission was established under Gerald Holtham with two additional members, David Miles and Paul Bernd Spahn. It was at the outset encouraging to see the high calibre of the team with the combination of public policy and economic expertise, experience of international financial services and deep knowledge of fiscal federalism systems across the world.

On 7 July 2009 the commission published its interim report (link to summary report). This first report concentrates on the current funding arrangements (the Barnett formula) and as extending this work will address tax varying and borrowing powers in the second and final report. Whilst recognising the wider context of the UK with devolved parliaments and assemblies in Scotland and Northern Ireland, the commission has concentrated its attention on the funding position of Wales vis a vis England. Given that the driving force behind public spending decisions is the needs of England, which then have a consequential funding effects on Wales through the Barnett formula this is an understandable approach. However this approach, together with the fact that the Commission was established as an initiative of the Welsh Assembly Government, may well reduce its political influence at the UK level where key decisions regarding current and future funding arrangements are made.

The report is over one hundred pages long and contains original research and analysis, as well as information already well known to aficionados of the Barnett formula. A careful review and analysis over the coming weeks and months will be required to extract full value from the report. Chapter 4 seeks to undertake a needs assessment for Wales and is likely to be used as a yardstick when others seek to undertake a similar exercise in the future.

The principal recommendations of the commission are:

1. In the medium term the funding arrangements for Wales should be based on relative need.

2. No further decline in relative funding per head should occur in Wales until a new funding system is in place. This could be achieved in a straightforward way by simply multiplying any positive increments allocated to Wales under the Barnett formula arrangements by 114 per cent.

There are other important recommendations regarding enhancing funding flexibility available to the Welsh Assembly Government, means of reducing the likelihood of future disputes between Cardiff and London and ways of improving transparency. In particular the report calls for the annual publication of information that would enable direct comparisons between Assembly Government expenditure and similar expenditure in England.

The first principal recommendation addresses the central weakness of the Barnett formula: relative funding is not related to relative need. To assess the adequacy of relative funding to Wales the commission assesses need in Wales compared with England by adopting, as closely as possible, the ways in which intra-England public funding is allocated according to need. This leads the Commission to the conclusion that, even on a very conservative assessment, Wales is under-funded when compared with England. It is for this reason that the report calls for an end to Barnett convergence: the characteristic of the formula which over time drives expenditure per capita in Wales down to the level in England irrespective of the relatively greater needs of Wales. The report estimates that unless this is done spending on devolved services which will be 112 per cent of the England average by 2010-11 will decline to 107 per cent over the subsequent decade.

This call to ‘freeze the squeeze’ is particularly pressing because the Commission estimates that the cumulative under funding of Wales over the next decade will total £5.3 billion under a low spending growth scenario (very likely in my view) and £8.5 billion under the historic average spending growth scenario (much less likely given the state of the public finances). Given that the forecasts of the current government in the 2009 Budget Red Book imply a cumulative cut of £2.2 billion in the Wales Departmental Expenditure Limit between 2011-12 and 2013-14 (see my earlier blog) the case for stopping further Barnett convergence is a matter of urgency.

The work of the Holtham Commission needs to be viewed in the broader context of what else is going on in the field of devolved funding. In Scotland the Calman Commission has come out with a set of recommendations which include retention of part of the block grant as well as giving the Scottish parliament greater income tax varying powers. Calman does acknowledge the drawbacks of the Barnett formula and in particular both the fact that relative funding is not related to relative need and that many allocations are the subject of arbitrary decisions within the Treasury. Calman avoids being drawn into recommending a replacement for Barnett, claiming that it is outside the scope of their work. However it would be a mistake to assume, as some have, that favouring a block grant as part of the Calman approach is the same as favouring the retention of Barnett. A needs related approach can readily be incorporated into a block grant the value of which is derived from relative need.

At the UK level, thanks to pressure from Lord Barnett, a House of Lords committee is currently examining the Barnett formula. The committee chaired by Ivor Richard, numbers amongst its members a former Chancellor of the Exchequer (Nigel Lawson) and two former Secretaries of State for Scotland (Ian Lang and Michael Forsyth). It is clear from their public hearings that this heavyweight committee accepts that there is no intellectual foundation to the Barnett formula and are puzzled that it has been allowed to be in force for so long. After many sessions the only witnesses favouring Barnett were the Treasury who defended it on the grounds of administrative convenience and the three territorial secretaries of state. Whilst it was perhaps understandable that the secretaries of state for Scotland and Northern Ireland favoured Barnett (it is widely recognised that those two countries get a good deal) it was surprising that the then Secretary of State for Wales, Paul Murphy, defended the status quo. It certainly appears that the House of Lords Committee will come out with a report condemning Barnett and proposing, at a minimum, approaches to replace it with a needs based formula. Given the valuable analyses in the Holtham Interim Report it is to be hoped that this will help inform the House of Lords’ deliberations.

What will come of all of this work by the three committees/commissions? There is a real danger that little will change. The Treasury is content with the status quo because it makes life easy for them and they can often continue to exercise arbitrary power in allocating funds when it suits them. Holtham gives the example of the London Olympics as an example of this. There is little pressure from Scotland because it is generally believed that they do well under Barnett. Lord Forsyth was open with his colleagues in the Lords in claiming that during his time as Scottish Secretary he as able to use the threat of the SNP as a bargaining counter with the Treasury. In the early 1980s th
e Treasury sought to reduce the block grants to both Scotland and Northern Ireland (but not apparently to Wales) by instigating a fresh needs assessment but were forced to ‘retire hurt’ after strong rebuffs from the Scottish and Northern Ireland Offices. In any event Northern Ireland is always regarded by the rest of the UK as a special case and the fact that public expenditure there is very high is taken as confirmation of this.

What of Wales? There is little doubt that any decision to change the current funding arrangements will require considerable political pressure and this will need all the political parties in Wales to work together for the common good. Trying to get change will be made more difficult by the bleak outlook for public spending across the UK over the coming years. Perhaps the position and political weakness of Wales was best summed up by Lord Rooker, a member of the House of Lords Committee. Rooker, who as Jeff Rooker was an MP for the English Midlands (Birmingham, Perry Bar) for many years, said at a committee hearing: ‘The Welsh are the big losers’, ‘The Secretary of State (as was) [Paul Murphy] did not quite appreciate how much they were losers under the status quo’. ‘It is amazing that they are not up in arms about it’. Let us hope that the Holtham Commission report will be our call to arms.

Dr Eurfyl ap Gwilym is a trustee of the IWA.

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