Calculating Welsh Spending Needs

Alan Trench reports on the Holtham Commission’s new working paper on a needs-based replacement to the Barnett formula.

The Independent Commission on Funding and Finance for Wales has published a ‘working paper’ on a needs-based approach to devolution finance. It’s available here. The Commission’s press notice about it is here.

Commenting on the proposed approach, Gerald Holtham, Chair of the Commision, said, “In the past it has been suggested that a needs-based formula would have to be extremely complicated in development or design, making it prohibitively difficult to devise or operate. Our analysis suggests that this is not the case – a needs-based replacement for Barnett could be relatively straightforward, and based on no more than half a dozen or so simple proxies for need.

“Such a formula could therefore preserve the simplicity and automatic character of the Barnett formula which has been its main justification. Basing the formula on current spending decisions provides a good starting point for political discussion about the relative size of the block grants going to the UK’s devolved authorities and should mean those discussions can be focused and not too drawn out.”

The Commission have attempted a short-form approach to assessing need by using a number of key (or proxy) indicators of need. Their finding is that these factors – different levels of health, different age structures to the population (as old and young people need services more than the middle-aged) and so forth – mean that £115 should be spent in Wales to have an equivalent effect to £100 spent in England on comparable functions. (This mirrors the approach recommended by the Lords Barnett Formula Committee, although that committee didn’t identify specific factors to use or attach any specific values to the amounts payable.)

They also apply their approach to Scotland and Northern Ireland, for which they calculate spending levels of £105 and £121 per £100 in England. The published data don’t make it clear what impact that would have in Scotland.

However, looking at overall public spending (not taking into account the functions that are devolved there and those that are reserved to the UK level) public spending in Scotland was £118 for each £100 in England in 2007-08 (and £125 in Northern Ireland). That implies a significant reduction in public spending in Scotland, with all the political difficulties that entails.

The Commission also appear to recommend using increased incremental payments as the major element of the transition mechanism, to bring the grant for Wales from where it is to where they say it should be. However, it’s dubious how workable this would be given the financial austerity that is coming.

Alan Trench follows devolution developments on his blog

Also within Politics and Policy