Spending cuts will at least reverse the ‘Barnett squeeze’

James Foreman-Peck runs his rule over the budget and pinpoints a paradoxical effect for Wales of spending cuts in England

Another £48 million for Wales in the Budget? Remarkable, in these times of expected austerity! How is it done? Well, you have to like numbers in this business. What sounds like a lot of money, when weighed against the Welsh Government’s £15 billion budget is er, what percent? Just one 300th of the total – in effect, no change.

Of course hard times have not really begun in Westminster and Whitehall. Not only are we all waiting for the election first, but there is no doubt that too early an attempt to rein in the budget deficit would choke off the recovery. That in turn would worsen the deficit problem, by delaying the return of tax receipts to something near their previous peak.

Still plans must be laid, especially as the Welsh Government budget, based on an expected block grant from Westminster, is set before the Westminster budget. Wales’s plans are anticipating the cold winds of retrenchment. Although Welsh departmental revenue spending is planned to rise by £287 million (2.1 percent) between 2009-10 and 2010-11, planned overall departmental spending falls by about £80 million. Is there a magic formula operating here? I fear not, since cuts in the budget for capital projects are taking the strain. These are considerably greater than the revenue increase, although they include £120 million already brought forward to combat the recession. Another magical element is the likelihood of a supplementary budget later in the fiscal year. Last year the Welsh Government’s supplementary budget, approved in October, added more than half a billion to departmental spending.

What will happen after the election? The present Government expects total public spending to be broadly flat in real terms over the four years beyond 2010–11. Because of rising debt interest and other payments, Whitehall departmental spending will need to fall by about 3 percent a year to 2014-5. If the health service is to be exempted from these cuts, other areas must be cut much more deeply. But in that case the Welsh block grant will fall by less than 3 percent per year because health expenditure features so prominently in it.

Whether the health service in Wales ought to continue to be treated as exceptional is another question. Research comparing waiting times of more than six months for elective hospital admission in England and Wales suggest other factors than money can matter more. Wales’s numbers waiting more than six months increased between 2001 and 2003, while England’s fell. Even after improvement began in Wales, the numbers waiting more than six months in Wales relative to England were greater in 2005 than they had been in 2001. This cannot be attributed to differential health service funding

Electorally softer targets in Wales have already been given a taste of the future. The Higher Education Funding Council for Wales has announced a 2 per cent cut for Welsh Universities – perhaps rather more than 4 per cent in real terms. (Yes, I declare an ‘interest’). On the other hand Scotland has managed almost a one per cent increase in University funding.

Still there is a brighter side. When these cuts become more general, the much maligned Barnett formula and its ‘squeeze’ comes into its own.

Perhaps this Budget’s increased £48 million for Wales was the last positive ‘Barnett consequential’ for four years (the consequences of applying the Barnett formula to the English budget to determine the Welsh block grant). But with ‘negative consequentials’, convergence of public spending per head between Wales and England is reversed.

Suppose relevant expenditure in England is cut by 2 per cent and this amounts to £160 per head. Taking £160 per head off the Welsh block grant will involve a smaller than  2 percent cut in the Welsh budget because Welsh spending per head is higher than in England – perhaps a 1.7 percent reduction. The proportionate excess of Welsh over English public spending has increased even though the absolute difference is unchanged.

What this shows is that whingeing about the Barnett formula is largely a distraction. As the IWA Third Term report in 2006  made clear: “Looking at the ‘squeeze’ compared with the block grant … suggests that, although absolutely the sums are large, they are less important as a potential loss of revenue than the uncertainties regarding English relevant nominal expenditure growth”.

Uncertainties for Wales’ budgets have increased enormously since 2007, helped by the UK government’s extraordinary borrowing requirement. Once Greece’s bail out is complete, perhaps speculation will turn to Britain and the viability of the sterling exchange rate. A re-run of 1976, and the Chancellor being obliged to write to the International Monetary Fund about the cuts he is implementing in return for currency support, is not impossible, although it would not be justified. What is certain is that whoever wins the next election will have an unenviable task of distributing painful spending cuts and Wales will not be exempt.

Professor James Foreman-Peck is Director of the Welsh Institute for Research in Economics and Development at Cardiff Business School

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