Doing the sums

Alan Trench argues that we need to understand the Welsh budget more fully or we will lose out

Data is about the most un-sexy topic in public policy debates. But it’s also vital. If we don’t have good-quality, accurate data about key subjects we can’t understand how they work, or what the problems are. It’s no accident that much of the work of pioneer social reformers like Seebohm Rowntree was to collect their own accurate, up to date data about social conditions. Public finance, more than any other subject, relies utterly on such data. Perhaps it relies on it too much. Many experts can talk in great detail about specific matters, but find the broader picture hard to tell – a classic case of not seeing the wood for the trees. But without data, you can’t have a serious argument at all – you can just opine, with no way of seeing who might be right and who might be wrong.

In Wales it’s not so much a question of not being able to see the wood from the trees in understanding the figures that underpin policy. Rather, it’s finding that half the forest simply can’t be seen at all. We have pretty good data now on public spending, data that are hugely better than they were in 1999.  Because British social statistics are generally pretty good, we know quite a lot about many social problems, at a UK level, across Wales and at more local levels.  However, we’ve had nothing up to date about the other side of the equation – how much tax revenues are generated in Wales.  The Welsh Office published a couple of reports in 1996 and 1997, when the Conservatives were still in office, but there’s been nothing since then.  Moreover, because the quality of public spending statistics has hugely improved since then, this information is not just out of date but not very reliable either.

Among the signal services that the Holtham Commission has done is to provide more accurate and up-to-date data about Wales’s public finances than we’ve ever had before, particularly about tax revenues. On the basis of their figure (£17.1 billion), I’ve calculated that in 2007-08 Wales’s fiscal deficit was £6.3 billion. That’s a terrifying sum: just under a quarter of all public spending in Wales, and over 14 per cent of national income (gross value added) generated in Wales. (I’ve discussed the implications of that previously, here and here.)

But as horrifying as the scale of that deficit is the fact that we did not know this before. We knew that the state of the Welsh economy was poor, and that tax revenues were a long way from paying for its public services. Some people had produced estimates of the likely size of the fiscal gap, based on what we know about Wales’s national income (gross value added) and the fact that tax revenues are generally are a fairly constant proportion of that.  But these were surmises, not data.  Because no-one chose to collect or publish this data, there was no way to know what the position was. We could only guess.

Contrast the position in Wales with that in Scotland. The Scottish Government publishes every year a publication called Government Expenditures and Revenues Scotland – GERS for short.  GERS tells us a huge amount about public finance every year – detailed information about spending (which ties in to the data published by HM Treasury in the Public Expenditure Statistical Estimates). It estimates tax revenues attributable to Scotland, including a lengthy discussion of how much might be attributable from North Sea oil on three different bases of calculation.

GERS isn’t flawless. It started life as a plainly political exercise when Ian Lang was Secretary of State, intended to answer calls for Scottish self-government by showing how much better off Scotland was in the Union. About the same time the Welsh Office briefly published similar data. (There’s a good discussion of its development from Public Finance, CIPFA’s magazine, by Iain Macwhirter here.)  Over the years, it has evolved.  It now meets the standards of National Statistics, which is both a kite-mark for the quality of the data and one that ensures that it’s prepared without political interference. Repeated questioning of the methods to use the data both by government statisticians and by outsiders like Jim and Margaret Cuthbert have helped incrementally improve the data.

The spending figures are now pretty clean (one person involved described them to me as being “about as good as one could get”). Indeed, the work on them has fed into PESA, as has work done by Iain McLean and colleagues on the territorial distribution of public spending in England some years ago (executive summary here, full report here).  The upshot is that the figures we now have for the territorial distribution of public spending across the UK are hugely better than they were a decade ago.  Wales is an indirect beneficiary of that work, of course.

There are greater problems when it comes to the revenue figures. These are estimates, which raise practical and methodological problems.  To give an example: the Scottish economy isn’t a microcosm of the UK economy as a whole – it’s different, with more activity in some sectors (oil and gas-related services, for example, and financial services), and less in others. The GERS data don’t appear to reflect that, but assume that the same sectors are equally strong across the UK, which is almost certainly wrong. And since some sectors generate more corporation tax revenue than others, that will mean the overall estimates of Scottish revenues aren’t right. But to say that data need improving isn’t the same as saying they aren’t useful as they stand.

It’s easy to mis-interpret data like GERS.  It’s wrongly stated as indicating the economic position of an independent Scotland (as this piece from the Daily Telegraph does), which emphatically it doesn’t do – the data are about how Scotland functions as part of the UK, integrated economically and in public finances, as well as for tax collection purposes. GERS may not even tell us much about how forms of limited fiscal autonomy might work – that depends on whether the definitions of tax attributable to Scotland (or another part of the UK) for statistical purposes would be the same as the legal ones that might be put in place, given that the legal definitions will certainly shape taxpayers’ behaviour in a way statistical definitions don’t.

But none of this is a reason to avoid starting to prepare such data for Wales.  It’s vital if we are to think seriously about how devolution is financed, and too important to be neglected either because it’s too difficult technically or it’s embarrassing politically. Again, the Scottish parallel is interesting on the practical level. Compiling GERS isn’t actually very time-consuming, once the data series are set up and given that the Scottish Government has a substantial number of statisticians and economists working for it.

And Scotland is only exceptional because its data are rather rough-and-ready – not because they’re so detailed. Swiss data is remarkably detailed: for every canton, in every year, you can find detailed data about spending, both capital and current, tax revenues, ratios of these, and rankings of the 26 cantons as a result.  And the largest Canton in Switzerland (Zürich) has a population less than a third that of Wales.  You can find similar data for most other federal systems.

The first thing that’s needed is for the Welsh Government to start to prepare a similar report for Wales – a ‘Government Expenditures and Revenues Wales’, or GERW, if you like. It needs to appear annually, and to cover both public spending by the Welsh and UK Governments, and tax revenues generated in Wales. Much of the spending data already exist, but this would collect them clearly into one place and make them more readable and accessible. The novel part would be information about tax revenues, which we don’t have anywhere at present (except, for 2007-08, in the Holtham report.) And if it wanted to be really useful, it would put that data into a run going back at least 3 or 4 years, so we could identify trends. It would also include changes in the amounts allocated as part of the block grant – the consequential changes made to the block grant following changes to spending on comparable functions in England.  This information is now available – it’s in a table at the back of the Wales Office annual report – but again it needs to be published as part of a series.

Everyone involved needs to accept that it’s not going to be pretty reading for some years at least, and that work to improve the data will be needed – so an open approach by the Assembly Government to compiling it will pay huge dividends, enabling it to tap into the professional goodwill and expertise that evidently hugely helped the Holtham Commission in its work. And that also means that elected politicians will have to avoid treating it simply as a political football, used to give the government a kicking when that’s convenient. That’s why we’ve been left in such ignorance for so long, and it’s been a disservice to everyone in Wales.

The second thing that’s needed is for the National Assembly to engage with this debate. It needs to insist on more and better data about public finances in Wales, generally. Its role is not limited to examining the detail of health or education policy (important though that is); it was set up to be, as the 1997 white paper called it, ‘A Voice for Wales’. That voice needs to be heard about all matters, and heard clearly. The Assembly needs to insist on seeing this data regularly, and ensure that its quality is satisfactory. It also needs to take an active role for the Assembly in scrutinising Wales’s economy, starting with a careful examination of the new economic renewal strategy unveiled by Ieuan Wyn Jones, and the UK Government’s plans as well.

And what’s needed then is to start using that data to engage with the UK Government and Parliament about what is needed to improve Wales’s economic performance. It’s unlikely that the Secretary of State is going to respond to the Holtham Commission’s report and policy recommendations until the Assembly Government has taken a position. The UK Government clearly thinks the issue can be postponed until the economy has recovered, when it will set up its ‘Welsh Calman Commission’. If the Welsh Government doesn’t take the lead on this, so that people in Wales can debate what solution they think is right, Wales will probably find itself left behind in the policy debate.

Alan Trench is associated with the University of Edinburgh and the Constitution Unit at University College, London. He comments regularly on the devolution process across the UK on his Devolution matters blog

2 thoughts on “Doing the sums

  1. I couldn’t agree more with what you’ve said, Alan.

    The only point I would add is that it is not only a question of putting together in a coherent form the information that is already available, but of getting better information. I think we need to make it a requirement for companies to produce regional accounts for taxation purposes.

    One of the main drivers of the recommendation from both Calman and Holtham to devolve income tax rather than other taxes is that the data is already identifiable by locality (it can be broken down on a workplace or residence basis). And it is for this same reason that the ConDem coalition’s plan for start up national insurance holidays everywhere in the UK except the three regions of SE England can work. The other taxes to be devolved are similarly easy to identify by locality.

    However, if the ConDem coalition are going to make good on their plan for a different rate of corporation tax in Northern Ireland, it must of necessity involve companies with operations in both NI and any other part of the UK producing separate accounts for NI. I’d like to see the same thing happen at least in Scotland and Wales, if not everywhere else.

    Similarly with VAT. Even Holtham was forced to use household expenditure as the basis for estimating the VAT element collected from Wales rather than any hard data from real VAT returns. VAT is a tax that is charged and reclaimed from company to company before finally not being reclaimed by the end user. It would be usually be the case that the manufacturing process is what adds most value to a product, so that a factory producing goods in Wales that are eventually bought by households in England would actually be responsible for most of the VAT collected.

    This is not just a matter of devolution. For example, English regional devolution is now dead in the water, but the wide discrepancy of wealth between the regions of England is surely enough reason in itself for this level of detailed information. For it is only with better information that the balance can be redressed … which is of course your main point, and why I agree with you.

    So in short, I’d like us to do much more than just a GERW—which incidentally is perfectly pronounceable in Welsh (ger-oo not jer-oo) and means rough or fierce—but a GERW would be a good start.

  2. I’ve been trying to get separate figures for the Welsh contributions to the UK Exchequer for months to no avail, Can you help? The fuel revenue derived from Millford Haven alone comes to £9billion annually, PAYE 2.9 billion,VAT 3.2billion,
    These figures only scratch the surface of the true fiscal value Wales is to the UK exchequer,Can you fill in the missing figures for/Railway and Mobile phone franchises, Water piped to England,
    Electricity sold to Eng and UK, companies who’s head offices are in other parts of the UK but manufacturing plants are in Wales,In other words can the whole sorry mess that surrounds the
    Welsh fiscal contributions to UK, be sorted out?

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