John Osmond argues that faced with a 41 per cent capital funding shortfall the new administration in Cardiff Bay after 5 May should borrow to invest
The new Welsh Government that will be elected in May faces an immensely challenging five years if it is to live up to the hopes that have been invested in it following the successful referendum in March. It may have more powers but it will have a lot less money than previous administrations have enjoyed since 1999. It will also confront a much less benign government in London, absorbed as it is with the UK deficit and the spending cuts it insists are necessary to address it.
The Welsh General Election
This is the first of a series of articles we shall be publishing in the run-up to the National Assembly election on 5 May. Tomorrow Alun Davies, Labour’s candidate in Blaenau Gwent, argues that the referendum experience has given the election a different tone.
When the next Assembly election appears on the horizon in 2016, a year beyond the normal four-year term to avoid clashing with the Westminster election in 2015, how should the forthcoming Welsh Government be judged? There are three major policy arenas where it needs to make a measurable impact: education, the economy and health. In the referendum the No campaign made the case that since the Welsh Government’s exercise of its powers had been so dismal since 1999, voters should not allow it any more discretion. This argument sought to conflate the powers of the National Assembly with the performance of the Welsh Government. However, Yes campaigners successfully argued that the referendum was about the former while the latter could be voted on at the Assembly election this May.
The large majority of those who voted took the view that although they might not like the Welsh Government very much, perhaps didn’t approve of many of its policies, and certainly were dubious about many of its achievements, nonetheless they supported having the Assembly and wished its standing within the United Kingdom to be enhanced. This demonstrated a sophisticated distinction between the principle of devolution and the Welsh Government’s record.
Nevertheless, the success of the new Welsh Government will be extremely important, both in tackling issues which are central to the lives of the people of Wales, but also in embedding a still fledgling institution in the affections of the electorate.
The major challenge is money. Faced with a shrinking budget over the coming four years of the Westminster Government’s Comprehensive Spending Review, Wales has responded by protecting current spending as far as it can, especially on education and culture – the right calls – and by slashing its overall capital spend by 41 per cent. How the Welsh Government should be judged in five year’s time is the way it responds to this shortfall.
First Minister Carwyn Jones has claimed, correctly, that the National Assembly needs borrowing powers, arguing that Wales has again been left in the slow lane while both the Scottish Parliament and the Northern Ireland Assembly are able to borrow. This is a reasonable argument, but not one that the UK Treasury is likely to respond to very swiftly. The First Minister should follow through the implications of the commitment made in Labour’s manifesto in which it pledges to:
“Establish a single Welsh Assembly Government Capital Infrastructure fund, working collaboratively with other public service bodies, the third and private sectors.”
In the Spring 2011 edition of the IWA’s journal Agenda, Gerald Holtham argues that this commitment should mean the Welsh Government taking advantage of local government’s ability to borrow. With an annual budget of over £15 billion, if the Welsh Government put aside just one per cent for debt service, that would amount to £150 million. At an interest rate of 5 per cent, that could service up to £3 billion of debt, enough to make a huge difference to Welsh infrastructure. And the local authorities could borrow much of that money under an agreement with the Welsh Government. As Gerald Holtham puts it, echoing that description ‘collaboratively’ in Labour’s manifesto:
“The Welsh Government must adopt a more collaborative and, dare I say, less high-handed attitude to local authorities. They have unexploited borrowing powers, that could be mobilised in their’s and the national interest. Take the Heads of the Valleys road that needs upgrading at a cost of several hundred millions of pounds. It goes through six unitary authorities. They could each borrow an average of £50 million and form a syndicate to build the road. That is well inside Public Works Loan Board ceilings for local authority debt. The Welsh Government could sign a hire purchase agreement with the unitary authorities to buy the road over the next 20 or 30 years at a rate that services their debt.”
In an accompanying article Gronw Percy, of PricewaterhouseCoopers, advocates tax increment funding, that is allocating a proportion of future income from the rates as a way for local authorities to lever new investment. This is being piloted in Scotland and could be undertaken in Wales.
The new Government should also consider establishing not-for-profit mutual concerns, on the template of Welsh Water, to make major infrastructure investments. One strong contender would be an electrified Metro light rail system to connect the Valleys with Cardiff and Newport, as advocated in our recent report A Metro for Wales’ Capital City Region – Connecting Cardiff, Newport and the Valleys. Such arms-length organisations could borrow on the bond market at favourable rates in the current climate, underwritten by income streams from their operations and by the Welsh Government itself.
This is the way for the new Welsh Government elected in May to face the next five years – with determination, courage, and a bit of flair. Go for it.