John Osmond examines the state of play of talks on the Welsh Government’s block grant and need to borrow
To all appearances, the bilateral negotiations between the Welsh Government and the Treasury in London over the size of the National Assembly’s block grant and its borrowing powers are progressing very slowly, if at all.
It will be recalled that these two crucial, but politically sensitive matters were expressly ruled out in the terms of reference of the Silk Commission that is currently looking at other financial issues, to be followed in about nine months time by wider constitutional concerns. Instead, they were to be subject to so-called bilateral meetings between the two governments.
There have been meetings between civil servants and politicians from both ends of the M4, which are continuing. While politicians have described talks as ‘constructive’, there is a conspicuous absence of any progress to report. It seems the Treasury is digging in its heels and refusing to give any ground.
What the Welsh Government is looking for is a complete reform of the Barnett formula that currently distributes money to Wales, Scotland and Northern Ireland on the basis of a population-derived formula. This goes back to 1978 when Joel Barnett was Chief Secretary to the Treasury – hence the formula’s name. Instead, the Welsh Government wants it to reflect relative need. The Holtham Commission reckoned that if money was distributed to the devolved administrations on a similar needs-based formula as applies to local government in England, then Wales would immediately be better off by about £400 million a year.
That is not going to happen any time soon, because applied to Scotland, such a formula would cut its block grant by as much as £4 billion. If the London government tried to impose that it would certainly make Alex Salmond’s day in the run-up to Scotland’s independence referendum in 2013 or 2014.
So, the Welsh government has been trying to make the case for what is called putting a floor under Barnett – that is to say, arrangements to ensure that Wales’s funding would not get any worse than it is now, relative to England. If budgets started to increase again Wales’ relative funding would deteriorate because of the so-called ‘Barnett squeeze’. This tends to bring Welsh spending down towards the lower English average. Currently, the squeeze is not an imminent risk since budgets are decreasing rather than increasing. However, in three or four years time they might be expected to start rising again if only because of inflation. Nominal increases, not real ones above inflation, are all that’s needed for the squeeze to resume.
The Holtham report demonstrated conclusively how the ‘Barnet squeeze’ operates, and its argument were accepted by the former Secretary of State for Wales Peter Hain towards the fag end of the last Labour Government. But all he could get from the Treasury was a promise to take action if Wales was “disproportionately disadvantaged”. It did not seem much of a commitment at the time and it is now turning out to be worth very little. In the current negotiations it seems the Treasury is refusing to recognize there is a problem.
One reason might be that they think that if they concede the case for putting a floor under Barnett they will also concede the argument for resting the distribution of funding on the basis of a needs-based formula, rather than the present crude head count. Ultimately this is a political matter. The Chancellor George Osborne needs to be reminded of the commitment he made to do just this in the run-up to the 2010 UK general election. This is what Osborne told the Western Mail on 12 February 2010 in the run up to the general election of that year:
“My initial look at the formula suggests that Wales might well be missing out under the Barnett arrangements. I think it is in Wales’s interest that we have that needs-based assessment, which is independently done … My view is that you want to move on it pretty quickly, as soon as a new Government is elected.”
Meanwhile, there is no more progress on borrowing. The Treasury argues that the Scottish Government is being given powers to borrow in the Scotland Bill presently before the Westminster Parliament because it already has powers to raise income tax and those powers are being extended in the Bill. In the case of Northern Ireland the Government there can borrow because it is responsible for some functions that in the rest of the UK belong with local government. Therefore, if it got into difficulty the Northern Ireland Government could levy an extra precept on council tax.
But why shouldn’t the Welsh Government simply be allowed to do the same? After all it has powers over local government, though business rates are not fully devolved as they are in Northern Ireland.
Meanwhile, negotiations are continuing between the Treasury and the Northern Ireland Government. A joint working group on “rebalancing the Northern Ireland economy” is under way and a decision about devolving Corporation Tax will be made next year. As a recent statement on the Treasury website puts it, the aim would be “to increase the size of the private sector and drive faster economic growth”.
All this suggests that the Silk Commission should take a robust view of its terms of reference. If, by the time it comes to pronounce on the National Assembly’s fiscal powers next September, there has been no progress on the bilateral talks between the Welsh Government and the Treasury over Barnett and borrowing it should argue that that would create a new context for its recommendations.
Equally, if by the time it comes to make its recommendations it is clear that Corporation Tax is being devolved to Northern Ireland then that, too, would certainly create a new context. The Treasury has already conceded some limited control over airport taxes at Belfast airport because it is cheek by jowl with Dublin and says it is subject to unfair competition. Yet the Treasury has refused powers over air passenger duty to Scotland and is highly unlikely to give them to Wales. That partiality simply won’t wash. Cardiff airport is nearly as close to Dublin, and has anyone told Treasury officials that aircraft can fly over water as easily as land?