Wales suffers from raw power politics

Gerald Holtham says the UK government and Treasury are living in shame but are apparently immune to embarrassment

The Independent Commission on Funding and Finance for Wales found that the country was under-funded relative to English regions, not to mention Scotland and Ireland. The criteria for that judgement were the needs-based formulae that the UK government used to distribute health, local authority support and, formerly, education spending around the English regions. If the Barnett formula were replaced with a needs-based formula reflecting similar distributional judgements to those embedded in existing formulae used by the government, Wales would get more public spending per head. When we factored in the formulae used within Scotland and Wales to distribute part of the block grant to local authorities, the distributional judgements were not much changed.

Those distributional formulae were very complicated, one might say unnecessarily so. But it was possible to find a much simpler needs-based formula that replicated their results and could therefore serve as a basis for replacing Barnett.

Need itself is an infinitely contestable concept but we finessed philosophical discussion by simply processing existing formulae. Our argument is not that the UK government’s preferences are right or wrong but simply that its treatment of Wales is inconsistent with the distributional preferences it has revealed elsewhere. Its procedures are therefore unfair.

Now, politicians have tended to seize on numbers in the report and brandish them in political debate – “Wales underfunded by £400 million a year” for example.  That is fair enough and Leanne Wood’s ‘updating’ of our numbers is in that tradition.  However, if we approach the report forensically rather than attempting to make (legitimate) political points, we notice aspects that have been underplayed.

First we produced a range of estimates of Welsh spending ‘need’ running from 114 to 117 per cent of the UK average, depending on which of a number of assumptions were made – all of them defensible. For example, does Wales ‘need’ bilingual schooling or is it a choice? How much adjustment should there be for different local-authority tax bases? Reasonable people could differ.

For illustrative purposes we focused on 115 as the ‘needs’ ratio – but making it clear that different, defensible political preferences could result in other numbers in the range. That range implied under-funding of between £300 and £750 million, given estimated actual expenditure in 2010-11 (out turn numbers for that year were not available when the report was published).

Commentary has tended to focus on the 115 estimate and the implied £450 million underfunding. But it is unnecessary to impart spurious precision to these estimates. We can say with some confidence that Wales is a underfunded by a few percentage points but there is no hard science that pins the number down very tightly. There is a fair-enough range within which legitimate differences of view can imply somewhat different outcomes. What we get is likely to be determined by our negotiating strength. Unfortunately all the evidence is that Wales remains in a weak bargaining position, whichever parties are in power in London.

Leanne now infers that actual devolved expenditure in 2010-11 was rather less than we estimated in relation to the rest of the UK. That is a surprising result because static or declining public expenditure in the UK would normally arrest convergence and lead to Wales’ relative share rising. In any case, the ‘revised’ shortfall she produces lies within our original range of estimates.

And while Leanne says our numbers have been widely accepted, that ‘widely’ does not encompass Her Majesty’s Treasury. They cannot justify any alternative numbers but unfortunately they don’t have to in order to simply refuse to accept ours. It is a shame the Treasury could not be lured into a sensible, honest debate on these matters. Yet I never doubted that if they were so lured they would find reasons, strong, weak or weaker still, to argue for reducing our estimates by a couple of percentage points.

The real moral strength of our position is this: we can haggle over the extent of under-funding but no reasonable needs-based estimate would find Wales relatively over-funded. Therefore, there is no justification whatever for a formula which reduces Wales’ relative share over time as nominal public spending grows. That is what Barnett does and that is why it should be dropped or at the very least amended.

The so-called Barnett floor that we proposed would prevent Wales’ relative share converging to the English level in defiance of relative need. The case for the floor still seems to me unanswerable and is resisted not by counter-argument but only by a pig-headed exercise of raw power politics. The UK government and Treasury are living in shame but are apparently immune to embarrassment.

And over a decade or two, as public spending resumes nominal growth, the Barnett formula would reduce Wales’ relative share and lead to cumulative under-funding of billions of pounds – numbers that will make discussion of whether the present shortfall is £400 or £500 million seem scholastic.

All Wales can unite around the proposition that Barnett convergence must cease and insist that is a cornerstone of fiscal reform.

Gerald Holtham chaired the Commission on Funding and Finance for Wales and is a trustee of the IWA.

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