Reconciling funding and expenditure in Wales

In the run up to the UK Budget this autumn attention will turn once again to the public spending envelope for Wales and its implications for public services which have experienced severe cuts since the financial crisis in 2008. Discussion will not be helped by misunderstandings and misstatements regarding the relative funding and public spending levels in Wales compared with other parts of the UK. It is also a little discouraging that forty years after the introduction of the infamous Barnett Formula it is still so poorly understood.

 

The current Secretary of State for Wales and the Wales Office have, on a number of occasions recently, erroneously claimed that for every £100 of public spending in England, £120 is spent in Wales: e.g. ‘a new financial settlement that secures £120 for Wales for every £100 spent in England…’. As will be shown this is simply wrong and is based on a misunderstanding of how Wales is funded. The purpose of this note is to clarify the position and to remove any confusion.

 

In Treasury methodology there are two principal categories of public spending: 

 

Identifiable expenditure,  defined by the Treasury as ‘expenditure that can be recognised as having been incurred for the benefit of individuals, enterprises or communities within a particular country or region.’ There are two subcategories of such spending:

• expenditure that is spent directly in Wales by the UK Government; and
• spending that is devolved to the Welsh Government and local authorities.

 

Non-identifiable expenditure, which is expenditure incurred by the UK Government for the benefit of the UK as a whole including: defence; international aid; and interest on the national debt.This expenditure is allocated to the countries and regions of the UK by the Office for National Statistics (ONS).

 

Identifiable Expenditure

Table 1 analyses identifiable expenditure by service and by the level of government responsible for it.

 

Table 1: Identifiable Expenditure in Wales 2015-16 (£million)

Services.	UK Government	Welsh Government	Local Government	Total
Health	18	6,574	–	6.592
Education	15	1,161	2,914	4,091
Public order and safety	390	2	812	1,203
Economic affairs	947	1,170	358	2,474
Environmental protection	113	165	361	639
Recreation, culture and religion	125	104	273	501
Social protection	11,251	90	2,947	14,288
Housing	4	177	513	694
General Public Services	47	242	199	488
Total	12,910	9,684	8,376	30,978

Note: numbers may not total exactly due to rounding.

 

Direct Spending by UK Government

As can be seen direct spending in Wales by the UK Government on those programmes that are not devolved was £12,910 million the bulk of which, £11,251 million, was spent on Social Protection. Social Protection includes old age pensions, family benefits and tax credits. These payments are made directly to recipients and are related to need insofar as the same rules apply to qualifying recipients in all countries of the UK.  

 

Devolved Spending

Determining spending on devolved services in Wales is straightforward but it is not easy to arrive at comparable figures for England. The Treasury does not publish such an analysis. The approach taken by the Holtham Commission and the Wales Governance Centre was to ‘reverse engineer’ the Barnett Formula methodology using the comparability factors published by the Treasury in the case of Wales, applying them to the corresponding expenditure programmes to derive the equivalent ‘devolved’ expenditure figure for England. The devolved figures for Wales are then compared with the equivalent figures for England.

 

Both the Hotham Commission and the Wales Governance Centre concluded that Wales received approximately 120 per cent of the England per capita level and this compared favourably with the Holtham Commission estimate of Wales’s relative need of 115 to 117 per cent. This estimate of 120 per cent was incorporated in the Welsh Government fiscal framework agreement and this may have confused the office of the Secretary of State when they claimed that total expenditure in Wales was 120 per cent of the England level.

 

Total Identifiable Expenditure

As noted identifiable expenditure comprises expenditure by local government, the Welsh Government and the UK Government. In Wales in 2015-16 such identifiable expenditure was £30,978 million or £9,996 per capita (Table 1). The comparable figure for England was £8,816 per capita: thus, the level of expenditure in Wales was 113 per cent of the level in England. The level for Wales, while higher than that for England, falls well short of the 120 per cent claimed by the Wales Office. Furthermore, Treasury figures show that this level of relative expenditure has been stable for a number of years.

 

Non-Identifiable Expenditure

Some may be concerned that the analysis refers to identifiable expenditure only and excludes non-identifiable expenditure which, as noted earlier, is expenditure made for the benefit of the UK as a whole. Fortunately, the ONS recently published a geographical analysis of total expenditure (identifiable plus non-identifiable) and this showed that relative total expenditure per capita in Wales in 2015-16 was 110 per cent of the England level.

 

Conclusion

To summarise identifiable public expenditure per capita in Wales in 2015-16 was 113 per cent of the England level. Total expenditure per capita in Wales – identifiable plus non-identifiable – was 110 per cent. Both are significantly lower than the level claimed by the Wales Office.

 

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