Given the continuing parliamentary turmoil surrounding Brexit it is perhaps understandable that limited attention is being paid to other important events in the parliamentary calendar – the Spring Statement and Spending Review that are due to be presented by the Chancellor of the Exchequer on 13 March. Readers may recall that the UK Budget, traditionally announced in the Spring, has been moved to the Autumn: the Spring Statement to be made this month should be an update on the progress of the economy together with minor fiscal announcements. One of the key inputs to the Statement will be the latest economic forecasts made by the Office for Budget Responsibility (OBR) which will have the unenviable task of forecasting the outlook for the UK economy at a time of great uncertainty due to Brexit. In the Spending Review the Chancellor usually sets out spending plans over the coming three years but given the uncertain economic outlook this review may look forward only one year.
In the case of the Spending Review one subject of particular interest to Wales will be what the Chancellor has to say, if anything, regarding the Shared Prosperity Fund (SPF). This is the fund that is due to replace the EU regional funding that will be lost if the UK leaves the EU. These EU funds flow directly to Wales and it is a matter for the Welsh Government how these funds are disbursed provided they comply with EU regulations.
Thus if Wales, as part of the UK, leaves the EU a number of vital questions arise:
- how much funding will Wales receive from the SPF:
- what will be the duration of the funding;
- how will future changes to the funding level be determined; and
- will powers regarding how these funds are disbursed be devolved to Wales or be retained by the UK Government?
At present Wales receives £370 million a year of European Structural Investment and this programme is due to continue until 2020. Given the low relative levels of GVA per capita in West Wales and the Valleys it could be expected that Wales would continue to receive development funds in the next EU round if Brexit did not take place. However, if Brexit takes place, there is no assurance regarding how long any replacement Shared Prosperity Fund will continue.
Even if the initial tranche of SPF funding is broadly in line with EU funding levels how will future changes be determined? One thing is clear: changes to the funding should not be subject to the Barnett formula. EU regional funding in England is £24 per capita compared with £119 in the case of Wales. If the UK Government decided, for example, to increase such funding in England by £1 per capita then under Barnett the same increase in pounds would apply to Wales. Thus a 4.2 per cent increase (£1/£24) in England would lead to an increase of 0.8 per cent (£1/£119) only in the case of Wales: this is the infamous ‘Barnett squeeze’, an effect which successive UK Governments have knowingly retained for decades.
Where will the powers over the SPF be held: in London or in Wales? Given the centralising tendency of the current UK Government there may well be a struggle to ensure that the powers are devolved to the National Assembly. The funding must be used to help build prosperity in Wales and not to promote such schemes as the ‘Western Powerhouse’ being peddled by the Wales Office.
Since the UK joined the EU successive UK governments have in practice been content to leave regional policy and funding to Brussels. If Brexit takes place one would hope that the UK government takes a fresh look at the massive economic imbalances across the UK and embarks on an ambitious programme to address this issue. Of the twelve standard regions of the UK three only have a fiscal surplus: these are London, south east England and eastern England – the area often tellingly referred to as the ‘Home Counties’. The nine other countries and regions, including Scotland and Wales, all have deficits. It is time for public spending levels, including investment, to be set in a way that not only reflects immediate spending needs but includes a material element of ‘pump priming’ investment to enable the poorer regions to prosper and fulfil their economic potential in the longer term. If the UK Government is intent on rebalancing the UK economy post-Brexit then, for example, a fund of 1 per cent of GDP (c£20 billion) per year committed for an initial period of five years and shared on a population basis across the nine countries and regions of the UK which are in deficit would mean that Wales received £1.5 billion a year. Investment funding at this level could have material impact on the Welsh economy in the medium term. Such a development would be in the interests of the whole of the UK. If this is not done then the disaffection exemplified by the Brexit referendum vote will be exacerbated as it becomes clear that ‘taking back control’ does not have an economic dividend for most of the countries and regions of the UK.