Borrowing powers sidelined

John Osmond looks at the implications of a Scottish row for future funding of the National Assembly:

John Osmond is Director of the IWA.

On the face of it the terms of reference for the Assembly Government’s Commission on ‘Funding and Finance in Wales’, chaired by hedge fund manager and IWA trustee Gerry Holtham, are pretty innocuous. They are to review the operation of the Barnett formula which allocates the Welsh block grant and to:

“… identify possible alternative funding mechanisms including the scope for the Welsh Assembly Government to have tax varying powers as well as greater powers to borrow.”

It is the possibility of the Assembly Government gaining powers to borrow which suddenly have become controversial, following an extraordinary admission by one of the economists that have been advising an equivalent funding commission in Scotland.

In Scotland the Calman Commission (see Fiscal Federalism post) has commissioned a group of 11 experts to examine the options for giving the Scottish Parliament greater financial powers. Now one of them, Hughes Hallett, Professor of Macroeconomics at Strathclyde University, said he had wanted the expert group to look at whether the Scottish Government should be given the power to borrow money but claims this was glossed over in the final report.

As he told Scotland on Sunday at the weekend: “Had it been a criminal issue, you would call it tampering with the evidence by not considering all the options.”

In the final version of the report, compiled by the experts under the leadership of Professor Anton Muscatelli, Principal of Heriot-Watt university, Hughes Hallett said debt was hardly mentioned.

He said:

“There is a very brief note that debt and borrowing may be necessary, but there is no discussion of any of the consequences or consideration of how much debt a Scottish Government can issue. The issue is how we can manage debt and how it can be issued. It would be helpful to know what that was.”

Hughes Hallett added that he could understand why the Labour Government might not want such issues fully explored if ministers were not keen on handing over more powers to Holyrood.
He said:

“You can see from the London end why they might not want to get into some of these issues. I can understand the political view from London that you don’t want to go into it.

“I could imagine that if you’re a sitting government, you probably have vested interest in keeping things more or less as they are. There may be all sorts of political reasons for keeping things as they are and they are legitimate. But they are not reasons to keep options out of the discussions.”

Hughes Hallett explained that the ability to issue debt was essential if Scotland were to replace the current Barnett Formula funding mechanism with an assigned taxation system, which would see the Scottish Government’s funds being calculated on the basis of the tax revenues paid by Scots to the UK Treasury.

He said the ability to issue debt was essential because tax revenue adjusts quickly to variations in income, but public expenditure for projects such as new schools and hospitals adjust at a slower pace.

Therefore the ability to raise money by going into debt is essential to keep projects going when tax revenue diminishes during economic downturns.

“You can’t just close hospitals and schools every time the economy slows down,” Hughes Hallett said. He also argued that the report had omitted to explore fully the merits of other economic models that could form the basis for a new constitutional settlement for Scotland.

“If you have to decide what you want and if people can’t find that laid out, it (the report] doesn’t have much legitimacy. What’s missing here is any consideration of how these sorts of schemes might work.”

Hughes Hallett said the report failed to examine the “trade-offs” between various systems. The economist claimed the report did not properly analyse the advantages and disadvantages of the Barnett Formula, assigned taxes and fiscal autonomy.

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