Wales and Whitehall - Welsh Affairs Committee Contents

6  Finance

172. The final aspect of the relationship between Wales and Whitehall that we examined was in the area of finance. The amount of money received by the Welsh Assembly Government, referred to as the "Welsh block grant" is determined by the Barnett Formula, named after Joel (now Lord) Barnett, who introduced the system in 1978. It was initially intended as an interim measure, but has been in use in Scotland and Northern Ireland since 1979 and in Wales since 1980. Lord Barnett has said himself that the formula was temporary and not expected to last "a year, or even twenty minutes".[223]

173. There have been a number of recent reviews of the Barnett Formula and the fiscal settlement across the UK. The Calman Commission on Scottish Devolution, which was established by the Scottish Parliament to examine the Scotland Act 1998 and to make recommendations enabling the Scottish Parliament to serve the people of Scotland better, looked at finance in Scotland. The Commission did not look at the means of calculating block grants to the devolved administrations across the UK but stated that "the present system of calculating block grant by the Barnett formula is not well related to need".[224] In December 2008, a House of Lords ad hoc Select Committee was appointed to examine the purpose, methodology and application of the Barnett Formula and concluded that "the Barnett Formula should no longer be used to determine annual increases in the block grant for the United Kingdom's devolved administrations".[225] In May 2009, the House of Commons Justice Committee concluded that the Barnett Formula was "overdue for reform".[226]

174. In 2008, the First Minister and Deputy First Minister for Wales and Minister for Finance and Public Services Delivery appointed Mr Gerald Holtham as Chairman of the Independent Commission on Funding and Finance for Wales, often referred to as the 'Holtham Commission'. The Commission's terms of reference were to "look at the pros and cons of the present formula-based approach to the distribution of public expenditure resources to the Welsh Assembly Government, 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".[227]

175. The Commission's first report was submitted to the Welsh Assembly Government in July 2009. It acknowledged that "in recent years, the financing of public spending in the devolved administrations has become increasingly contentious"[228] and recommended that "Barnett must ultimately be superseded by a needs-based formula" with "any new needs-based funding model [...] jointly agreed by Ministers from both the UK Government and all the devolved administrations concerned".[229] A working paper was published in December 2009, setting out how this could be achieved. A particular issue in these discussions has been the question of "convergence": that is the tendency identified by some analysts for the Barnett formula to bring the per capita level of public spending in Wales closer to that of England, despite the very different economic, social and geographical situations of the two countries.

176. On 26 November 2009, the Secretary of State for Wales announced that he had secured a commitment from the Treasury that Wales would receive a "fairer funding agreement" than that provided by the Barnett formula. The new arrangements are that:

·  the Government agree that the Barnett formula could lead to convergence[230] to an extent that would be regarded as unacceptable although further convergence is not currently expected in the coming years;

·  the Government will make a full assessment of the extent of convergence with consideration of Wales' position relative to other parts of the United Kingdom as part of each spending review; and

·  following this assessment the Government would be prepared to take action if appropriate to ensure Wales is not disproportionately disadvantaged.[231]

177. In oral evidence, the Secretary of State for Wales noted that this commitment "recognised [...] that there was an issue here"[232] and was recognised by the First Minister, by the former Finance Minister Andrew Davies AM and by Mr Holtham as a major achievement. The Secretary of State for Wales stated that "The formula will stay for the foreseeable future but I think we have now got the basis for establishing a mechanism which would ensure that in periods of greater and increased public spending Wales' position is protected".[233]

178. The Welsh Assembly Government was:

    ... glad that the UK Government has agreed, with regard to Wales, that the Barnett formula could lead to convergence to an extent that would be regarded as unacceptable (although it maintains that further convergence is not currently expected in the coming years); and its undertaking to make a full assessment of the extent of convergence [...] and take action, if appropriate, to ensure Wales is not disproportionately disadvantaged. […] However this undertaking does not go far enough. It is fundamentally important to recognise that the level of resource required in Wales to achieve an equitable level of public services compared with England—in other words—an equivalent outcome, is higher than a straightforward population share, given the higher levels of deprivation in Wales and other factors such as demographics and sparsity.[234]

179. The Barnett Formula is overdue for reform. Recent reviews have highlighted its deficiencies, and the Holtham Commission has put forward a needs-based formula. Whilst we recognise the commitment given to the Secretary of State for Wales from HM Treasury that Wales will not be disadvantaged by convergence under the Barnett Formula, we urge the Government to review the current arrangements and to adopt a needs-based approach to a new financial settlement. As well as bringing about a formula which is fairer to Wales, the need for predictability for some time ahead is of enormous importance and we strongly recommend that any such formula should not be subject to year-on-year or even the three-year variations which depend on a contemporary interpretation of statistical information. This should be treated as a priority.

180. The role of HM Treasury also came under scrutiny. There have been calls for an independent advisory body to administer the Barnett formula. The Welsh Assembly Government commented that:

    … the UK Government, in the shape of the Treasury, currently acts as judge and jury in the case of disagreement over how the Barnett formula operates. […] for the purpose of reviewing the formula and addressing any anomalies that arise, there needs to be an adjudicating body which can command the respect of the devolved administrations and representatives of the bodies governing England as well as of the UK Government.[235]

Andrew Davies AM commented that:

    … the way in which it [the Barnett Formula] is administered […] decisions are made by the Treasury with which we have to live without recourse to any appeals mechanism [...] it needs to be put on a different footing.[236]

181. Mr Holtham said in oral evidence that the devolved administrations "do not want to be end-run as it were by the Treasury; they do not want to be in a situation where they are confronted with something at the eleventh hour and there is very little realistic opportunity to change it".[237]

182. Evidence also suggested that HM Treasury has a more general lack of devolution awareness and sensitivity. The Holtham Commission noted that:

    …at present, fiscal arrangements are implemented in a way that more than reflects the primacy of the UK Government over the devolved administrations. The settlement is applied as if the devolved administrations were mere departments of the UK Government, without a democratic locus of their own. A reformed relationship is required which recognises the primacy of the UK Government and its responsibility for taking final decisions but which provide sufficient flexibility for Welsh Ministers to set their own priorities, coupled with adequate fora for discussion and resolution of disputes.[238]

Alan Trench agreed that:

    The role played by the Treasury is central, as it is solely responsible for taking practically all decisions relating to finance. Despite this central role, it has little awareness of the wider nature of its role and the sensitivities that attach to it. [...] It appears ill-equipped to develop the sort of system that is needed to ensure that the financial system for devolution matches the constitutional nature of devolution ...[239]

183. That such a central department as the Treasury has been criticised for a lack of awareness of and engagement with the devolution settlement is worrying. We recommend that the Treasury actively seeks to increase its awareness of the devolution settlement and its own role in that settlement. Given the concern expressed by various organisations, we support the recommendation for an independent body to administer the Barnett formula.

223   First Report of the Independent Commission on Funding and & Finance for Wales, Funding devolved government in Wales: Barnett & beyond para 2.4 Back

224   Final Report of the Commission on Scottish Devoution, Serving Scotland Better: Scotland and the United Kingdom in the 21st Century, June 2009, para 3.86 Back

225   House of Lords Select Committee on the Barnett Formula, First Report of Session 2008-09, The Barnett Formula, HL 139  Back

226   Justice Committee, Fifth Report of Session 2008-09, Devolution: A Decade On, HC 529-I, para 31 Back

227   First Report of the Independent Commission on Funding and & Finance for Wales, Funding devolved government in Wales: Barnett & beyond preface Back

228   First Report of the Independent Commission on Funding and & Finance for Wales, Funding devolved government in Wales: Barnett & beyond, para 1.4 Back

229   First Report of the Independent Commission on Funding and & Finance for Wales, Funding devolved government in Wales: Barnett & beyond, para 3.9 Back

230   Public spending per head is higher in Wales and the other devolved administrations than it is in England. However, additional allocations to the budgets of the devolved administrations through the operation of the Barnett Formula are the same per head as those in England. For this reason, overall relative spending per head in the devolved administrations should converge over time towards the English level of spending per head on comparable programmes.  Back

231   HC Deb, 26 November 2009, col 101WS Back

232   Q 626 Back

233   Q 627 Back

234   Ev 146 Back

235   Ev 146 Back

236   Q 218 Back

237   Q 323 Back

238   First Report of the Independent Commission on Funding and & Finance for Wales, Funding devolved government in Wales: Barnett & beyond, para 5.1 Back

239   Ev 127 Back

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