Memorandum by Plaid Cymru
Plaid Cymru welcomes the establishment of the
Lords Select Committee on the Barnett Formula.
Wales for much of the 20th century has
experienced relative economic decline compared with the rest of
the UK: this was principally a consequence of the decline in traditional
industries such as coal, steel, agriculture and slate quarrying.
Decline in these industries in Wales has accelerated since 1980,
the year when the Barnett formula was introduced and used to determine
changes in the block grant allocated to Wales. The formula, introduced
only as a temporary measure, takes no account of the disproportionate
impact that this decline has had on Wales compared with the rest
of the UK and the current funding formula not only reflects the
spending needs and priorities of England but seeks to converge
identifiable funding per capita across the four countries of the
UK irrespective of the differing and diverging needs.
In designing a funding mechanism for funding
the countries of the UK a set of principles needs to be established.
The funds available should be related
not only to need but to remediation of disadvantage.
The Assembly Government should have some
tax varying powers.
The Assembly Government should have borrowing
The forum in which decisions are made
regarding the allocation of funding to the four countries of the
UK should be such that the governments of the devolved administrations
have a key say in such decisions.
The Barnett formula is both unfair and
unsatisfactory and should be replaced. A detailed analysis of
the strengths and weaknesses of the current formula is set out
in Appendix 1 of this submission. It is estimated that Wales
lost £778 million in 2006-07 due to the convergence
effect of the Barnett Formula.
A set of proposals designed to ameliorate
the unfavourable treatment of Wales under the current formula
and an approach to replacing it with a more satisfactory system
involving the establishment of an independent funding commission
is included in this submission.
This submission will: provide the background
to the current position; propose the guiding principles for a
fair and adequate funding mechanism; demonstrate the unsatisfactory
nature of the current funding arrangements; and propose a set
of measures to establish a more satisfactory approach.
1. Plaid Cymru has a long record of opposition
to the Barnett formula and welcomes the establishment by the House
of Lords of a Select Committee on the Barnett Formula.
2. In economic terms Wales has long been
a relatively poor country compared with other parts of the UK.
The reasons for this are complex. Wales was slow to urbanise;
was very dependent on an agricultural sector which suffered from
a high proportion of poor quality, low productive land; and when
industrialisation came it was concentrated initially on extractive
industries with much of the added value being contributed elsewhere.
Viewed from a UK perspective such specialisation may have made
sense but it left Wales with an economy highly dependent on a
few business sectors all of which suffered long term decline over
much of the twentieth century (agriculture, coal, steel and slate
quarrying). Although the Welsh Assembly Government is now making
considerable efforts to strengthen and diversify the Welsh economy,
most of the significant levers remain in the hands of Whitehall.
3. Thus Wales has the challenge of dealing
with this legacy but during much of the last hundred years or
more UK governments have regarded Wales as being on the periphery
and have sought at best to ameliorate economic weakness rather
than address the root causes. Since the implementation of the
Barnett formula, which takes no account of relative need, GVA
per capita has declined from 88 per cent of the UK average
in 1978 to 75 per cent in 2007.
4. The way successive UK governments view
Wales is reflected in the way that devolved services are funded:
in particular both the formulation and operation of the Barnett
formula reflect the peripheral status of Wales. Changes to the
block grant are a consequence of spending decisions made
with respect to spending departments with responsibility for England.
Indeed as is noted in the Treasury's Statement of Funding Policy
"in the vast majority of cases, the United Kingdom departmental
programme covers England only" (this is further demonstrated
in the next paragraph) yet it is decisions made by such departments
that drive changes to the funding of Wales.
5. Out of UK total managed expenditure (TME)
in 2007-08 of £590 billion,
the UK Government was directly responsible for:
non-identifiable expenditure for the
UK (£108 billion). This encompasses defence, interest
on the national debt, cost of central government etc;
Social Security (£156 billion)
which is a standard, needs related, UK wide set of programmes;
identifiable but non-devolved expenditure
in Scotland, Wales and Northern Ireland (£3 billion);
all public expenditure in England (£243 billion)
excluding locally financed expenditure.
6. The devolved governments and local authorities
of Scotland, Northern Ireland and Wales had responsibility for
£60 billion of expenditure.
7. Thus essentially the UK Government is,
from a financial viewpoint, responsible for all public expenditure
associated with the UK per se (central government expenditure
including social security) and for all public expenditure in England.
In addition it is responsible, with the important exception of
Social Protection, for a very small amount of spending on non-devolved,
identifiable expenditure in the other three countries of the UK
(£3 billion in 2007-08) which is less than 0.5 per
cent of TME. The UK Government has a dual role: it is responsible
for central expenditure and it is responsible for all non-local
authority expenditure in England. This duality is the source of
many of the difficulties associated with the allocation of funding
for devolved services in the other three countries of the UK.
8. In addition the UK Government is responsible
for fiscal policy ie setting and collecting all taxes and duties
in the UK with the exception of council tax and business rates.
A third financial role is that the UK Government is responsible
for macroeconomic policy including the setting of overall public
expenditure levels in the UK and determining the level of public
9. The Welsh Assembly Government:
(a) is responsible for public expenditure on
devolved services in Wales;
(b) has no fiscal powers;
(c) has no control over the amount of funding
it has at its disposal for public expenditure; and
(d) has no long term borrowing powers.
10. Of total identifiable public expenditure
of £24.2 billion in Wales in 2007-08, the Assembly Government
and Welsh local authorities were responsible for £15.2 billion.
The balance of identifiable public expenditure was Social Protection
(£7.5 billion) and other programmes (£1.5 billion)
which were controlled by Whitehall departments.
11. In reviewing the funding and financial
arrangements for Wales we believe that certain principles should
(a) the funds available should be related not
only to need but also to the remediation of disadvantage. Funding
should be sufficient to enable the devolved administrations to
address the underlying causes of any relative underperformance
of the economy and its consequential social impact;
(b) the Assembly Government should have tax varying
(c) the Assembly Government should have borrowing
(d) the forum in which decisions are made regarding
the allocation of funding to the UK and to its four member countries
should be such that the governments of the devolved administrations
have a key say in such decisions and the conflicted position of
the UK government in its dual role as the government of the UK
and of one of the four member countries of the UK should be recognised.
12. It is not sufficient to set funding
levels in terms of relative need. It should be the objective of
the UK Government to ensure that the devolved administrations
have the financial means to address and materially reduce economic
and social disparities between the member countries of the UK.
The present funding arrangements appear, at best, designed to
ameliorate the effects of economic and social disadvantage. It
is noteworthy that in recent times the UK Government has to a
marked extent abdicated to the EU its responsibility for the additional
funding of disadvantaged areas. Even in the case of EU funding
the UK Government sought initially not to pass on to Wales the
EU Objective 1 funds but sought to treat these funds as part
of Treasury receipts to be used for the benefit of the UK as a
whole. The UK Government continues not to provide additional funding
over and above the Barnett determined increase for the purpose
of public sector match funding. As a result the Assembly Government
has had to use the block grant to provide its share of the match
funds for Objective 1 and successor Convergence Funding programme.
13. According to Eurostat 2008 Statistical
Handbook the UK is the most regionally unequal country in
the EU. In the case of the UK there is a factor of 3.9 between
the two extreme values of regional GDP per capita. (The lowest
values in the EU are in Sweden and Ireland where the factors are
1.6 and 1.5, respectively.) This outcome is indicative of
the hitherto highly centralised nature of the UK state and of
the failure of central government effectively to address the issue
of regional disparities. The current Select Committee has excluded
from its terms of reference the distribution of funds within the
different regions of the UK. It should be noted that if identifiable
public expenditure per capita were the same across the countries
and regions of the UK then such expenditure in the case of England
would increase by three per cent only and that the variation within
England (ranging from 117 per cent of the UK average in London
to 84 per cent in Eastern and South East England) is not
a function of the Barnett Formula but of the distribution mechanisms
employed within England. Thus concerns in parts of England regarding
relative identifiable public expenditure compared with Scotland
and Wales are often erroneously blamed on the Barnett Formula.
Pros and cons of the present formula-based approach
to the distribution of public expenditure resources to the Welsh
14. The strengths and weaknesses of the
Barnett formula have been the subject of much analysis and comment
and the balance of independent and academic opinion has long been
unfavourable. No doubt the Select Committee will receive submissions
drawing attention to weaknesses of the formula particularly from
the point of view of its unfair and damaging impact on Wales over
the last 30 years.
15. A summary of the strengths and weaknesses
is set out here and covered in more detail in Appendix 1. It is
in the context of the principles set out in paragraph 11 that
the strengths and weaknesses of the formula are assessed.
16. In summary the weaknesses of the formula
(a) the arbitrary setting of the baseline expenditures
(b) the inaccurate population ratios used to
the detriment of Wales between 1980 and 1997;
(c) the application of the formula is not subject
to independent audit;
(d) the formula is mechanistic rather than needs
(e) it is an arbitrary convergence formula. In
Appendix 1 we estimate that using 1999-2000 as the base-line
year Wales lost £700 million in 2006-07 due to
(f) there is a lack of transparency in its application
particularly with respect to the determination of comparability
factors and the resulting consequential changes to the block grant;
(g) the formula is driven by the public expenditure
priorities of England;
(h) no account is taken of the massive structural
changes that have taken place in Wales since 1978changes
which were proportionately far greater in Wales than in England;
(i) it is an outdated formula whose operation
does not reflect devolution and the existence of the National
17. It is claimed that the formula has certain
(a) the formula reduces the need for negotiation
with the Wales Office and the Assembly Government;
(b) the formula leads to predictable outcomes;
(c) the way the formula operates in practice
offsets Wales's weak negotiating position.
18. As noted all these points are developed
at greater length in Appendix 1 to this paper. It is our
conclusion that the Barnett formula is unfair and inadequate and
should be replaced.
19. It is clear from the above and our detailed
analysis set out in the Appendix 1 that Plaid Cymru considers
the current funding formula both unfair and unsatisfactory. We
advocate a number of steps to reform and then replace the current
formula. The first three steps proposed here would be simple to
implement but would not address the key weaknesses of the Barnett
20. A useful first step, albeit a modest
one, would be more clearly to identify within government reporting,
expenditure by Whitehall departments which is for those services
in England which in the case of the other three countries of the
UK are devolved. This would enhance transparency and facilitate
comparisons between the member countries of the UK. This would
also reflect the recommendations of the Treasury-sponsored Allsopp
21. A second step would be for the National
Audit Office and the Wales Audit Office to review and report annually
to Parliament and the National Assembly, respectively, on the
operation of the Barnett formula. It is clear that many of the
decisions made regarding the comparability factor of spending
programmes are questionable and should be open to independent
challenge (for examples see paragraph 6 of Appendix 1).
22. A third step would be to stop the Barnett
squeeze by increasing the block grant to Wales by the same percentage
as the corresponding increases in expenditure in England. In the
absence of evidence to the contrary there is no justification
for arbitrarily reducing relative identifiable public expenditure
per capita on devolved services in Wales. Such a change would
be a trivial modification to the current Barnett formula and would
not increase total managed expenditure (TME) but would be a rebalancing
of country allocations within the TME envelope.
23. A fourth, more significant step would
be to apply the principle that relative funding of services in
the four countries of the UK should be related to relative need
as is the case for intra-country distribution of funding. Determination
of relative need is of course a complex and potentially contentious
subject. Given that expenditure on devolved public services is
concentrated on health and education (approximately 70 per
cent of the total) it should be possible to formulate an acceptable
needs model. Assessment of need is a challenge not unique to the
UK and the Select Committee should consider models employed in
other countries with varying degrees of devolution. The additional
funding needed to address remediation would be over and above
the needs requirement.
24. Appendix 2 sets out relative identifiable
public expenditure (IPE) excluding social protection, relative
GVA and relative expenditure on social protection (SP) in the
four countries of the UK (all on a per capita basis). As can be
seen there is little correlation between IPE and SP in the cases
of England, Wales and Northern Ireland. Whilst a case could be
made for a correlation between IPE and the inverse of GVA there
is no such pattern in practice. The position of Wales with low
GVA and relatively high expenditure on social protection but a
modestly higher identifiable public expenditure (excluding social
protection) confirms the poor funding deal that Wales has received
since the implementation of the Barnett Formula.
25. An independent standing commission should
be established which would either determine or advise on the allocation
of funds to the four countries of the UK. Such a commission should
be at arms length from the UK Government in a similar way to the
Monetary Policy Committee (MPC) of the Bank of England. The commission
be given terms of reference unanimously
agreed between the UK Prime Minister and the First Ministers of
Wales, Scotland and Northern Ireland;
have an equal number of representatives
drawn from each of the member countries of the UK;
have a suitably qualified secretariat
to support the work of the commission together with an appropriate
receive representations from interested
commission appropriate external work
to support the commission in its task;
as in the case of the MPC publish minutes
of its meetings together with the evidence on which its recommendations
are based; and
schedule its deliberations to fit in
with the Spending Review cycle of the UK Government.
26. Some may object that the allocation
of public funds is a political matter that is too important to
delegate to a commission. A similar view was taken by many when
the MPC was established. At a minimum publication of the evidence
gathered and considered by the commission, minutes of its deliberations
and its recommendations would bring considerable pressure to bear
on those charged with the allocation of funds to the four countries
of the UK particularly if the recommendations of the commission
27. Plaid Cymru believes that the current
funding arrangements for Wales are both unsatisfactory and unsustainable
and should be replaced. Wales has suffered for far too long in
terms of inadequate and unfair funding. The funding approach advocated
in this paper would lead to a fairer allocation of funds.
1 Pre Budget Report and Comprehensive Spending Review
2007. HM Treasury. Cm 7227. Back
PESA 2008. HM Treasury HC489. Back