Memorandum by the Welsh Local Government
Association
INTRODUCTION
1. The Welsh Local Government Association
(WLGA) represents the 22 local authorities in Wales. The
three national park authorities, the three fire and rescue authorities
and four police authorities are associate members.
2. It seeks to provide representation to
local authorities within an emerging policy framework that satisfies
the key priorities of our members and delivers a broad range of
services that add value to Welsh Local Government and the communities
they serve.
3. The WLGA welcomes the opportunity to
respond to Call for Evidence from the Select Committee on the
Barnett Formula. This submission sets out the WLGA's views of
the present formula and goes on to consider possible alternative
funding mechanisms and the scope for the Welsh Assembly Government
to have borrowing and tax varying powers.
THE EXISTING
"BARNETT FORMULA"
4. The Barnett Formula was devised in the
late 1970s as an adjustment mechanism, intended to adjust the
historic expenditure baselines of Scotland, Wales and Northern
Ireland in a manner which would ultimately achieve standard spending
per head across the United Kingdom, ie achieve convergence.
5. Since devolution calls for a review of
the Barnett Formula have grown stronger as questions have been
raised about its validity as a means of distributing resources.
With similar reviews being undertaken by the Holtham Commission
in Wales and the Calman Commission in Scotland the House of Lords
Select Committee is timely.
6. The existing formula appears relatively
straight forward using population share and comparable functions
as its drivers. In essence, when there is an addition to public
expenditure in England on functions which have been devolved to
Wales then there is a consequential addition to the allocation
to the Welsh Assembly Government based on the ratio of Wales to
England population. The allocation to the Welsh Assembly Government
is therefore partly based on the historic allocation, fixed in
1979, plus population based changes made thereafter. Over time
it was anticipated that the population based consequentials would
grow to over-ride the historic allocation and convergence would
increasingly be achieved.
THE BENEFITS
OF BARNETT
7. There have been benefits to Wales from
the application of the Barnett formula. The "automatic"
nature of the consequential adjustment has provided the Welsh
Assembly Government with relatively predictable and guaranteed
increases in expenditure since 1999. The grant to the Welsh Assembly
Government has remained very largely un-hypothecated and this
has allowed the democratic politics of Wales to set and challenge
public expenditure priorities. The formula has continued to provide
a level of public expenditure in Wales on comparable functions
which is higher than that in England, even if significantly lower
than that in Scotland and Northern Ireland. Convergence has been
slower than many would have expected. This is partly because population
growth in Wales has been slower than that in England and because
there have been occasional extra-Barnett allocations, eg the provision
of additional public expenditure cover for European Structural
Funds.
THE PROBLEMS
WITH BARNETT
8. However, it is the view of the WLGA that
the benefits gained from Barnett are now less significant than
the anomalies it has created. In particular, the formula takes
no account of the particular needs of Wales and there is no evidence
available to justify the lower levels of comparable expenditure
in Wales compared to that in Scotland and Northern Ireland. Another
difficulty with the application of the Barnett formula which concerns
the WLGA is its lack of public transparency and the apparently
unchallenged ability of the Treasury to impose its own interpretations
and amendments to the application of the formula (particularly
between Spending Reviews) in ways which are not open to public
debate or challenge. For instance, we understand that the Treasury
has determined that the local regeneration expenditures in south
east England associated with the Olympics are not comparable expenditure
so no consequential has been derived for the devolved administrations;
there has been no public declaration, debate or challenge over
this unilateral decision.
9. The Treasury's decision, in around 2003,
to hypothecate the Welsh block into capital and revenue components
is another example of a unilateral decision which has had a significant
impact on public finances in Wales. Since 2003-04, the Welsh Assembly
Government's settlement has been split into three fixed sub-limits
for revenue, capital and non-cash (ie capital charges) all derived
using the Barnett formula. Introducing these sub-limits with little
or no flexibility to move between them has removed the discretion
of devolved administrations to decide their own spending priorities
within an overall block grant.
10. The policy intention of introducing
a capital and non-cash limit was to improve the management of
public sector assets and increase departmental accountability.
While this may have worked in UK departments, the introduction
of a capital limit using Barnett has not delivered the desired
effect in Wales. Using Barnett to set a capital limit ignores
significant historic differences in individual countries' asset
bases (in terms of quantity, market value and quality) and the
extent to which UK departments have used the Private Finance Initiative
(PFI), compared to Wales. In Wales there is a multi-billion pound
capital investment gap in public sector infrastructure (schools,
housing, waste management and transport etc). One way forward
would be to increase the revenue provision to local authorities
in a manner that would allow them to extend their prudential borrowing
to fund the necessary capital expenditure. The hypothecation of
the block grant prevents this course of action. There is also
a problem of inflexibility in financial management when inevitably
some capital programmes do not fully utilize their allocation
in a given financial year. Without the ability to switch such
expenditure to revenue the allocation is returned to the Treasury
and its future use may be restricted if the Treasury exerts controls
over End-of-Year Flexibility.
11. The WLGA believes there is a need to
formalize the arrangements between HM Treasury and the devolved
administrations to ensure that decisions which affect funding
allocations are transparent and are not taken without formal agreement
from devolved governments. Such a move would ensure that the implications
for devolved administrations of policies developed in Whitehall
were fully understood before changes to funding arrangements could
be made. This issue is discussed further in paragraph 18 below.
An Alternative Mechanism
12. The WLGA believes that an alternative
distribution mechanism based on an open and transparent assessment
of expenditure need would deliver more resources for public expenditure
in Wales and, on that basis, supports the proposition that such
an alternative mechanism should be developed and implemented.
A needs based assessment would allocate above average resources
to areas of greater deprivation, where the need for public services
are greater, and to areas of sparse population where the cost
of service delivery is higher. On both counts Wales would justify
on a needs assessment above average expenditure levels to an extent
that Barnett is currently not delivering and, given the intended
convergence, will increasingly not deliver in the future
13. We have identified six key principles
for any new mechanism:
1. The principle of Simplicity and Transparency;
2. The principle of Distribution according to
Needs;
3. The principle of Non-Hypothecation;
4. The Principle of Independent Advice;
5. The principle of Fiscal Compensation; and
6. The principle of Flexible Financial Management.
The Principle of Simplicity and Transparency
14. Any replacement must be simple and transparent
if it is to achieve the credibility that the current arrangements
arguably lack. The public needs confidence that the future allocations
are "fair" in outcome and in process. They need to be
able to see the criteria that inform the allocations and need
to be assured that the application of such criteria is not capable
of any arbitrary manipulation.
The Principle of Distribution according to Need
15. In outline the assessment of expenditure
need in any distribution formula has just three elements:
— The identification of the relevant population
base for the expenditures being allocated;
— The identification of the relative need
for the relevant public services and this will be driven by measures
of relative deprivation;
— The identification of the relative costs
of service delivery and this will be driven by measures of the
relative sparsity of population.
16. Whilst there is conceptual simplicity
in identifying just three elements, in practice the development
of indicators and their weightings to give effect to these elements
can lead to complexity and confusion. At this stage the best that
can be said is that the indicators chosen should be relatively
few in number, chosen and weighted in accordance with their broad
effect on expenditure need. The alternative path of very detailed
service based indicators leads to the sort of complexity that
can bring these systems into disrepute and can lead, perhaps unintentionally,
to a convergence of policies and priorities between the different
devolved administrations.
The Principle of Non-Hypothecation
17. There is a danger that the UK Government
would see the review of Barnett as an opportunity to introduce
greater hypothecation of the grants available to devolved administrations,
perhaps requiring that grants are made conditional on the pursuance
of UK Government priorities. Such a move would be opposed by the
WLGA which is convinced that the devolution of democratic political
choice to devolved and local administrations is only made real
when those administrations can set their own budgets. In supporting
the Welsh Assembly Government on this principle Welsh local government
would expect that the same principle is applied to the distribution
of grants to Welsh local authorities.
The Principle of Independent Advice
18. In principle, the WLGA sees merit in
the establishment of an independent organisation such as the Australian
Commonwealth Grants Commission to advise on the process of equalisation
between devolved administrations and regions. Ultimately the WLGA
recognises that resource allocation is a matter for elected governments,
but the availability of independent advice would require governments
to explain their decisions and give reasons for the departures
from the advice taken. This discipline on governments would mitigate
against arbitrary or partial decision making. In the distributions
to Welsh local government there have been occasions when independent
reviews have been commissioned. Sometimes the advice has been
accepted by the Welsh Assembly Government and Welsh local government,
sometimes not; but the challenge provided by such advice has invariably
been positive. An Australian style Grants Commission would provide
this sort of advice on a standing basis and would ensure greater
transparency of decision taking by governments.
The Principle of Fiscal Compensation
19. Should greater fiscal autonomy be given
to devolved administrations through assigned taxation or tax varying
competence then it must follow that the grant allocation to the
devolved administration compensates for variation in the tax bases
in each devolved administration. The grant distribution to local
authorities is designed to achieve this. However in so far as
total public expenditure in Wales relies on the contribution of
the council tax and the Non Domestic Rate, the current Barnett
formula is not designed to compensate for the relatively low tax
base, driven by relative property values, in Wales. In this respect,
and in respect of any further fiscal devolution, the grant distribution
should provide for fiscal compensation.
The Principle of Flexible Financial Management
20. Local authorities have reasonable powers
for flexible financial management in that they are able to borrow
and hold reserves. The borrowing powers of local authorities were
recently extended under the system of prudential borrowing which
allows them to make a rational decision to commit future revenue,
through borrowing, to finance capital projects in a manner that
properly spreads the burden of funding long term assets to future
service users.
21. The WLGA believes the Welsh Assembly
Government should have similar financial flexibility to that of
local authorities both in terms of borrowing powers and holding
of reserves. Such a move would strengthen the financial responsibilities
and accountability of the Welsh Assembly Government, which in
turn should improve the efficacy and efficiency of its financial
planning and asset management. When combined with a needs based
formula, these powers would enable the Welsh Assembly Government
to enter into longer term financial commitments helping to address
the country's infrastructure and revenue needs more effectively.
ISSUES FOR
FURTHER CONSIDERATION
22. Several academic commentators have remarked
that public spending expenditure for a region and in a region
are not the same thing at all. This is particularly important
to Wales in the context of the high proportion of the population
claiming welfare benefits which is non-devolved expenditure. What
would be the implications, if any, for non-devolved expenditure
should a replacement for the Barnett Formula be agreed? And how
would this impact on the differentiation between the Welsh Assembly
Government Departmental Expenditure Limit (DEL) which is subject
to the Barnett formula and Annually Managed Expenditure (AME)
which is not?
CONCLUSION
23. The WLGA believes that there are some
clearly established and fundamental considerations that should
inform the Select Committee's further work. These are covered
in this paper. Equally, however, there are several key questions—also
identified, but as yet unanswered which certainly bear further
scrutiny to determine where the balance of advantage lies for
Wales, but recognising that if a better model is to be found it
will need to be acceptable to the other devolved administrations
and take account of the fact that many in England believe that
devolved administrations already receive in excess of their entitlement.
February 2009
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