Memorandum by Cymru Yfory—Tomorrow's
Wales
1. A MECHANISM
NOT FIT
FOR PURPOSE
1.1 Cymru Yfory regards the current method
of allocating funding to the devolved governments via the Barnett
formula as not fit for purpose in a context where devolved parliaments/assemblies
have now established themselves as key institutions within the
wider UK governmental structure.
1.2 It seems clear that Wales suffers significant
disadvantage as a result of the way in which the formula works
and this is a matter of concern for us, particularly in view of
the extremely tight public expenditure framework that will result
from the current financial and economic crisis. However we are
also aware of wider concerns. Bell and Christie are certainly
not alone in their criticism: "The funding mechanism has
been roundly condemned by all shades of public opinion… Unless
this issue can be satisfactorily resolved, the tension caused
by the perceived unfairness of the system of allocating resources
between the constituent parts of the UK will undermine the legitimacy
of devolution" (our underlining). Lord Barnett's characterisation
of his own formula as "terribly unfair" is well known.
1.3 Gillian Bristow points out that Barnett
"is an inherited legacy of the finance arrangements that
existed pre-devolution and which operated within the era of territorial
arrangements". When it was devised in 1978 in readiness
for the devolution arrangements then being planned the intention
was for it to be a temporary arrangement. According to Bristow,
it was "an historical and temporary expedient which became
permanent".
1.4 The assessment of need carried out at
that time, according to Alan Trench, "showed that significantly
greater amounts of spending would be justified for all three territories
than for England—but that amount would be less than what
Scotland and Northern Ireland already received". It is recognised
that the reason those two territories enjoyed a higher level of
spending than that provided for Wales was that they, unlike Wales,
posed a potential threat to the union and, in any case, had administrative
devolution for far longer.
1.5 The disparity was retained in the Barnett
formula to avoid shocks and for reasons of political expediency.
Thus Wales was disadvantaged in comparison with Scotland and Northern
Ireland from the very outset. In addition, the Barnett formula,
says Trench, was designed "to serve as a way of braking growth
in Scottish spending" by incorporating a mechanism to bring
about convergence in per capita spending levels in the four countries.
Ironically, but perhaps not surprisingly, the resultant "Barnett
squeeze" has probably punished Wales more than it has Scotland
(McLean and McMillan).
1.6 When democratic devolution was introduced
in 1999, a decision was taken behind closed doors, again for reasons
of political expediency, to retain Barnett rather than consult
on a new funding mechanism that would be appropriate for the new
arrangements.
2. A TIME FOR
REFORM
2.1 We have briefly rehearsed the Barnett
story in order to illustrate the way that the current arrangements
have evolved in an ad hoc and politically expedient manner rather
than being based on any logic or fundamental principles. Such
a state of affairs is our view no longer acceptable. It is time
for reform, and if there is to be reform, it should be sufficiently
radical to tackle head-on the chronic dissatisfaction that exists
in so many quarters, specifically in Wales, and which is certain
to get worse rather than better.
3. THE DEFICIENCIES
OF THE
CURRENT ARRANGEMENTS
3.1 We now list some of the deficiencies,
of both process and outcome, of the current arrangements.
(i) Convergence
Our view is that the formula should converge,
not on a per capita population basis, but on need (see below 4.1).
Eurfyl ap Gwilym claims that the "Barnett squeeze" arising
from the existing convergence principle, cost Wales about £1 billion
between 1999 and 2006. McLean, Lodge and Schmuecker state
that identifiable public spending, which they say "provide[s]
the most accurate picture possible of monies flowing through the
Barnett formula", fell between 2002-03 and 2007-08 in
Wales from 13 per cent to 8 per cent over the UK average,
in Northern Ireland from 31 per cent to 21 per cent,
and in Scotland not at all.
(ii) Failure to reflect changing circumstances
— Since 1978 the population of Scotland
has fallen and that of Wales has risen but this change was not
reflected in the allocation of funds until 1997, by which time
the baseline for the calculation of increased funding had been
adversely affected.
— Over the same period, as a result largely
of the decline of heavy industry, which was dominant in the Welsh
economy, GPD per capita has declined from 88 per cent of
the UK average in 1979 to 77 per cent in 2007. This
decline is what led to the EU recognising the West and Valleys,
four-fifths of Welsh land area, as being in serious need, having
less than 75 per cent of EU average GDP, and thus eligible
for Objective 1 status under the Structural Funds. However
the Barnett formula remained unaffected by all of this.
(iii) The Formula is not needs-based
Basing the allocation of funding, ever since
the initial estimation of needs, on a population basis has been
severely disadvantageous to Wales. Two recognised proxy indicators
of need are poverty, as measured by social security spending,
and average GDP. According to Mackay and Williams, if the first
were used, devolved spending per head should be roughly 20 per
cent higher in Wales and Northern Ireland and 10 per cent
higher in Scotland than in England. In the case of the second
(arguably a more objective measure), the devolved spending per
head should be 27 per cent higher in Wales and Northern Ireland
and 6 per cent higher in Scotland than in England.
McLean, Lodge and Schmuecker state that identifiable
public spending ("the most accurate picture of monies flowing
through the Barnett formula") are as follows: Northern Ireland
21 per cent over UK average; Scotland 21 per cent; Wales
8 per cent. The same authors consider the relationship between
public expenditure and GVA. They state that England has a GVA
per head two per cent over the UK average, Scotland 5 per cent
below and Wales, lowest among the UK regions, at 23 per cent
below. They then proceed to calculate that in 2006--07 London
received 65 per cent more than it would if public expenditure
were allocated on the basis of GVA per head, with Scotland receiving
11 per cent more, and Wales receiving 14 per cent less.
(iv) Allocations are based on departmental
spending levels in English departments
This is inappropriate in a system where the
devolved assemblies and parliament exist in their own right as
representative bodies of their peoples. Bell and Christie found
that "there is no country in the developed world other than
the UK that allocates resources at a subnational level using a
formula based on spending changes elsewhere, rather than allocating
levels of spending in relation to assessed need."
(v) The way in which decisions on allocations
are made is often opaque
— There is no independent audit of the
process or of the decisions made.
— Determining what counts as spending for
England and what is for the UK as a whole, and therefore may or
may not carry a Barnett consequential, may be subjective and arbitrary,
as for example with spending on the Olympics and rail infrastructure.
— The extent to which convergence has actually
occurred and why, including the various Barnett bypasses engineered,
has been extremely difficult to ascertain, even by experts in
the field.
Such weaknesses arise from the fact that the
Barnett formula has no statutory basis and the way it is applied
depends very much on informal practice, conventions and goodwill.
We would argue that this is not sufficiently robust in the quasi-federal
system that now exists in the UK.
4. PRINCIPLES
FOR A
NEW SYSTEM
4.1 We have no doubt that a new system for
allocating resources should be based on need. We recognise that
determining need is a complex matter and that opinions concerning
what factors should be included differ. However the task is achievable,
as examples in numerous countries demonstrate. Among the elements
to be considered would be: geographical factors such as rurality
and population dispersal; age profile; health needs; and average
GDP or social security spending as indicators of deprivation.
4.2 The way in which resources are allocated
to nations and regions within an union state should reflect the
principles of solidarity, mutual dependence and justice. Indeed
the very stability of such a state may depend on the application
of those principles. This is the philosophical underpinning for
basing allocations on need, but it should also lead to a commitment
to the elimination (or at least amelioration) of disadvantage
as well as compensation for it. The formula should therefore include
an element of funding for achieving economic and social cohesion
across the UK.
4.3 This is linked with the way in which
the UK Government deals with the European Union's Convergence
Funds. The UK as an EU member state accepts the criterion of a
needs-based approach in order to promote economic and social cohesion
across the EU and as a counterbalance to the internal market.
As a result a number of UK regions have at various times been
allocated structural fund resources. We believe that the same
strategic policy approach should apply within the UK, as we argue
in 4.2 above. Specifically, resources allocated to regions
of the UK by the EU should always be truly additional to existing
budgets.
New ground was broken in UK Government policy
in 2001 with the famous "Barnett +" allocation
to Wales for the delivery of the Objective 1 programme in
the West and the Valleys and this is very welcome. However the
failure to provide any resources for match funding this programme
has imposed a significant burden on the National Assembly. Among
the effects (combined with the impact of the Barnett squeeze)
has been the increasing funding gap in education between Wales
and England, which is particularly acute in Further and Higher
Education. In the spirit of cohesion enshrined in the EU Convergence
programmes, funds allocated to Wales should include provision
of match funding for those programmes.
4.4 The introduction of a needs based formula
should in no way imperil the devolved governments' autonomy in
making decisions on public spending. In discussing the introduction
of an "equalisation formula" for funding allocations,
McLean and McMillan say that this would mean "placing each
territory in a position to offer the same mean level of service,
should it choose to do so" (our underlining). The Welsh Assembly
Government may decide for example that investing in appropriate
economic development or in housing, or in environmental improvement,
is an effective way of tackling long-term health problems. It
should be entirely free to do so. Policy divergence is a major
justification for devolved government, and one of its advantages
is that the countries of the Union can learn from each others'
achievements as well as, sometimes, their mistakes.
4.5 Transparency should be a key principle
of the new system. This does not mean that the new allocations
formula would be readily understandable by the public at large—indeed
the degree of complexity necessary to achieve a just allocation
would make this difficult. What it does mean is that the principles
underlying decisions would be explicit and all the information
publicly available.
4.6 The relationship between the countries
of the UK in determining a new formula and in negotiating allocations
should be established on the basis of equality. Currently the
bargaining position of Wales is weak in comparison with Scotland
and Northern Ireland and the position of all three weak in relation
to the UK Treasury. This needs to be corrected.
5. THE NEW
ARRANGEMENTS
5.1 We strongly support the proposal made
by a number of experts, notably McLean and McMillan, and Bristow,
that a new Territorial Grants Commission, on the lines of the
Commonwealth Grants Commission of Australia, be set up. It would
be established by Act of Parliament and would be independent in
status, similar to that of the Electoral Commission.
5.2 We support the following suggestions
by Bristow: "It should be a non-governmental public body
staffed by non-partisan public servants (eg secondees from the
devolved administrations and relevant government departments)
plus relevant experts in the field of public finance (eg academics,
other professionals). The members of the commission would be appointed
on the basis of widespread consultation with the devolved administrations
and regional representatives... The Commission should be charged
with making an annual report on regional expenditure needs and
the relevant equalisation process with this report being made
to a joint ministerial council of the UK and regional governments."
5.3 The final decisions on funding allocations
would have to be unanimous. Failing that, we agree with the suggestion
of McLean and McMillan that the default would be the use of average
GDP per head as the proxy indicator of need.
5.4 We accept that the move from Barnett
to a new needs-based formula will not bring change in one fell
swoop. Rather there would be, to use McLean and McMillan's term,
a "convergence on need" which would take a number of
years to be completed.
6. CONCLUSION
6.1 The current arrangements for funding
devolved government are flawed and unsustainable. As devolved
government becomes embedded in the UK system and as Wales looks
forward to the granting of primary legislative powers to its National
Assembly, now is the time for a radical overhaul. Whereas we believe
that Wales would benefit from the changes that we advocate, we
also believe that the UK as an union state would strengthen its
credibility by adopting a system designed to meet collective interests
and to promote cohesion, equity, stability and transparency.
BIBLIOGRAPHY
In drawing up our analysis and recommendations
we have drawn heavily upon the work of experts in the field and
we wish to acknowledge our indebtedness to them. The relevant
works are listed here:
Eurfyl ap Gwilym: "Barnett Squeeze"
Agenda Spring 2006
Gillian Bristow: "All for one and one for
all? Territorial solidarity and the UK's system of devolution
finance". Paper presented to Seminar on Regional Economic
Disparities, University of Edinburgh 10-11 April 2008
Gillian Bristow: "Barnett Issues Paper:
Report for Adam Price MP" (2006)
Gillian Bristow: "Bypassing Barnett: The
Comprehensive Spending Review and Public Expenditure in Wales".
Economic Affairs September 2001
R R Mackay and J Williams: "Thinking about
Need: Public Spending on the Regions" Regional Studies
Vol 39 2005
I McLean, G Lodge and K Schmuecker: Fair
Shares? Barnett and the Politics of Public Expenditure IPPR
2008
Ian McLean and Alistair McMillan: "The
Fiscal Crisis of the United Kingdom". Nuffield College Working
Papers on Politics 2002
The following essays in particular from Alan
Trench: Devolution and Power in the United Kingdom (Manchester
University Press 2007).
David Bell and Alex Christie: "Funding
Devolution: the Power of Money"
James Mitchell: "The United Kingdom as
a state of unions; unity of government, equalising of political
rights and diversity of institutions"
Alan Trench: "The politics of devolution
finance and the power of the Treasury"
March 2009
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