Silver lining on the dark cloud of Welsh spending cuts

Ten years ago the taps of government spending were fully turned on just as the National Assembly and embryonic Welsh Government were getting into their stride in their very first term. Money was plentiful, and hair-shirt prioritisation did not seem so necessary. But by the middle of the decade annual increases in funding began to diminish until they hit the brick wall of the UK’s government’s 2010 comprehensive spending review. Rigorous prioritisation has become inescapable.

That is why the processes implied in the new £15 billion 10-year National Infrastructure Investment Plan – announced yesterday by the Welsh Finance Minister, Jane Hutt – are as significant as the spending proposals themselves.  It would be easy to be critical of the time taken to get such processes in place, but it is more important to welcome them both for their own sake and for the promise they hold out of a new direction of travel.

One of the characteristics of Welsh Government to date has been a tendency for departments to work in silos – and before anyone says that this is another go at civil servants, it is worth noting that ministers have often been just as territorial. During Rhodri Morgan’s period as First Minster, when his personal preference seemed to be to run the Cabinet on a rather loose rein, this tendency was not sufficiently curbed.

As the document published yesterday states, with eye-brow raising honesty:

“Historically, decisions on investment projects in the Welsh Government have largely been made within the relevant department. Capital budgets have been determined in the annual budgetary process and each department has then used its own procedures to evaluate and decide on specific projects.”

The only exceptions to this have been £700m – only 7.4 per cent of the total allocated capital budget of £9.5billion – allocated via the Strategic Capital Investment Fund that came into play in 2008-09 and the Centrally Retained Capital Fund introduced in 2011-12. Open acknowledgement of these facts is a very healthy development.

The emphasis on delivery – which was the keynote of Carwyn’s Jones first Assembly election campaign – and the spending constraints, together  necessitate a level of central coordination that has been missing hitherto. Although we are still some way from the creation of a First Minister’s department or a robust Treasury function, yesterday’s announcements are at least the fruit of a unified process for evaluating the capital bids of different departments.

This new coordination together with innovative ways of levering additional funds amount to a useful silver lining on the dark cloud of spending cuts. They are significant developments for Welsh Government and for Welsh society that need to be built upon. For instance, this new approach should mean that we can extract a greater value from the next round of European funds.

Much of this new thinking has come from Gerald Holtham, the economist who chaired the Holtham Commission and who has floated many of his ideas at IWA conferences and in our journal, Agenda. His detailed knowledge of the operation of markets has been a valuable addition to the Welsh Government’s finance function.

The Welsh Government’s £44m of new investment for 2012-13 £2.7m for M4 junction improvements £3m for NEST and £2m for the Arbed scheme benefiting an extra 1000 homes £6m to expand the successful Welsh Housing Partnership, levering in an investment of £30m in total to deliver 280 family homes for intermediate rent £5m to double the size of the recyclable empty homes fund, contributing to our target  of bringing 5,000 empty homes back into use during this Assembly term £4m to accelerate essential flood protection schemes, reducing the impact of flood and coastal erosion on communities £6.8m to accelerate major hospital projects at Ysbyty Glan Clwyd and Llandough £500k to deliver premises for domestic abuse ‘One Stop Shops’ in Pembrokeshire, Swansea and Gwynedd £5m to support schools projects in in Lampeter, Denbighshire, Abercynon and Penarth £3m for the new Cardiff City Centre post-16 campus £3.5m to support essential infrastructure work for the Northern Gateway site in the Deeside Enterprise Zone £2.5m to boost the Welsh Economic Growth Fund A commitment of £4million a year of funding for thirty years to support a Welsh Housing Bond issue of over £100m, which will finance delivery of more than 1,000 affordable homes over the next four years

There are three crucial facts that put this announcement into a proper context:

• First, a cut of more than 40 per cent in in the Welsh Government’s capital budget following the comprehensive spending review by the UK coalition – a cut that will will see the capital budget 46 per cent lower in real terms than in 2009-10 and lower than at any stage since the advent of the Assembly.
• Second, the anomaly whereby the Welsh Government is the only one of the three devolved administrations that does not have its own borrowing powers.
• Third, the UK Treasury’s restrictive approach to defining the Public Sector Borrowing Requirement (PSBR), which unlike many other governments in Europe takes in not only direct government spending but also spending by external agencies with their own revenue streams, such as Network Rail.

These three constraints together force the Welsh Government to find innovative stratagems for levering additional funds without either exceeding its own powers or falling into the PSBR trap, which would negate any benefit by prompting an equivalent reduction in the Barnett formula funding. But innovations  – such as the local Government Borrowing Initiative and the proposed Welsh Housing Bond – that, with other schemes, have already raised around £1 billion from non-governmental sources, will have a lasting value.

Equally, the insistence on prioritising infrastructure schemes of national significance is exactly what respondents across Wales asked for when the last administration went out to consultation on its economic renewal programme.

The only unknown is how far the Welsh Government can push these initiatives in the next few years to scale up the capital spending, without having to punish unduly  departmental revenue budgets that are just as strained. There was no indication in yesterday’s document of what the outer limit – or target – might be.

While the schemes that have been detailed in the plan are all valuable – even if some have been in the public domain for some time – we must not forget that many of the biggest schemes are ones that the Welsh Government does not control – such as the electrification of the rail network. Even the funding of an M4 improvement around Newport look as if it will be dependent on the devolution of responsibility for the Severn Bridge tolls – a matter not yet settled. In that sense a National Infrastructure Investment Plan is not yet complete, and may never be. As yesterday’s announcement emphasised, it has to be ‘a living document’.

But it is also a challenge to the approach of the UK Coalition. The fact that, despite being hedged around with Treasury constraints, the Welsh Government has found an extra £1 billion shows what the UK Government could do if it set to the task with a purpose. Its current growth funds seem far too modest for the task that we face.

The Welsh Government can look to support from such authoritative sources as the director of the National Institute for Economic and Social Research, Jonathan Portes, who said recently:

“With long term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity, and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This not just basic macro-economics, it is common sense.”