Wales faces a funding crisis if there is no change

An ideal system of devolution finance would allocate resources across the nations of the UK in a way that enabled a broadly similar level of public services to be delivered to each citizen. This should be a fundamental component of our common UK citizenship. So, for example, in areas where the costs of delivering public services are unavoidably greater than the UK average, this should be reflected in funding allocations.

Although not a devolved administration, London is the obvious example where cost constraints justify increased public spending on services, and indeed this is exactly what we observe. Spending per head on public services is higher in London than in any other UK region, including Wales.

However, I am emphatically not calling for uniformity of provision in public services across the UK. The great benefit of devolution is that it allows local preferences and priorities to be taken into account, but this should operate within an overall quantum of funding that is broadly in line with each area’s needs. Nor do I believe that we should attempt to capture every small difference in the needs of our nations and regions. Nonetheless, the broad characteristics of demographics, deprivation and cost should be taken into account.

The Barnett formula has been used to allocate funds to Wales for over thirty years. This is despite the fact that the formula lacks any logical underpinning and makes no effort to determine whether the funds it allocates bear any resemblance to needs. Even Lord Barnett, after whom the formula is named, famously remarked that he did not expect it to last a year, or even twenty minutes.  And yet, more than thirty years on, it is still in place.

At the heart of the Barnett formula lies a phenomenon known as the ‘Barnett squeeze’. This drives public spending per head on devolved public services ever closer towards the English average spend on those services. Public spending per head on Welsh devolved services – health, education and so on – is being squeezed downwards. There is no rationale for this, apart perhaps from an ill-founded suspicion that Wales is over-funded. Certainly the UK Government can point to no evidence to justify a continuing squeeze. Nor do we see a squeeze being imposed in England.

It was for this reason that we established the Independent Commission on Funding and Finance for Wales, chaired by Gerald Holtham. The Commission’s central finding was that in Wales the Barnett squeeze has gone too far. Public spending per head is below the level that is justified by needs. Even more importantly, the Commission demonstrated that if Barnett remains in place under funding will persist and is very likely to get worse over time.

So, from Wales’s perspective, reform is an urgent issue. We cannot afford to wait another thirty years for devolution finance to be put on a sustainable footing. If there is no change, Wales will face a crisis in the funding of its devolved public services. This is, self evidently, bad news for Wales. But it is also, I would argue, a matter of great importance for all of us who wish to see devolution thrive and who care about fair funding across the UK.

The Commission proposed a short-term remedy in the form of a funding floor, which could be incorporated into the existing Barnett regime without any need for wider change. Over the longer term, the Commission argued that a needs-based formula should be jointly agreed to replace Barnett.

Holtham was also asked to consider whether more fundamental reform should be considered – should we move away from a system of block grant funding towards one in which the Assembly Government’s budget depends in part on taxes raised in Wales?

There is always a danger when discussing devolution that Wales and Scotland are viewed as being interchangeable. There is often an unspoken assumption is that if it works in Scotland it must surely work just as well in Wales. Of course, the truth is more complicated. It is a simple fact of economic life that Wales is much more integrated with the English economy than is Scotland.

A clear demonstration of this is that 100,000 people cross the Welsh border every day for work. In contrast, only 30,000 commute across the Scottish border. And 90 per cent of the Welsh population lives within fifty miles of the border. On the other side of the border, a journey of fifty miles can take you to Manchester, Liverpool, Birmingham or Bristol. The contrast with the sparsely populated border region between Scotland and England is stark.

It is clear therefore that a simplistic read across from Scotland to Wales must be avoided.  The risks of tax devolution – by distorting economic activity or incentivising tax avoidance – are much greater in the Welsh case.

We see a strong case for devolved borrowing powers. Personally, I am sceptical that a government has to have large-scale tax powers in order to be accountable to the people it serves. It is essential to stabilise Welsh finances in a way that addresses the problem of under funding before we can consider whether tax devolution would be worthwhile.