Welsh public spending’s answer: 114

Much of the United Kingdom appears unaware of the valuable answer, ‘114’, published last week. ‘114’ was the answer to the following question posed in the Holtham Commission’s interim report: “If we use English ‘needs’ formulas for health and other public spending, how much more public spending per head would Wales need in the block grant, assuming English spending is 100?” The commission note for 2010-2011 that the actual block grant, or Barnett payout, at 112 will be rather less than calculated spending needs.

Somewhat oddly (and unnecessarily) the Commission focuses on Gross Value Added per head (GVA) in their initial discussion of deprivation in Wales (on p.39). It is odd because GVA is a production idea and so at best is an indirect indicator of deprivation. Low productivity and low labour force participation are not necessarily signs of deprivation in the population. For instance the Republic of Ireland has comparable low participation rates but this is not usually taken to show that today’s Irish are impoverished.

More conventionally, family income, adjusted for the purchasing power of money, and after tax and transfer payments from (the UK) government, would be taken as a measure of well being or deprivation in Wales, compared with elsewhere in Britain. But this leads to a rather different result from GVA per head. Whereas Welsh GVA per head is 25 percentage points below the UK average, Welsh household disposable income in 2006 was only 11 percent lower. Adjusted for the lower Welsh prices, Welsh ‘real’ incomes are then approximately only 4 percent lower than the UK average household disposable income. Not only does ‘real income’ give a very different impression of Welsh deprivation than does GVA, it also raises important questions about why the Holtham Commission’s needs indicator is so different from Welsh real household income.

As a quick fix for the problem identified by their Welsh ‘needs’ calculation, the Commission propose abandoning the Barnett formula for the block grant, with its tendency to drive Welsh spending per head down to English levels. Instead all English relevant increases in public spending per head should now be multiplied by 1.14 to get the Welsh allocation. My recommendation for a ‘relaxed Barnett’ to the House of Lords Select Committee enquiry into the formula, to match percentage increases per head, achieves a similar effect but without reliance on precise needs calculations.

In the longer term the Holtham Commission advise a needs-based formula for allocating the block grant, observing that other countries manage to do agree such a procedure for devolved administrations and therefore the UK should be able to. One reason the UK may not rise to the occasion, is that, as massive public spending cuts become necessary, creating a new ‘needs formula’ quango would be politically ‘courageous’. Another reason for doubting the UK will develop a needs formula is that the matter is not widely considered a political priority. The devolved administrations account for only about one sixth of the UK population, and Wales does not have the most politically influential of these governments.

Secretary of State for Wales, Peter Hain’s initial reaction to the Commission’s report is perhaps indicative of the attention Whitehall intends to devote to Wales. ‘..spending in Wales compares well with comparable English regions, and .. existing funding levels are reasonable… We want to keep this issue under consideration..’ This consideration is likely to include a desire to deal with the devolved governments altogether, not just Wales.

Unfortunately, a replication of the Holtham Commission’s work for Scotland and Northern Ireland is unlikely to show that revision of the Barnett formula is a pressing matter for them. Perhaps the best hope for Wales is that the Calman Commission’s recommendation for Scotland of devolved tax powers are accepted and bundled with a ‘relaxed Barnett formula’ for all the devolved governments’ block grants. This would have the appeal of simplicity and encouraging devolved spending responsibility. True Scotland and Northern Ireland will continue to receive more public spending than they should, and Berwick upon Tweed will remain miffed by its free spending neighbour across the border. But the forces that have maintained these disparities for decades will not disappear over night and politics is the art of the possible.