Wales breaks £10,000 spending per head barrier

Welsh identifiable public spending per head broke the £10,000 barrier for the first time in 2010-11. According to the Treasury’s just published annual Statistical Analysis 2012, we each spent £10,017 last year. At the same time the Welsh population passed the three million mark, at 3.06 million in mid-2010.

Identifiable public expenditure takes place in a country or region of the UK for the direct benefit of that geographical area and accounts for approximately 86 per cent of total public expenditure. Some of this expenditure, such as health and education, is devolved to the Welsh Government and to local authorities while other identifiable expenditure such as social protection is paid directly by the UK Government to recipients in Wales: in other words it is not devolved.

The balance of public spending is non-identifiable expenditure, judged as being for the benefit of the UK as a whole no matter where it is incurred and is not analysed geographically. Examples of such non-identifiable expenditure include defence, international development, debt interest repayments and, more topically, most of the expenditure on the London Olympics. There is considerable evidence that such non-identifiable public expenditure is in fact concentrated in certain regions of the UK, particularly London, south east England and south west England.

Identifiable public expenditure per capita in Wales of £10,017 is £1,383 higher than the English average of £8,634. The major sources of this difference are given in Table 1.

Table 1.

Principal Differences in Identifiable Public Expenditure in England and Wales 2010-11 (£ per capita).

Function	England	Wales	Difference
Social Protection	3,582	4,216	634
Health	1,900	2,017	117
Economic Affairs	585	893	308
General Public Services	121	263	142
Housing	196	242	46
Education	1,446	1,485	39
Other	804	901	97
Total	8,634	10,017	1,383

Source: HM Treasury. PESA 2012. Table 9.15 

As can be seen in Table 1, almost half the difference in identifiable expenditure is in the field of Social Protection which includes old age pensions, personal social services, income support and tax credits.

If non-identifiable expenditure is allocated on a population basis then the difference in total expenditure in Wales compared with England is also £1,383 per capita.

Gerry Holtham, in his recent evidence to the House of Lords Economic Affairs Committee examining the implications for the United Kingdom of Scottish independence and in his subsequent appearance on Dragon’s Eye, estimated that, while the public finance deficit in England was approximately £2,000 per head, it was £6,000 in Wales: a difference of £4,000.

As can be seen £1,383 of the difference, or roughly one third, can be accounted for by higher identifiable public expenditure in Wales. What is the cause of the remaining two thirds? It is the shortfall in tax revenues generated in Wales. That this is so should come as no surprise. In a unitary tax system such as that of the UK (the recent Scotland Act has yet to impact on the tax system) there is a close correlation between relative tax generated per capita and relative GVA.

Given that Wales’s relative GVA per capita has declined to 74 per cent of the UK average one would expect tax revenue to show a comparable shortfall and this is indeed the case. According to the Office for Budget Responsibility [HM Treasury Budget Red Book 2012] total tax in the UK in 2010-11 was estimated to be £550 billion. Using relative GVA per capita as a proxy for relative tax yield would suggest that the total tax generated in Wales was £19.9 billion which includes approximately £2.2 billion of council tax and non-domestic rates. This corresponds to a tax yield of £6,600 per person.

In the case of England relative GVA per capita in 2010 was 102.4 per cent of the UK average and this would be expected to yield tax of £9,000 per person. The shortfall in tax in Wales compared with England is therefore £2,400 per capita.

Thus the combination of higher public spending of £1,383 and lower tax generation of £2,400 can be readily reconciled with the overall difference in the fiscal deficit between England and Wales of roughly £4,000. This is summarised in Table 2.

Table 2.

Relative Fiscal Deficits in England and Wales 2010-11 (£ per capita).

Fiscal deficit in England	2,000
Relative tax shortfall in Wales	2,400
Relative higher expenditure in Wales	1,383
Fiscal deficit in Wales	5,783

In practice the two factors are not unrelated. For example higher public spending in Wales on Social Protection including on tax credits, income support and on housing benefits are bound to be higher in areas of lower wages, higher unemployment and greater social deprivation which in turn are reflected in lower GVA [about 62 per cent of GVA arises from compensation from employment, that is, wages and salaries] and a corresponding lower tax yield.

The policy challenge is to analyse the various components of GVA which lead to underperformance in the case of Wales and then to formulate polices to address the causes giving rise to these weaknesses. I published an analysis of the elements of GVA leading to the relative GVA shortfall in Wales in Agenda almost two years ago (Agenda Winter edition, 2010 and carried on ClickonWales.org here). It would be encouraging if the Welsh Government, in facing up to the continuing relative deterioration of the Welsh economy, showed that it too was using such an analytical approach to formulate evidence based economic development policies.