Wales’ response to Covid-19: borrowing and the road to federalism

Wales’ First Minister Mark Drakeford at a daily Coronavirus press conference.

Mike Sweet

Neither a borrower nor a lender be; For loan oft loses both itself and friend; And borrowing dulls the edge of husbandry.

While Shakespeare’s advice may be as sound today as it was when the Bard penned it, the benefits to a society and its government of borrowing has been seen as a cornerstone of economics in Britain since the 17th century. It was England’s monarch, William III, who first conceived a British national debt – encouraging City traders to offer for sale bonds that would finance the wars of the 1st Duke of Marlborough and later imperial conquests.

The syndicate created would become the Bank of England.

Today the arrangements for borrowing by the Welsh Government is coming into sharp relief as a means to maximise its ability to respond to the Covid-19 crisis and repair the damage the pandemic is having and will leave in its wake.

Chancellor Rishi Sunak and his ‘whatever it takes’ message delivered on March 20  – along with billions of pounds to support businesses and their employees – set the tone for the UK Government’s response to the crisis. But in terms of the national regions, the time-honoured Barnett Formula – a population-based funding calculation rather than needs-based calculation to meet the needs of public spending – is predicted to fall short of Wales’ needs.

A recent report published by Cardiff University’s Wales Governance Centre has spelled out many of the issues, not least that the Welsh Government’s measures to date to tackle the pandemic – costing more than £2 billion targeted at the economy and health services – is likely to be insufficient to deal with Wales’ demographic – an above UK-average elderly population, many of who have underlying health problems.

Recording confirmed Covid-19 cases per 100,000 of population has regularly seen Wales track above England in the past weeks, adding weight to the argument that Wales will suffer more and therefore requires more resources than the math of the Barnett Formula allows. But it’s a far from an exact science, as is much of the interpretation of data with coronavirus cases still on an upward though levelling trajectory. Figures for confirmed cases are influenced by the volume of testing in each region, making comparisons difficult; it will only be after mass testing that the true picture will emerge.

Changes to the Barnett Formula mechanism aren’t likely to happen soon, but a key recommendation from the WGC report is gaining traction: that restrictions on the Welsh Government’s ability to borrow be relaxed, or removed entirely for the duration of the coronavirus crisis.

Guto Ifan, Research Associate at the Wales Governance Centre, and the report’s author, told Nation Cymru:

“The Welsh Government’s limited borrowing powers went hand-in-hand with tax devolution, but the Treasury placed tight limits; the Welsh Government can only go up to a total of £1 billion, with a £150m annual limit.

“A temporary reform could be to remove restrictions and increase the annual borrowing limit to fund day-to-day spending, if initially, only for a fixed period. Broader changes to devolved borrowing powers should be for discussion after the crisis, but in the future, the fiscal framework should have an in-built property to allow the devolved governments to respond to a crisis such as Covid-19.”

 

Federalism

In this and the last financial year, the Welsh Government will have borrowed £125 million per year, almost its full quota, to fund capital spending – with principal and interest repayments to be made over 25 years. While the Government can theoretically borrow for day-to-day spending, under current arrangements this is only allowed if tax revenues fall short of forecasts. As it stands, borrowing to meet additional costs brought on by the coronavirus crisis is a non-starter.

Looking to international models of sub-national governments, loosening Westminster’s grip on the Welsh Government’s ability to borrow would not be out of step; few devolved governmental systems around the world have strict centrally-defined borrowing limits.

The ability of a national region (or English region for that matter) to support its public services more effectively through borrowing and enhanced economic powers, is an agenda item that is quickly becoming more resonant in UK political life, reviving the devolution debate with a new impetus. Allowing a sub-national government to borrow less-restrictively to meet unprecedented challenges makes sense, but it’s also a stepping stone to a reimagined Britain and revives the idea of what some would call ‘real devolution’.

And that’s where the growing support to extend the Welsh Government’s borrowing powers fits into a bigger picture, and one to which Labour leader Keir Starmer has firmly attached his banner. Starmer has vowed that even in opposition Labour will establish a “constitutional convention” to prepare for a federal system of government, “and build a future on the principle of federalism.” His words, though targeted at a Scottish audience, resonate loudly as the campaign evolves to strengthen the Welsh Government’s hand over its Covid-19 response. Of all Starmer’s statements as he begins the task of making Labour electable again, this may be the most portentous.

“We cannot go back to business as usual,” he said. “The NHS and our other public services must be given the support they need. Key workers in a time of crisis must be treated as key workers all the time.” And those ideas, synonymous with Labour’s core values may make the concept of federalism more than ever to a British society psychologically and emotionally transformed by its experience of the pandemic.

Exhausted by the divisive Brexit debacle, shocked by the trauma of coronavirus, the British electorate will be ready for change. The benefits of a federal future may well be seen not as a diversion as the anti-devolutionists claim, but a new and welcome reaffirmation of the concept of devolution itself – bringing decision-making closer to the people whose lives are affected by those decisions. Many could feel it’s just what the doctor ordered.

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Steve DugganPlain citizenTudor ReesJohn YoungE. Jones Recent comment authors
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Plain citizen
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Plain citizen

The problem with a ‘needs’ based system with powers of unlimited borrowing is that there is always a deserving cause or brilliant idea where the money could be spent (motor racing track, tidal lagoon anybody) with shaky economic justifications that politicians would love to see named in their honour. They pile on debt and the next generation has to pay it back including big interest payments. Eventually strangers run out of kindness and won’t lend anymore. Then default or very high taxes. Or borrow from the Chinese who take a lien on an asset like a port or hospital group… Read more »

John Young
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John Young

You’re correct in saying that there’s always a ‘deserving cause’ or a ‘brilliant idea’ where the money could be spent. And the motor racing track and the tidal lagoon may very well have had shaky economic justifications. I don’t know enough to argue the cases. But the problem that has existed for a long time is that unlimited borrowing has been happening and has been done on our behalf by the Westminster government, both Labour and Conservative, and they decide which areas that money should be spent in. And that is invariably in England. Many people argue that HS2 is… Read more »

Plain citizen
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Plain citizen

Good point , if we are going to have reckless idiots borrowing taxing and spending at least they should be ‘our’ idiots.

John Young
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John Young

Not that we want our government to borrow and spend recklessly but at least that money would be spent in Wales so you might imagine Wales would benefit to some extent.

Dr John Ball
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Dr John Ball

Interesting and timely article. My response is brief, but before doing so I’d like to comment on Plain Citizen. He is absolutely correct about “shaky economic justification,” the two schemes he mentions were expensive and vain glorious white elephants; thankfully – and perversely – the Assembly’s limited borrowing powers was a factor in their rightful demise. He then spoils his contribution with strange mutterings about borrowing, “kindness” of lenders and Chinese seizing assets – it doesn’t work that way! What the original article actually raises is the power – or potential power – of a Welsh state. Whilst federalism might… Read more »

John Young
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John Young

Well said John.

Tudor Rees
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Tudor Rees

I Agree!

Plain citizen
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Plain citizen

Very good.

Plain citizen
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Plain citizen

Just to add one point. The Sri Lankan government attempted to borrow on the international markets to develop a port facility which had many benefits for local business. They accepted an offer from Chinese investors and as is common the loan was secured on the port and its environs. On default the Chinese have seized the entire port and surrounding infrastructure. So much for sovereignty. The thing about a loan is that you have to pay it back.

Ben Angwin
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Ben Angwin

Lack of financial education in Wales is a remp. This ignorance means the free market is often seen even by those in power as a problem instead of an answer. More financial powers for Wales will help end this educational dirth.

E. Jones
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E. Jones

Has anyone given any thought as to why Wales has a larger “Older population “ ? It couldn’t possibly be that the Barnett consequential arrangement is out of date with the retirees from across the dyke could it ??

John Young
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John Young

In the 2011 census the population of Wales included 20.8% English (now around 22%). In Scotland the percentage was 8.7% and in NI it was 3.1%.

With a HUGE percentage of English people in Wales being retirees it’s hardly surprising we have an ‘older’ population. And that makes it just a bit galling when various English Conservative politicians criticise the Welsh NHS for it’s performance. By all means criticise when deserved but all those extra OAP’s are a huge drag on the Welsh NHS budget.

Steve Duggan
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Steve Duggan

More power on a local level is definitely needed, it’s well established in Germany. I suspect they’ve handled the virus better than us as a result of that devolved local power, it enabled their communities to act quickly. I honestly can’t see it happening here, especially with a Tory government. As an independent nation Wales would have a great opportunity to change things and move more power away from Cardiff.