It’s not Westminster’s money: Why we should stop believing the myths about Wales’ ‘block grant’

Peter Daniels

During the first Covid-19 Lockdown, the Welsh Government received a payment of £2bn from the UK Treasury, described by an unnamed Tory spokesman as “an unprecedented level of financial support for Wales”.

Nothing could be further from the truth.

Every year, the Treasury, utilising our own tax revenues, supplies the Senedd with a Consolidated Welsh Block Grant to cover expenditure in the devolved government’s areas of responsibility.

The grant is calculated on the basis of the previous year’s grant, plus what are called ‘consequentials’, additional sums which match any extra English activity in these areas, allocated pro rata population size, in line with the so-called Barnett Formula.

In this instance, the £2bn was a ‘consequential’ of additional virus-related spending by England, the Welsh Barnett equivalent of a significantly larger English spend of £50bn.

Yet Tory Government propaganda would have you believe that this was another example of English Westminster subsidising third world Wales.

Yardstick

The Welsh Block Grant actually only represents about a third of total Welsh expenditure, and the Barnett Formula applies only to incremental additions to it. Yet the grant and the formula seem often to be at the heart of any debate concerning Welsh funding.

The Tories claim the Celts are overpaid by the formula, whilst the Welsh argue that the formula should be ‘needs based’ rather than pro rata population size.  This Welsh point of view reflects the findings of the independent Holtham Commission which reported back in 2010.

Not only did the Commission argue the case for a ‘needs based’ system, but proceeded to calculate Wales’ per capita need (in relation to the total grant and not just ‘consequentials’) as being 15% above English spend; the result of an older, less healthy, less wealthy demography, and a mountainous, more sparsely populated geography.

By accident, or because such needs had translated themselves into a demand for services, the Welsh Grant in 2010 was actually 111% of the English equivalent, with Holtham believing it should have been higher.

But linking Welsh spend directly to England’s activity actually confuses the issue. If ‘consequentials’ are added pro rata population, to a grant that is already more than pro rata, the average ratio between Welsh and English spend will, by definition, decline. In contrast, if England spend less, so that Wales has a lower percentage of its budget calculated pro rata population, the Wales/England ratio will actually increase.

Thus the Westminster austerity budgets between 2010 and 2016 actually saw the Wales’ Grant decline in real terms, even as the Wales/England ratio rose from 111 to 120, the increase in ratio being created by England spending less rather than Wales receiving more.

Using English spend as the yardstick in this way will always see Welsh spend being influenced by English budgets and policies rather than by Welsh requirements.

After 2010-11, this saw the Block Grant prove insufficient to meet Welsh needs, with the Welsh Government having to transfer money originally ring fenced for local government to make up each year’s deficit. In 2020-21, before the onset of Covid-19, the grant was still lower in real terms than in 2010-11.

To quote Cardiff University’s Wales Fiscal Analysis in 2019: “The last nine years have seen the longest sustained period of spending restraint in UK history.”

So much for the Conservative Government’s claims of “unprecedented support”!

Spend

In the Fiscal Framework Agreement signed in 2016-17, the Westminster Government finally agreed, 18 years after devolution, that the total Welsh Grant should be ‘needs based’.  They also agreed that the Holtham Commission’s calculation of this need as being 15%  above England’s spend should be the target.

What the agreement wanted to avoid however was the need each year to negotiate next year’s formula on the basis of this year’s actual spend. Such debates might even make Brexit seem like a walk in the park.

With the then current Wales/England ratio at 120, it was assumed that additional pro rata ‘consequentials’ would over time bring the grant down to 115. To slow the speed of this decline, the formula of pro rata +5% was to be applied to new ‘consequentials’. Once the 115 level was finally reached, it would then replace 105 as the new formula.

As usual the Tory party exaggerated the deal and their part in it. To quote Alan Cairns from the ‘Glamorgan Gem’: “As Secretary of State for Wales I negotiated a new settlement which sees Wales receive £120 for every £100 spent in England”.

To correct Mr Cairns, the level for the time being was to be pro rata +5%, eventually rising to 15%. But the direct link to extra English spend still meant that the level of Welsh spend was dependent on English policies, and what use is the promise of £115 for every English £100, if England don’t spend the £100 in the first place?

The second article in this series will look at the further lack of expenditure and investment for Wales by Westminster in non devolved areas of government.

The two articles reflect the findings of a new book, Wales Denied: A Layman’s Guide to Welsh Public Finance available only on line from [email protected] for £10 plus postage.

Peter Daniels is an ex market research and advertising consultant, a graduate in Economics & International Politics, who, in retirement, has spent the last 18 months analysing Welsh public finance.