Rethinking how Wales is funded
Mike Hedges – Gŵyr Abertawe
I have consistently supported the ability of the Welsh Government to borrow prudentially, as every local authority in Wales can.
There should be no borrowing limit, but the government should have to produce a repayment plan including cumulative repayments.
It is ridiculous that the Welsh Government can use the modified version of PFI, which is the old PFI scheme but without janitorial services for capital expenditure, but not the cheaper direct borrowing method.
When I was a member of the finance committee it consistently asked that money could be moved into and out of reserves with no limit.
All councils have had this power, so it is an anomaly that the Welsh Government does not have this power.
I have previously described this as the Treasury treating the Welsh Government as a Westminster department.
There is a strong economic case for a United Kingdom, where not only is Wales a net beneficiary of redistribution, but also larger countries can more easily withstand economic storms and support the less affluent parts.
The banking crisis in Iceland is an example of the problems faced by a small country.
Wales has substantially more of its expenditure, including expenditure on people in Wales, coming from Westminster, including funding to the Senedd and the Welsh Government, than is raised in Wales.
We know that Wales get 10% more than England on total expenditure.
We know in devolved areas Wales gets 20% more than England for the same responsibilities.
Barnett
We know that the Holtham commission said Wales need 15% more than England in devolved areas to provide the same level of service which then became the Barnett floor.
We know the income tax take in Wales is approximately 75% of England.
There are four possible methods of funding Wales.
The Barnett Formula which evolved from the Goschen Formula that was specifically designed to preserve Scotland’s public spending advantage over England.
The Formula was never designed with Wales in mind. Applied rigorously, the Formula should have led to convergence in levels of spending per head across the UK. The Formula has, however, preserved a spending advantage for Wales over England.
There have been periodic adjustments to the operation of the Formula since 1980, mainly through relative population changes. These adjustments have increased relative spending levels in Wales.
The main advantage of the Formula is its simplicity and objectivity as a basis for making spending allocations.
The formula sets the minimum funding level, Northern Ireland under Therese May’s premiership got additional funding but this was not the first time that Northern Ireland had additional funding above the Barnett formula.
There has been notable success in Wales in securing money above the formula since devolution, for example in relation to the Objective One matched funding and the funding for city deals.
We also have the Barnett floor, at the 2015 Spending Review, the UK Conservative Government implemented a funding floor in Wales.
This provided a guarantee that the Welsh Government’s block grant funding per head would not fall below 115% of equivalent funding per head in England.
The second option is that Wales pays its share of Westminster costs and keeps the rest of the taxes raised in Wales. This is what independence looks like. This would have a catastrophic effect on public expenditure in Wales.
The only way Plaid Cymru could get anywhere near getting it to work is to not fund the state pension, other central benefits, and not fund the Welsh proportion of the national debt charges.
Simple
The third option is that Wales gets its population share of devolved expenditure. This is the simplest and the second most catastrophic.
The 115% Barnett floor would be reduced to 100% of English expenditure. This would lead to a removal of the Barnett floor that protects expenditure in Wales and sees Wales doing better than England.
The fourth option is to create a new formula that takes into account sparsity, age profile, and deprivation. Any new formula will not be without criticism.
Consider the local government formula in Wales and the misunderstanding, arguments, and misleading statements we have on it.
Anyone who has followed discussion on it would not realise that the two authorities who receive the least government support per head are Monmouthshire and the Vale of Glamorgan.
The local government s formula could be compared to England and be used for calculating relative local government need between England and Wales.
Age
Health and social care are a major part of the Welsh budget. On health, there is the simplistic age-based formula to calculate relative need.
Then there is the more complicated and accurate formula, including the relative occurrences of all conditions and diseases with a cost weighting attached.
This would create a long and detailed formula, but it is relatively easy to achieve, the data exists, and the calculations can be done.
The data on relative poverty, rates of long-term ill health and sparsity are known. The rest of the expenditure need in Wales could be calculated in the same way.
The Holtham Commission proposed as well as the Barnett floor, the production of a needs-based formula.
Fair funding for Wales should be on the basis of relative need and as reform to a needs-based formula will take time, work needs to start on it now.
I support in principle the introduction of a needs-based formula for determining the Welsh block grant, but we must realise it could reduce the current block grant.
These calculations of relative need should be undertaken immediately.
If Holtham is correct and Wales needs 15% more than England, then Wales currently gets over a £ billion more than the calculated need.
Why would Wales want to change to a formula that gave it less than it gets now?
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How about we make our own money, and not go out with a begging bowl and complain life isn’t fair. If you want strong public finances you need to let the private sector grow. If we did this over a period of 20 years. It would be revolutionary. Why can’t we be rich and affluent? It’s because of stupid left wing policies and economic incompetence.
Nail on the head. We need a better deal but it would be nice if, just once, we started talking about how to support ourselves. 27 years of sitting there with a begging bowl and saying we can’t possibly do anything ourselves when we don’t get what we want. It’s extraordinary.
No it’s not just because of left wing policies. There is strong historical and social reasons our tax income is lower. But i do agree Welsh government doesn’t focus on how to the private sector grow. Virtually every policy from this plaid government is about benefits or taxing etc. No plan about how to develop private enterprise. It’s one of the flaws in devolution in my view. They get effectively the same money regardless of economic performance, despite it being a devolved area. There is a massive contradiction with plaid- want more money from Westminster, but this will also grow… Read more »
Under the current devo deal, growing the private sector raises more money that almost all goes to London with almost nothing extra coming back.
Odd thing to say. It comes back to us in creating jobs. It also benefits us if we were to create a country where entrepreneurs and SMEs thrive.
Would you work overtime for free? Politicians aren’t going to take risks where there’s no reward. Just like entrepreneurs.
A stronger private sector means better-paid jobs, less brain drain and a more self-sufficient economy. All of those outcomes would strengthen the case for greater autonomy or independence. It may not have been in Labour’s interest but would definitely be in Plaid Cymru’s interest. Taxpayers want to see more of the wealth created here retained and invested here rather than flowing to England.
I’m not arguing against a stronger economy. I’m pointing out that the current devolution settlement actively discourages it.
Adjusting the size & material that the begging bowl is made of seems to be all Mr Hedges is concerned with! Retaining the colonial status quo where dodgy accounting is used to keep us in our place! Is this really how low our worth is? We are the only nation in the world that can’t be independent? Are we too stupid? Too slow? Or just too servile and accepting of the easy con trick? A nation of congenital suckers? Perpetual victims of circumstance? I don’t think so! We need to get out of this viscous colonial circle! Take responsibility for… Read more »
Almost all the small independent countries in Europe are now much more prosperous than they were as colonies of bigger countries (Russia, Serbia and the UK). I cannot see why an independent Wales would not eventually follow suit. Moreover, unlike Mr Hedges, I detest that my country, Wales, is being totally dominated and controlled by a far bigger country, England – in perpetuity if he gets his way.
Wtf Serbia??? But comparing Wales to former Soviet republics is tiny bit of a false analogy, given the USSR was a one-party authoritarian state that suppressed political social freedoms, and most of them joined the single market . I don’t think Wales in the UK is quite the comparison you think it is, I mean which part of a democratic country with devolved government, free elections and a fair bit but self-rule is analogous to the USSR?!
543 English MPs v32 Welsh MPs& the final legal control of Cymru lies with Westminster! If Westminster decided to dissolve the Senedd tomorrow there is nothing we can legally do about it! Central imperial control disguised as democracy!
There is only 70 MPs in London, 10 in Surrey! Central imperial control is destroying these parts of the UK as well you know?!
Or the other extreme- the Senedd only has 6 representatives from Wrexham and Flintshire, central imperial control of Cardiff bay disguised as democracy!
(Totally ridiculous argument and thing to say, especially in context of discussing the USSR)
I agree that the UK is nothing like the USSR or Yugoslavia. However, many countries that became independent from the Soviet Union or Yugoslavia in the early 1990s successfully transitioned from being under communist rule to successfully functioning democracies that achieved EU membership within little more than a decade. That does not mean Wales is in the same situation, but it does show that small nations are more than capable of thriving after constitutional change. I therefore see no reason why Wales could not succeed as an independent country which could qualify for EU membership.
Fair point, but the main reason they saw an increase of 3 or 4 times gdp, was because the iron curtain fell and they benefitted from the single market- neither of which are relevant to modern day Wales. Small nations can indeed survive, but each country has its own circumstances. In our case, it’s dealing with a massive fiscal deficit.
It’s completely academical, it’s not going to happen – and a distraction from the fact that we have real devolved issues that require attention!
How big do you believe the fiscal deficit is Alwyn ?
Based on ONS data, it’s about 25%. That’s about 40% worse than Greece at the height of the global financial crisis. Greece’s deficit was financed by foreign investors, who walked away and left the EU and IMF to foot the bill as they didn’t want to throw good money after bad!
Thank you for the reply Alwyn. Unfortunately it shows that you’ve taken no notice whatsoever of so many explanations as to why the deficit in the event of Cymru becoming an Independent country would be a far smaller amount than you quote. And a manageable amount also. The ONS data you mention refers to the way the numbers (tax/expenditure) are measured now. There are many ways to find out the correct information. You could try reading the ‘Independence in Your Pocket’ booklet for example. Just one example of the way in which numbers are measured now compared with if Cymru… Read more »
Democratic? You HAVE to be joking! Just because we can vote and chage the the government from party label to another doesn’t mean democracy comes into it.
Real democracy is Switzerland and Tristan da Cunha.
The current GDP of Estonia, Latvia and Lithuania is significantly higher than that of Russia. Likewise Slovenia and Croatia compared to Serbia (that effectively ruled them). Moreover the Irish Republic’s GDP is now more than twice that of the UK and Malta’s GDP is on a par with that of the UK and significantly higher than that of Wales. These are undeniable facts whatever irrelevant assertions Alwyn makes.
‘The banking crisis in Iceland is an example of the problems faced by a small country’. Iceland, like everywhere else, was hit by the global banking crisis of 2008. By the mid 2010s, it had recovered. Iceland has been independent of Denmark since 1918 and has a population fewer than half a million. Norway has been independent of Sweden since 1905 and has a population fewer than 6 million. Ireland has been independent of the British Empire since 1922 and has a population fewer than 6 million. Other independent countries have populations in the tens or hundreds of thousands only.… Read more »
Slight factual correction, Iceland became a fully sovereign nation in 1944, not 1918. Norway had, to all intents and purposes, been independent since 1814, when the Norwegian Constitution was implemented and which is celebrated on May 17th each yea, but came under the Swedish crown, an arrangement that was ended with a 1905 plebscite.
You ask a very good question, why can’t Cymru be independent? Bhutan is a fully sovereign country with just over 800,000 population.
Just give Wales the Crown estate money it steals from us every year..
Thats about 15 million per year.
Scotland gets crown estate revenue, but loses exactly the same amount from the block funding grants. Net sum zero
Not sure where you get your figure from.. current Crown Estate profit in Wales is £240 million. The new off shore sustainable energy licences will bring potential billions..
What your referring to is the option fee, a one off payment to secure rights. We won’t see that for another 50 years. England has got close to 10 billion from option fees as there are lots of wind farms in the north sea. Next year, it’ll be back to normal (10 million pa). In any case, whatever it is, it’ll be knocked off the block grant, like it does in Scotland
Our hands are bound tightly by Westminster. We will never reach our true potential as a country unless we have all the powers enjoyed by a normal functioning democracies. Only with independence can we realise this.
‘I have consistently supported the ability of the Welsh Government to borrow prudentially, as every local authority in Wales can.’ Having compared our Senedd to a local authority Mike Hedges then complains about the English government doing the same. He goes on – suggesting that in an independent Cymru, ’Wales pays its share of Westminster costs’. Hedges is part of the Labour Party that has kept Cymru “sooooo poor” but that has finally been rejected by the electorate. The young people of Cymru (those under 34 years) have spoken. They overwhelmingly support Welsh independence despite this huge propaganda machine that… Read more »
Cutting out the Westminster middle men will put Wales at the trade table will make it better for Wales
Which ever way you look at it Wales/Cymru is being shafted by London Westminster Governments and thats all parties until we get Independence we will always be ROBBED BLIND
Another British Labour unionist party politician painting a picture of Welsh dependence on our Westminster masters. If I can offer a genuinely heartfelt message to our unionist Labour politicians here in Cymru – enough is enough, you’ve had over 100 years of political dominance and by most economic indicators we’re amongst the poorest in western Europe PLEASE LEAVE US ALONE!!!!! (I’m being polite I should have finished with a tirade of four letter expletives)
There are allot less problems looking after a population of 3 Million people compared to looking after 60 Million+ people.
Apparently the sweet spot for effective and efficient governance is 5m to 12m. Above this threshold government struggles with regional inequality, government bloat, lack of resilience, legislative gridlock and social instability. Below this threshold the population is too small to be economically self-sustaining and must rely heavily on niche sectors such as energy, tourism or tax haven status.
My question asking how an independent Wales would deal with the issues raised by our land border has disappeared, presumably ‘cancelled’ under the nation.cymru algorithm by those who cannot tolerate hard questions.
But the border will not disappear so easily.
So you have this doomsday obssession with the border, so perhaps you could tell us what your reasonable, logigical border scenario would be in the event of Independence.
She has a point. The border means Wales will never be able to deviate much from ‘rest if the UK’s in the unlikely scenario of Welsh independence. No under cutting of taxes, no state aid, no special preference to Welsh businesses. Basically exactly as NI has to stay part of the single market after Brexit, Wales will have to stay part of the UK internal market