Speeches and Articles: 23/07/2010
Observations on the Holtham Commission
The publication of the final report of the Holtham Commission coincides with a time of growing finacial stringency and a debate about expanding the responsibilities of the National Assembly.
While a wider discussion on taxation is of interest, it is well beyond the boundaries of the current debate on the evolution of Welsh devolution. It is the work on a fair funding formula for Wales that is of immediate relevance.
Wales underfunded
The key message from the final reprort of the Holtham Commission is that on a comparable needs basis as the English regions, Wales is under-funded. The Commission estimates that for every £100 spent in England, £115 should be spent in Wales. However at the moment Wales received £112-113.
This might not seem to be a substantial relative difference but it amounts to between £300 – 400 million in real cash terms. This would make an important difference in helping the Assembly Government make the difficult decisions it now faces.
It could be reasonably be argued that the relative funding needs is even higher. In England, ethnic diversity factors are a bigger driver of public funding compared to Wales. However, the current funding system does not recognise the Wales is also a diverse and bilingual country and that this also entails extra cost. The Holtham Commission estimated that this could increase the relative need in Wales to £116.
Barnett Convergence.
This emerging picture is a consequence of the way the Barnett Formula works. One of its effects is that as public expenditure increases, so the overall differences in funding between England and Wales will get smaller. This is called the “Barnett Convergence”. However this Convergence is not based on need but is a by-product of increased spending levels.
As long as public spending goes up, the funding gap per head between the two countries will get ever closer. Alternatively, when levels of public expenditure goes down, then the Barnett Formula will lead to a divergence in funding levels. However Prof Holtham thinks that the present UK Government's proposed reductions in spending, linked to current inflation, will not produce a significant divegence in the short term at least.
The Commission points out the the current formula used to allocate resources is extremely complex indeed. However the final report has identified a collection of six variables which would account for over 90% of the variation in the funding formulae. It is argued that this simplified formula should be used to allocate resources across the UK regions and the devolved administrations.
Holtham Floor
It is accepted that it could take some time for new arrangements to be put in place, not least because it would need to address the present very generous levels of funding provided for Scotland. To get around this, a device called the “Holtham Floor” is proposed. This would require that any extra funding that is spent in England, would be multiplied by 115% to reflect the higher level of need in Wales. This floor is not a perfect solution but it would more or less put an end to the “convergence” that is built into the present Barnett Formula.
Now is time for change.
While the Commission has not looked specifically at the data since 1999, Prof Holtham accepts that at present relative underfunding is due to the high levels of spending during the Labour Government. It is very possible that this under funding did not exist when the Assemby was established. It therefore follows that while it is sensible to call for a review of the Barnett Formula now, a review in 1999 might easily have resulted in less funding coming to Wales. This is the reason why Welsh Labour did not support an earlier demand to scrap the Barnett Formula and has only done so when the evidence shows that Wales is losing out.
This is important as both Plaid Cymru and the Liberal Democrats have been calling for a scrapping of the Barnett Formula for years. If their advice had been taken from the start, it is more than likely that Wales could have lost out considerably for most of the last decade.
Taxation devolution?
A considerable amount of final Holtham Report is given over to considering the devolution of some taxation matters. It is argued that this would create a greater link and accountablity between the taxation revenue that is raised and spent in Wales.
While this might be true, the practical consequences of such a move is would be to create uncertainty in Welsh funding streams. In addition there is virutally no evidence that even a significant minority of people in Wales wish to move in this direction in the forseeable future.
While it is therefore unlikely that there will be any real progress towards the devolution of taxation in the short term, the final report does throw up some interesting observations in the process of considering this matter.
Public Spending and taxation in Wales.
The Commission reports that £17.1 billion is raised in taxation in Wales in 2007-08. This is well above the total level of Assembly Government spending for the same year of £13 billion. However the Assembly Government accounts for just over half (54%) of the £25 billion of Welsh public expenditure, the other £12 billion being spent on things such as pensions, welfare benefits, police, prisons and defence. Thus Wales, in 2007-08, benfitted to the tune of over £8 billion by being part of the United Kingdom. This is the sum that would have to be found to fund the current level of spending in an independent Wales... the equivalent to an increase in taxation of over 45%.
The Commision also report that there are about 1.4 million income tax payers. As Wales has an adult population of 2.3million, this means that about 40% of the adult population does not pay tax. Consequently the increseas in personal tax allowance in the recent budget, will not benefit this 40% who fall outside the income tax net.
If have any thoughts on the above posting please feel free to contact Dr Gibbons via e mail at brian.gibbons@wales.gov.uk