Finance

Dude, where’s my consequentials?

This article was written by Guto Ifan. Guto joined the Wales Governance Centre at Cardiff University as a research assistant on the Government Expenditure and Revenue Wales (GERW) project, analysing public finances in Wales.

The 6-page-long list of financial concessions gained by the DUP has dominated the reaction to their deal with the Conservatives. For the DUP, it is a stunning achievement. They have secured £1 billion of extra funding for devolved areas, flexibility over another £500 million of funding, and have lined up many other goodies for future deals over coming years.

For the UK government, the deal will likely create grievances which may ultimately prove it to be a fiscally and politically irresponsible move.

The scale of extra funding for devolved policy areas like health and education makes it the most remarkable bypassing of the Barnett formula in its long and contentious history. To put in context, it would have required around £15 billion of extra spending per year in England to trigger an equivalent amount of Barnett consequentials. If Wales received an equivalent amount through the Barnett formula, it would overturn well over half of all the real-term cuts made to the Welsh budget since 2010.

The deal also represents an extreme example of a long-standing phenomenon in UK territorial finance – from the ‘Vow’ to Olympic funding, politics trumps principles when it comes to how investment flows through the UK. In the words of Professor Richard Wyn Jones, no one can doubt that ‘the UK is a realpolitik union’.

Comparisons being made between this deal and UK government funding for City Deals across the other countries of the UK are disingenuous and misleading; not least because of the sheer amount being invested over such a short period of time. The Conservatives pointed towards the £1.3 billion of investment in Scotland and Wales through City Deals committed since 2014, above and beyond the Barnett Formula. But this investment is over decades to come. To put in context, the DUP have secured more extra funding from Westminster in two years than the Greater Manchester City Deal secured over 30.

In the agreement documents and subsequent media interviews there have been repeated references to the “unique and specific challenges” faced by Northern Ireland. Welsh politicians will see the bitter irony in this, given that successive UK governments of all colours have repeatedly refused to introduce a system of devolved finance which recognises the varying needs of each country. No matter how challenging the unique circumstances of Northern Ireland are, they are probably already covered by the fact that identifiable public spending per head there is 21% higher than the UK average[1] (compared with 10% higher in Wales).

It is true that Wales does quite well out of current funding arrangements – it receives roughly £120 per person for every £100 spent per person in England on services devolved to Wales, and the underfunding issue identified by the Holtham Commission back in 2010 has indeed been ‘resolved’. However, this has come about not through any benevolent action on the part of the UK government (or the individual efforts of the Secretary of State for Wales) but from the peculiarities of the Barnett formula itself – Wales’ recently slower growing population has meant that the block grant it is given is shared between fewer people.

As striking as the headline extra funding for Northern Ireland is, it may well pale in comparison to the concessions the DUP will be able to win if this government survives the next few years. Every budget vote will present an opportunity to strike deals on the long list of vague areas mentioned in the agreement.

The agreement mentions (yet un-costed) commitments for the creation of Enterprise Zones and a set of ambitious city deals (even though, we’re meant to believe the whole deal itself is just one big city deal).

On tax devolution, the agreement commits to “flexibly” manage the devolution of Corporation Tax rates, which could mean the UK government bearing the short-term costs of a tax cut in Northern Ireland. Detailed consultative reports on the impact of VAT and APD on tourism could also lead to future concessions. Northern Ireland will certainly be first in line to benefit from any relaxation of EU rules on devolving and varying taxation across regions.

The deal also commits to ensuring the needs of Northern Ireland are properly reflected in the UK Shared Prosperity Fund, which is set to replace current European regional funding. Wales currently receives over a fifth of all such infrastructure investment – European Union control over these funds removed UK political considerations and meant allocations were based on statistical indicators. Given Wales’ perennial weak position in the UK financing pecking order, this could well become another cause for concern and anger in Wales.

Only last week, Carwyn Jones repeated his call for an independent arbiter on financial disputes between devolved and central government, as part of a wider reform of joint-governance structures. This week’s deal makes his case all the more compelling – but a compelling case is far from enough in this sharing Union.

[1] The Holtham Commission estimated the respective need of each devolved country based on demographic, economic and social indicators and the importance the UK government attached to these indicators in its spending decisions in England. It was estimated that Wales’ relative need was around 115% of England’s level, 121% for Northern Ireland, while only 105% for Scotland.

* Figures on relative spending in Northern Ireland and Wales were edited at 13:23 on Tuesday 27th June.

Comments

  • iestyn

    I’m confused by the £120 figure.

    The latest expenditure figures I see from the ONS (15/16) show Wales getting £12,531 per capita compared to England’s £11,297.
    (Source: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/articles/countryandregionalpublicsectorfinances/2015to2016#expenditure)

    That is £111 per £100 of England spending. Has the Welsh budget shot up by nearly 10%, the England’s population shot up by the same, or English expenditure been cut without a corresponding cut to Wales?

    Or is this figure based on a more Conservative (capitalisation intentional) estimate of expenditure than the ONS figures?

  • iestyn

    Diolch Guto!

    Looking at the figures again briefly, nothing quite makes sense to me. £12k per capita gives overall expenditure of £36bn+, more than twice the Welsh government budget, whereas the £120 presumably is only directly devolved spending. In other words we are not getting £120 per head for every £120 spent in England, and as there are more devolved spending areas in Scotland, presumably their per capita figure is higher on devolved spending than it looks in the ONS figures.

    Lies, Damned lies and Statistics…

  • Graham Davies

    Ydych chi’n siarad Cymraeg Guto? Pam felly nad yw’r erthygl hon yn Gymraeg?

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