Laws aren't the answer

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I’ve thought all along that the Tories’ proposal for legislation mandating the elimination of the budget deficit was just a silly gimmick.  In the first place, no government can ever tie the hands of another – any law passed can equally easily be repealed - and in the second place, whether, when, and to what extent the deficit should be reduced depends on economic circumstances.  Making it an absolute priority regardless is poor economics.

I’m afraid that I don’t think that Plaid’s proposal for a law mandating fair funding for the north (as noted by Cai Larsen last week) is any more sensible.  The first objection still applies – no Welsh government can ever bind its successors.  And a variation on the second also applies – whether equality of funding is the right thing to do at any point in time depends on the circumstances at the time.

That’s not to say that there isn’t a problem with the way the Welsh government is spending our money at present – there clearly is.  And it doesn’t only affect the north; there are those of us out here in the wild west who also feel that a Cardiff-centric government is replicating the centralist tendencies of the UK and concentrating spending in and around the capital.  It’s just that legislating for equality of spending isn’t the right answer.

In the first place, it might well be that in some years, depending on projects and priorities, it might actually be right to spend more per head in the north than in the south-east.  And what do we mean by the ‘north’ anyway?  If equality was achieved by spending all the north’s money in Wrecsam (nothing against Wrecsam, by the way), how does that help Ynys Môn?  And demanding equality of spending, carried to its logical conclusion on a village by village basis, might also mean that no large projects could ever be undertaken – anywhere.  Over what period would this ‘equality’ be mandated?  The shorter the period, the harder it would be to finance large projects; but the longer the period, the more meaningless the proposal becomes in practical terms.

No, I simply don’t think that the proposal for legislation to control the way money is spent in different parts of Wales is a sensible response to the problem.  It looks like a gimmick; just like Osborne’s deficit law. What we really need isn’t legislation, it’s an economic plan for Wales with a vision for improved infrastructure and for boosting the economy of all parts of the country.  It’s not exactly a new idea, of course (although the 1970 version might need more than a little dusting off).  But real, hard proposals will do more for the north and west than any amount of meaningless legislation.

Mathematics and politics

Tweet I’m not over-impressed by the response of either Carwyn Jones or Kirsty Williams to Plaid’s claim that Wales would have £1.2bn extra per year if funded on the same basis of Scotland.  Calling it a bizarre figure and claiming not to understand where it has come from are not exactly grow-up responses.  Comparing it with the figure of £300m arrived at by the Holtham Commission is simply not comparing like for like; the figures are the result of calculating two very different things.

The Holtham Commission set out to calculate by how much Wales was losing out as a result of the inbuilt unfairness of the Barnett formula, and came up with a figure of around £300m a year.  There’s a sense in which it’s a ‘snapshot’ figure, and of course, it can change over time.  It’s the result of calculations based on a range of factors which are not themselves constant, but it’s a figure which is widely-accepted, and an entirely reasonable basis for debating change to the underlying formula to come up with a needs-based distribution.

The figure of £1.2bn, however, is something very different.  Scotland is, it is generally accepted, over-funded compared to what the situation would be under a needs-based formula, but there is nothing inherently unreasonable about estimating how much better off Wales would be if we were over-funded in the same way as Scotland.  As a mathematical exercise, it’s an interesting and novel way of highlighting the extent of the unfairness built into the system. 

I’m rather less sure about the politics than the mathematics, though.  On what basis is it reasonable for any politician to argue that Wales should be over-funded just because Scotland is?  Asking for a sum in excess of a needs-based share is a huge jump from a wholly reasonable demand for fairness.  And whilst the facts that Scotland gets more than it should while Wales gets less might, in mathematical terms, be just two different variables in the same equation, giving attention to the Scottish part rather than the Welsh part seems a strange approach, more likely to persuade people of the need for a downward revision in Scotland than an upward one here.

Perhaps that’s the intention.  It is natural for those getting a bigger share of the cake than an assessment of needs would determine to seek to protect their special treatment; and there is always scope for considerable debate about how need is defined and measured.  And those are the two big problems which need to be addressed in any reform of Barnett.  But they do need to be tackled, and any revision to the formula will inevitably mean a reduction in Scottish over-funding, which is precisely why the parties at Westminster are avoiding the question.  From a Welsh perspective, however, and for as long as the devolved administrations are funded through block grants, I really can’t see any basis on which we can reasonably demand more than our fair share.

An offer we can't refuse

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Devolved power over taxation, in the form likely to be ‘given’ by the UK Government is something of a double-edged sword.  I can understand why the Labour manifesto for the Assembly elections tried to rule it out, although it wasn’t a very realistic stance to take.

I can understand as well why they’ve now shifted their position to that put forward in Plaid’s Assembly manifesto, which is that it needs to be discussed as part of a package which also includes fair funding for Wales.  I’m not sure that position is any more realistic though.

As Eurfyl ap Gwilym has pointed out, taxation powers are likely to be ‘given’ to Wales whether we want them or not; trying to refuse them or make acceptance conditional seems unlikely to deter the UK government.  It’s also dubious politics; whilst people will naturally be hesitant about the possibility that they might have to pay higher taxes, I suspect that most people will readily understand the anomaly of a government which can spend money but not raise it.

It doesn’t follow, of course, that the tax levels in Wales have to be any different after tax powers are devolved than they are now.  Provided that the associated variation in the block grant precisely matches the amount of money which would be raised by keeping taxes at the same level – which ought to be the case, initially at least – then the Assembly’s income is unaltered.  It might be argued that that makes the whole exercise a little pointless.  In practical terms, it probably does; but it establishes the principle that tax-varying powers can and should be devolved.

Unless Scotland is somehow to be excluded from any Barnett reform, I think we can take it as read that any move to ‘fair funding’ through the block grant is now off the table until at least after the referendum on Scottish Independence.  So, whilst associating the two issues during the discussions with London might look like a good idea to the Labour Party, it simply isn’t going to happen in practice.

What would be more constructive is to widen the debate to include borrowing powers, and a wider range of taxes which can be varied.  I’m sceptical about the over-concentration on income tax in the discussions to date.  It’s a tax which provides a major source of government revenue, as well as being the most visible tax from the point of view of the taxpayers, both of which are ‘good’ in terms of ensuring fiscal responsibility.

However my argument for devolved taxation revolves not simply around that issue of fiscal responsibility, but around the question of giving the Welsh Government more power over the economy of Wales.  And that requires control of a number of different taxes, and the ability to vary them in different ways at different times.

Rather than trying to constrain and limit what the UK Government is proposing by seeking conditions which are extremely unlikely to be conceded, it would be far better for the Welsh Government to grasp the opportunity with both hands and seek to widen the remit of which taxes are devolved.

Power clawback?

Tweet I'm not entirely sure what to make of the article by Darren Millar on WalesHome today. Is it a statement of opinion by one individual Tory AM - or is it clarifying and adding detail to the statement made by Cameron - which would make it a great deal more sinister?

The basic analysis – i.e. that a government which has responsibility for the spending side of the balance sheet but not for the income side has no real incentive to wealth creation – is one that I can understand, even if not entirely agree with.

It assumes that governments will only work for wealth creation if they are directly incentivised to do so, rather ignoring the possibility that some politicians might actually do so because they believe it to be right for Wales. I can forgive him that to an extent – most Tories seem to have an inbuilt belief that people will only do what they are incentivised to do. That's one of the fault lines between the political right and the political left.

What is a good deal less clear – and I'm not entirely sure that this isn't deliberate – is what solution is being proposed. The obvious solution would be to give the Assembly Government at least a degree of control over the income side as well. It seems increasingly likely that Holtham will recommend something along those lines, given the report of the Calnan Commission.

Yet Darren Millar ("This is not the same as advocating Assembly powers for raising taxes") seems to be specifically ruling out that option. So what actually is he suggesting? A funding formula which includes "elements which provide incentives for wealth creation" sounds to me like a conditional funding arrangement under which the Treasury only passes money across to Wales if the Assembly Government achieves a set of targets set by London. And that in turn sounds like a major clawback of power from Cardiff to London.

That brings me back to my opening question. If this is just a statement of opinion by one individual Tory about the nature of the relationship between Cardiff and London, then it's no real surprise. I'm sure that it's in line with what many Tories believe - Cardiff needs to be reined in. But if it's a clarification and amplification of what Cameron meant when he agreed that the funding formula needs to be looked at, then it takes on a much more sinister meaning.

Asking the right questions

Tweet I was not in the least surprised at the results of the recent opinion poll about whether people would prefer to plug the budget gap by raising taxes or by cutting public spending. But I'm not convinced that the survey has added much light to the debate. It seems to have proved, mostly, that the answer you get depends on the question you ask.

If the choice people were given had been between modest tax rises and closing half the country's hospitals, I'm reasonably certain that the headline could equally have read - 'people demand tax increases'. That alternative question is not a fair or realistic way of framing the question, of course; but my point is that neither was the question which was actually put to people.

'Cutting public spending' is always likely to prove popular; it's only when people are asked more specifically about what to cut that they have to give the question a bit more thought. Far too often, some politicians (of all parties, sadly) lead people to think that the answer is as simple as 'eliminating waste and bureaucracy'. There's a danger that that simply avoids facing up to the real question.

That's not to say that there isn't any 'waste and bureaucracy' in public expenditure. No organisation can be as big as the public sector without having some scope to improve its efficiency; but it is wrong and misleading to suggest either that such improvements can be achieved as a result of simply cutting their overall budgets by an arbitrary percentage, or that the level of savings likely to be achieved will be enough to plug the budget deficit without any cuts to services.

There are some big programmes which could and should be chopped, of course. There's a developing consensus that ID cards and the replacement of Trident are in that category. I'd add illegal wars to the list as well, although bringing involvement in those to an end will not be a simple task.

Even after taking such obvious steps, the gap between government income and current levels of expenditure remains a large one. And, for a variety of reasons including the need to spend on something else in some cases, and the costs already committed, the savings are not likely to be as large as the headline costs of the projects.

The cost of bailing out the financial sector has been a phenomenal cost which has led to a hugely increased level of government debt. (As an aside, I'm far from convinced that enough is being done to ensure that the same cannot happen again in the future. That's not directly relevant to the argument about how we get out of the current hole, but it's vital that government tackles that issue, and does so soon.)

Plugging that gap will be the major economic task facing the next government, and for all the attempts by Labour to try and paint themselves as being different from the Conservatives on this issue, it seems to me that whichever of the two leads the government after the election, there will, in reality, be a mix of both service cuts and tax rises. That will pose a particular challenge in Wales, for two main reasons.

Firstly, we are more heavily dependent on the public sector, and secondly, under the current devolution settlement (and even after the changed situation which will pertain after the referendum which is to be held in the next two and a half years) we have no tax-varying powers. Cuts in English public expenditure will lead to an automatic reduction in the block grant – and the Welsh government will find itself forced to cut budgets in some areas.

LIke most other people, I find discussion of Barnett incredibly boring – but the issue of fair funding for Wales has never been more important than it is right now. The current unfair funding system means, effectively, that those parts of the UK which are underfunded on a needs basis will suffer disproportionately from spending cuts – the exact opposite of what any needs-based approach would suggest should happen.

The One Wales government will be faced with some difficult choices in the near future - but we should surely start by trying to ensure that we have a fair allocation of funding in the first place, rather than by rolling over and accepting the situation.