Hiding the fiscal facts

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Nation.Cymru carried a piece yesterday about the response by Transport Secretary Chris Grayling to a claim by Plaid that Wales isn’t getting its fair share of infrastructure spending. 

The claim that Wales doesn’t get its fair share is a long-standing one, and I suspect that it’s true although it isn’t quite as black-and-white an issue as its sometimes presented.  It appears to many of us in the west and north of the country that the allocation of capital spending within Wales is as unfair as the allocation of capital spending between Wales and England; there seems to be the same concentration on the south east, in and around the capital city.  But merely looking at share of capital expenditure in relation to percentage of population is an over-simplistic way of doing the calculation.  As an example, we know that the cost of building a mile of road will depend significantly on where that mile of road is built – it will cost more in the centre of Cardiff than in the middle of Powys, for instance.  But the difference in ‘cost per head’ of population living in the area will not be in the same ratio as the difference in absolute cost; and neither will the calculated economic benefit.  In addition, the timescale for many infrastructure projects is lengthy; what looks like an unfair share in one year can potentially end up looking very different over many years.  Fairness is an elusive concept when it comes to sharing out infrastructure investment.

But there was another point in the Minister’s response which caught my attention.  He said “I do not think that the Welsh can ever claim that their money is siphoned off to pay for the rest of the country, given the amount of support from taxpayers elsewhere in the UK that goes into Wales...”.  This is, of course, the standard unionist line about taxpayers in England subsidising Wales out of the goodness of their hearts.  It is, though, as over-simplistic as the idea that fairness in infrastructure investment is as easy to work out as spend per head.  The problem is that we simply do not have figures which are accurate and comprehensive enough to determine whether there is a fiscal transfer between England and Wales let alone the size of that transfer; such figures as we do have are inevitably based on estimates and often arbitrary assumptions about the way expenditure should be split.

The GERW figures published two years ago were a useful attempt to analyse income and expenditure for Wales as part of the UK, despite the fact that they were misused by some who attempted to present them as being in some way relevant to the concept of an independent Wales.  There are, though, always going to be problems with such figures.  To take one example, any analysis of expenditure in or on behalf of Wales will assume that Wales needs to pay a percentage of the costs of central administration of government activities.  This is not unreasonable in itself; clearly where the UK Government provides services from which Wales benefits then, under the current constitutional arrangements, it is entirely sensible to apportion part of that cost to Wales.  But it’s worth asking what then happens to that money – assuming that it’s spent once and gone isn’t the whole story.  The reality is that that expenditure largely goes on salaries, and the people receiving those salaries mostly live in England.  The personal tax those individuals pay on their income and on their expenditure (VAT, fuel duty etc.) is then all counted as English revenue based on residence.  Given that probably around 30-35% of all private income (on average) ends up going straight back to the Treasury in tax, every £million spent ‘on behalf of Wales’ but not actually in Wales only costs the Treasury a net figure of around £650,000 - £700,000.  And that’s without the multiplier effect as the people providing the goods and services purchased by those individuals then pay their taxes and buy goods and services themselves…

Now, within a unitary state, none of that really matters.  It’s just a question of book-keeping because there is ultimately one Exchequer and one big cheque book.  But it does matter when people start talking about ‘siphoning off’ and ‘subsidies’, because the truth is hopelessly obscured.  There’s another aspect to what Grayling said as well – every time unionists like him talk about subsidising Wales they effectively undermine their own case for the union, which is that we pool and share.  Still, I suppose that I shouldn’t complain too much about that.

Destructive jealousy

Tweet I don’t really understand why people are getting so worked up about the clear conclusion that if some areas of the UK benefit from the development of the new HS2 rail line, other areas of the UK will lose.  That is surely an inevitable concomitant of any investment in improved infrastructure – ‘extra’ economic activity in one place is lust as likely to be ‘displaced’ economic activity from somewhere else as it is to be genuinely ‘extra’.  Justifying a project on the basis of the competitive advantages derived in one place has an inevitable concomitant elsewhere.

I particularly don’t understand the knee-jerk reaction of some which is to argue that because some areas lose out from a particular investment, then that investment should not proceed.  It’s a bit like saying ‘because we can’t have it neither can you’.  Surely the more constructive responses to say ‘if you’re having it we want it too’?

My biggest reservation from the start about the HS2 proposal has been that it has been put forward as a stand-alone project rather than part of an overall strategy.  I can understand other areas being ahead of us in the queue, but my concern is about the fact that we don’t even seem to be in the queue at the moment and nobody seems to be putting the case that we should be.  Rather than opposing a scheme which will benefit others surely it is far more productive and constructive to demand inclusion of Wales in the longer term plans.

There’s a danger in the attitude being displayed here that infrastructure investment becomes a race to the bottom.

Cardiff Bay Cargo Cults

Tweet The cargo cults on some Pacific islands reached their peak just after the Second World War.  Although they'd started earlier than that, the extent of contact between the natives living on those islands and outside civilisations increased so much during the war years that they gave a massive impetus to the cults.

It's easy enough to understand how people who did not understand the technologies which they were witnessing would have assumed that the planes bringing cargo were coming from the gods, and that they were summoned to bring their cargo from the gods by the strange rituals of the outsiders.  Many of them also believed that the cargo was really intended for them and had been wrongly purloined by the outsiders.

When the outsiders left, the islanders often tried to replicate the rituals which they had observed.  They built their own rough airstrips, wooden control towers, and even wore headsets carved out of wood and the best imitations of American uniforms that they could make.  The planes didn't come though.  Whilst aeroplanes needed airstrips and control towers, the mere presence of those things and the associated rituals was not in itself sufficient to bring the planes back.  (And that would have been just as true had the towers been filled with the latest fully operational technology rather than mere wooden imitations.)

In essence, the cults are just an example of a common fallacy - usually referred to as ‘Post Hoc Ergo Propter Hoc’.  It's a fallacy to which we are not immune here in Wales; and sometimes I wonder whether our politicians’ approach to economics is really that much different from a cargo cult, based on observing the rituals of others and then copying them.

One of the old chestnuts is the regularly repeated demand by business and opposition leaders for the Welsh government to invest more in ensuring that we have a trained and skilled workforce available.  I wouldn’t argue against having a highly skilled and trained workforce of course, but it will never be enough to bring the planes and their cargo.

Similarly, much of the debate around the electrification of the railway seemed to be based on a belief that shaving 15 minutes off the journey time between Cardiff and London would bring about some sort of economic miracle.  Again, I wouldn’t argue against electrification; but it is not a solution to anything very much in itself.

I could add superfast broadband, or city regions, an M4 relief road, or even last week’s call for reduced energy prices.  Some I'd support; some I would not, but all of them seem to be geared to a belief that performing the right rituals will bring the planes and their precious cargos to Wales.

And, just like the Pacific islanders, when our politicians do divert their attention from their ‘demanding infrastructure’ rituals, it is usually to criticise those wicked outsiders who have diverted the planes which the gods clearly intended for us, and stolen the cargo.

There’s nothing wrong with infrastructure building per se, and it’s easy to see why politicians concentrate on that.  It’s under their control, and it is (comparatively!) easy for them to control.  But it’s about facilitation rather than action; it is built on the assumption that the solution lies with others whom we need to appease, rather than with ourselves.

One of the more interesting suggestions in the Offa’s Gap paper which Plaid produced last week was the “creation of publicly-owned Welsh enterprises” to bid for contracts.  Another lies in the creation of more co-operative and social enterprises.  Neither is particularly original, although they've fallen out of favour in recent decades.  Neither is as simple or straightforward as complaining about what others are not doing.  But both are about taking some responsibility for action ourselves – and that has to be a better starting point than performing rituals or criticising others.

£170 million of lost opportunity

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The Welsh Government announced this week that it is working with the 22 local authorities in Wales on a scheme to use local authority borrowing powers to boost infrastructure investment in Wales.  This looks, in principle, very similar to the proposal floated by Gerry Holtham some time ago, and effectively circumvents the restrictions which prevent the Welsh Government from borrowing.

To that extent, it’s a welcome departure from the usual approach of simply blaming the Tories for everything.  I do have three reservations though.

The first is the scale of the plan – or rather the lack of scale.  Gerry Holtham suggested that it would be possible to use this approach to borrow around £2billion for spending over the five year life of a government.  In comparison to that, £170million looks remarkably unambitious.  It’s significantly less even than Plaid’s rather more modest Build4Wales, which suggested borrowing a mere £500 million from the private sector.

The second reservation is that it seems to be restricted to spending on highways projects.  Whilst I’m sure that at least some of those schemes will be worthwhile, investment in road schemes wouldn’t be my top priority.  And it appears as though the schemes haven’t even been selected yet – local authorities are being invited to come forward with proposals.

And that brings me to my third reservation – the lack of an obvious strategic driver behind the scheme.  Obtaining a large capital sum for infrastructure investment should be a real opportunity to take a strategic view and decide on the most important projects to boost GVA.  Instead of that, we have a bid-driven allocation of resources to local authorities – the availability of the money is driving the spending, rather than the infrastructure needs.

It’s what we’ve seen far too often from successive Welsh Governments.  It’s the same curse which afflicted Objective One funding and Convergence Funding – an attempt to please as many people as possible and share the cash around rather than use it to drive a step change.

Sadly, it isn’t that the Welsh Government doesn’t have strategies – those they have aplenty.  They’re all carefully written, consulted on, amended, approved, and filed somewhere, with all the right boxes duly ticked.  What they are not, however, are drivers of government action.

In going down this route, the Welsh Government was in serious danger of getting something right – it’s a pity that the implementation is another missed opportunity.