Up to now, devolution has had a very easy ride, fuelled by the UK Government having large amounts of money to spend. Thanks to financial austerity – ‘fiscal tightening’ – that is now changing. The new government has tried to make its impact quickly, and later this week George will make the first announcements about the £6 billion of cuts due in the current year. On 22 June, the new government’s emergency budget will spell out more detail. There will be more to come in the next years – and the Barnett formula may be as effective at transferring these to the Welsh Government as it was at increasing spending during the good years.
Changing public spending implies making choices. Devolution greatly complicates the effect of those choices, and one big question is whether the new ‘Ikea coalition’ understands the territorial implications of the choices they make.
The first choice is about the means used to reduce the deficit. The UK faces not just an accumulated public sector deficit (from emergency action like the stimulus programme or the bank bail-outs), but what has become a structural annual budget deficit. The amount spent on public services each year is greater than the amount of tax revenues the UK generates. Either it must reduce spending, raise more revenue, or some combination of both. There’s wide speculation that this will mean taxes going up, with the obvious candidate being to increase the rate of VAT to 20 per cent or so. The coalition agreement suggests that won’t happen. It says that the main burden of deficit reduction will be borne by reduced spending rather than increased taxes. That implies pretty deep cuts over the coming years. However, experience shows that making serious reductions in public spending is difficult. Even the Thatcher governments didn’t actually succeed in making much of a reduction in spending, but just constrained its growth. If the UK Government goes down the cuts route, the effects will be serious, and long-lasting.
The second choice is about what sorts of cuts to make. Will these be widely spread across all public services, or concentrated in a number of specific areas? Spreading cuts widely, and sharing the pain, can seem like the easier way to make them. That may not be very effective, however. Canada is one of the few cases where serious public spending cuts to address a public sector budget deficit. After several years of trying to make widely-distributed cuts, in 1995 the Finance Minister took a different approach and cut public spending generally. This meant large, targeted reductions in areas including defence and transfers from the federal government to the Provinces. The savings enabled Canada to reduce its budget deficit quickly, and for most of the last few years it has had a budget surplus. The price was a significant reshaping in the Canadian state; the Provinces have had to assume a more active role in finding funding for services like education and healthcare, and there’s been an ongoing debate about the distribution of tax powers between the two ever since.
The third choice is what to cut and where. Any cut will be painful; people’s lives will be harmed by any decision. But they can be hurt more by some cuts than others. Cutting a service like BBC 6 is a dumb cut; it is a cheap service, popular with a sizable number of listeners. So is cutting areas like income tax collection (which produces huge returns for little investment), simply to reduce the headcount of an agency like HM Revenue & Customs. Thinking about the relationship between the benefits delivered by potential targets for cuts, and their cost, is key to making cuts in the best way possible.
The fourth choice is how those cuts affect the devolved administrations, and the devolved parts of the UK. If there are cuts to services like health or education in England, the Barnett formula means those will feed through to the devolved administrations as well. It will be up to them to decide where to make their own cuts. It could be that the Welsh Assembly Government will decide to cut health rather than education, even though it appears education will get extra money, from the ‘pupil premium’ for schools in England with pupils from poorer backgrounds. The Conservative commitment to shelter health spending in real terms still applies, and that should help protect devolved budgets generally, given how much of devolved spending is on health. If cuts are made for a non-devolved matter, there is the question of how it affects people’s view of the UK level of government. Cuts in UK transport spending or social security will shape views of what the UK does for people, whether they live in Manchester or Merthyr.
All these choices are going to be hard, and it’s important for the UK Government to think about their territorial effects as well as their economic and financial ones. They will affect how people in Wales (and Scotland and Northern Ireland) think about the Union and their relationship with it.
(This appeared as the ‘Wednesday Essay’ in the Western Mail on 19 May, under the heading ‘Devolution complicates spending cuts question’. For those interested, the article as printed is available here.)