Wales and the 2015 Spending Review

The 2015 Spending Review makes two significant changes to the Welsh Government’s finances: it removes the requirement for a referendum before introducing the partial devolution of income tax, enacted in the Wales Act 2014, and it proposes to introduce a ‘Barnett floor’ for the overall envelope of devolved funding.

The referendum on the Welsh rate of income tax was a way of ensuring that devolution did not happen automatically (as is the case for Scotland) – a rare case of common ground between David Jones and Carwyn Jones. It never made much sense intellectually; if the rationale for income tax devolution was ‘financial accountability’, why should that be optional? And why should the body that would be made accountable get to choose whether it should be accountable? It made even less sense politically, if the aim was to make income tax devolution happen rather than ensure it could not. A referendum campaign would be hard to stage and harder to win. It would mean asking voters to vote for potentially higher taxes, with no guarantee that they would even enjoy additional spending as a result given the lack of clarity about the mechanism for reducing the block grant as a result. There would be little chance of a cross-party consensus, so while Conservatives had a strong interest in seeing income tax devolution since it would enable them to offer a tax cut, they would struggle to find allies for a referendum campaign (unlike 2011). Abandoning the referendum had become the only way to create even a possibility of income tax devolution, and now has support from not just Conservatives but Plaid Cymru.

This does not mean that income tax devolution will automatically take place. Not only will it still need support from the Assembly to make the necessary changes, but the Assembly’s approval of the removal of the requirement for a referendum is also needed under the Sewel convention. The powers for the Welsh Government to trigger a referendum vote and for the Assembly to approve its calling by a two-thirds majority which it now has can’t be removed without the Assembly’s legislative consent.  So that means Labour needs to support it in the Assembly too.

The other side of the equation is the Welsh Government’s pursuit of ‘fair funding’ in the form of a ‘Barnett floor’ to the block grant and the overall envelope of funding. This has been a nostrum of Welsh political debate for years now. There have been offers of a mechanism with a process to follow (from Peter Hain in 2009), a mechanism with a vague promise of possible action but no clear outcome (from the Conservative-Lib Dem Coalition in 2012), and now a ‘floor’ with no indication of how it will work. Despite the 2012 commitment to ‘a joint review of the pattern of convergence by the two Governments’ before each subsequent spending review, it is far from clear if that actually took place – if it did, no-one is talking about it in public.  Moreover, slightly oddly, the floor is to be set a little below where Welsh Government funding presently is (at 115 per cent of per capita spending on comparable functions in England, while the Welsh Government appears to get 116 per cent at the moment). What we get now is simply a guarantee of an outcome, without any indication of how that will be achieved.

(As an aside, there are other ways of securing a ‘fair funding’ arrangement which are much simpler, now that Wales is pretty much at its needs-related figure. The best is not to worry about fiddling with the baseline of funding or the outcome of the sum, but to adjust the multiplier used – so that instead of the Barnett formula giving the Welsh Government 100 per cent of a per capita change in comparable spending for England, it gives it a needs-adjusted 115 per cent. This means further convergence will not happen, whatever happens to changes in ‘comparable spending’ for England.  It is scarcely a novel idea – the Holtham Commission discussed and recommended it in 2010, in chapter 3 of its final report. It has some advantages in the present circumstances, discussed below.)

All this looks like the beginnings of a political horse-trade, which is unsurprising for a highly political Chancellor who no doubt is trying to help his party colleagues in the May 2016 election. Indeed, the Welsh Conservatives have already committed to a cut in the standard and top rates of income tax.  The Welsh Government gets ‘fair’ funding – which, given the impact of austerity, may well not result in any extra money (so it gets ‘fairness’ compared to England but that’s all). In return, it’s expected to endorse income tax devolution. However, that not be enough as there’s no real sweetener for the Welsh Government to swallow this pill on offer publicly as yet, and the most that can be said is that the Welsh Government will be in a degree of political difficulty if it chooses not to move.  It can probably survive that political difficulty, which is pretty limited as matters stand.

What makes the Welsh Government’s life more straightforward is the Treasury’s ongoing silence about how the reduction in the block grant as a consequence of tax devolution will be calculated. This is the key issue in considering the ‘fiscal framework’ for Scotland, of which the Spending Review merely says discussions are ‘ongoing’. (In which context, this paper from David Bell and colleagues just published by the Institute for Fiscal Studies is well worth reading.)  It is also a vital issue for devolution of corporation tax to Northern Ireland. There is a serious tension between a commitment to a Barnett floor and a reduction in the block grant, at least if the system is to be introduced with any degree of transparency and accountability. The Barnett floor is an invitation to governments to do a political deal. The problem with the reduction in the block grant is that unless the methodology is clear and agreed it will do the same thing. At least adding a needs-adjusted factor to the Barnett calculation would make the calculations simpler, more robust and more transparent.

It is also worth noting that the Treasury appears to have adopted the figure of 115 per cent for Wales’s per capita relative needs without any analysis of its own, let alone a needs review.  It has simply taken that figure, which was more or less the mid-point of those the Holtham Commission published in 2010, without any published analysis of it at all.  This is not just a unilateral action, but one for which the only evidence base is a review conducted more than five years ago for a different government.  That compounds the degree to which these moves should be seen as first and foremost political in nature.

There remain strong arguments for tax devolution for Wales – not so much to advantage any political party or even to make the Welsh Government ‘financially accountable’, but to give the Welsh Government and the National Assembly greater power to make real choices about policy and the relationship between spending and revenues in Wales.  To make that work, one needs to go much further than merely devolving 10 points of income tax, which just does not provide the room for manoeuvre that is needed.  It needs much more tax devolution, particularly in a place with a weak tax base like Wales, and that means a sequence of further changes.  We looked at this in our Devo More work for IPPR and that model still stands, for Wales as well as Scotland (where the tax proposals but not the other changes are largely being enacted in the Scotland bill).  Those changes include the administrative apparatus for managing finances, the calculation of the block grant, and the reduction from it, and all of them are more than the Treasury seems willing to contemplate.  What is on offer is no more than a modest half-step in the direction of a UK that combines meaningful fiscal devolution with state-wide equity.

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Filed under Devolution finance, Wales, Whitehall

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