Wales has been squeezed harder than Scotland under the Barnett Formula. The challenge now facing First Minister Carwyn Jones is to explain to the Welsh electorate why it is fair that poorer Wales receives less privileged treatment that that given to more prosperous Scotland, writes Richard Wyn Jones. This post originally appeared on the LSE British Politics and Policy blog.
Last year’s Scottish independence referendum was a sobering experience for the leaders of Wales’s unionist political parties. Partly because the result demonstrated that the Union is in much greater peril than they – and to be fair, most others – had ever thought possible. But also because the events leading up to the poll demonstrated just how little influence they have with their party leaderships in London, certainly compared to their Scottish colleagues. Everyone in Wales now knows that when Scottish accents beckon, Dave, Nick and Ed find it very easy to turn a deaf ear to Welsh concerns.
‘The Vow’ printed on the front page of the tabloid Daily Record a few days before the referendum was the clearest possible indication of how little Wales – and its leading politicians – matter. By promising Scottish voters that the Barnett Formula would be retained come what may, Messers Cameron, Clegg and Miliband were effectively telling the Welsh that they couldn’t care less about our legitimate concerns and aspirations. Even when there is nigh-on universal acceptance that the Barnett formula is unfair to Wales, London politicians fell over themselves to assuage opinion north of the border. So much for the ‘sharing Union’ trumpeted by the Scottish Labour Party. So much the ‘fair funding’ demanded by Welsh politicians.
The Barnett formula is unfair to Wales in at least two ways. First, and contrary to the absurd claims of both Ed Miliband and Gordon Brown, Barnett takes no account of need. Back in 2009 the Holtham Commission calculated that if Wales were funded through the same needs based formula that determines funding for England’s regions, the Welsh Government’s budget would be £300 Million per year better off. Conversely, when measured on the same basis, Scotland, a very much more prosperous part of the UK, is overfunded to the tune of almost 4 Billion per annum. Even if this was rarely if ever made explicit, Welsh calls for ‘Barnett reform’ implied not only an increase in funding for Wales but a concomitant decrease for Scotland.
Secondly, not only does Barnett ignore need, but also – as a mathematical property of the formula itself rather than the result of any malign intent – during those periods in which overall levels of public spending are increasing, the operation of the formula serves to squeeze levels of public spending down towards the English ‘norm’. This is the infamous ‘Barnett squeeze’. Adding insult to injury, demographic differences between Wales and Scotland mean that, even as we start from a lower base, the effects of the ‘squeeze’ have been more pronounced here than there. Wales has been squeezed harder.
This is why the demand for ‘fair funding’ has become a recurring theme in Welsh politics. ‘Fair funding’ has been regarded not only as being important in its own right, but also as a necessary precondition that must be satisfied before any steps can be taken to introduce income tax devolution. For more cynical observers, the latter being a rather convenient excuse for avoiding the increased scrutiny and accountability that would surely follow if the National Assembly for Wales were endowed with meaningful tax powers.
What is becoming increasingly apparent, however, is that ‘The Vow’ is fundamentally shifting the terms of the previous debate. There is now no prospect of Barnett reform. This in turn means that the meaning of ‘fairness’ has shifted. If Scotland is to continue to receive a financial settlement that it very much more generous than can be justified on Whitehall’s own definition of need, how on earth is it ‘fair’ that Wales receives less? Especially when it is recalled that Wales is a substantially poorer country than Scotland?
Unsurprisingly, Plaid Cymru has responded to the new post-referendum situation by calling for funding ‘parity with Scotland’. According to Leanne Wood this would see a very substantial uplift in public spending in Wales of some £1.2 billion per annum. ‘Parity with Scotland’ is a position that appears both plausible and potentially popular. Which may explain, perhaps, why Carwyn Jones has responded to it with such hostility.
The problem for the First Minister, however, is that it appears to make little sense to argue (as he has done) that Wales should be offered the same powers as are now being offered to Scotland whilst denying that Wales should be afforded the same (preferential) financial treatment. He will no doubt have been further discomforted by the fact that his predecessor as First Minister, Rhodri Morgan, has also used his Western Mail column to argue that Wales should receive funding parity with Scotland.
The challenge now facing Carwyn Jones is to explain to the Welsh electorate why it is ‘fair’ that poorer Wales receives less privileged treatment that that given to more prosperous Scotland. Good luck with that one… In this way ‘The Vow’ may yet prove to be biggest gift to Welsh nationalists since Tony Blair decided to impose Alun Michael as leader of a reluctant Welsh Labour party in 1998.
As if this were not enough, Carwyn Jones faces the prospect of attack on a different, if related, front. Although it may not feel like it, the Welsh Government’s budget has actually been relatively sheltered from the full effects of the UK government’s austerity programme. Sheltered to such an extent that the £300 million ‘needs gap’ identified by Gerry Holtham and his colleagues in 2009 has been greatly reduced. Holtham himself has suggested that it has halved. Wales Office Minister Baroness Randerson – who, one suspects, is in a position to know the lastest Treasury estimates – has even intimated that it has disappeared entirely. In other words, according to the (pre-‘Vow’) definition of ‘fair funding’ championed by Welsh politicians, Wales has either reached the promise land, or is close enough that it makes no meaningful difference.
Given this the question now arises when will some of the responsibility for determining the levels of income tax be devolved to Wales? In theory, at least all the unionist parties in Wales (as well as Plaid Cymru) support this development. This in the name of enhanced ‘fiscal accountability’ and what the Silk Commission termed ‘mature democracy’.
For Welsh Conservatives, however, there is another reason for supporting tax devolution. The party wants to enter the next Assembly election campaign advocating a tax cut. Indeed, it lies at the very core of the party’s long term strategy in Wales. If ‘fair funding’ has been achieved it is difficult to see what basis remains for denying the Tories the opportunity to at least make the case to the electorate. The problem they face, however, is that by insisting – alongside Labour – through the Silk Commission process that income tax devolution can only occur after an affirmative vote in a referendum, a referendum that can only be called with the support of a super-majority in the Assembly, the Tories have effectively handed Labour a veto on their own flagship policy!
It will come as no surprise to learn that, behind the scences, one finds increasing support in Conservative circles for Montgomery MP Glyn Davies’s view that such a referendum in unecessary. A view that is further strengthened by the fact that, since last year’s referendum, Labour have agreed a further measure of income tax devolution to Scotland through the Smith Commission process. Itself, of course, another consequence of ‘The Vow’. Meanwhile Welsh Labour’s response to all of this is characterised by increasing nervousness and suspicion. Until now the party has managed to control both the direction and the pace of Wales’s devolution process. It is no surprise that any apparent loss of control is a deeply disconcerting experience.
It was, of course, the Scottish electorate who were the targets of ‘The Vow’. But whatever the intentions of its signatories, its impact is being felt in Wales too. It will continue to resonate in the elections of 2015, 2016 and beyond.