Opinon: fighting for funding – Wales and coalitions (part 2)

Previously, I referred to the fact that the Coalition Agreement contained three specific provisions relating to Wales. One of these concerned the drawing down of legislative powers over housing.The second provision relates to the way that Wales (and Scotland for that matter) is funded. This is a matter of some controversy here and the coalition agreement offers little clarity on how it is to be resolved. It is safe to say that the rather esoteric phrase referring to it needs to be subject to negotiation with UK Treasury Ministers so as to establish the best way forward.

Funding has been the subject of debate in Wales for the eleven years that the Assembly has been established and before. Despite that Labour failed to act on the issue in the 13 years they were in power at a UK level. Now that they have lost power in Westminster it is their favourite subject of attack.

A Commission was established by the One Wales government a few years ago under an economist called Gerry Holtham. That Commission have now issued two reports that established some important facts. They found that the present Barnett formula, which is based on population, does not reflect need in Wales or, for that matter in some English regions.

As a result Wales is between £300 million and £400 million worse off. In contrast Scotland is over-funded. Holtham also found that if a proper needs-based formula was put into place as we committed to do in the Federal manifesto in 2005 and 2010 then the Treasury would save £4 billion a year. The catch is that this would come from Scotland’s budget.

We are not talking about an overnight change. It would take 10 to 14 years to negotiate and put in place these changes. Furthermore in the long run it is in Scotland’s interest to take the deal before the Treasury forces it upon them. That is because without the solid base of a needs-based formula the fiscal powers that Scotland would gain through the implementation of the Calman Commission proposals would be very difficult to use.

The reasoning is that if a Scottish Administration uses the powers to reduce taxes then they would effectively fund this from the surpluses they have been building up year after year. It is no accident that Alex Salmond has offered to absorb cuts in his budget in the current year whereas Wales cannot afford to do so. Such a use of these surpluses to give the Scots a tax advantage over England would cause an outcry over the border and force the Treasury to act.

From Wales’ point of view the need for reform is overwhelming. The coalition government though has not yet made it clear how it will respond to that demand. The agreement says that we will establish our own Treasury-led review but that we need to get the public finances in order first. We are now seeking a timetable for that review.

Peter Black AM
Welsh Liberal Democrat Housing and Finance Spokesperson

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  • Having a “needs-based” funding system sounds great but it is actually daft.

    It creates perverse incentives – to get more money in Wales, increase unemployment, increase ill health and increase poverty.

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