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Friday, July 16, 2010

Does the Finance Minister understand her brief?

I had a bit of a shock on Tuesday when the Minister for Budget and Finance made a statement on how she was to apply the cuts being imposed by the UK Government this year. This was not because of the way she was going to apply these cuts, that was perfectly sensible, but because of her apparent misunderstanding of the Holtham Commission recommendations on reforming the Barnett formula and in particular, the Barnett floor.

According to the Minister, these reductions will hit Wales harder than other parts of the UK because, as the independent Holtham commission has made clear, Wales is already underfunded by some £300 million per year. We recognise that action on the commission’s recommendation on Barnett reform will take some time. However, we will continue to press for the immediate introduction of a funding floor to prevent underfunding becoming worse. In the meantime, this underfunding for Wales makes these in-year reductions even more difficult to manage.

I felt it right to take her to task on these points:

I take issue with two points that you make in your statement. I think that there has been a lot of misrepresentation about the alleged £300 million underfunding that the Holtham commission has identified. If you read that report and its recommendations, it is clear that that £300 million will not be available just like that in one year. Even the Holtham commission recommends that we can only get to that stage over a period of time; if we were to bring into effect a means-tested funding formula, which would take some time to be put together and agreed, there could still be five, six or 10 years before we get the full benefit of that £300 million. Let us not pretend that we are short of £300 million this year, next year or even the year after, because it is not true. We know that the whole process of reforming the Barnett formula has to be one of securing the agreement of all parties to it. That is why the coalition Government has a commitment to carry out a Treasury-led review, which will get that agreement once we have got other constitutional issues out of the way.

I also take issue with your characterisation of the Barnett floor. You said on a number of occasions that that floor is necessary to protect us from further cuts, and you say in the statement that it is necessary to prevent underfunding becoming worse. If you actually read the Holtham report, you will see that it argues that the floor should be put in place to prevent the differential spending per head from converging, so that, at present, we spend more per head in Wales than is done in England. It is in place to stop that differential converging and equalising out, so as to give us the edge that we currently have and to compensate for the fact that the formula is not means-tested. That convergence only happens when public expenditure is rising, which is clearly not currently the case. Therefore, to characterise the Barnett floor as necessary to protect Wales from cuts from the UK Government or to protect Wales from underfunding is, in my view, a misrepresentation. We need to be clear about that. We also need to be clear that, although I support the Barnett floor and believe that it is a necessary precursor to proper reform, we cannot put it forward as a panacea for the problems that the UK economy faces as a result of the huge deficit and debts inherited from the previous Labour Government, or for the problems that will be visited upon the Welsh Government, the Welsh Assembly and Wales as a result of the profligacy and economic illiteracy of the previous Government.

I thought that Gerry Holtham well and truly shot the Plaid fox yesterday. Anyone with any commonsense could see that any changes would take years for two reasons. The first is the decision by the UK Coalition government to cut the public deficit fairly rapidly. In these circumstances no one is going to unilaterally increase the Weslh block grant by £300 million. The second problem is that any reform of Barnett requires Scotland to lose £4 billion. This is the elephant in the room. There is really no clamour for reform except in Wales and amongst some northern Labour MPS who resent the amount of money going to Scotland. It will be interesting to see if the UK Coalition even gets anywhere with Calman given the strong criticism in Scotland that it will leave the Scottish Executive worse off. Treasury civil servants must be laughing their heads off at the begging bowl tactics of certain Assembly politicians. It's about time they woke up smelt the coffee and started talking about their priorities in a world where they will have far less to spend than in the past.
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