Devolution finance under the Tories

1. Presentation for IWA/WGC Conference on ‘Life under the Tories’ Cardiff, 3 December 2009 Alan Trench (University of Edinburgh and Constitution Unit, UCL; Author, ‘Devolution Matters’ blog) Devolution finance under the Tories

2. The debate so far I • Scotland: calls for ‘full fiscal autonomy’ (National Conversation, Reform Scotland, Hallwood and McDonald) • Calman Commission: a limited measure of fiscal autonomy (10 income tax points plus small taxes), needs basis for grant whenever that happens • Largely endorsed in principle by UK Govt white paper Scotland’s Place in the UK, though diluted – and no timescale for delivery • Conservatives endorse the principle but will reconsider and produce their own white paper

3. The debate so far II • Commons Justice Cttee: grant should be based on need – and someone else should say how • Lords Barnett Formula Cttee: grant should be based on relative need, using small number of top-down proxy indicators (rather than very detailed needs assessment done in 1979) • And also institutional reform – independent commission to carry out assessment, limiting powers of HM Treasury • No formal response published yet from Treasury • Holtham Commission: Wales underfunded by 2 points by using UK Govt criteria for England (gets 112 %, should be 114%) • Peter Hain has declared UK Govt intention to protect Wales from ‘disproportionate disadvantage’ arising from the convergence effects of Barnett (as further convergence is unlikely, this is pretty meaningless)

4. Where the Tories are • Commitment to the Union; acceptance of devolution • Willing to allow a referendum on Part 4 GWA 06 • Concern about the inequities Barnett creates (primarily an English resentment of its generosity to Scotland) • Because of its perceived ability to threaten the Union, Scotland looms much larger in Tory thinking than Wales does • Liking for the control that grant funding brings (both directly over general public spending, and indirectly in tying devolved policy to that in England) • Endorsement of principle of ‘fiscal accountability’ for Scottish Parliament as recommended by Calman • But misgivings about timing of fiscal powers and borrowing powers given the economic and financial climate • And concerns about concessions to ‘the Nats’ (more SNP than PC)

5. The situation the Tories will face • Ongoing economic crisis – limited economic growth • Desire to cut taxes if there’s a chance • Severely stretched public finances • Reduced tax revenues (around 10% less in 2009 than 2008) • Higher demand for entitlement-based funds (social security, esp Job Seekers Allowance) • Very high levels of public debt, with implications for interest payments • Need to ‘do something’ about devolution finance • Scottish demands • English concerns about the generosity/unfairness of Barnett • The $64,000 question: How strategic will the Tories be? And how strategic will circumstances let them be?

6. How bad will things be? Falling tax revenues (overall 9.1% lower in Oct 09 than Oct 08; 2009 Budget estimate was a decline of 7.8%) Increased social security costs, notably JSA. According to PESA 2009 (based on 2009 budget), to rise from 25.1% of total resource budgets in 2007-08 to 27.1% in 2010-11. If unemployment grows, that will be higher yet. Increased debt service charges – from 5.7 to 7.1% of resource budget between 2007-08 to 2010-11 by official figures, and already forecast for 7.7% by 2010 by IFS in Jan 09. War-time levels of debt Will become even more expensive as interest rates go up Ireland as an example Plus costs of bank bail-outs, and increased defence spending? The numbers are probably getting worse: we will know more after the PBR next week The only saving grace: most of Wales’s block grant is underpinned by health (46.8%) which Tories have committed at least to protect if not increase in real terms. Also important are education (33.8%) and local govt (14.4%): together, 95% of the block.

7. What the Tories might do • A bilateral deal with Scotland over tax powers (what about borrowing?) • Good for SNP, in keeping with established Tory approaches • But offers no advantage to Wales whatever. • Retain block grant but recalculate allocations to Scotland, Wales and NI • Can be used (and portrayed as) part of a programme of spending restraint • Very limited direct benefit to Wales • Treasury still in control • But a high road to Scottish independence • Hain’s fudge a pragmatic (if meaningless) response to this problem • A UK-wide, decentralised, approach • Needs-related grant • Fiscal autonomy all round, with fiscal equalisation to compensate Wales and NI for its effects • Means 2 forms of equalisation and transfer • No money to help cushion its introduction

8. The implications of what the Tories might do The Barnett formula is a very effective way of transmitting spending cuts to devolved govts’ budgets Any cuts are very likely to have constitutional ramifications as well as financial ones. Even if the pain is shared ‘fairly’, Scotland & Wales are much less likely than they ever were to accept the justice of that. Undertaking more comprehensive and explicit forms of redistribution (especially fiscal equalisation) is very tricky: funding the transition will be hard, making the transfers plain will be unpopular in ‘contributing’ parts of England Bilateral deals are politically attractive and easy to implement – but will weaken the glue of ‘union-ness’. Who is advising? The Treasury is deeply hide-bound and unable to approach these issues in the sort of imaginative way that is needed. Will any of these considerations matter if there should be a hung parliament?

9. Read more on the ‘Devolution Matters’ blog! http://devolutionmatters.wordpress.com/