Wales: Additional Financial Resources

Baroness Penn Excerpts

Wednesday 18th January 2023 Lords Chamber

[Lord Wigley]

To ask His Majesty’s Government what additional financial resources they have made available to the government of Wales, over and above the Barnett formula consequential provisions, to meet unforeseen financial needs for which no provision was made in Wales 2022-23 expenditure plans.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

The Welsh Government are well funded to meet their devolved responsibilities. The 2021 spending review set out the largest annual settlement in real terms since the devolution Act. This is still growing in real terms this year. The Welsh Government also have their own tax and borrowing powers. On top of this, the UK Government are supporting households UK-wide with the cost of living, and supporting businesses, charities and the public sector with their energy bills.

[Lord Wigley (PC)]

My Lords, is the Minister aware that Wales Fiscal Analysis, at Cardiff University, has shown that, even after taking into account the additional allocations made to the Welsh Government, the higher levels of inflation since the coming year’s budget was set could amount to an impact of £800 million in 2023-24, and that, consequently, real-terms spending on public services in Wales will fall by that amount? Will the Government now allocate an additional £800 million to the Welsh Government for the coming year, to avoid real cuts in essential services in Wales?

[Baroness Penn (Con)]

My Lords, we have a difference of opinion on the figures. That might be because government budgets are routinely translated into real terms using the GDP deflator, by both the Treasury and independent bodies such as the OBR and the IFS. Using those figures, we see that the Welsh spending settlement is still growing in real terms this year and over the spending review period, even after the higher costs, and we believe that the Welsh Government are well funded to meet their obligations.

[Lord Morris of Aberavon (Lab)]

My Lords, have the Government any intention at all of reforming the Barnett formula in this Parliament? Would such a reform not be a levelling up that the Government aspire to?

[Baroness Penn (Con)]

My Lords, the fiscal framework between the UK and the Welsh Governments was agreed in 2016; that added a needs-based factor into the Barnett formula to ensure that Wales receives fair funding. It receives at least 15% more funding per person than the equivalent UK government spending in the rest of the UK. In fact, in the current spending review period, that additional amount is 20%.

[Baroness Randerson (LD)]

My Lords, the lack of Barnett consequentials from the HS2 rail project—a railway not a foot of which will be built in Wales—is a glaring injustice. The recently confirmed extension of the project means that additional Barnett formula funding was confirmed for Scotland and Northern Ireland. Why not Wales?

[Baroness Penn (Con)]

As the noble Baroness will know, the Welsh Government do not receive Barnett on HS2 spending because rail infrastructure in Wales is a reserved matter and the UK Government continue to invest in rail infrastructure in both England and Wales.

[Lord Touhig (Lab)]

My Lords, perhaps I can help the Minister. She might care to suggest to her right honourable friend the Secretary of State for Wales that he has a word with my noble friend Lord Murphy of Torfaen, who, when Secretary of State for Wales, working with the then Chancellor Gordon Brown, invented something called “Barnett-plus”. In truth, with a little imagination you can put as much money in as you want with Barnett.

[Baroness Penn (Con)]

My Lords, I believe that the fiscal framework agreed in 2016 does that, and I am sure the noble Lord will welcome the fact that the latest spending review set the largest annual block grant in real terms of any spending review since the devolution Act of 1998.

[Lord Forsyth of Drumlean (Con)]

My Lords, has the time not come to get rid of the Barnett formula and to fund the devolved Administrations on the basis of need, which is how they distribute the money themselves? I know my noble friend is very busy, but could she read the report of the Select Committee of this House, which was initiated by the late Lord Barnett, which showed clearly that Wales lost out as a result? I say that as a Scot, and Scotland benefits in addition to parts of the north of England, Wales and other devolved parts of the United Kingdom.

[Baroness Penn (Con)]

My Lords, I am aware of the views of Lord Barnett, to whom the formula’s name relates. The point my noble friend makes about needs is exactly what we tried to build into the fiscal framework in 2016. There was an assessment of additional needs in Wales. It said that, on a needs basis, it should be at least 15 % more than the equivalent in the UK. That was recommended by the independent Holtham commission, and that is something that the UK is taking forward.

[Baroness Wilcox of Newport (Lab)]

My Lords, while I would not wish necessarily to disagree with the Minister, I got my figures directly from the Welsh Government. Their overall budget this year, and in 2024-25, will be no higher in real terms than it was in 2022. Their capital budget will be 8.1% lower. With post-EU funding arrangements, Wales has been left with a £1.1 billion shortfall, and it is no longer able to fund three key areas: apprenticeships—Wales used to fund 5,000 apprenticeship places every year; practical support for those furthest from work through the communities for work scheme and ReAct for those in need of redundancy support; and higher education has been shut out of the levelling-up process, and hundreds of jobs are now at risk. Why is Wales being underfunded by the UK Government?

[Baroness Penn (Con)]

I have to disagree with the noble Baroness on most of the points in her question. As I have set out to this House, Wales receives 20% more funding per head than the UK equivalent, and that is over its needs-based assessment as recommended by the independent Holtham commission. The spending review set out the largest annual settlement in real terms since the devolution Act and the Welsh Government also have their own tax and borrowing powers. It is important that the Welsh Government are well funded, and that is what the Government have done.

[Lord Shipley (LD)]

My Lords, are the Government going to keep their promise to Wales to match EU funding through the shared prosperity fund?

[Baroness Penn (Con)]

My Lords, the Government have set out their plans for the shared prosperity fund and how they intend to keep that commitment. Taking into account the tail of EU contributions and then the UK top-up, the levels of funding remain those we committed to in the election manifesto.

[Lord Kirkhope of Harrogate (Con)]

My Lords, I am following on from my noble friend Lord Forsyth’s point. While we are discussing the Barnett formula, a considerable number of people in England, particularly in parts of England quite close to the Scottish border, have always been concerned about the preferential treatment given to Scotland through the Barnett formula in terms of public spending. Does the Minister not think it is time for the Government to review that, but also look at other areas of England, when they look at improving expenditure?

[Baroness Penn (Con)]

I do think it is important that, when we look at our public spending, we take into account the needs of the various areas. I have described how we do that when it comes to the Welsh Government. We also have that process when we look at, for example, funding for local government. That is a principle that the UK Government will continue to support in our approach.

[Lord Morgan (Lab)]

My Lords, in addition to the excellent financial points that have been made on both sides of the House, would the Welsh Labour Government not benefit from having greater powers, of the kind of “devo-max” proposed in Gordon Brown’s excellent proposals on the constitutional settlement?

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, there was a considerable extension to the Welsh Government’s powers relatively recently, and I would put the emphasis on those powers being used to their fullest effect before we return to this question again.

[Lord Watts (Lab)]

My Lords, is it not the case that the allocations to Scotland, Wales and Northern Ireland were made before the Tory Government wrecked the economy? Is it not time that we reviewed those allocations and, at the same time, the pay issue, which was also set before the Government wrecked the economy? That has had a dramatic effect on both.

[Baroness Penn (Con)]

My Lords, if the noble Lord is talking about levels of inflation, they have been largely driven by external factors such as Russia’s invasion of Ukraine. As I have already reassured the House, in addition to the fact that the 2021 spending review settlement was the largest since the devolution Act, it is also growing in real terms this year and over the spending review period, even taking into account that higher level of inflation.

[Lord Howell of Guildford (Con)]

My Lords, the late Lord Barnett of course disliked the Barnett formula intensely; he realised it had many faults and clearly needed improving. How do the Government feel about suggestions from some quarters that there should be much more fiscal devolution and that the devolved nations and areas should raise their own funds through new taxation? Is that a good idea?

[Baroness Penn (Con)]

My Lords, in the latest round of devolution to the Welsh Government, I believe they were given greater powers to raise taxes than previously. As I said to noble Lords, making use of those existing powers before looking to extend them further would be a sensible way forward.