Public Expenditure and Taxation (Advisory Body)

Jonathan Edwards Excerpts

1st reading: House of Commons
Wednesday 2nd October 2019 Commons Chamber

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

I beg to move,

That leave be given to bring in a Bill to establish an independent advisory body to make recommendations on the equitable distribution of public expenditure across the United Kingdom, the calculation of block grants to devolved administrations, the implications of the devolution of tax-raising powers for the United Kingdom fiscal framework, and the resolution of fiscal disputes arising between governments in the United Kingdom; and for connected purposes.

For decades, British Governments—red and blue alike—have tinkered around the edges of our broken economic system without challenging its structural flaws. Nine of the 10 poorest regions in northern Europe are located within the British state, as well as the richest by a country mile. These disgraceful geographical wealth inequalities are a record of shame. Successive British Governments, even after the 2008 financial crash, have been too timid to challenge the economic status quo, which prizes consumer debt addiction and the financialisation of the economy. In response to the crash, the former Chancellor George Osborne used to talk a lot about geographical and sectoral economic rebalancing, but in reality there has been little action to match the rhetoric.

Of the 12 NUTS—nomenclature of territorial units for statistics—nations and regions of the British state, only three, London, south-east England and east England, are not in deficit. Recent international data showed that the largest difference in economic prosperity in Europe was between inner London—the UK’s richest region, with a regional GDP average of 614% of the EU average—and west Wales and the valleys, the UK’s poorest, with a regional GDP of 68% of the EU average. London acts as a black hole, sucking in talent and investment from the rest of the UK and beyond. Perversely, this inequality further incentivises investment in London from the public and private sectors alike, so the cycle continues unabated.

That is why I am introducing a Bill to establish an independent advisory body to make recommendations on the equitable distribution of public expenditure across the British state: a new office for fair funding, with delivering geographic wealth convergence as its statutory aim. It would advise on the calculation of block grants to devolved Administrations, make recommendations on the implications of the devolution of tax-raising powers for the United Kingdom fiscal framework and act as an independent arbitrator in dealing with the resolution of fiscal disputes arising between the Governments in the UK.

There are constant misunderstandings and mis-statements about the relative funding and public spending levels in Wales compared with those in other parts of the UK. Forty years after the introduction of the infamous Barnett formula, it is still very poorly understood. On a number of occasions, the British Government have erroneously claimed that for every £100 of public spending in England, £120 is spent in Wales. While that may be the case for devolved spending, it is certainly not the case for total expenditure, which is a very different measure. Identifiable public expenditure per capita in Wales in 2015-16 was 113% of the England level. Total expenditure per capita in Wales—identifiable plus non-identifiable—was 110%, well below the 120% claimed by the Secretary of State.

For the British state, it pays to keep the system as impenetrable as possible. Relative need, as used in consideration of funding for the devolved Administrations, makes no allowance for the concept of pump-priming, in which additional funding is allocated for long-term capital investment to realise the latent economic potential of poorer-performing geographical areas. The issue is well described in the first report of the UK2070 Commission, which claims that the Treasury Green Book is biased in favour of capital investment in the most successful regions. It is also important to mitigate the self-reinforcing tendencies of the Treasury Green Book and cost-benefit analysis whereby fast-growing places automatically move to the front of the queue for more public investment. One of the main reasons the British state currently has anaemic economic growth is low productivity. The best way to boost productivity would be to invest in poorer-performing areas, but what we are likely to get from the Brexit “Britannia Unchained” gang is even more money spent in London.

In July 2019, the Public Accounts Committee published a report outlining several problems with the way in which funding is currently allocated to the devolved Governments. It identified unnecessary complexity involving funding arrangements, recommending that the Treasury become more transparent in the way that it allocates funding. It concluded that the allocation of funding outside the Barnett formula without consequentials was unsatisfactory. For example, the dodgy deal with the DUP that resulted in £1 billion extra funding clearly undermined the little credibility that the Barnett formula still retained. A lack of clarity on whether the block grant reflects need was reported, and the Committee expressed concern at the impact of slower population growth on funding per head. The report also reiterated Plaid Cymru’s concerns about delays in the sharing of information by the Treasury with the devolved Administrations on the comparability factors included in the statement of funding policy.

The statement of funding policy, usually published alongside the comprehensive spending review, sets out the comparability factors that are used in the calculation of the Barnett formula. The last set of comparability factors in relation to spending programmes was published in 2015, and a departmental breakdown, with no material difference, was published as an addendum to the spending round last month. The comparability factors are decided unilaterally by the Treasury, and that needs to be changed as a matter of priority.

HS2 is a case in point. It currently swallows up a third of the UK Government’s support for rail: £2.1 billion out of a total of £6.4 billion in the year 2017-18. It is clear from published and leaked reports that HS2 will cost far more than the planned £56 billion—up to £100 billion. The Treasury categorised HS2 as a national project with a comparability factor of 0% for Wales, while Scotland and Northern Ireland had a 100% score. As a result, full Barnett consequentials are payable to Scotland and Northern Ireland, but not to Wales. These are huge sums of money. If HS2 ends up costing £100 billion, full Barnett consequentials for Wales will amount to £5 billion.

Transport expert Professor Stuart Cole has also demonstrated that HS2 will have negative consequences for Wales, particularly in the south of my country, as journey times to cities in the midlands and north of England are reduced and new technology encourages companies to areas with HS2 stations. Professor Cole’s analysis was supported by a report from Greengauge 21, which drew on analysis by KPMG, which found that HS2 could reduce employment growth in Wales by 21,000 jobs between 2007 and 2040, as well as costing the economy of the south of my country £200 million per annum. My Bill aims to put a stop to the unfair way in which those comparability factors are set by setting up an independent advisory body.

With growing fiscal divergence and an evolving constitutional landscape, the need for such an independent body has never been greater. The Wales Act 2014 devolved certain tax and borrowing powers to Wales. It enables the Welsh Government to legislate in respect of stamp duty land tax and landfill tax, and for the partial devolution of income tax to Wales. A fiscal framework was negotiated between the British and Welsh Governments to establish rules for determining matters resulting from fiscal devolution. At the moment, the three Welsh rates are set at 10p, maintaining parity with England, but with the possibility of further devolution and greater fiscal divergence, the current mechanism for developing and negotiating the fiscal framework is unsustainable.

Significant concerns remain with regard to the dispute resolution mechanism in the framework. If no agreement is reached, the status quo remains. How can the devolved Administrations secure a fair hearing if the UK Government, with whom they are raising the dispute, are playing judge, jury and executioner? If we established an office for fair funding under my Bill, we would have a system of independent arbitration.

There is international precedent for an independent office for fair funding. In South Africa, the Financial and Fiscal Commission is an independent body that does not determine expenditure allocation formulae directly but advises the South African Government on those formulae. The South African Government have to consult the FFC regarding the division of revenue between different tiers of government. In Australia, allocations of federal funding to the six states and two territories are overseen by the Commonwealth Grants Commission, which is a statutory, independent, non-partisan body. The CGC was discussed in the 2009 report from the Lords Select Committee on the Barnett Formula, which recommended that a similar body be set up in the UK.

While an office of fair funding would not solve the fundamental imbalance at the heart of the British state, it could at least give Wales and other neglected areas the tools to begin improving our infrastructure and to diversify our economies. Brexit is not an excuse to reassert Westminster control over Wales. The Bill would help to create a level playing field between the nations of the British state.

Question put and agreed to.

Ordered,

That Jonathan Edwards, Liz Saville Roberts, Guto Bebb, Anna McMorrin, Jane Dodds, Caroline Lucas, Ben Lake and Hywel Williams present the Bill.

Jonathan Edwards accordingly presented the Bill.

Bill read the First time; to be read a Second time on 3 October 2019 and to be printed (Bill 437).