Opinion

Newton Emerson: Time for Last Decade, Welsh Approach?

Newton Emerson

Newton Emerson

Newton Emerson writes a twice-weekly column for The Irish News and is a regular commentator on current affairs on radio and television.

Foreign affairs minister Simon Coveney (left) and Secretary of State Julian Smith presided over the New Decade, New Approach agreement in January 2020. Picture by Niall Carson/PA Wire
Foreign affairs minister Simon Coveney (left) and Secretary of State Julian Smith presided over the New Decade, New Approach agreement in January 2020. Picture by Niall Carson/PA Wire Foreign affairs minister Simon Coveney (left) and Secretary of State Julian Smith presided over the New Decade, New Approach agreement in January 2020. Picture by Niall Carson/PA Wire

Stormont is set to be revived through a debate Wales had years ago – 'Last Decade, Welsh Approach' might be the best name for any new deal.

The DUP and other parties want more money. In return, the Treasury will expect public sector reform. This sounds similar to New Decade, New Approach but there is a critical difference: rather than a one-off cash sum to get back to work, the DUP wants the Treasury to change how Stormont is funded via the Barnett formula.

While this is partly to create a distraction from accepting the Windsor Framework, it also raises a genuine budget issue.

The formula matches public spending increases in England by giving the devolved regions the same extra amount per head. However, public services are more expensive to provide in the regions due to economies of scale. So the formula is gradually reducing spending everywhere towards English levels, a phenomenon known as the Barnett squeeze.

This has now reached a critical point in Northern Ireland. Stormont was receiving 40 per cent more per head than England as recently as 2019 but this premium will drop to 23 per cent next year and 20 per cent by the end of the decade. It needs to be 24 per cent to deliver equivalent services, according to the Northern Ireland Fiscal Council, an independent body established under New Decade, New Approach to advise Stormont on its finances.

Northern Ireland is coming to this discussion remarkably late. The Barnett squeeze has been a well-understood problem since the formula was introduced in 1978. Its profile was raised enormously when devolution was introduced across the UK 20 years later.

In 2009, a landmark report on fiscal devolution in Scotland – the Calman Commission – proposed replacing the formula with funding based on need. But there was no consensus on how need should be calculated and the issue dropped down the political agenda. Scotland barely feels the squeeze because its population has declined relative to England, which the formula does not take into account.

In 2010, an equivalent report in Wales – the Holtham Commission – came up with a simpler idea. Welsh public services were estimated to cost 15 per cent more to provide, so a ‘needs-based factor’ could be added to the formula to ensure public spending per head never dropped below this level.

The amended Welsh Barnett formula was agreed in 2016 and went into operation two years later. The Treasury guaranteed a 15 per cent minimum premium, after a few more years of squeezing it down from its 20 per cent level at the time.

In return, Wales would take on responsibility for more of its own funding. Several taxes were devolved, most notably the top 10 pence of all income tax bands, with the block grant lowered by a corresponding amount.

Since the system came into operation, Cardiff’s Labour government has chosen not to diverge from UK income tax rates, which demonstrates the advantage of the deal to both sides. Wales gets a guaranteed premium and more powers but that makes it clear it receives enough money from London and can raise any extra it wants by itself.

Agreeing to such a deal would challenge Stormont under normal operation, let alone present tensions. Nationalists might struggle to concede a funding premium exists and is perfectly adequate – perhaps one reason the SNP has not fixed the Barnett formula in Scotland.

The DUP might struggle to boast of a deal that points to putting up taxes – and not just income tax. Council tax and water charges in Wales are double domestic rates in Northern Ireland.

To be fair to Stormont it has been inching towards a Welsh debate, especially since New Decade, New Approach. The Fiscal Council is part of this, as is the Independent Fiscal Commission set up by Sinn Féin former finance minister Conor Murphy in 2021.

Stormont followed the Calman and Holtham reports closely but directed most of its efforts last decade to devolving corporation tax instead – a rational decision at the time and work that may yet turn out to be valuable. If nothing else, it gave our political system at dry run at negotiating serious fiscal powers.

So it is possible to imagine the executive parties eventually agreeing a Welsh-type funding settlement. It is just very difficult to imagine them wrapping a deal up by Autumn.

The likeliest outcome is another one-off cash injection, while the budget can is kicked even further down the road.