Devolution of Financial Liabilities.
The Welsh assembly recently approved devolution of tax raising powers. There was no Welsh public debate and no Welsh referendum on this new devolution.
So what is this new devolution all about and what is the comparison to Greece? I shall try to explain as simply as possible.
This is a Wikipedia link to the Barnett formula Https://en.m.wikipedia.org/wiki/Barnett_formula
The Barnett formula calculates the amount money that the UK central government gives to the united countries that make up the United kingdom. It is essentially based on percentages. Eg for every £1 per capita given to England a percentage calculated from this amount is given to Wales, Ireland and Scotland. Wales currently gets 120% per capita via the Barnett formula. So for every £1 given to an Englishman a Welshman receives £1.20 from central government.
The Barnett formula is far from perfect and could be seen by the English as unfair. However for all its faults the Barnett formula is a very important surplus recycling mechanism. Wales is a deficit country, more money via trade flows out of Wales to England than flows from England to Wales, the Barnett formula simply reverses some of this capital outflow.
Devolution of tax raising powers to the Welsh assembly comes with a reduction of the Barnett formula from 120% to 115%. Please see this link on tax devolution.
As more tax raising powers are devolved to the Welsh assembly this percentage will be reduced. Given that UK central government is running a huge public deficit, it seems very likely that the funds given to Wales from central government will come under increasing pressure.
Before the devolution of tax powers it would have been impossible for central government to reduce Welsh funding per capita below that of the English funding per capita. However now the Welsh assembly has tax raising powers the UK central government can simply tell the Welsh assembly to fund their own spending through devolved taxation. The argument for central government to fund England and Wales equally has been lost.
As well as devolving taxation the UK central government has also been devolving its financial liabilities. Public pension funds such as the fire service has now been devolved to the Welsh assembly . Please see this link
What we have here is a Welsh assembly guaranteed public pension scheme. What happens if this pension fund goes into deficit?
1. The Welsh assembly could borrow the money? The tax devolution powers come with a new £1 billion debt facility. So this could be used, as long as it’s not all spent on propping up other public spending.
2. The Welsh assembly could raise income tax. ( Not very popular)
3. The Welsh assembly could cut public spending to fund the pension deficit ( not very popular)
4. The Welsh assembly could reduce the final pension of fire fighters. ( Very probable)
The Welsh assembly could not simply print money to cover these deficits. ( It has no central bank or Welsh sovereign currency)
Now why did I title this blog ” Is Wales turning Greek?”
Greece has a shared central currency like Wales .
Greece has a limited debt facility like Wales.
Greece controls it’s own taxes, tax raising powers are being devolved to the Welsh assembly
Greece has its own public pensions that are in deficit. Public pension liabilities are being devolved to the Welsh assembly.
Greece runs a trade deficit with other Eurozone countries, Wales runs a deficit with England.
The Eurozone has no surplus recycling mechanism, Greece recieves no funding from a Eurozone central treasury. It does recieve some funding from the EU budget.
If Wales loses the Barnett formula, funding from UK central government will be cut. Wales will have no surplus recycling mechanism just like Greece.
In order to redress the capital outflows via its trade deficit , Greece has had to drastically reduce public spending, raise taxes, reduce wages to become more competitive ,cut public pensions and sell public assets. Unless the Welsh assembly has plans to create it’s own Welsh soveign currency and print new money for its public spending needs. Wales will end up in a very similar situation to Greece!
Author Paul Fear.