Glyn Davies has some interesting reflections on last night's IWA event in Wrexham on the 'Future Health of the People of Wales'. And once again the issue of powers rears its head.

The argument the IWA made in the recent Putting Wales in the Driving Seat research was that the current system - with LCOs and all the rest of it - is by nature restrictive when it comes to tackling issues in a rounded, strategic way. We cited public health as an example that could benefit if the Assembly were to receive further powers that would come after a yes vote in a referendum.

A legislative approach might be beneficial to public health because of the breadth of its determinants (the Swedes cite eleven); and because of the weight of legislation, as opposed to ministerial responsibilities (which can be changed more easily). A relevant precedent for public health interventions occurred in Victorian Britain, when town planners were public health officers who ensured adequate sanitation and 'healthy' city design. They aimed to tackle those things that affected the whole of the population's health but which the population could do little about themselves. As the report noted, modern examples might include the salt, fats and sugar content in food and in the design of urban developments.

It was slightly disappointing that the Western Mail's coverage of the report did not seem to pick up on the argument about making our laws strategic and rounded. It focused more on the couple of ideas the report had mentioned for some of the possible contents of a public health law. The law would not be about telling people what to do or trying to exercise control over their lives, but to write into law the responsibilities for tackling public health determinants and to make it as easy as possible for people to lead healthy lives. People are not being able to make free choices when urban settlements are built a long walk away from public transport links - and with barely any thought to cyclists - and energy-rich foods are cheaper per unit of energy than more nutritious foods people. The unhealthier options seem to be a whole lot easier or cheaper. The latter in particular will favour those with more disposable income.

In any event, the point is that achieving a holistic (legislative) approach to any issue, like public health, is difficult with the current arrangement. You might well disagree with the public health example — but there are many other fields that could benefit from a more strategic, rounded legislative approach.

Nick Morris, IWA Research Officer.
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Eurfyl ap Gwilym considers Budget 2009:

It is usually wise before commenting on the budget to reflect for a few days. Often what appear to be the principal issues on the day recede in importance on reflection and other matters, often buried inadvertently or deliberately in the Budget Red Book, come to the fore. In the case of the budget for 2009 the principal forces at play were clear even before the Chancellor rose to speak: the economic recession was going to dent the public finances in two ways – tax revenue would fall and public expenditure on programmes such as social security and debt interest would rise.

These issues had been highlighted in November’s Pre Budget Report, although the forecasts were viewed by most independent commentators as being optimistic. In the event the state of the public finances, as revealed by the Chancellor on 22 April, were dreadful. The collapse in tax revenues (£39.4bn lower than in the Pre Budget Report) and the growth in public expenditure (an increase of £17.7bn in Total Managed Expenditure since last November) meant that even on the Treasury’s forecasts the public sector deficit this year would be £175bn and over the next five years the cumulative deficit would total £703bn, equivalent to £11,500 for every man, woman and child in the UK. The one crumb of comfort is that even after such an increase in debt the total public debt as a proportion of GDP at 79 per cent by 2013-14 could still be manageable and will be comparable to some other advanced countries, as Professor James Foreman-Peck noted yesterday.

Much attention since the budget has been focussed on three factors: the forecasts for economic growth which are viewed by many as still being unduly optimistic; the decision to levy a higher rate of income tax on those earning over £150,000 a year; and the planned efficiency savings in the public sector. Given the uncertainties surrounding the global economy whether or not growth resumes at the end of this year and hits 3.5 per cent in 2011 is probably academic at this stage. Forecasting, always a hazardous exercise, is even more so given the uncertainties. The decision to raise the rate of income tax to 50 per cent on those earning more than £150,000 may be symbolically significant but the increase in revenue by 2011-12 will be a modest £1.8bn according to the Treasury forecasts. A much more material consideration is the impact of the planned efficiency savings but many of these are timed for 2012-13 and later which conveniently fall outside the forecasting cycle in the budget which is up to 2011-12.


The UK’s Public Finances

An important point to make is that while the current contraction in economies around the world is exacerbating the position it has been clear for some years that the UK’s public finances were in a mess. Between 1999 and 2009 cash GDP grew by 52.4 per cent, income from taxes and duties grew by 42.1 per cent whilst nominal public expenditure grew by 92.3 per cent. As many have pointed out over recent years, after abandoning ‘prudence with a purpose’ at the start of the decade, public expenditure growth has been at an unsustainable level. We have had the boom, now we have an almighty bust. The only certainty is that there will be a need for radical action to start to address the public finances: action much more radical than that outlined in the budget. It can be argued that whilst most advanced economies around the world are suffering from the recession the UK is in a particularly poor state because of the poor management of its public finances over the last decade.

Unfortunately, because there will be a UK General Election within the next year, the UK Government is reluctant to specify the far-reaching actions they will have to take in the event that they are in power after that election. For similar reasons the Conservatives are also unready to be too specific. Given the scale of the problem there will have to be a combination of tax increases and spending cuts. What we do know is that over the course of the next Parliament 30 per cent of the fiscal tightening will come from lower capital investment in the public sector, 50 per cent will come from other cuts in public expenditure and 20 per cent only from tax increases (IFS April 2009). The mantra of growing public expenditure more slowly than GDP used in the past and still being clung to by both principal UK parties will not work. Both parties will also be all too aware of what has happened in Ireland, the country with its public finances in a comparable mess to the UK. There the government has raised taxes and cut public expenditure. While this may be the right thing to do financially it has been rewarded with a slump in popular support (in Ireland Fianna Fáil polled 23 per cent – the party’s lowest ever recorded result).


Tax and Spend

If serious steps are to be taken to close the public sector deficit over the coming years then it is inconceivable that taxes will not have to be raised further and some spending programmes will not have to be cut. While a case can be made for delaying these moves until decline in the economy has levelled out, planning for these cuts should be underway now.


Public Expenditure

The Government has stated that current spending will grow by 0.7 per cent in real terms between 2011-12 and 2013-14 compared with a planned 1.1 per cent in November’s Pre Budget Report. As has been demonstrated by the Institute of Fiscal Studies it is probable that all this growth will be swallowed up by increased expenditure on debt interest and social security with none being available for health and education and other programmes. The Government has avoided the term ‘cuts’ and has called for efficiency savings. It is probable that there will have to be both cuts and efficiency savings. At the same time public sector net investment ‘will move’ (in plain English: be reduced) to 1.25 per cent of GDP. Three public spending programmes account for 59 per cent of public expenditure: education; social security; and health. If serious reductions in public expenditure are required some of these programmes will have to be cut.

Taxation

The three main sources of tax revenue this year are income tax; national insurance; and VAT. These three taxes account for over 60 percent of the total revenue. If tax increases are to make a material contribution to closing the gap in public finances then some of these three taxes will have to be increased. It will not be sufficient simply to tax more heavily those earning over £150,000 a year. The Treasury’s estimated yield from this tax rate increase (£1.81bn by 2011-12 which is little more than the £1.75bn from fuel duty increases) is already subject to debate with the ‘Laffer effect’ being raised as usual (the Laffer hypothesis is that cutting marginal tax rates can lead to an increase in the total tax take while increasing the marginal tax rate can lead to a fall in total tax take). Given that capital gains tax is now 18 per cent irrespective of the time over which the gain is made, remuneration consultants, ever quick off the mark, are already promoting schemes where remuneration for the better off can be structured as capital gains rather than income, thus incurring tax at 18 per cent rather than 50 per cent. It is probable that the Government will either have to increase broad based taxes such as the standard rate of income tax or VAT.

Of course there may be an attempt yet again to avoid raising the rate of income tax (which was only cut to 20 per cent in 2007 when the public finances were already in difficulties: that cut cost £10bn a year) and to play around with thresholds. This is already being done for those on higher pay. Another way of increasing the tax take would be to broaden the range of goods and services on which the standard rate of VAT is levied and use part of the proceeds to target help for those on low incomes and using the remainder to help plug the gap in public finances. VAT is a regressive tax with those on higher incomes benefiting most from exemptions, such as food and children’s clothes. In practice it is unlikely that any political party will be prepared to risk such a move irrespective of its financial merits but it could well be that when the standard rate of VAT is restored after the temporary cut it will be raised to 20 per cent. Such an increase would yield £8bn a year.

Impact on Wales

What will be the impact here in Wales? After some confusion on budget day WAG announced that the planned budget meant a cut of £416 million next year. It is unclear as to the baseline being used in this case. Of course, it was already clear from the Pre Budget Report last November that Wales would suffer its share from the planned cuts in forecast spending of £10bn in 2010-11 and 2011-12. Some of this reduction will come though the block grant and the remainder from Whitehall programmes which are not devolved.

The Institute of Fiscal Studies is predicting that the block grants to Scotland and Wales will show no growth during the next Spending Review period. The reductions already identified and the subsequent reductions foreshadowed in the Budget will hit particularly hard in Wales because growth in identifiable public expenditure here has not kept pace with that in England and Scotland over the last decade. Real growth in England between 1999-00 and 2006-07 was 33.0 per cent, in Scotland 32.9 per cent but in Wales it was only 30.0 per cent. A difference of 3 percentage points may appear small but this represented a shortfall of £700 million in 2006-07 alone. Given that the Assembly Government acquiesced in the current funding shortfall during the good times it is unlikely to be effective in getting a sympathetic hearing from the UK Government if it seeks to plead a special case this time.

Until now it is the private sector that has borne the brunt of the recession and some commentators in Wales have taken comfort that its impact may be that much less in Wales because of our higher reliance on the public sector (23 per cent of those in employment in Wales are in the public sector compared with 20 per cent in the UK as a whole). As efficiency gains and public expenditure cuts take effect over the coming years Wales will, unfortunately, suffer due its over-reliance on public spending.

It is to be hoped that the UK Government will at least start to spell out in greater detail its planned reductions in spending over the coming years so as to enable the Assembly Government to estimate the future level of the block grant and to start planning for the harsher financial environment.

Eurfyl ap Gwilym is an economist and IWA trustee.

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James Foreman-Peck reflects on the tax row sparked by the Budget last week:

One advantage for the Welsh Assembly Government of their current income source, the block grant, is that it does not fall off in a recession. Instead the central UK government absorbs most of the drop in tax receipts by borrowing. Being able to borrow also allows the UK government, unlike the Assembly Government, to offset some of the impact of the present financial crisis.

During the last world crisis on a comparable scale, policy was to balance the budget at all costs, and the attempt to do so brought down the Labour Government elected in 1929. The conventional wisdom for half a century has been that they should have borrowed rather than balancing the budget. Yet, their successors are now universally berated by the media for doing so. The chattering classes smell electoral blood and the financial industries can divert attention from the sins of the City in causing the crisis.

Certainly the UK Government’s need to borrow nearly 13 percent of GDP this year and the prospect of national debt rising to 80 percent of GDP before adjustment to the world recession is over, are horrendous. But do both these factors really spell disaster? OECD figures suggest that this year’s borrowing would only take the UK up to the debt–GDP ratios of France and the US. After the First World War, Britain managed a debt-GDP ratio greater than 200 percent without default - admittedly with great discomfort. And civilisation has not yet collapsed in Italy with a ratio of well over 100 percent.

Admittedly Gordon Brown’s abandonment of prudence when Chancellor has made matters worse. The European Council of Ministers should not have been obliged to rap Britain’s knuckles over an excessive government budget deficit in 2004-05 when times were relatively prosperous. But this is water under the bridge. The big question now is, how should the public finances be brought back into balance as the economy recovers? To answer this we need to know about the timing and strength of recovery, both of which are still very uncertain. Alistair Darling was unlucky to have announced only two days after his budget GDP figures considerably worse than he projected. This means lower tax receipts than he expected and more borrowing necessary. But the GDP numbers are not his fault, despite the tendency to blame government for everything that goes wrong.

We know that the public spending bonanza under Gordon Brown mark II’s Chancellorship must be over for a decade. Turning to ‘efficiency savings’ and ‘eliminating waste’, opinions differ in practice. There will always be something, if not many things, that some taxpayers think an inappropriate use for their taxes – if they find out. Until recently presumably the Health Commission Wales (HCW) suspected that giving transgender patients in Wales access to funding for gender reassignment therapy would not be popular in Wales – otherwise why pursue a different policy from the rest of the UK?

If defining ‘waste’ and ‘efficiency’ are difficult, how about deciding on tax increases to reduce borrowing? The howls that greeted the prospect of a 50 percent tax rate for those earning over £150,000 a year suggested that the hike presages the end of an era, more than the world crisis itself. Apparently the rich will now leave Britain so we will have no jobs. And, supposedly, they will spend their wealth employing tax advisers to ensure they do not pay the tax, so revenue will actually fall.

A traditional economic argument for not taxing the poor as heavily as the rich was that the more money anybody received, the less wellbeing they would obtain from each pound. So taking £1 in taxes from a rich person caused them less grief than taking £1 from a poor person. Equalising the pain of taxation then means that the rich pay proportionately more. In a world focused on incentives, all this has gone out of the window. If the poor cannot avoid taxes as well as the rich then by this logic presumably the poor should bear most of the burden.

Is this what the present state of economic research tells us about taxation? According to a recent Institute of Fiscal Studies survey, taxes do not affect whether highly educated and wealthy men work or not, or how long they work each week, or even over a year. Not surprisingly, taxes do affect their total earnings as well as their taxable income. So these people react by shifting income and consumption to non-taxable forms, rather than by reducing their work effort. Taxable income of the self-employed is apparently very sensitive to the tax rate and indeed increases in tax rates may lead to reductions in the revenue raised from this group. (Is it an uncharitable thought to wonder if some of this is simply a matter of reduced compliance?)

For ‘low skill’ men the benefit system is likely to affect the chances that they will work at all. Here the Tories’ interest in reducing National Insurance may be relevant to increasing work and ultimately tax receipts. For ‘high skill’ men higher rates of taxes are likely to discourage effort quite substantially. (It is not entirely clear to me how these ‘high skill’ men differ from the highly educated and wealthy mentioned above.) But generally hours of work do not respond much to taxes for men. They are a little more responsive for married women and lone mothers. The critical point is that working at all in the market is quite sensitive to taxation and benefits for women and for ‘low skill’ men.

The conclusion is that we need to worry about the behavioural impact of taxes on everybody if we are concerned about raising extra tax revenue. In a democracy with an election coming up the votes of those directly affected or otherwise by tax increases to cover the budget deficit are likely to be even more fundamental to policy, however.

James Foreman-Peck is Director of the Welsh Institute for Research in Economics and Development. Read more...

Geraint Talfan Davies takes issue with the All Wales Convention’s description of the choice of paths to law-making open to the Assembly:

The All Wales Convention quite rightly wants to be seen as impartial in the debate on law-making powers for the National Assembly. It also has the unenviable task of making an arcane constitutional issue accessible to a wider public. The wording of its latest leaflet shows just how difficult it is to achieve both things at the same time.

Under the heading “What’s up for debate?”’ it says that “the question at the heart of the matter” is whether “the Assembly should continue getting law-making powers step by step, or should powers come all at once”. (My italics) Is this apparent sweet reasonableness quite as impartial as it is meant to be?

It implies that the only argument is about timescale, and that sooner or later we will end up in the same place whether we catch the slow train or the express. All things being equal, what reasonable person, posed with a choice between doing something ‘step by step’ or ‘all at once’, would not adopt a gradual approach rather than being landed with everything in one fell swoop?

The convention’s leaflet reinforces this with a quote from a Brian Moylan of Torfaen:

“In general I would prefer to stay with the step by step approach. I think you learn more as you go along – learning from mistakes, adapting and then moving on. I think the same is true of the Assembly and devolution.”

My objection to this characterisation of the choice is that it is simply not accurate. All things are not equal. While gradualism may be a factor in the current argument, the leaflet does not even hint at a debate about the material qualitative differences between the two paths.

The ‘step by step’ approach could just as easily be described as piecemeal or ‘pick ’n mix’ or even un-strategic, and even on the best of experience so far does not address the issue that Lord Richard highlighted when he launched the Richard Commission’s report: “The problem of knowing what the Assembly can and can’t do remains a central issue of accountability to the people of Wales.”

Contrasting ‘step by step’ with ‘all at once’ also carries an implication that getting law-making powers ‘all at once’ doesn’t allow the Assembly to tackle law-making gradually, which is not the case. The transfer of powers en bloc, following a yes vote in a referendum, does not mean that the Assembly would have to rush to change the legislation transferred. It would have the power of choice.

I am not suggesting that the Convention can necessarily adopt a racier description such as a choice between a maze and a motorway, but the latter is easier to navigate, better sign-posted and gets you from A to B more quickly. And, on a motorway you still have a choice: between the slow lane and the fast lane.

There’s more to this debate than the convention’s leaflet allows. Perhaps another leaflet is required to inform the public of some of the key strands in the argument. A good source for those who want to delve deeper into this debate is the IWA’s latest report, commissioned by the All Wales Convention, and published earlier this week: Putting Wales in the Driving Seat: Legislative Opportunities for the National Assembly as a result of implementing Part 4 of the 2006 Wales Act.

Geraint Talfan Davies is Chair of the IWA.
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John Osmond reports on a new prediction about the timing of the forthcoming referendum on extending the powers of the National Assembly:

Richard Wyn Jones, the new Director of the Wales Governance Centre, put his head above the parapet at the IWA’s Devolution Decade conference this week and made some informed, if speculative, predictions about the next three years in Welsh political life.

Given the conference’s focus on devolution the centrepiece of his predictions was the timing of the forthcoming referendum on extending the Assembly’s powers. In the One Wales coalition agreement between Labour and Plaid Cymru the commitment is to hold a referendum at or before the next Assembly election, in May 2011. However, Professor Jones says that commitment will only be partially delivered. Instead, he predicts that the Assembly will vote shortly before the election, by the required two-thirds majority, that a referendum should be held.

Critically, this prediction is based on the assumption that in the next Westminster election, assumed to be held in about a year’s time, in the Spring of 2010, the Conservatives will win a comfortable majority and so there will be a Conservative Secretary of State for Wales. This means that the Assembly vote in favour of a referendum could be timed so as to require the Secretary of State for Wales to make a response in the run-up to the next Assembly election. It is specified in the 2006 Wales Act that the Secretary of State must decide to lay an order before both Houses of Parliament authorising a referendum or write to the First Minister in Cardiff outlining reasons for not doing so within 120 days.

This means that, if a Conservative Government is in power, we can expect a vote in favour of a referendum to be passed in the Assembly in late December 2010. This will force the Tory Government in London to make a decision on what to do about holding the referendum before the Assembly election, in early May 2011.

How, in these circumstances, would a Conservative government respond? Richard Wyn Jones’s advice is that, in its own interest, the government should, as he put it, ‘cut and run’ before the Assembly votes in favour of a referendum. That is to say, it should announce in favour of Part 4 of the 2006 Wales Act which would devolve further law-making powers to Cardiff Bay, but announce that it is amending it so that no referendum is required. His argument is that the Assembly’s current powers, under Part 3 of the Act to pass specific Measures (in effect, Acts - so long as the nod has been received from Westminster) is so close to full law-making powers (passing Acts without needing the nod from Westminster) that a referendum is not really needed.

Richard Wyn Jones says this would be the strategically sensible course for the Conservatives. However, he predicts they won’t adopt it. Instead, he says they will “muddle on” and then be forced by the Assembly to allow a referendum. As he put it, “It is not sensible politics for the Tories to allow themselves to be put in this position, but who among them will expend the political capital to avoid it?”

The Conservative’s present commitment is to maintaining the status quo, that is Part 3 of the 2006 Act. This is apparently on the advice of Lord Roberts of Conwy, who last July delivered a 20,000 word report to David Cameron on the The Way Ahead for Welsh devolution. So far this report has not been made public - and few Tories have been able to read it in full, apparently. Instead, a summary excerpt was released on 5 November last year, co-incidentally the same day that Barack Obama was elected President in the United States (a good day to bury news). Lord Roberts was, apparently, recommending another “in-depth examination” of the whole issue once the Conservatives were in power.

However, a two-thirds vote by AMs in favour of a referendum, just ahead of the next Assembly election, would overtake the possibility of yet another commission of inquiry. It would force the Conservatives into an choice between joining in with the call for a referendum (and working out which side they would take) or opposing one and uniting the rest of political Wales against them.

John Osmond is Director of the IWA. Read more...

The Budget balance sheet for Wales (novices version) announced a £216m reduction in the Welsh Assembly Government Departmental Expenditure Limit for the next year. Strangely enough, this is filed under 'Improving public services'. And we shall shortly begin to see whether the Assembly Government can do the maths of improving services while the coffers shrink.

Economic development and enterprise is one area that merits serious attention. Wales' relative Gross Value Added has been backsliding for some time, while economic development spending in Wales currently stands at around 230 per cent of the UK average. While the Assembly Government could argue that the situation would have been even worse without this spending the cuts in Wales' budget provide a chance for real reflection about the effectiveness of current spending.

Nick Morris is IWA Research Officer. Read more...