Mike Hedges AM surveys four different options.

There is a very strong economic case for a United Kingdom, where not only Wales is a net beneficiary of redistribution, but also where larger countries, which can more easily withstand economic storms, support the less affluent parts.

Wales is a net economic beneficiary of the Union. Wales has substantially more of its expenditure, including expenditure on people in Wales, coming from Westminster, including funding to the Senedd and Welsh government, than is raised in Wales.

There are four possible methods of funding Wales.

The Barnett Formula evolved from the Goschen Formula which was specifically designed to preserve Scotland’s public spending advantage over England. The Formula was thus never designed with Wales in mind. Applied rigorously, the Formula should have led to convergence in levels of spending per head across the UK. The Formula has, however, preserved a spending advantage for Wales over England.

There have been periodic adjustments to the operation of the Formula since 1980, mainly through relative population changes. These adjustments have increased relative spending levels in Wales.

The main advantage of the Formula is its simplicity and objectivity as a basis for making spending allocations. There has been notable success in securing Formula bypass since devolution, for example in relation to the Objective One matched funding and the funding for city deals.

We also have the Barnett floor. At the 2015 Spending Review, the UK Conservative government implemented a funding floor in Wales. This provided a guarantee that the Welsh Government’s block grant funding per head would not fall below 115% of equivalent funding per head in England.

The second option is that Wales pays its share of Westminster costs and keeps the rest of the taxes raised in Wales. This is what independence looks like. This would have a catastrophic effect on public expenditure in Wales.

From published ONS data, we know that as a percentage of the British income raised, gross value added is 62.9% of the UK for West Wales and the valleys. For Cardiff and east Wales, it is 87.3%. In total for Wales, it is 72.1%, where Britain is shown as 100%.

The only way Plaid Cymru could get anywhere near getting it to work is to not fund the state pension, other central benefits, and not fund the Welsh proportion of the national debt charges.

The third option is that Wales gets its population share of devolved expenditure. This is the simplest and the second most catastrophic. The 115% Barnett floor would be reduced to 100% of English expenditure. This would lead to a removal of the Barnett floor that protects expenditure in Wales and sees Wales doing better than England.

The fourth option is to create a new formula that takes into account sparsity, age profile and deprivation. Any new formula will not be without criticism. Consider the local government formula in Wales and the misunderstanding, arguments, and misleading statements we have on it. Anyone who has followed discussion on it would not realise that the two authorities who receive the least Government support per head are Monmouthshire and the Vale of Glamorgan.

The system of grant allocation is designed to be objective and to equalise for need and resources. The following principles underlie the calculation of the standard spending assessments (SSA):  the relative weights of the services provided by local government are determined by actual expenditure patterns; the distribution within services is, in general, determined by objective indicators of authorities’ relative need to spend.

For the purpose of calculating individual SSA allocations, local government revenue spending is broken down into 55 notional service areas. A separate method of distribution exists for each of these elements in order to distribute the total across the authorities. This formula could be compared to England and be used for calculating relative local government need between England and Wales.

Health is the major part of the Welsh budget and is currently just over 50% of Welsh Government expenditure. On health, there is the simplistic age-based formula to calculate relative need. Then there is the more complicated and accurate formula, including the relative occurrences of all conditions and diseases with a cost weighting attached. This would create a long and detailed formula, but it is relatively easy to achieve – the data exists, and the calculations can be done.

The data on relative poverty, rates of long term ill health and sparsity are known. The rest of the expenditure need in Wales could be calculated in the same way. Jerry Holtham chaired an independent commission on Funding and Finance for Wales which reported in 2010. Also known as The Holtham Commission, it proposed the Barnett floor and the production of a needs-based formula.

Fair funding for Wales should be on the basis of relative need and as reform to a needs-based formula will take time, work needs to start on it now. I support the introduction of a needs-based formula for determining the Welsh block grant, but we must realise it could reduce the current block grant.

Mike Hedges is the Senedd Member for Swansea East and a former Leader of Swansea Council.

Image: Mike Hedges. Author: Steve Cushen, licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.