Page last updated at 15:44 GMT, Tuesday, 7 July 2009 16:44 UK

Wales 'could lose out on 8.5bn'

Gerald Holtham
Gerald Holtham is a visiting professor at the Cardiff Business School

A commission considering the way the assembly government is funded says Wales is losing out by £300m a year.

The commission chair, economist Gerald Holtham, warned the underfunding could reach £8.5bn over the next decade, or £2,900 for everyone living in Wales.

The report, for Welsh ministers, concludes that a new funding formula is needed to reflect the actual cost of providing services for Wales.

A further report on taxation and borrowing powers will follow next year.

The commission was established as part of the coalition deal between Labour and Plaid Cymru after the assembly election two years ago.

Mr Holtham said the Barnett formula, drawn up by the Labour government in the late 1970s, was "arbitrary" and in "urgent need of reform".

When the UK government increases funding for departments such as health and education in England, the formula is used to decide how much money the devolved governments in Cardiff, Edinburgh and Belfast receive.

The needs-based system the commission favours would take into account factors such as the age of the population and levels of poverty.

Mr Holtham admitted the commission did not suggest any "magic bullet" to replace the Barnett system.

He indicated the commission's second report, due around the middle of 2010, would include research on what should be included in a new needs based formula.

Political process

Mr Holtham said agreement on any changes "must come out of a political process" - negotiations between the UK and devolved administrations.

He told BBC Wales that by comparing how the UK government funds the English regions, the commission had concluded Wales is currently losing around £300m a year.

He warned that without changes Wales could lose £8.5bn within 10 years, more than half the money the assembly government spends on Welsh public services each year.

As an interim measure, the report suggests the Treasury amend the Barnett formula to effectively freeze funding at the current level.

This would, according to the commission, stop the money Wales receives being gradually eroded compared to England's funding.

The report was welcomed in a joint statement by First Minister Rhodri Morgan, Deputy First Minister Ieuan Wyn Jones and Finance Minister Andrew Davies.

It said the report made "a good argument that need should be the principle for allocating resources in a devolved system".

The statement continued: "The report also acknowledges that introducing a needs-based formula is likely to be complex and will take time.

"We will need to make sure that any major changes are introduced on a basis of mutual agreement between ourselves, the other devolved administrations and the UK government."

'Show leadership'

Welsh Conservative finance spokesman Nick Ramsay AM said it was "right" to looking at the funding issue "at a time of growing pressure on the assembly's budgets".

"As a party we have said that the Barnett formula cannot last forever," he said.

"We have repeatedly called on the UK government to show leadership on this issue and look at an updated, needs-based assessment of how spending should be allocated across the UK."

Welsh Liberal Democrat leader Kirsty Williams called on UK ministers to "act immediately" on the commission's findings.

She said it was "really good news to see that the ideas that the Welsh Liberal Democrats have been advocating for decades are becoming mainstream".

"We have long argued that the Barnett formula is not fit for purpose and needs to be replaced with a fairer system," Ms Williams added.

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