Scotland and Wales: Responses to the Recession David Bell University of Stirling 1

The context: Effects of the recession vary across the devolved territories Partly reflect differences in industrial structure, credit conditions and conditions in regional housing markets. Devolved institutions financed almost exclusively through a block grant which is determined by the Barnett Formula The recession has not resulted in substantial changes in UK government spending plans Changes that have taken place are nevertheless controversial. 2

Inactivity Rates 3

Unemployment Rates 4

The context: The huge gap that has opened in UK public finances has largely arisen due to falling tax yields, over which the devolved bodies have no control. The UK government bears the risk of falling tax revenues. The pain will come when, after the next election. the new government has no option but to significantly cut current Departmental Expenditure Limits, with consequential effects, via the Barnett formula, on the devolved bodies Automatic stabilisers e.g. JSA funded from Westminster 5

Response to the recession The devolved bodies want to be seen to be contributing towards easing the pain of recession, but they can only do a limited amount within a fixed budget. Although they cannot originate a fiscal stimulus, they may be able to change the time profile of spending or reallocate funding between budgets However, although they cannot borrow, they may have unallocated End Year Flexibility which may be spent subsequently (with the consent of the Treasury) 6

Responses to Recession: Scottish Government Some examples: Acceleration of £293m of capital spending into Increase supply of affordable housing, bringing forward £120m from £35m to Home Owners Support Fund over Bringing forward spending on European Structural Funds programmes £16m to support a 7,800 new apprenticeships 7

Welsh Assembly Government Extension to the Single Investment Fund to provide smaller enterprises with access to revenue support grants of up to £10,000 and capital grants from £5,000-£10,000 Pressing for changes in EU intervention rules for match funding Convergence projects The ReAct scheme: Businesses can obtain financial support to assist them in hiring individuals who have been made redundant from their previous job. Training costs and wages can both be subsidised.. 8

The Political Imperative: Be Seen to be Doing Something "There is no doubt that the recession has instilled in us some key disciplines and allowed us to demonstrate the real dividends of devolution. We have been able to take bold and swift decisions that are the right ones for Wales, the Welsh economy and the people of Wales Deputy First Minister and Minister for the Economy and Transport Ieuan Wyn Jones But is there an evidence base for the policy responses to the recession? 9

Would Additional Fiscal Powers in the Devolved Areas Reduce Negative Impact of Recession? Where should responsibility for the control of macroeconomic policy lie? Should the devolved bodies have borrowing powers? Would tax competition be helpful/harmful? Whose perspective matters? 10

Do the Parliament/Assemblies Have Processes to Adequately Manage Future Real Cuts in DEL? Where is the challenge function? Should it be strengthened? How will capital spending be protected? Can efficiency savings deliver required cuts or do parliament/assemblies need to redefine the boundaries of state intervention? 11