Barnett bailouts

It's the dog days of August and the calm before the political storm of the Nato summit in Newport and the Scottish referendum.

So what better time to talk about the Barnett formula - the equation which decides how much money the Welsh government receives from Westminster every year.

Reform of Barnett has been easier said than done over the years, mainly because of the sensitivities surrounding Scotland and the possibility of harming the comparatively generous settlement it gets.

The Welsh Liberal Democrats have come out with a policy which will be included in what they call their pre-manifesto to be published next month.

The party is proposing a series of top-up payments for Wales over the course of the next Parliament if there is a repeat of 2010, and it forms part of a coalition government at Westminster.

The background here is the report published by the economist Gerry Holtham five years ago which for the first time put a figure on the amount Wales was being short-changed by, if you took into consideration things like social deprivation and the age of the population.

The shortfall at the time was put at £300m. The top-up payments would try to address that.

I caught up with Gerry Holtham this week to get his take.

'Nice work if you can get it'

The big thing for him is not top-up payments but having what's called a "funding floor".

One of the problems with the Barnett formula is that when public expenditure increases across the UK, the difference between the relatively higher levels of spending per head in the devolved nations and England narrows. It's what's called the Barnett squeeze.

Between 1999 and 2010, public expenditure per head in Wales fell from 120% of the English average to 111%.

It's not a problem now because public expenditure is reducing but at some point when spending rises again then Wales will lose out.

The Lib Dems are also proposing a funding floor to protect the higher levels of spending in Wales, where there is judged to be a higher need, and to stop the amounts between Wales and England converging.

Gerry Holtham said: "Given the Barnett squeeze it's quite possible that Northern Ireland will be able to say in a year or two that it is underfunded as well and in that case they could ask for a top up.

"You then have to sell it to the English public that anybody underfunded gets a top up but somebody who is overfunded does not have to pay anything back.

"Nice work if you can get it but I don't know how well that will play.

"Here's the thing, suppose they decide that this year the top up should be worth £100m, if then the squeeze resumes when public expenditure starts growing again then that will become £200m, £300m or £700 and at some point that becomes politically vulnerable and people will say 'why are we giving the taffs all that money?'.

"It's much more important to get the thing right by putting the floor in place than having a sticking plaster top up."

Persuade Treasury

So there are some of the mechanics of the Barnett formula, but how realistic is it that the Lib Dems can do anything about it?

Obviously they have to form part of a coalition first and then they have to persuade the Treasury which has traditionally been reluctant to change.

The problem is it won't be cash neutral because no-one is going to cut the amount that Scotland gets so the money will have to come from other sources.

On the flip side, we are talking about a relatively small slice of the overall public spending cake.

And while the Lib Dems have gone further than anyone so far they are not the only ones talking about it.

Labour is hinting at possible action on this front saying there is a specific set of issues for Wales.

It's a big unknown but maybe the Scottish referendum provides some kind of once-in-a-generation momentum or dynamic that could trigger a change.

Don't hold your breath.