Limbering up

| 09:03 UK time, Wednesday, 20 October 2010

We're hours away from finding out the long awaited contents of the Spending Review. Welsh ministers will be watching more closely than most, as, unlike Whitehall departments, who've gone through a lengthy negotiating period with the Treasury before getting their final budgets for the next four years signed off, the Assembly Government has no firm idea what its budgets will be until the Chancellor gets to his feet.

That's because changes in budgets of the devolved administrations are governed by changes in the budgets of Whitehall departments - Lord Barnett's famous formula.

It's going to be a day of statistics, but I've got one advance one for you which could play an important role behind the scenes today. So as a limbering up exercise for what's to come later, let's have a look.

Barnett works in a simple way - it takes the cash changes in each Whitehall department, multiplies them by the amount that department's functions are devolved, then multiplies that figure by Wales' proportion of population compared with the rest of the United Kingdom. (My mistake: compared with England. Doesn't make any difference to the figures but well spotted!)

As that meerkat says, simples.

So if the Department of Health's budget goes UP by £1bn, this is multiplied by 99.5 per cent (virtually all of health is devolved) and then multiplied by 5.84 per cent (Wales' proportion of the UK population).

These proportions were all set out in 2007 at the time of the last Comprehensive Spending Review. But remember that population is fluid. What I understand is that the number being used for today's calculations of Wales' population proportion, based on official mid-year estimates, has gone down to 5.79 per cent.

Before we get the inevitable slew of "snub to Wales" press releases so beloved of my colleague David Cornock, consider this.

When spending rises, multiplying by a smaller number gives you a smaller rise. Hypothetical example - take a Whitehall department whose budget is 100 per cent Barnettised, which sees its budget rise by £1bn. Multiply that increase by 5.84 per cent and you get around £58.4m. Multiply it by 5.79 per cent and you get £57.9m. So for every £1bn increase, the Welsh budget would lose out on around £500,000.

So if the English health budget sees increases over the next four years, the increases coming to Wales will be less than they otherwise would have.

But there's another side of the coin here. If you multiply a negative by a smaller number, you get a smaller cut.

Take the example above - if our hypothetical department above sees its budget cut by £1bn, then the corresponding reduction to the Welsh budget under the new 5.79 figure would be £57.9m not £58.4m. So for every fall of £1bn, the Assembly Government actually saves £500,000 from the cut it would otherwise have received.

Will this have a positive or negative effect? It'll all come out in the wash today. One minister told me in passing in the last couple of days that the Assembly Government now believes privately that their prediction of a three per cent annual cash cut may be considerably too pessimistic and that the figure may be nearer one per cent a year. If so, their response to the Spending Review will need careful handling. Most people's gut reaction would consider a one per cent fall, even before inflation, as frankly not too bad. We shall see in the coming hours.

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