New report detailing Wales’ public sector finances finds deficit of £14.7 billion

A new report by tax devolution experts released today (Monday 4 April 2016) shows that public sector expenditure for Wales exceeded public sector revenues by £14.7 billion in 2014-15.

The report finds that Wales’ net fiscal balance was a deficit of £14.7 billion in the last financial year, which is the equivalent to around 24% of estimated GDP. This figure compares with a deficit of 4.9% of GDP for the UK as a whole and £14.9 billion (9.7% of GDP) for Scotland.

The landmark report, Government Expenditure and Revenue Wales (GERW) 2016, is published by Cardiff University’s Wales Governance Centre. The report presents a comprehensive multi-year analysis of Wales’ public spending, public sector revenues and the nation’s overall fiscal balance, utilising similar methodologies used by the Scottish Government and Northern Ireland Executive for their annual surveys of expenditure and revenue in the UK’s other devolved territories.

In their report, the authors find that:

• Wales’ net fiscal balance has improved in recent years, from a deficit of £15.8 billion (29.2% of estimated GDP) in 2010-11.This was caused by faster growth in revenues (12.3% in nominal terms) compared with expenditure (only 3.9%) from 2010-11.
• Total Welsh public sector spending by all levels of government in 2014-15 was £38.0 billion, approximately £12,300 per person (compared to an average of £11,400 across the UK level as a whole). Welsh Government and local council spending represented 53% of this total; UK government spending constituted 47% of total spending.
• Total public sector revenues in Wales in 2014-15 were estimated at £23.3 billion. Revenues per head were around £7,500, significantly less that the average UK figure of approximately £10,000.

The report also addresses the issues facing Wales’ future fiscal framework with imminent devolution of taxes to Wales. As a result of tax devolution, the system of funding Wales’ expenditure will undergo significant change during the Fifth Assembly.

The report finds that revenues that have been or will soon be devolved collectively raised £4.2 billion in 2014-15, around 18.1% of total current revenue in Wales, and equivalent to around 21.0% of estimated devolved expenditure.

Compared with non-devolved taxes such as VAT which have shown robust growth in recent years, revenues from soon-to-be devolved taxes have been relatively stagnant, primarily because of the fall in the estimated revenues from the Welsh rates of Income Tax.

Ed Poole, a lecturer at the Wales Governance Centre at Cardiff University and one of the authors of the report said: “Transfers between richer and poorer territories within a state are not unusual internationally. Moreover, the UK as a whole has been in deficit, relying on borrowing to make up the difference between revenue and expenditures. That said, at around 24% of estimated GDP, Wales’ £14.7 billion net fiscal deficit is a very substantial gap between the revenues raised in Wales and public spending for Wales, and there is no evidence that the gap between Wales and the rest of the UK is being bridged.

“The GERW 2016 figures lay bare the scale of the challenge facing Wales as public services increasingly come to rely on own-sourced taxes such as the new Welsh rates of Income Tax and Stamp Duty.”

Commenting on the findings of the report, Professor Richard Wyn Jones, Director of the Wales Governance Centre at Cardiff University said: “In contrast to the annual fiscal balance reports published and disseminated in both Scotland and Northern Ireland, there has been no similar report focusing on Wales’ situation for almost two decades. This has meant that serious discussion of the state of our nation’s public finances has been constantly hampered by the paucity of disaggregated public spending, taxation and other basic economic data. GERW addresses this longstanding need for better data and information on Wales’ relative financial position.

“Not only that, but with tax devolution likely to be one of the defining stories of the Fifth Assembly, this report also serves to highlight the challenges that lie ahead, not least as Welsh politicians seek negotiate with the Treasury over the key question of how tax devolution is implemented: a negotiation in which, as is made clear in GERW 2016, there are literally hundreds of millions of pounds at stake.”