New report says Welsh fiscal deal set to boost Government coffers by hundreds of millions

The Welsh Government’s budget could be boosted by over £120 million a year by 2028, and £600 million over the next decade, as a result of the new Fiscal Framework agreement for Wales.

This is the main finding of a new report, Fair Funding for Taxing Times?, published today (13 February 2017) by researchers at Cardiff University’s Wales Governance Centre and the Institute for Fiscal Studies. The report assesses the new funding agreement between HM Treasury and the Welsh Government in December 2016.

The boost in funding to Wales, relative to what it would receive under the Barnett formula alone, results from a redesigned ‘funding floor’ that will more than offset expected losses due to the way the Welsh block grant will be adjusted after tax devolution.

In their report, the authors find that:

• After around £2.5 billion of tax revenues are devolved to Wales, the existing Welsh block grant will be cut by a corresponding amount. This Block Grant Adjustment (BGA) will then change from year to year according to what happens to equivalent revenues in England & Northern Ireland (E&NI). This means the relative performance of Welsh revenues (and Welsh Government tax policy) become very important to the Welsh Government budget for the first time. Those BGAs will be calculated separately for each income tax band, recognising the particular risks from Wales’ lower level of incomes.
• The agreed method of BGA will mean the Welsh Government will bear population-related revenue risk. Given that Wales’ population has been growing more slowly than the E&NI population for some time, and is projected to continue to do so, this could see the Welsh budget lose out from slower population growth, even if revenues per person in Wales grow as quickly as in E&NI.
• The agreement also introduces a new “needs-based factor” in the Barnett formula. From 2018-19, increments passed onto the Welsh budget will be 5% greater than they would have been under the original Barnett formula. Although Wales’ relative funding is currently above the level of relative need estimated by the Holtham Commission, the multiplier is designed to ensure that relative funding per person in Wales stays above 115% of the level in England. At the point at which funding per person in Wales converges down to this level, the needs-based factor will increase from 105% to 115%. Under reasonable assumptions of expenditure and population growth, this ‘transitional period’ in which the multiplier will be 105% will last for decades.
• Assuming spending growth in England returns to 4% a year following the end of austerity, and population growth matches current projections, the extra funding provided by the needs-based factor will more than outweigh population-related revenue losses. Cumulatively, this could mean almost £600 million more being available over the first 10 years of the agreement than if the Welsh government continued to be funded by the current Barnett formula.

Commenting on the report, co-author Guto Ifan of the Wales Governance Centre at Cardiff University said:“In purely financial terms, the agreement represents a good deal for the Welsh Government, with more funding available as a result of changes to its block grant funding and extra capital spending as a result of increased borrowing powers.

“However, as the Welsh Government will lose out if its revenues grow more slowly because of slower population growth, it will be harder to assess its relative performance in managing tax revenues. Increased transparency and budgetary information on the underlying block grant, devolved revenues and the adjustments made for tax devolution will be crucial in boosting fiscal accountability and aiding understanding of annual changes to the budget. Similarly, statements should be provided to individual taxpayers clearly stating the taxes they have paid to the Welsh and UK governments.”

David Phillips of the Institute of Fiscal Studies and co-author of the report added:“Although the inclusion of a need-based element in the Barnett formula is to be welcomed, the agreement makes no provision for updating the assessment of relative need in future. Even at the point of introduction the calculation will be based on an already decade old assessment. This could become a source of tension, if it emerges Wales’ relative need is changing, and the agreement is therefore unlikely to end debate around Wales’ fiscal framework.

“Looking across the UK as a whole, devolved funding arrangements look increasingly asymmetric and ad hoc. There will now be significant differences in the scale and composition of devolved and reserved taxes across each country; in how their block grants are determined and adjusted over time; and in the borrowing and budget management capacity of each devolved government.”