How effective is the Welsh fiscal framework?

Published 24/03/2021   |   Last Updated 24/03/2021   |   Reading Time minutes

“… evidence to the inquiry, alongside the real life issues experienced with the funding arrangements [for Wales] throughout the COVID-19 pandemic has shown that the funding mechanisms need to be urgently reviewed by the Welsh Government and the UK Government”.

This is the key finding from a recent inquiry by the Senedd’s Finance Committee.

What is the fiscal framework?

In December 2016, the Welsh Government and the UK Government agreed a new fiscal framework, which establishes the financial powers of the Welsh Government. This agreement supported:

  • devolving Stamp Duty Land Tax – now Land Transaction Tax (LTT);
  • devolving Landfill Tax – now Landfill Disposals Tax (LDT); and
  • creating Welsh Rates of Income Tax (WRIT).

The framework also covers adjustments to the:

  • Welsh Block Grant, to account for these changes;
  • Welsh Government’s capital borrowing limits;
  • Welsh Government’s budget management tools, which include the Wales Reserve and revenue borrowing;
  • treatment of policy decisions by one government that affects the tax or spending of another; and
  • arrangements for implementing these changes.

While the Committee found that administering the new devolved taxes has been successful, it believes there are significant issues which require addressing.

The Wales Reserve

The Welsh Government can save up to £350 million of its money in the Wales Reserve. This money can be carried across from one financial year to the next but the Welsh Government is limited to how much it can drawdown annually - £125 million for revenue and £50 million for capital.

The Committee concluded that both the total amount the Welsh Government could carry across financial years and the annual drawdown limits should be increased, at least temporarily. This, it says, would enable the Welsh Government to respond to the pandemic and support economic recovery more effectively.

In February 2021, HM Treasury announced that a further £650 million of Covid-19 funding had been allocated to Wales. It highlighted that the “funding can be spent now or carried over to spend in 2021-22, providing vital and unprecedented flexibility”.

Has this made a case for the Welsh Government having greater discretion to carry across more funding between years to manage its budgets more effectively?

Capital borrowing powers

The Minister for Finance, Rebecca Evans, noted that she’s had discussions with the UK Government about increasing the £1 billion and £150 million total and annual borrowing limits respectively, but this has been met with resistance. She further commented that there’s no rationale for the current borrowing limits and felt that linking borrowing limits to Welsh tax revenue collected, which was suggested during the Committee's inquiry, could be a more practical approach.

The UK Government has not responded publicly to the Minister’s comments.

Dispute resolution

A key issue with the fiscal framework is the mechanism for resolving potential disputes between Welsh and UK governments. The Minister noted that disputes can be escalated to Joint Ministerial Committees, however, “that’s not a satisfactory way to do it, because the UK Government then, essentially, becomes the judge and jury on the issue”.

Again, there has been no public response by the UK Government to the Minister’s comments.

The Welsh Government is seeking an independent arbitration process, which it believes would represent a more equitable approach to resolving disputes.

The fiscal framework agreement does state that discussions over disputes may be informed at any stage by seeking the view of independent bodies.

The Committee’s report on the fiscal framework will be debated in the Senedd on 24 March 2021. You can watch the debate live on SeneddTV.

Article by Christian Tipples, Senedd Research, Welsh Parliament