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Funding mechanisms need to be urgently reviewed by the Welsh and UK Governments
Published 02/02/2021   |   Last Updated 02/02/2021   |   Reading Time minutes
“The way Wales receives funding is complex, inconsistent and often haphazard” – Llyr Gruffydd MS
The COVID-19 pandemic has highlighted serious problems with the way the Welsh Government receives funding from the UK Government, the Senedd Finance Committee is reporting.
The Committee says the funding mechanisms need to be urgently reviewed by the Welsh and UK Governments as they not fit for purpose – and COVID-19 has highlighted further the unsuitability of elements of the fiscal system, such as the Barnett formula, which calculates changes to Wales’ ‘block grant’.
The Wales Act 2014 introduced the devolution of tax powers, including Welsh rates of income tax, Land Transaction Tax and Landfill Disposals Tax. The Committee is happy with the administration of devolved taxes and feels this is working well, with the Welsh Revenue Authority playing a vital role in the successful implementation of Welsh taxes.
Whilst recognising the constraints on the time of UK Government, the committee says it’s disappointed that the Chief Secretary to the Treasury has not engaged with its inquiry. The Wales Act 2014 was a fundamental piece of legislation in the devolution settlement and the role of the Welsh Government in delivering successfully is intrinsically linked with the UK Government. The value of the scrutiny process is undermined, it says, by the lack of engagement from the UK Government.
Whilst awareness of fiscal devolution is increasing in Wales, the Committee is concerned to hear that awareness is still low amongst businesses, professionals and other stakeholders. The Welsh Government’s own survey shows that most respondents didn’t know that it had been able to set some taxes in Wales since April 2018.
The Committee’s online public poll showed that more than half of the respondents were unaware that some taxes are the responsibility of the Welsh Government, with only 62% of respondents aware that the Welsh Government is responsible for the Welsh Rate of Income Tax. The Committee heard evidence that it is difficult to increase awareness when tax rates remain unchanged from before they were devolved.
The Committee is recommending that the Welsh Government and the Senedd continues to build on the existing knowledge and awareness of Welsh taxes with the public, businesses and professionals to improve awareness and engagement on fiscal devolution.
Developing the tax base
The Committee is calling for innovative strategies to develop the amount of money the Welsh Government brings in from taxes. It believes that this must include implementing policies to increase productivity in Wales, which is important for growing the tax base, through areas such as creating highly skilled jobs and attracting high productivity employers.
Uncertainty for the Welsh Government’s budget
There has been an unprecedented level of uncertainty regarding the UK Government’s budgets and Spending Reviews over the past few years because of factors such as Brexit, the UK General Election and the COVID-19 pandemic.
The difficulties of providing multi-year settlements in the current circumstances are recognised by the Committee. However, it is disappointed that for the past three years the Welsh Government has had to produce a draft budget based on a one year revenue settlement, especially as departments such as health and education in England have received multi-year settlements.
Although the timing of UK budgets and spending reviews is a matter for the UK Government, the Committee is recommending that the Welsh Government continues to call for greater certainty through multi-year funding allocations and call for clarity of the timing of UK fiscal events from the UK Government.
Increasing borrowing limits
The UK Government placed borrowing limits on the Welsh Government, limiting the money it can raise through borrowing. The Committee heard how these limits are not linked to the fiscal capacity of the Welsh Government or changing economic circumstances in Wales. The Committee believes that the long term borrowing limits should be increased.
In the short term the Committee is recommending that a temporary increase to borrowing should be implemented to support the Welsh Government in planning an effective recovery from COVID-19.
Llyr Gruffydd MS, Chair of the Finance Committee:
“The way Wales receives funding is complex, inconsistent and often haphazard meaning the Welsh Government has a very difficult task in planning ahead. The last few years have been turbulent, with a snap UK General Election, Brexit and COVID-19 having a huge impact on the way funding has been allocated to the Welsh Government to fund their priorities and our public services.
“The Welsh Government, like all governments, needs to be able to make long term funding decisions. The impact of this chaotic funding arrangement is that the Welsh Government find it difficult to plan ahead, not knowing what its funding settlement will be; there is also a lack of transparency and it is hard for us to know if Wales is receiving its fair share.
“For Wales to thrive we must be able to develop our tax base and take advantage of the devolved taxes available. We’re calling on the Welsh Government to develop innovative strategies to develop the amount of money the Welsh Government brings in.
“At the moment, the limits placed on the Welsh Government’s ability to borrow are arbitrary and do not bear any relation to the fiscal capacity of the Welsh Government or changing economic circumstances. We’re calling for these limits to be increased.
“We’re concerned that the complex and haphazard funding arrangements in place at the moment, coupled with the limits on borrowing capacity are holding Wales back and making it hard for the Welsh Government to effectively plan for the future. Changes are needed urgently.”