Devolved government in Wales has four main sources of finance:
- money allocated by the UK Government
- money raised in Wales by means of taxation and other charges
- money received from the European Union
Money allocated by the UK Government
HM Treasury controls the overall level of public expenditure in the UK each year. A portion of the total funds raised throughout the UK and earmarked for public expenditure is allocated to Wales and this portion, known as the ‘block grant’, is the basis of the Welsh Government’s annual budget.
The amount of the block grant is determined as part of the UK Government’s Comprehensive Spending Review, in accordance with the policies set out in HM Treasury’s ‘Statement of Funding Policy’ for the devolved administrations.
Adjustments to the block grant are determined using the Barnett Formula. The formula is used to calculate by how much the block grant will change following an increase or decrease in the UK wide budget for public expenditure. The formula factors in the population in Wales compared to (usually) England, and the extent to which changes to the UK budget are made in areas where public service provision in Wales is comparable with that in (usually) England.
The block grant is paid initially to the Secretary of State for Wales, who retains the funding needed to run the Wales Office and transfers the balance to the Welsh Government. The monies are placed in the Welsh Consolidated Fund (essentially Wales’ bank account) and the Welsh Government must then prepare its draft Budget setting out how it will use the funds. National Assembly Committees and other interested parties then scrutinise and comment on the draft Budget before it is finalised, and approved by the National Assembly for Wales in the annual Budget motion. The Budget may be varied through a supplementary Budget motion approved by the National Assembly.
The Welsh Government, the National Assembly for Wales Commission, the Wales Audit Office and the Public Services Ombudsman for Wales each receive allocations from the Welsh Budget. A significant proportion of the Budget is allocated to the public bodies which the Welsh Government sponsors and funds, including local authorities, the NHS in Wales and the Welsh Government sponsored bodies. This is the money used to provide public services in Wales.
The Welsh Government is accountable to the National Assembly for the way in which it applies and manages the Budget. The Welsh Ministers are required to produce accounts recording the financial affairs of the Welsh Government and payments into and out of the Welsh Consolidated Fund. The Auditor General for Wales reports on those accounts, and has a role in checking that expenditure has been incurred lawfully, and checking that if funds were made available for a particular purpose they were in fact used for that purpose.
For more information in relation to the Welsh Government budget, see sections 117 to 145 of the Government of Wales Act 2006.
Money raised in Wales by means of taxation
Although taxation is generally administered centrally in the UK by HM Treasury, council tax is raised by local authorities. Council tax receipts are therefore an important source of revenue for local authorities in Wales and other Welsh bodies such as the police. Local authorities receive further funding by means of a redistribution of the non-domestic rates (business rates) collected and paid into the Welsh Government’s Non-Domestic Rates Pool.
The first report of the Commission on Devolution in Wales (also known as the Silk Commission) made recommendations in relation to the funding arrangements for the Welsh Government and the devolution of certain taxes. Some of these recommendations were implemented by the Wales Act 2014. The Act has transferred to the National Assembly the legislative competence to make laws imposing tax on land transactions and on disposals to landfill. Currently these transactions are taxed at the UK level (stamp duty land tax and landfill tax respectively). It is proposed to disapply the UK stamp duty land tax and landfill tax regimes in Wales from April 2018. The National Assembly will be able to use its new legislative competence to create equivalent taxes for Wales. The amount of the block grant to Wales will be reduced to reflect the fact that Wales will then be raising more funds for itself.
The Wales Act 2014 creates the possibility for the National Assembly to vary the rate of income tax paid by Welsh taxpayers by up to 10%. In order for this to happen, it would need to be agreed in a referendum of the Welsh people. Again, were this to happen, the amount of the block grant would be adjusted accordingly.
The current borrowing powers of the Welsh Ministers are set out in section 121 of the Government of Wales Act 2006. They may borrow funds from the UK Government for the purpose of meeting a temporary shortfall in the Wales Consolidated Fund or to provide a balance of working capital in that fund. The maximum amount which can be borrowed is currently capped at £500 million (but the Wales Act 2014 allows for the Secretary of State to vary this cap (but not reduce it below £500 million) in the future).
The Wales Act 2014 will, when the relevant provisions are brought into force, extend the borrowing powers of the Welsh Ministers in two ways. Firstly, the borrowing mechanism referred to in the previous paragraph will also be made available to meet any temporary shortfall as a result of fluctuations in receipts from the newly devolved Welsh taxes. Secondly, there will be a new power to borrow money from the UK Government for capital expenditure. There will be a cap of £500 million for this borrowing, but it will be possible for the Secretary of State to vary the cap (but not to reduce it below £500 million).
Borrowing by local authorities is also an important source of funding for public services in Wales. The Welsh Government allocates funds to local authorities from the block grant, but they are permitted to borrow more funds, subject to any limits set by the Welsh Government. Local authorities must follow the rules on ‘prudential borrowing’, which involves complying with the Prudential Code which (among other things) requires that borrowing be affordable and prudential.
Funding from Europe
One of the key objectives of the European Union is to assist less prosperous Member States, and less prosperous areas within Member States, to work towards a convergence in standards of living between the most prosperous and least prosperous regions of the EU. A large area of Wales, encompassing West Wales and the South Wales Valleys, is one of the ‘convergence zones’ which benefits from a relatively high amount of European funding because it is below the EU average in terms of its prosperity.
Wales therefore receives considerable amounts of funding from the European Structural Funds (i.e. the European Regional Development Fund and the European Social Fund). This funding is administered and distributed by the Wales European Funding Office (WEFO). WEFO is part of the Welsh Government, and it applies the funds in accordance with an Operational Programme agreed with the European Commission. In this way, EU investment of nearly £2 billion will be made available to Wales for 2014-2020, and this will be used to support economic growth and jobs through research and innovation, business finance, information technology and transport connectivity, energy, and helping people into work and training.
More information about the way in which EU Structural Funds benefit Wales can be found on the WEFO website.