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
The Wales Act 2014 power to enabled the National Assembly for Wales to make primary legislation imposing certain taxes in Wales. The Act also extended the borrowing powers of the Welsh Government. Both of these developments implemented recommendations from the Part I Report of the Commission on Devolution in Wales (the Silk Commission).
Part 2 of WA 2014 enabled the National Assembly to legislate about devolved taxes. Initially legislation was proposed to establish a system for the collection and administration of Welsh devolved taxes and for the creation of two devolved taxes. These were a Welsh tax on transactions involving interests in land (replacing stamp duty land tax in Wales) and a Welsh tax on disposals of landfill (replacing landfill tax in Wales), both of which took effect from 1st April 2018. The primary legislation on taxation passed to date is as follows:
- The Tax Collection and Management (Wales) Act 2016
The Tax Collection and Management (Wales) Act 2016 established the Welsh Revenue Authority (WRA). The WRA is responsible for the collection and management of devolved Taxes. The Act has put in place the legal framework necessary for the future collection and management of devolved taxes in Wales. It confers appropriate powers and duties on the WRA, so as to enable the WRA to identify and collect the appropriate amount of devolved taxes due from taxpayers.
- The Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017.
From 1 April 2018, Land Transaction Tax applies to land transactions in Wales. Land transactions in Wales will no longer be subject to Stamp Duty Land Tax (SDLT) but will be subject to Land Transaction Tax as set by the National Assembly. This devolved tax, is essentially, a transaction tax applying to the acquisition of interests in land in Wales. The tax is operated by the Welsh Revenue Authority (WRA).
- The Landfill Disposals Tax (Wales) Act 2017
From 1 April 2018, a Welsh tax on disposal of landfill came into force. The Landfill Disposals Tax (Wales) Act 2017 established a new tax on landfill disposals. The tax is to be charged on taxable disposals, which are defined in Chapter 2 of Part 2 of the 2017 Act. The 2017 Act also makes provisions for disposals that are exempted from the tax. The WRA is responsible for the collection and management of the tax.
Since 6 April 2019, people with a main residence in Wales and who pay Income Tax have been paying Welsh rates of Income Tax set by the Welsh Government, and the Welsh Government has powers to vary the rate paid by Welsh resident taxpayers. For the tax year 2019 to 2020, the Welsh Government has set the Welsh rates at the same level as in England and Northern Ireland.
Council tax is also 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 current borrowing powers of the Welsh Ministers are set out in section 121 of the Government of Wales Act 2006 as amended by the Wales Acts 2014. They may borrow funds from the UK Government for the purpose of meeting a temporary excess of sums paid out of the Welsh Consolidated Fund over sums paid into that Fund, any amounts it appears to them are required by them for the purpose of providing a working balance in the Welsh Consolidated Fund and any amounts which in accordance with rules determined by the Treasury are required by the Welsh Ministers to meet current expenditure because of a shortfall in receipts from devolved taxes, or from income tax charged by virtue of a Welsh rate resolution, against forecast receipts.
In addition there is also a power, inserted by the Wales Act 2014, to borrow money from the UK Government for capital expenditure. There is a cap of £1 billion on this borrowing, but the Secretary of State may increase this amount (but not reduce it).
Amounts borrowed must be repaid to the Secretary of State at such times, and by such method as the Treasury may determine. Any interest on such sums must also be paid to the Secretary of State at such times and at such rates as the Treasury may determine.
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 EU
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.