How is Wales funded?

(Title Image: BBC Wales)

This is a rewrite of an old, now completely outdated, post which explained how Wales was funded. It had to be updated to take into account future devolved taxes and other agreements between the Welsh and UK governments on finance.

Where do your taxes go?

In most cases your taxes go to the same place as everyone else’s taxes in the UK: the UK Treasury. Taxes are collected on behalf of the UK Government by HM Revenue & Customs (HMRC).

Council tax and non-domestic rates (aka. business rates) are set and collected by local authorities and the Welsh Government. Local authorities keep whatever council tax they raise, but business rates are redistributed by the Welsh Government as part of the annual funding grant to local councils.

Councils also collect precepts (set by Police & Crime Commissioners & Fire Authorities), which go towards funding policing (non-devolved) and fire & rescue services (devolved).

From April 2018, three relatively minor taxes – aggregates levy, landfill tax and stamp duty – will be collected by the Welsh Revenue Authority (WRA). Wales will also be able to vary income tax by 10% up or down from 2019 – managed through HMRC.

How does that money come back to Wales?

                              Note: The differences between the spending breakdowns and total expenditure are largely down to rounding errors.

The UK Government (via the Treasury) decides how much money the Welsh Government, National Assembly etc. should receive each financial year to fund devolved services. To do this they use the Barnett Formula.

The Barnett Formula is supposed to ensure Scotland, Northern Ireland and Wales receive an amount of money based on their respective populations compared to England. In Wales’ case, we receive about 5.7% of equivalent spending in England because Wales has about 5.7% of England’s population.

When the UK Government announce new spending that benefits only England, the other nations are supposed to receive a top up to their funding (known as a Barnett consequential), again calculated based on their respective population sizes compared to England.

Barnett consequentials don’t apply to spending that benefits the entire UK (i.e. defence spending), but the definition is so broad, the UK Government may decide a major project that solely benefits England (or areas that aren’t devolved to Wales, like rail infrastructure) counts as a “UK project”.

In such circumstances the UK Government may offer a certain level of Barnett consequentials to prevent a political row, but it may fall short of the expected figure – recent examples include the 2012 London Olympics and High Speed 2.

Funding allocated to Wales by the UK Government is delivered in a single lump sum (block grant) which is held in a “bank account” at the Treasury called the Welsh Consolidated Fund. The block grant averages around £13billion a year, with this figure topped up by council tax and business rates to around £15billion a year.

Under the Wales Act 2014, the Welsh Government is allowed to borrow up to £500million a year (though this limit is likely to be raised in the future).

Wales also receives an additional £245million a year from the European Union (i.e. farming subsidies, structural funding), but this funding is likely to end after Brexit unless the UK Government replaces it with a similar scheme.

Fair Funding Explained

One of the most heatly-contested arguments in Welsh politics for the best part of a decade, is that despite all of the above Wales is under-funded both in comparison to the other devolved nations and in terms of our relative needs.

Public services are usually more expensive to provide in sparsely-populated rural areas (which defines most of Wales), while Wales also has high levels of disability, long-term unemployment and a growing elderly population – all of which put pressure on public finances because such things are expensive to maintain.

In 2010, influential economist Prof. Gerald Holtham said Wales was about £300million worse of under the Barnett Formula than we would be if relative needs were taken into account. After several years of Conservative (& Lib Dem) austerity measures, in 2016, Prof. Holtham believed this underfunding was no longer there to a significant degree.

In response, the UK & Welsh governments agreed a measure by which funding-per-head in Wales wouldn’t fall below 115% of English funding-per-head until 2020. Despite this, in real terms (once things like inflation are taken into account) the figure will remain lower.

What happens after 2020 is anyone’s guess, but the Welsh Government continue to press for a funding formula that takes need into account.

Fair funding is a double-edged sword for nationalists. Screaming “more money” sounds exactly like the begging-bowl politics of Labour and directly undermines the case for independence by sticking your hands in someone else’s pocket.

But at the same time, without extra investment (particularly in infrastructure, people and skills), it makes achieving independence more difficult as it harder to address some of the structural problems holding the Welsh economy back compared to the rest of the UK.

Is Wales “subsidised”? By how much?

The best, most recent, estimate was from the Government Expenditure & Revenue Wales report, produced by Cardiff University’s Wales Governance Centre in April 2016 (pdf).

The report estimated that in 2014-15, Wales raised £23.32billion in taxes and had £38.01billion spent on it by the Welsh & UK governments, meaning £14.7billion more was spent on Wales than was raised by Welsh taxes (“the subsidy”).

This is the picture now. It’s not the same picture it would be after independence. It’s quite probable Wales would spend considerably less in certain policy areas – defence is an obvious one, but there are others like foreign affairs and public administration.

It’s also unclear yet whether Wales would have to contribute to the state pensions of those who’ve retired before independence (based on comments made during the Scottish independence referendum campaign) – which could potentially release between £4-5billion by itself.

£14.7billion is a scary number, but until we all have a better idea as to how an independent Wales would spend its own money, it’s not entirely relevant to the debate.

However, any “deficit” in Welsh public spending would still have to be manageable, which means perhaps running no more than a ballpark figure of £3billion a year (~4-5% of GVA).

Funding and independence are topics in their own right. The trouble with making predictions for how the books of an independent Wales might look like is that there are very few accurate figures out there.

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