Millions at stake in crucial treasury negotiations

Hundreds of millions of pounds are at stake in crucial Treasury negotiations, according to a new report by the University’s Wales Governance Centre and the Institute for Fiscal Studies.

The report, For Wales Don’t (Always) See Scotland: Adjusting the Welsh Block Grant after Tax Devolution outlines the issues that must be considered by the Joint Exchequer Committee in its negotiations for tax devolution to be a success.

After tax devolution, an annual reduction will be made to the Welsh block grant with updates negotiated between the Welsh and UK governments.

Scotland has already agreed an approach to block grant adjustment but the report argues that basing Wales’ tax devolution model on that, may not be suitable because of major differences between the Welsh and Scottish economies, and devolution settlements.

These dissimilarities may result in hundreds of millions of unfunded cuts (or, in some circumstances, unfunded increases) to the Welsh budget if they are not appropriately factored in the Fiscal Framework agreement this autumn.

Among the report’s findings are:

• Wales’ relatively slow rate of population growth means that the overall size of the Welsh tax base will grow more slowly than England’s, regardless of Welsh government policy.  Not accounting for this slower growth could mean that the Welsh budget would be £110 million lower after 10 years compared with full block grant funding.

• The Welsh tax base is very different to that of the rest of the UK, with far more lower-income earners. This means that factors outside of the Welsh Government’s control, such as the UK Government policy to increase the personal allowance, could greatly impact the relative performance of Welsh taxes.

The report suggests two options to account for Wales’ differences and make tax devolution fairer and more sustainable in the long term.

• The first option would be to calculate separate block grant adjustments for each tax band (i.e. the basic, higher and additional rate bands of income tax). This could help account for a large part of the differences in revenue growth attributable to differences in incomes between Wales and the rest of the UK.

• The second option would be to index Wales’ block grant adjustment to tax growth in regions of the UK that are more comparable to Wales, such as the North of England.

Commenting on the report, Ed Poole of the Wales Governance Centre at Cardiff University said: “Adjusting the Welsh block grant after tax devolution may seem a technical issue but it is far from trivial. Hundreds of millions of pounds are at stake for the Welsh budget. What lies at heart of the issue is how to introduce Wales’ new taxes in a way that is fair and sustainable for both the Welsh and UK Governments.

“Factors such as Wales’ pattern of population growth and its very different tax base must be taken into account to mitigate against large negative impacts on the Welsh budget.”

David Phillips, Senior Research Economist at the Institute for Fiscal Studies added: “Although the deal reached for Scotland provides a useful starting point for the Welsh negotiations, the major differences between Wales and Scotland should be taken into account when deciding how to adjust the Welsh block grant.

“It is crucial that any deal reached by the Ministers in the coming months is subject to scrutiny, and that its potential impact on the future funding of Wales’ public services is thoroughly assessed.”