Welsh Government ‘lacks fiscal firepower due to borrowing cap’, says report

The Welsh Government lacks the ‘fiscal firepower’ for larger-scale or more transformative policy measures due to a lack of borrowing ability, according to a new Institute of Welsh Affairs (IWA) report. 

In the report, Fiscal Firepower and Effective Policy-Making, it ultimately recommends reform of the Welsh Government’s borrowing powers to better enable transformative policy making in Wales.

Despite having fairly strong powers and a budget in the tens of billions, the IWA’s research finds that the Welsh Government only has a limited ability to kickstart major projects to improve people’s lives.

“Wales faces urgent challenges including climate change, a cost-of-living crisis, dealing with the fallout of the Covid-19 pandemic and its impact on public services, a broken housing system, and more. These are big problems that will require equally big solutions,” the IWA says.

“Our report finds that the Welsh Government has a lack of ‘fiscal firepower’, with a huge part of its budget essentially pre-committed to public service delivery.

“It has relatively little available finance over-and-above that, required to effectively conduct major projects that could set the Welsh economy and society on the different path it clearly needs.

“Many policy proposals can only expand to the limits that finance allows it to. The Welsh Government is therefore limited in its ability to conduct policy even in devolved areas such as transport and housing by its fiscal limitations.

“The UK Government on behalf of England in devolved areas can simply borrow money to its own priorities. However the Welsh Government has a strict borrowing cap, meaning that it is largely left to hope that the UK Government increases spending in devolved areas in England, in order to release funds to the Welsh Government.

“This is due to 82% of the Welsh Government’s budget coming from the block grant which is predicated on Barnett Consequentials from UK Government spending in England.”

‘Strong restrictions’

The IWA added: “Our paper finds that this means in practice that the Welsh Government has strong restrictions on policy-making measures, even in areas that are ostensibly fully devolved.

“It also finds that the Welsh Government has had to use more expensive forms of borrowing such as the Mutual Investment Model (MIM) to increase its access to finance, raising the question of whether this framework increases the cost of borrowing for government projects in Wales in comparison to England.

“This paper seeks to open a debate about the impact of fiscal limitations on policy-making, and recommends reforms to the Welsh Government’s borrowing powers to partially mitigate this.

The IWA’s Director, Auriol Miller said: “Our report finds that the Welsh Government finds its actions significantly limited by its fiscal settlement, even in fully devolved areas.

“We are calling for a more mature debate about the impact of ‘Fiscal Firepower’ on the Welsh Government’s ability to enact policy in devolved areas, in order to ensure that voters in Wales have a full range of policy options available to them.

“We are also calling for the reform of Welsh Government borrowing powers, in order to ensure that it is able to prioritise the cheapest forms of borrowing, rather than having cheaper means of borrowing capped, and being pushed towards more expensive options.”

Four points

The IWA is recommending four points.

1. The IWA supports the Welsh Government’s calls for it to have prudential borrowing powers and it should continue to explore the case for this. It should publish its up-to-date case for having these powers in response to this report in order to push this important issue more fully onto the political agenda. 
2. The UK Government should accept the insufficiencies of the Welsh Government’s fiscal framework and accept the Welsh Government’s case for prudential borrowing powers via the National Loans Fund, if it is able to protect its own position from the ‘moral hazard’ of implicit bailouts by means such as further tax devolution or strong repayment guarantees. An increased borrowing cap would provide an improvement on the current system, but is less preferable to prudential borrowing powers for the Welsh Government. 
3. Any future amends to the fiscal framework should seek to maximise flexibility for the Welsh Government in the use of reserves and borrowing, and between resource and capital. For example, greater flexibility within borrowing powers should be explored, including allowing borrowing for revenue as well as capital expenditure in order to increase the number of policy options available to the Welsh Government. 
4. The lack of fiscal firepower for the Welsh Government should be a core consideration for all policy-makers, academics, and the Constitutional Commission.