Wales ‘nearly £1bn a year better off because of deal negotiated by Mark Drakeford’

Martin Shipton

A financial deal negotiated in 2016 between Mark Drakeford and Conservative UK Treasury Minister David Gauke will deliver almost £1bn in additional funding for Wales next year, according to a major report published today.

But the current devolution settlement has, says the report, so far failed to enable the hoped-for improvement in accountability and empowerment.

The report, titled A Decade On: Reforming Wales’ Fiscal Framework, was written by researchers at Cardiff University’s Wales Governance Centre and was prompted by the UK Labour Party’s 2024 General Election Manifesto, which acknowledged that aspects of the 2016 Fiscal Framework were “out of date” and required reform.

The authors find that tax devolution has been an “unheralded and unequivocal budgetary success”. Devolved tax revenues have grown far more quickly than the equivalent downward reductions to the Welsh block grant which compensate the UK Treasury for tax receipts foregone. In 2026-27 alone, the net impact of tax devolution will add nearly £500m to the Welsh budget relative to a situation in which all taxes were reserved to Westminster.

The report also finds that the Needs-Based Factor – a 5% top-up to all Barnett consequentials which was agreed at the time of the 2016 Fiscal Framework to address Wales’ greater public spending needs – will contribute a further £500m to the budget by 2027-28.

Although largely unheralded, tax devolution and the 105% Needs-Based Factor mean that, relative to England at least (but not Scotland or Northern Ireland), the historic per capita underfunding of Wales has largely been resolved.

The Needs-Based Factor has successfully halted the ‘Barnett Squeeze’ that previously saw Welsh funding converge downward toward English levels. Wales now receives approximately 121% funding per person for public services that are devolved compared with England – above the 115% relative need identified by the Holtham Commission back in 2009/10.

But the report also finds that per capita spending on functions that remain reserved to the UK Government (such as rail infrastructure and justice) lags far behind per capita spending on devolved areas (such as health and education). Wales receives substantially less than its population share for reserved functions. On this basis, the authors caution against nervousness about devolving additional functions to Wales – the more Barnett, the better.

Reforms

While praising the budgetary impact of the 2016 agreement, the report argues that without reforms to the governance of the Barnett formula, expanded tax powers, enhanced borrowing capacity, and improved budget management tools, the original objectives of the Silk Commission – to enhance the accountability and empowerment of Welsh institutions – will remain unfulfilled.

The report concludes with the following key recommendations:

* Bring disputes over the Barnett formula into the UK’s New Intergovernmental (IGR) Arrangements. Despite a new set of IGR arrangements agreed by the previous government which open some disputes between governments to third party mediation, HM Treasury remains “judge, jury and executioner” on disputes over the Statement of Funding policy and the Barnett formula – most notably on the designation of HS2 as an England and Wales project. As with all other policy areas in this new framework, funding disputes raised at the Finance Interministerial Standing Committee (FISC) should in principle be allowed to proceed to third-party dispute mediation and arbitration.

* Triple Capital Borrowing Capacity: The report recommends increasing the Welsh Government’s overall borrowing cap from £1bn to £3.3bn by linking the limit to the share of the Welsh Government’s resource budget devoted to servicing debt. This would help to address historic underinvestment in one of the poorest nations or regions of the UK. The current limit set in 2018 has been substantially eroded by inflation.

* Fully Devolve Income Tax. To date, tax devolution has been an unqualified success. Given this backdrop and the precedent of income tax devolution in Scotland, there is now no justification for the Welsh Government to not have full devolution of income tax, including for savings and dividends incomes. Such a reform would give the Welsh Government genuine fiscal levers independent of UK fiscal policy.

* Set up Budget Management Tools that are Fit for Purpose. Since it was set up, inflation has seriously eroded the value of the fund which allows the Welsh Government to carry forward monies from one year to the next. There is no justification for the Welsh Government having fewer budget flexibilities than small Whitehall departments such as DCMS, as is now the case. Drawdown limits for the Wales Reserve should be uprated for inflation at minimum, or removed entirely.

* Agree an updated, transparent re-evaluation of relative need and spending levels: The report calls for an updated assessment of relative need, which is already nearly two decades old. Analysis of outturn data also suggests that actual devolved spending levels are closer to 117% of England’s level (as opposed to 121%), highlighting the need to update the methodology of calculating relative funding levels.

‘Remarkable’ 

Lead author of the report Guto Ifan said: “The 2016 Fiscal Framework has been a remarkable budgetary success, delivering nearly £1bn in additional funding next year and largely resolving Wales’ historic per capita underfunding relative to England.

“But this budgetary win has not translated into the fiscal empowerment and accountability that was envisaged by the Silk Commission. Genuine fiscal empowerment implies full income tax devolution and uprated borrowing capacities that reflect Wales’ current fiscal needs, not arbitrary limits fixed back in 2016.”

Co-author Dr Ed Gareth Poole added: “Wales is in the paradoxical position of having the most successful fiscal devolution story in the UK, yet the Welsh Government possesses limited fiscal levers to adjust its budget independently of UK Government policy decisions. Tripling the borrowing cap by linking the total limit to future debt service that would be paid for here in Wales would be transformative for infrastructure investment, particularly given how much Wales is losing out from reserved programmes like rail enhancement spending and HS2.”

The Welsh Fiscal Framework was signed in December 2016 by then Cabinet Secretary for Finance and Local Government Mark Drakeford and Chief Secretary to the Treasury David Gauke.

Wales Act 

It was designed to operationalise the tax devolution legislated by the Wales Act 2014 by agreeing the formula under which downward adjustments would be made to the Welsh block grant to account for tax receipts foregone by HM Treasury.

The 2024 Labour general election manifesto noted that: “Labour recognises that the Welsh Fiscal Framework is out of date. We are committed to working in partnership between the two governments to ensure the framework delivers value for money, with two Labour governments committed to fiscal responsibility.”

The Welsh Government has annual capital borrowing limits of £150m against an overall cap of £1bn.

Devolved taxes include Land Transaction Tax and Landfill Disposals Tax, plus Welsh Rates of Income Tax (WRIT). For the latter, the Senedd sets rates for the 10 pence of income tax that was devolved for each of the basic, higher, and additional rates, but unlike Scotland does not have the ability to change the thresholds at which taxpayers start paying these rates.