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Fiscal framework for the Welsh Government agreed

New fiscal framework for the Welsh Government has been agreed between the UK and Welsh governments.

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The new fiscal framework for the Welsh Government has been agreed between the UK and Welsh governments.

The fiscal framework sets out how the Welsh Government will be funded following the devolution of stamp duty land tax, landfill tax and Welsh rates of income tax.

Under the new arrangements both governments have agreed Wales will have a fair level of funding for the long term.

This will be achieved by:

  • The creation of a new needs-based factor within the Barnett formula to determine changes in the block grant in relation to devolved spending – this builds on the funding floor announced by the UK government at the Spending Review 2015. The new needs-based factor will be set at 115% as recommended by the Holtham Commission. While relative funding in Wales remains above the needs level identified by Holtham, changes in funding through the Barnett formula will be multiplied by a transitional factor of 105%.

  • Using the comparable model to determine changes in the block grant in relation to tax devolution – this takes into account the relative Welsh tax capacity and, alongside the Barnett formula, ensures population change is treated consistently within Welsh Government block grant funding. This will be applied for stamp duty land tax, landfill tax and each band of income tax.

In addition, the fiscal framework sets out:

  • increased capital borrowing powers - the Welsh Government’s overall capital borrowing limit will be increased to £1 billion and the annual limit to £150 million

  • a new Wales reserve – a Wales reserve will be created to enable the Welsh Government to better manage its budget, including the new tax revenues

  • independent oversight – there will be a role for independent bodies, where required, to provide input on matters relating to the operation of the fiscal framework

The framework also paves the way for the introduction of Welsh rates of income tax in April 2019. This is subject to the removal of the referendum requirement through the Wales Bill, which is currently before Parliament, and the Welsh Government setting out its intention to introduce Welsh rates of income tax the National Assembly for Wales.

Chief Secretary to the Treasury, David Gauke, said:

After constructive negotiations, we have agreed a fair and principled long-term funding settlement with the Welsh Government. The path is now clear for the Welsh Assembly to consent to the implementation of the Wales Bill. We are delivering on our commitments and the Welsh Government can now decide how to use their greater powers and responsibilities to grow and support the Welsh economy.

The Welsh Government’s Cabinet Secretary for Finance and Local Government, Mark Drakeford, said:

I am pleased we have been able to reach agreement about a new fiscal framework which puts our funding on a stable and long-term footing. This is an agreement which is fair to Wales and the rest of the UK.

It ensures fair funding for Wales for the long term, something we have consistently made the case for and builds on the work of the Holtham Commission and the cross-party Silk Commission.

This package of measures paves the way for partial income tax devolution in Wales. But crucially it protects our budget from the range of undue risks that could arise following the devolution of tax powers from 2018 and provides additional flexibility to manage our resources.

Notes to editors

  • Under the Wales Act 2014, the following tax powers are being devolved:
    1. Stamp duty land tax from 2018-19
    2. Landfill tax from 2018-19
    3. Welsh rates of income tax from 2019-20 – subject to the removal of the referendum requirement through the current Wales Bill and the Welsh Government setting out its intention to introduce Welsh rates of income tax to the National Assembly for Wales.

In 2009 and 2010 an independent Commission set up by the Welsh Government (the Holtham Commission) suggested Wales needed a higher level of funding than England to reflect its higher needs – it recommended Welsh Government funding should be between 114% and 117% of comparable spending in England.

This new agreement is in line with the Holtham Commission’s recommendation, while also taking into account Welsh tax capacity and treating population change consistently across the tax and spending elements of block grant funding (through a combination of the Barnett formula and the comparable model).

The comparable model introduces a “comparability factor”, which reflects the difference between per capita revenues in Wales and the rest of the UK at the point of devolution. For instance, if revenue per head in the rest of the UK for a particular tax is £100, but the equivalent figure for Wales was £87, then the comparability factor would be 87%. Therefore, the change in the block grant would be a population share of the absolute change in UK revenues, multiplied by the comparability factor.

The comparable model will be applied to stamp duty land tax (land transaction tax in Wales from April 2018) and landfill tax (landfill disposals tax in Wales from April 2018) and each band of income tax. This ensures income tax policy decisions taken by the UK government will not affect the Welsh Government’s budget.

Published 19 December 2016