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Written Statement - A fair fiscal framework for Wales

Jane Hutt AM, Minister for Finance and Government Business

My Written Statement ('Funding reform - continuing progress and the challenges ahead') on 1 February explained that we are seeking agreement with the UK Government on the fiscal framework for Wales which will underpin our future funding arrangements for the long term.

Following months of detailed negotiations it is encouraging that the UK and Scottish Governments have reached agreement on the Fiscal Framework for Scotland. It is inevitable that those negotiations will set the tone for our ongoing negotiations on the fiscal framework for Wales.

The Holtham Commission provided a thorough analysis of how the block grant could be reduced to account for the revenues from devolved taxes in Wales.  The Silk Commission endorsed that analysis and concluded that: "it would be inappropriate for the Welsh Government to be exposed to all the risks associated with the devolution of tax powers as some of this risk may not be the result of actions by the Welsh Government.  It is, however, right that the Welsh budget should be exposed to the risks associated with the choices of the Welsh Government".

I have always maintained that the Welsh Government’s budget should bear the risks and reap the rewards from the impact of its decisions on devolved taxes.  Nevertheless, if tax policy in Wales remains the same as in the rest of the UK and growth in revenues per head from devolved taxes matches that in the rest of the UK, the Welsh Government’s budget should be unaffected.  That is consistent with the conclusions from the Silk Commission and the "no detriment" principle outlined by the Smith Commission for Scotland.

The UK Government has proposed a number of methods for adjusting the block grant in Scotland that were contrary to the no detriment principle. Those methods, if applied to the devolved taxes in Wales would have significant implications for our future investment in public services in Wales. The Welsh Government would not be able to accept those terms and this was not the basis upon which the Assembly agreed the devolution of Stamp Duty Land Tax and Landfill Tax to Wales.

It has been clear during the negotiations in Scotland that the per capita indexed deduction method advocated by the Scottish Government provides a firm basis for sharing risk appropriately between the devolved administrations and UK Governments.  It is important that we now review the details of the agreement in Scotland. However, the report from the Wales Governance Centre published this morning correctly concludes that no method of the block grant offset can automatically adjust the block grant in the correct way to account for all potential changes in UK Government policy. That is why it is important to review the arrangements to ensure that they are fair and do not expose the Welsh Government’s budget to risks that are outside our control.

There have been repeated calls for an independent body to review fiscal arrangements within the UK. The announcement of an independent body to review the fiscal framework for Scotland sets a precedent for arrangements in Wales. I will be calling on the UK Government to make similar arrangements for Wales to include all aspects of our fiscal arrangements including an appropriate review process for our funding floor to secure a fair long term funding agreement for Wales.

Crucial talks lie ahead for us as we seek to establish a fair fiscal framework for Wales which takes into account the properties of our tax bases, our devolved responsibilities and assigns the appropriate risk to the Welsh Government. Together with an appropriate independent review process for the framework, including the funding floor, this would represent a secure and fair settlement for Wales for the long term.