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 £1bn and the annual limit to £150m.
- A new Wales reserve – a single 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 to the National Assembly for Wales.
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.
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.”