Welsh fiscal balance

Net fiscal balance of Wales (red) and UK (blue) in percent of GDP

Net fiscal balance by UK nation and region per capita, 2017–18

The Welsh fiscal deficit is the amount by which the public expenditure in Wales exceeds the tax revenue collected in that country. For the 2017–18 fiscal year, the deficit was estimated at around £13.7 billion, which was 19.4 percent of GDP and the equivalent of £4,300 per capita. In Wales, fiscal policies that affect the economy of Wales are mainly influenced by the UK Government. The Welsh Government is not allowed to borrow more than £1 bn, to issue bonds or to exercise quantitative easing measures.

Forecast

The total revenues to Wales were expected to grow by an average of 3.5% a year between 2018-19 and 2023-24. On a per capita basis, total expenditure was set to recover its 2011-12 level by 2023-24. The effect of COVID-19 may now influence these figures.

Deficit

Nine of the twelve UK countries and statistical regions carry a deficit; the exceptions are London, South East England and East of England. At £4,300, Wales's fiscal deficit per capita is the highest of the regions except for Northern Ireland fiscal deficit, which is nearly £5,000 per capita. Tax revenue per capita in Wales is only 76 percent as much as the UK average, but spending is 108 percent as much, leading to shortfall. Wales spends more on social security than other parts of the UK; the capital expenditure on infrastructure such as transport (which is not devolved to Wales) however is significantly less.

In 2016, Wales spent £14.7 billion more than it gathered in local revenue, which decreased to £13.7 billion for the 2018–19 fiscal year, due to reduction in public spending. Public spending peaked in 2011–12. For the 2018–19 fiscal year, the fiscal deficit is about 19.4 percent of Wales's estimated GDP, compared to 2 percent for the United Kingdom as a whole.

The Welsh economist John Ball suggests that an independent Welsh government could plug the budget shortfall by instituting land value tax (possibly raising £6 billion per year), tourist tax and "exploring some ways in which taxation revenue could be improved in a sovereign state". In his opinion, VAT revenues from businesses not owned by Welsh residents are underestimated in the current revenue data, meaning that the shortfall may not be as high as it appears.

Reducing the Welsh fiscal deficit

The fiscal policies which create the economy of Wales are, on the whole, created by the UK Government and as such, Wales is not allowed to borrow money, issue bonds, exercise quantitative easing etc.

The Welsh economist John Ball suggests that an independent Welsh government could plug the budget shortfall by instituting land value tax (possibly raising £6 billion per year), tourist tax and "exploring some ways in which taxation revenue could be improved in a sovereign state". In his opinion, VAT revenues from businesses not owned by Welsh residents are underestimated in the current revenue data, meaning that the shortfall may not be as high as it appears.

Ball also suggests that Wales' £3bn defence cost is excessive and that at 3% of GDP is more than any other country. He also notes that incoming pensioners from England cost £2bn and a further “accounting adjustment” of another £3bn. The vast number of external business ownership in Wales makes it difficult to estimate the amount of VAT actually collected in Wales and which is allocated to the business headquarters in England. An independent Welsh government would decide how much to spend on matters such as defence, and could have its own currency.

Identifiable and non-identifiable expenditure

HM Treasury’s (2018) Country and Regional Analysis (CRA) aims to identify where resources were spent - depending on where those who benefitted are located, and is publishes on an 'Expenditure on Services' (TES) basis, formed by two types of spending:

1. identifiable expenditure: spending identified as benefitting Wales
2. non-identifiable expenditure: and expenditure outside the UK that is deemed to be incurred on behalf of the UK as a whole, for example,

public debt interest payments and defence spending.

Breakdown of non-identifiable and expenditure outside the UK apportioned to Wales, 2017-18
Public Sector Debt Interest (£2,123m)			2123
Defence (£1,821m)			1821
International Services (£505m)			505
Public and common services (£250m)			250
Social protection (£228m)			228
Recreation, culture and religion (£201m)			201

By UK law, Wales must pay for items that do not directly benefit Wales, where there is no 'Barnet consequential' e.g. over £5 billion for HS2 "which will damage the Welsh economy by £200m pa", according to the UK and Welsh Government's transport adviser Prof. Mark Barry. Wales also pays more for military costs than most similarly sized countries, e.g. Wales pays twice the amount Ireland spends on the military. The UK government spends £1.75bn per year on the military in Wales which is almost as much as Wales spend on education every year (£1.8 billion in 2018/19).

Taxes or levies on water and electricity exports

Among other areas where Wales, presently, can not charge are water and power. Severn Trent abstracts 133 billion litres of water for English customers and United Utilities can take 110 billion litres of water a year from Lake Vyrnwy and the River Dee to serve its customers in Merseyside, for profit. In 2018, Wales generated 30.2 TWh of electricity, around twice what it consumed (14.9 TWh), with the surplus being exported to England and other countries. Post-independence, a tax or levy on energy exports from Wales could be imposed, possibly worth around £890 million on the wholesale market according to Wales Fiscal Analysis (Wales Governance Centre) in March 2020.

Implications

Wales spends 11 percent more per person than England. Welsh economist Ed Gareth Poole notes that fiscal transfers between wealthier and poorer parts of a sovereign state are not unusual. Wales's government deficit was consistently higher than that of Greece during the Greek government-debt crisis but, unlike Greece, the gap was covered by transfer payments from the rest of the UK. Such transfer payments, according to the economist Robert A. Mundell, are essential to a functional currency union.

See also

• United Kingdom national debt