WALES could lose out on hundreds of millions of pounds of funding during crucial Treasury negotiations on devolved tax, according to a new report. 

The newly created Joint Exchequer Committee (bringing together Welsh Government and Treasury Ministers) today continues high stakes negotiations over Wales’ future funding.

The report, For Wales Don’t (Always) See Scotland: Adjusting the Welsh Block Grant after Tax Devolution, outlines the key issues these negotiations should consider when it comes to one of the trickiest decisions: how to adjust the block grant funding Wales currently receives to account for the newly devolved revenues, and how to update these adjustments over time. This decision is at the heart of ensuring tax devolution happens in a way that is seen as fair to both Wales and the rest of the UK.

The report by researchers from Cardiff University’s Wales Governance Centre and the Institute for Fiscal Studies, argues that differences between the Welsh and the Scottish economies, and between their devolution settlements, mean that the model agreed between the Treasury and the Scottish Government is unlikely to be the right one for Wales. 

The report finds that: Wales’ relatively slow rate of population growth means that the overall size of the Welsh tax base will likely grow more slowly than England’s, regardless of Welsh government policy. Not accounting for this slower growth could mean that the Welsh budget would be £110 million lower after 10 years compared with full block grant funding.

The Welsh tax base is very different to that of the rest of the UK, with far more people on relatively low incomes. This means that factors outside of the Welsh Government’s control, such as the UK Government policy to increase the income tax personal allowance, could disproportionately impact the relative performance of Welsh tax revenues.

The report suggests two options to account for Wales’ differences and ensure tax devolution happens in a way that is more appropriate and sustainable for the long term.

The first option would be to calculate separate block grant adjustments for each tax band (i.e. the basic, higher and additional rate bands of income tax). This could help account for a large part of the differences in revenue growth attributable to differences in incomes between Wales and the rest of the UK.

A second option would be to update the block grant adjustment using changes in tax revenues in regions of the UK that are more comparable to Wales, such as the North of England.

Ed Poole, of the Wales Governance Centre at Cardiff University, said: “Adjusting the Welsh block grant after tax devolution may seem a technical issue but it is far from trivial. Hundreds of millions of pounds are at stake for the Welsh budget.

"What lies at heart of the issue is how to introduce Wales’ new taxes in a way that is fair and sustainable for both the Welsh and UK Governments.

“Factors such as Wales’ pattern of population growth and its very different tax base should be taken into account to mitigate against large negative impacts on the Welsh budget.”