New report detailing Welsh public finances finds deficit of £14.7 billion

Ed Poole and Guto Ifan outline the findings of their Government and Expenditure Review for Wales.

Each March, the publication of Government Expenditure and Revenue Scotland triggers a major political and public debate as government and opposition wrangle over the latest annual assessment of Scotland’s fiscal health. As an official statistical publication quantifying the nation’s public spending, revenues and net fiscal balance, GERS played a starring role in the independence referendum campaign and in the intense negotiations over tax devolution that followed the narrow “No” vote in September 2014.

Although a similar publication for Wales also started life in the 1990s, unlike GERS, the Welsh series was discontinued by the incoming UK government in 1997 and therefore did not have the opportunity to undergo the gradual revisions to methodology that have significantly improved the Scottish report over its 25 year history. As a result, since devolution, serious discussion of the state of Wales’ public finances has been constantly hampered by the paucity of disaggregated public spending, taxation and other basic economic data. The absence of such data is increasingly serious given that fiscal devolution constitutes the next major phase of Welsh devolution.

A landmark new report by Cardiff University’s Wales Governance Centre, Government Expenditure and Revenue Wales 2016, attempts to address this need to enhance awareness of Wales’ relative financial position and how Wales’ finances might fare under a system of greater fiscal autonomy. The report presents a multi-year analysis of Wales’ public spending, revenues and the nation’s overall fiscal balance, utilising similar methodologies used by the Scottish Government and Northern Ireland Executive for their annual surveys of expenditure and revenue.

Among the many fiscal aggregates for Wales presented in the report, GERW’s key headline finding is that total expenditure for Wales exceeded public sector revenues by £14.7 billion in 2014-15, meaning Wales’ net fiscal deficit is equivalent to around 23.9% of estimated GDP. This figure compares with a deficit of 4.9% of GDP for the UK as a whole and £14.9 billion (9.7% of GDP) for Scotland.

Revenue

Total public sector revenue in Wales is estimated at £23.3 billion in 2014-15, around 3.6% of total UK revenues of £648.8 billion. Revenues per head in Wales were around £7,500, significantly less than the average UK figure of £10,000.

The composition of revenues in Wales is markedly different from the UK as a whole. Large direct taxes (e.g. Income Tax and Corporation Tax) constitute a smaller share of Welsh revenues, while a greater share is raised through indirect taxes (e.g. VAT and excise duties). This difference reflects a Welsh tax base that is significantly different from that of the UK.

Over the past five years, Welsh revenues have grown by £2.6 billion, or 12.3%, slightly behind UK growth during the same period (13.0%). The main components of this growth were the increase in VAT and council tax revenues. In contrast, Income Tax revenues in Wales actually fell during the period, and were 2.6% below their 2010-11 level in 2014-15. These trends reflect population divergences between Wales and England and the effects of UK government policy, particularly the rapid increases in the Income Tax personal allowance over the past five years.

Compared with non-devolved taxes such as VAT which have shown robust growth in recent years, revenues from soon-to-be devolved taxes have been relatively stagnant, primarily because of the fall in the estimated revenues from the Welsh rates of Income Tax.

Expenditure

Total expenditure for Wales was £38.0 billion in 2014-15, around 5.2% of total UK expenditure of £737.1 billion. Expenditure per person was approximately £12,300, around £900 (or 7.7%) above the UK level. Total expenditure for Wales was equivalent to 61.8% of estimated GDP in 2014-15, compared with 40.2% across the UK.

Social protection (including social security payments, pensions and devolved social services) is by far the largest expenditure programme for Wales, accounting for 37.4% of total spending, followed by health (17.0%) and education (10.8%). Social protection as a share of total expenditure for Wales increased from around £4,100 per person in 2010-11 to £4,600 in 2014-15.

Health expenditure for Wales also grew during this time period, by £278 million, or 4.5%, in nominal terms. This however was a substantially lower rate of increase than the corresponding growth across the UK of 11.9%, reflecting decisions taken by the Welsh Government not to ring-fence health spending and to moderate the impact of cuts across other areas of spending. The flipside of this decision was that there was a greater increase in social services expenditure and a smaller reduction in education expenditure than across the UK.

Net Fiscal Balance

Figure 1 shows Wales’ net fiscal balance, or the difference between total expenditure and revenues, over time. Because total expenditure for Wales grew much more slowly than revenues over the same period, Wales’ net fiscal balance has improved from the deficit of £15.8 billion (or 29.2% of estimated GDP) recorded in 2010-11 to £14.7 billion (or 23.9% of estimated GDP) in 2014-15.

 

Going further back in time*, the estimated net fiscal balance for Wales in 1999-00 was a deficit of £5.1 billion, or 14.5% of estimated GDP. Rapid growth in expenditure meant this deficit grew to £8.0 billion (20.1% of GDP) by 2002-03, but remained relatively constant as a share of GDP until 2007-08. As was the case across the UK as a whole, the financial crisis in 2007-08 severely worsened Wales’ fiscal aggregates. Declining revenues, increasing expenditure (particularly on social protection) and contracting GDP meant that the net fiscal deficit reached a peak of £15.9 billion in 2009-10, more than 30% of estimated GDP.

Net fiscal balance does not constitute a direct measure of regional transfer from other parts of the UK because the UK as a whole was also in deficit, and therefore borrowing funded some of the overall UK expenditure. Furthermore, transfers between richer and poorer territories within a state are also not unusual internationally.

That said, at around 24% of estimated GDP, Wales’ £14.7 billion net fiscal deficit is a very substantial gap between the revenues raised in Wales and public spending for Wales, and there is no evidence that the gap between Wales and the rest of the UK is being bridged.

Fiscal framework

Wales’ current fiscal framework means that the level of public expenditure by the Welsh and local government in Wales is mostly unconnected to the amount of revenues collected in Wales. In future however, fiscal devolution will mean that several revenue sources will contribute directly to devolved expenditure. The net effect of tax devolution will ultimately be determined by how the block grant from HM Treasury will be adjusted after devolution.

The risks and opportunities that the Welsh budget is facing for the first time as a result of fiscal devolution represent a major course change in Wales’ devolution journey.

*Difficulties in compiling consistent data (especially for government expenditures) before 2010-11 mean that these data should be treated with particular caution.

Ed Poole is a Lecturer in Territorial Politics and Guto Ifan is a Research Assistant, both at the Wales Governance Centre at Cardiff University.

8 thoughts on “New report detailing Welsh public finances finds deficit of £14.7 billion

  1. Remind me again…what exactly are the certain advantages that Wales will derive from greater fiscal devolution?

  2. It is obvious from these figures that London Government of Wales and seventeen years of a unionist party in charge at Cardiff Bay is a failure.
    Fifty years ago Malta sought independence and was told it was a basket case it could never survive with out London money and control. It did survive and prosper as have a dozen or more other countries freed from British or Russian control.
    We need to have the self confidence and vision to get rid of our dependency culture and London politicians and civil servants meddling in our affairs We need to grow up run our own independent state.
    Government of the Welsh people by the Welsh people for the Welsh people as Lincoln was about to say.

  3. As a point of reference: Singapore per capita GDP in 1965 before it became independent was $511. It is now $56000. That’s compounded at an average 9.85%. Before 1965 it was stagnant. Largely thanks to the plans of Goh Keng Swee and Albert Winsemius Singapore has rocketed. Whether we agree entirely or not with growing an economy of 8 Million on an island the size of Anglesey a lot can be achieved once concentration and economic levers are yours to use. Most of the high HDI countries are under 10 million people. Whatever we do it can not continue to be as we are.

  4. It’s not really fair on the very affluent parts of the UK is it. They have had their fill from our natural resources and our industrial past and left us with a hefty legacy to tidy up, but perhaps now, when we have less to offer we should do the right thing and offer to leave.

  5. There are no certain advantages from fiscal devolution. There are risks and opportunities. Do we want to grasp any opportunity to change our economic situation or do we want to accept our lot and shun risk? As my old grandad used to say: are you a man or a mouse?

  6. Ah yes Ross but have you confidence in the decision making of Carwyn and Leanne, the dynamic duo who will be in charge after the Assembly elections. As Dirty Harry would say..”Well, punk, do you feel lucky?”.

  7. Funnily enough I have more confidence in them jointly than I would have in either singly. Leanne would inject some ambition and Carwyn will supply the caution. But I’m not supposing that will be the outcome; I don’t know if they would agree to work together. Anyway, leaders come and go. The nation has to grow up and take some responsibility for itself.

  8. This is by far the most important statistic published in the history of the Senedd and is the challenge that now faces both Welsh politics and Welsh business. It is only the business sector that can provide the income necessary to plug that gap and building on our tradition for international trade is the means by which that will be achieved. I hope that this figure is published on an annual, if not quarterly, basis so that we can objectively measure our collective strength as a society as well eliminating the dependency of the Welsh economy and Welsh public services on England cultivated by Westminster down the decades.

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