Welsh Government funding deal

The UK and Welsh Governments have reached an agreement on borrowing powers for Wales and changing how Wales' share of public spending is worked out. But it's very much an agreement in principle, the Welsh Government cannot yet raise any loans and there will be no immediate change on funding.

The UK Government says it accepts that the Welsh Government should borrow money for construction projects but there must be the revenue to pay for it. There will be no decision on tax raising powers until after the Silk Commission has recommended what taxes, if any, should be devolved to Wales.

Talks are continuing about how to pay for specific projects, notably relieving congestion on the M4 around Newport. Last year, the Chancellor suggested that toll revenue from the Severn Bridges could be used to repay a loan once the cost of building the Second Severn Crossing has been met.

In the long run, the deal heralds an end to the much misunderstood Barnett formula, It was devised at the end of the 1970s and initially was kept secret. Its purpose was to slowly reduce Wales' share of public spending by linking any increase to rises in expenditure in England. When public spending grew rapidly at the start of the twenty-first century, it became noticeable that the formula meant that is was rising less fast in Wales, what became known as the 'Barnett squeeze'.

Nothing will happen immediately. As public spending is falling at the moment, there is no Barnett squeeze but the two governments have agreed that future spending settlements will be checked to make sure that the squeeze has not resumed.

The Shadow Welsh Secretary Owen Smith says the possible borrowing powers for the Welsh Government need to be seen in the context of cuts in capital spending imposed by the UK government.

Meanwhile, the former Deputy First Minister, Ieuan Wyn Jones, who's now Plaid Cymru's finance spokesperson, summed it up as a deal to be ashamed of.