Is Wales well-funded or underfunded?

Nearly all politics is about money and none more so than in the political arguments over the amount of money Wales receives from the UK Government. 

Depending on which political party you listen to, Wales is either well-funded or underfunded.

What’s the truth? It is, I’m afraid, difficult to answer. 

• What the politicians say

The Welsh Government certainly thinks it doesn’t get the amount of money it should. 

Mark Drakeford recently told the BBC that "our budget next year is worth £1.5bn less than it was when a Conservative government set it in November last year".

A Welsh Government spokesperson put it in this way:  "If our budget had just kept pace with the growth in the economy since 2010-11, it would be £3.5bn (or 15%) higher by 2024-25.

"Instead, our spending power has been eroded by decisions taken by the UK Government, including a decade of austerity, and record levels of inflation."

After the latest UK Government spending announcement in November, Welsh Finance Minister Rebecca Evans acknowledged an increase but said: "We will receive an additional £1.2bn over the next two years (2023-24 and 2024-25) but our overall budget in 2024-25 will be no higher in real terms than in the current year and our capital budget will be 8.1% lower."

In that Autumn statement, the Chancellor Jeremy Hunt said: "Difficult decisions have been made, but we are taking decisive action to support the people of Wales, including increasing pensions and benefits in line with inflation next year and providing the Welsh Government with £1.2bn in additional funding over the next two years."

Speaking in the chamber recently, Welsh Secretary David TC Davies said "the overall funding amounts for the devolved administrations, including the Welsh Government, have still increased in real terms over the period despite the impact of inflation".

His colleague the Wales minister Dr James Davies said that "over the spending review period the UK Government are providing the Welsh Government with 20% more funding per person than equivalent UK Government spending in other parts of the UK".

And the Prime Minister has also weighed in, saying that "when it comes to funding Wales, as a result of funding from Barnett [the formula used to work out Welsh Government funding] the Welsh Government receives significantly more funding than the NHS in England, but also £1.2 billion of extra funding as a result of the autumn statement".

All of these politicians are mixing different factors: inflation, austerity, direct funding, Welsh Government funding to bolster their arguments. I'll try to disentangle and keep to the facts.

• How much does the Welsh Government have to spend?

Around £23bn a year, although it has no say over around £4bn of that.

Welsh Government funding comes from two sources: a direct payment from the UK Government known as the block grant and the money raised by Welsh taxes.

Adding the two sources together, the total budget for 2023/24 and 2024/25 is expected to be around £23bn each year. 

A large chunk of that budget is 'managed' by the Welsh Government on behalf of the UK Government in areas that it has no control over, like student loans. 

Senedd officials estimate the amount the Welsh Government can actually decide how to spend is around £19bn and of that, around £3bn can only be spent on "capital" projects such as buildings, roads and other things classed as "infrastructure" like broadband. 

That leaves about £16bn of funding classed as "revenue" which is spent on services.

• Does UK Government funding recognise Welsh 'needs'?

Yes and no.

The size of the block grant is worked out using what's known as "the Barnett formula" - a simple calculation that critics have said doesn't recognise the specific needs of Wales - an older population with higher levels of ill health. 

Every time the UK Government decides to spend money on something in England which is devolved to Wales, Scotland or Northern Ireland it applies the Barnett formula to work out an amount to give to those nations. 

Wales roughly gets 5% of the amount spent in England. 

These days there is also an extra calculation made during the process, after an agreement reached in 2016 called the Fiscal Framework. 

It's designed to provide an "uplift" to ensure that the specific needs of Wales and guarantees that Welsh Government funding remains above 115% of what's spent in England. It doesn't necessarily mean that the Welsh Government gets more in total, just more than is being spent in England. 

It's why UK Government ministers say, as Welsh Secretary David TC Davies did recently, that "the Welsh Government are receiving £1.20 per head for public services for every pound that is spent in England".

• Are current Welsh Government budgets 'record' amounts?

Yes.

For several years, UK Government ministers have hailed funding settlements as "the largest since devolution began".

That first budget for the financial year 1999/2000 was certainly much lower - at £7.4bn compared to the £23-4bn it is now - but increases in funding have only occurred as spending increased across the UK.

Budgets increased in real terms (in other words above inflation) between 1999 and 2010 and fell in real terms from 2010 until 2021 when they began to increase again partly because of pandemic spending.

However…

• Is inflation reducing the Welsh Government's spending power this financial year?

Yes.

At least we can be clear about this. Rising costs of everything from salaries, services, supplies and particularly energy are eating into the budgets of all governments, local authorities and businesses as well as the rest of us.

According to Cardiff University's Wales Fiscal analysis, even after the increase of £1.2bn announced in November, inflation will mean an effective reduction in spending power of £1.4bn - £800m in 2023/4 and £600m in 2024/5.

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• How much is being spent in Wales directly by the UK Government?

At least £20bn.

The UK Government funds a lot of services in Wales that have nothing to do with the Welsh Government, such as welfare payments and job centres, policing, agencies such as DVLA, HMRC and the Passport Office, defence and railways.

As this spending is UK-wide or England and Wales-wide it's difficult to work out how much it adds up to.

A study by Cardiff University looking at Government Expenditure and Revenue Wales in 2019 put the figure at approximately £20bn, about twice the then-Welsh Government budget.

Since then, the UK Government has launched a number of other spending streams such as the Levelling Up Fund, the Communities Fund, Freeports and continued with area-specific programmes such as city or growth deals.

It's a safe bet that the amount spent is more than £20bn, but I haven't been able to establish a current figure. 

• Is Wales receiving less aid money from the UK Government than it used to from the EU? 

Difficult to say! The Welsh Government will no longer handle the money but the UK Government says it will match the amounts available UK-wide.

So far the UK Government's replacement for EU funding, the Shared Prosperity Fund, has made available £585m to Welsh projects in the period up to 2025.

However the Welsh Government says that even with that amount, there's still a shortfall of around £1bn.

It reaches that figure by adding a loss in rural funding of £243m and £772m funding from the EU structural funds programme. 

The UK Government rejects the figure totally.

It says the the Shared Prosperity Fund - which replaces EU funding - will make £2.6bn available across the UK in the years up to 2025.

Remaining EU funding will taper off, it says, while the SPF will increase to £1.5bn a year in 2024/25 which it says will match the amount which used to come from Brussels. 

Note that that's a UK-wide figure. Something that tends to get overlooked is that Wales often got more from EU funding than the English regions as a result of political decisions by previous UK Governments.

Under the SPF projects, Wales will now have to bid directly against projects elsewhere in the UK. 

• Can the Welsh Government raise money from Welsh tax rates?

Yes.

The Welsh Government is now responsible for non-domestic business rates, stamp duty land tax (known as land transaction tax), landfill tax and, since 2019, Welsh rates of income tax. 

Around £4bn of its funding comes from those taxes. Of that, Welsh rates of income tax are expected to raise by £2.8bn this coming financial year. 

It collects 10p in the pound for each of three income tax bands and so could increase what it charges taxpayers.

The Wales Fiscal Analysis team estimates that increasing Welsh rates of income tax by 1p on each band would raise around £275m in 2023/4 and £288m in 2024/5. 

It still wouldn't make up for the impact of inflation and it's something Mark Drakeford has said he's reluctant to do in a cost of living crisis. 

• Can the Welsh Government borrow money?

Yes, within strict limits.The Welsh Government can borrow very limited amounts primarily to fund important capital projects up to a maximum of £150m a year and a total limit of £1bn.

It can also borrow money to make up certain shortfalls, but up to a maximum of £500m.

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