Restrictions on the Welsh Government’s ability to borrow money should be significantly relaxed to cope with the Covid-19 pandemic, according to a report from Cardiff University’s Wales Governance Centre.
Researchers on the Wales Fiscal Analysis programme say Wales should be given greater flexibility to manage its finances during this extraordinary period. Temporary reforms of borrowing powers would give the country access to millions more in funds, which could be directed towards vital public services such as the NHS and social care.
Currently, the Welsh Government can only borrow money for capital projects or to make up shortfalls in tax revenue. It cannot borrow money to cover day-to-day spending and is limited to drawing down £125m per year from an account known as the Wales Reserve - a limit that has already been reached.
With these restrictions in place, the Welsh Government has ramped up spending to combat coronavirus by using transfers from the UK Government through the Barnett formula - based on a population share of spending in England - and from reallocating existing money from within its own budget.
Although the full impact on Wales over the course of the pandemic has yet to be seen, the report argues that factors such as Wales’ older population and higher levels of people with ill-health and disabilities may mean this allocation does not reflect the additional demands faced by public services.
Researcher Guto Ifan said: “Given the scale of the health and economic crisis resulting from the Covid-19 pandemic, urgent reforms are needed so Welsh Government can respond in a way that meets the needs of our citizens.
“The funding formula used to determine additional funding for Wales is not based on need, which would be a risk if Wales were to become relatively more affected during the outbreak.
“Given record low interest rates, the ability to borrow for day-to-day spending might also give the Welsh Government an important temporary tool to combat the pandemic over the coming months, whether that’s funding for frontline NHS and social care services or help with bills and living costs.
“We provide options in the report for the UK Government to modify the fiscal framework - the set of arrangements by which funding is distributed to Wales.”
Researchers say removing limits on drawdowns from the Wales Reserve would provide £155 million of additional day-to-day spending for 2020-21.
The Welsh Government can also currently borrow up to £200m a year, up to a total lending limit of £500m. This money can only to cover shortfalls in tax revenues, and can’t fund planned day-to-day spending, which includes its financial response to Covid-19.
Welsh Government budget measures to date have focused on offering support for businesses through the non-domestic rates system, costing approximately £1.3bn and a £1.1bn support package for the economy and public services in Wales. Funding for these measures mainly derive from ‘Barnett consequentials’ triggered by policy announcements in England.
Guto Ifan added: “The extent to which the Welsh Government will be able to find further significant savings from other areas of the budget to fund its coronavirus response is highly uncertain. Action is needed to make sure people in Wales are fully supported during this difficult time.”
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