The Welsh Government has significantly under-utilised its borrowing powers to invest in economy boosting capital projects, despite repeatedly calling on the 海角视频 Government to have the level increased.
Under the Wales Act 2014 and 2017 the Labour led administration has the ability to borrow up to 拢150m a year for capital, via the 海角视频 Government issuing of gilts through the National Loans Fund. It also has the ability borrow 拢200m a year for resource expenditure, which it has never used.
With interest on 海角视频 Government debt at record lows, the Welsh Government鈥檚 only use of borrowing for capital was a single transaction of 拢65m in early 2019.
In contrast, while with a bigger capital borrowing capacity of 拢450m a year, since the Scotland Act the Scottish Government has borrowed 拢1.6bn in capital and plans to raise a further 拢300m in low interest bearing debt by the end of the current financial year.
The Welsh Government has no plans to use capital borrowing in what remains of the financial year to the end of March.
The Welsh Government鈥檚 budget has swelled in the current 2020-21 financial year to more than 拢25bn, due to 拢5.2bn in additional funding from the 海角视频 Government - which Welsh taxpayers contributed towards - in response to the pandemic. How that additional resource funding has been spent will be clarified in a third Welsh Government supplementary budget late this month.
However, both governments are in discussions over increasing the amount the Welsh Government can carry over in funding to the next financial year.
The Welsh Government said its under-utilisation of capital borrowing was due to current inflexibilities in its funding arrangements set by the 海角视频 Government. It stressed that while it starts every financial year, as it will do in 2021-22, with the intention to borrow 拢150m for capital investment, the receiving of what it said was late capital consequentials 鈥 as a result of increased spending by the 海角视频 Government 鈥 meant it was difficult to know what its capital budget would be until year end, so making deployment difficult enough without borrowing on top.
It added that the current amount it can carry over from one financial year to the next, with a reserve capacity of 拢350m, was another contributing factor to its lack of borrowing. Any amount not spent over that could have to be returned to the Treasury.
However, leading economist Gerry Holtham, said the Welsh Government should be able to manage its budget to ensure it makes far more use of its capital borrowing powers. He said that late payment of capital receipts from the 海角视频 Government couldn鈥檛 really be used as an excuse and warned that a lack of appetite for capital borrowing could undermine the Welsh Government鈥檚 case for current levels being increased.
The Welsh Government鈥檚 capital budget is spent in areas like roads and hospitals, but could also extend to say new hospital equipment bought by NHS trusts.
Mr Holtham, who chaired a commission that looked at a fairer funding model for Welsh Government, which resulted in a Barnett floor which ensures that the Welsh Government鈥檚 block grant cannot see funding per head in Wales falling below 115% of that in England, said: 鈥淔ailing to borrow in two successive financial years [2019-20 and 2020-21] seems unambitious. Not knowing the capital allocation is not a decisive reason because they know what it will be within a 10-20% error margin and could plan for contingencies.
鈥淭here鈥檚 a huge programme required of house insulation and refitting and of coastal and river flood defences, not to mention faster rural broadband and rail鈥檚 South Wales Metro project.
"The Welsh Government should proceed while real interest rates are negative, as at present. It is also harder to push for a higher borrowing allowance when you don鈥檛 use what you have. Perhaps Welsh Government lacks capacity in project appraisal and management. Yet I鈥檇 guess they could hire a strong team of 20 for around 拢5m.鈥
In a statement the Welsh Government said: 鈥淭he Welsh Government sets its planned capital borrowing through the annual budgetary process. The recently published draft Budget for 2021-22 shows that in order to finance our capital plans, we are anticipating borrowing the maximum 拢150m that is available to us within our annual limit
鈥淗owever, we face the continual challenge in recent years of receiving allocations of capital funding late in the financial year from the 海角视频 Government. While we have welcomed additional funding the long-term nature of infrastructure planning and investment means that it is simply not possible to deploy large amounts of capital funding shortly before the year end.
鈥淐oupled with the restrictions on our carry-forward limits, such allocations necessarily mean that we have to replace our planned borrowing with the additional funding, rather than expand our capital ambitions.
鈥淭hat is why it is crucial to consider Welsh Government budgetary flexibilities as a package. A relaxation of our borrowing limits, coupled with an increased capacity in our ability to carry forward funding between years would ensure that we are able to maximise our capital ambitions for the benefit of Wales.鈥
The Scottish Government鈥檚 repayment of its 拢1.6bn capital borrowing with the 海角视频 Government has an annuity structure, which means as well as paying interest it is also prudently reducing the principal.
A Scottish Government spokesperson said: 鈥淔or these reasons (and others) the average interest rate is not a meaningful measure of debt servicing costs. Nonetheless a weighted average interest rate on outstanding debt is 1.2%.鈥
The only Welsh Government capital borrowing to date of 拢65m, which was used to help finance the Grange Hospital, was drawn down in March, 2019. As of this month there is 拢62.8m of principal and 拢11.4m of interest left on the loan, with a fix interest rate of 1.4%. There are 23 years left of the term of repayment.
As well as seeking to increase its end year carry, the Welsh Government also wants the 海角视频 Government to agree to an increase its annual borrowing ceiling, while not specifying an amount, as well as the total debt it can hold. That is currently set at 拢1bn and for Scotland at 拢3bn.
While the Welsh Government can move revenue into its capital budget, any movement the other way requires specific approval from the Treasury. The Welsh Government wants direct control to do so.
The Treasury has confirmed it is discussions with the Welsh Government over further flexibility on the reserve.
The Welsh Government鈥檚 ability to use 拢200m in borrowing for resource annually only applies to a limited number of circumstance, including to meet expenditure because of a shortfall of receipts from devolved taxes, against forecast receipts.
The Welsh Government has not utilised this type of borrowing to date. Scotland though is expected to do so for the first time before year end.
Any borrowing request, whether for capital for resource, from the Welsh Government can be processed through the 海角视频 Government鈥檚 Debt Management Office in ten days and with no arrangement fees.
