Why we need a Welsh Treasury

Whilst the Welsh Government has been undertaking some treasury-type activities in relation to the Wales infrastructure investment programme and has implemented a number of major innovative funding arrangements, this work will have to increase considerably if the UK Government, as expected, responds positively to Part 1 of the Silk Commission’s report on tax powers.

Currently the Welsh Government does not exercise a formal treasury function. This is because in financial terms it is treated the same as if it was a Westminster department. The Government is provided with a block grant, split between capital and revenue. It has no effective opportunity to either borrow or invest money.

There are two main reasons why we would need a Welsh Treasury: firstly for the economic growth potential and community benefits of increased capital expenditure; and, secondly, to manage revenue income and expenditure more effectively. Treasury management is defined as:

“The management of investments and cash flows, banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”

All local authorities in Wales, as well as the Westminster Treasury carry this out, because they borrow for capital investment and also invest reserves and income. When the Welsh Government secures borrowing and tax varying powers then the creation of a full Welsh Treasury will become inevitable. In answer to a question in the Senedd on 24 April, Finance Minister Jane Hutt said:

“Of course, we are anticipating that the Silk recommendations will be implemented, in terms of the preparations that we are already undertaking. Clearly, functions that we are preparing for relate to tax policy; tax administration, including compliance and enforcement work; revenue forecasting; budgetary and investment strategy; cash management and in-year monitoring. We are already putting in place a number of roles in the department in order to make effective use of our resources, particularly at these times of budgetary reduction.”

A Treasury within the Welsh Government will need to do the following:

• Arrange borrowing for capital expenditure over and above any capital grants received.
• Invest money received earlier in the year than they need to spend it.
• Arrange borrowing when receipts are less than expected and the shortfall has to be made up.
• Determine tax policy on all devolved taxes.
• Forecast and monitor both revenue and capital expenditure.

Compliance and enforcement would also need to be undertaken. Would the Welsh Government want to set up its own compliance and enforcement department or would it want to use the much larger HM treasury to carry out these functions on its behalf?

These functions are similar to those that local authorities carry out in managing their finances. Of course, councils are limited to deciding Council Tax. If the Part 1 recommendations of the Silk Commission are implemented, the Welsh Government will need to set a range of taxes, including income tax – subject to a positive referendum result.

Local authorities follow the Chartered Institute of Public Finance and Accountancy’s (CIPFA) code of practice on treasury management. Below I examine the CIPFA code and look at how it could be amended for treasury management by the Welsh Government and National Assembly:

1. Creation and maintenance of a Treasury Management Policy Statement that sets out the policies and objectives of the Welsh Government’s Treasury management activities.
2. Creation and maintenance of Treasury Management Practices which set out the manner in which the Welsh Government will seek to achieve those policies and objectives, including setting borrowing limits for both revenue and capital expenditure.
3. Receipt by the National Assembly of an annual Treasury Management Strategy Statement – including the Annual Investment Strategy and Minimum Revenue Provision Policy – for the year ahead; a Mid-year Review Report and an Annual Report covering activities during the previous year. These would take the form of a series of reports, probably as part of the Budget and Supplementary Budget reports to an Assembly Plenary session.
4. Delegation by the Welsh Government of responsibilities for implementing and monitoring Treasury Management policies and practices and for the execution and administration of Treasury Management decisions. These powers will need to either be delegated to the Finance Minister or delegated to the Welsh Government by the National Assembly as part of any legislative change.
5. Delegation by the Welsh Government of the role of scrutiny of Treasury Management strategy and policies to an Improvement and Budget Performance Panel or similar body. In the case of the National Assembly this would be the Finance Committee which already scrutinises the Budget and all supplementary Budgets.

The expectation would be that a Welsh Treasury would, at least initially, be run along these lines. In practical terms a borrowing requirement would be forecast as part of the Budget setting process and would then be reviewed at each Supplementary Budget report. If the borrowing limits needed to be increased then that would need to be agreed by the National Assembly in Plenary session.

The most contentious issue will be setting the tax rate both on income tax and on the other taxes devolved, just as the setting of Council tax is currently with local Authorities.

If Silk Part 1 is implemented and borrowing powers and some taxation policies are decided in Wales then we will need a Welsh Treasury. However, the challenge will be preventing it becoming as powerful as the Treasury is in Westminster.