The Wales Governance Centre released its annual report analysing the Welsh deficit and exploring the differences with the rest of the UK on Monday.
Since the centre’s first such report in 2016, the gap between tax revenue and public spending has decreased from £14.7bn (24% of GDP) to £13.7bn (19.4%) in 2017-18.
But the difference with the UK as a whole, where the deficit is just 2% of GDP, remained significant.
Only three regions (London, south east England and the east of England) had a positive net fiscal balance in 2017-18, whereas Wales’s deficit was second largest only to Northern Ireland.
The report found the deficit reduction was due to spending cuts rather than increased revenues.
Total spending as a share of the economy fell by more than 10% since 2009-10, and revenue from income tax remained well below its pre-recession peak, which the report blamed on slow growth in the tax base and UK government policy.
Ed Gareth Poole, academic lead of the Wales Fiscal Analysis project, said the report will be “invaluable for policymakers” dealing with the UK’s constitutional future and the impact of Brexit.
He added: “While these results are based on ONS estimates, there is no escaping the fact that historic factors have led to the Welsh economy and tax base being far weaker than that of the UK as a whole.
“The figures show that all of the UK’s nations and regions are in financial deficit outside of London and its immediate neighbours, with Wales having the second highest deficit per person behind Northern Ireland.”
The report also identifies how the tax base in Wales is different to the UK as a whole.
Wales comprises 4.7% of the population but generated just 3.6% of the country’s tax revenues in 2017-18.
And whereas income tax was the largest source of government revenue in the UK, in Wales it was VAT.
Social protection (including all benefits, social care spending and the state pension) was by far the biggest expenditure for Wales in 2017-18, accounting for £14.8bn of its £40.8bn total spend.
Per person spending in Wales was 108% of the UK average (or 111% of the level in England alone) – lower than the estimated relative funding per person received through the block grant (120% of the English level).
Because social protection spend per person in Wales was so high, this suggested non-social protection expenditure per person was “significantly lower”, the report added.
A report by the same group, which it hopes will present options for reducing this disparity, will be published in the autumn.
