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This note is a response to the consultation from the Finance Committee of the National Assembly for Wales concerning preparations for replacing European Union (EU) funding for Wales, focusing on the options available for how these funds will be distributed across the UK (both to Wales and within Wales).

The key points made by this note are:

  • EU funds are currently either pre-allocated to member states or the case of structural funds particular regions within them according to formulae based on state/regional characteristics; or are competitive funds that can be bid for by governments, universities, businesses and other organisations.
  • Wales is due to receive over 5 billion Euros in funding from the pre-allocated funds for the 2014–2020 EU budget period, which is more than 3 times the average per capita figure for the UK as a whole, reflecting high levels of regional development funding (particularly for West Wales and the Valleys). It has recently received less than a population share of funds from some of the main competitive funds.
  • The UK (and therefore Wales) will continue to operate existing EU schemes until at least the end of 2020 (and perhaps June 2022 in the case of farm payments). But beyond that decisions will need to be taken about whether to replace these schemes, and if so, the level of funding and the way that funding is allocated.
  • Some have suggested the Barnett Formula could be used to allocated replacement funding post-Brexit. The Barnett Formula is simple and well understood. The Welsh Government also has significant flexibility over how it spends annual increments to its funding as a result of the application of the Barnett formula. But the formula has design flaws which mean its use the allocation of funding to replace current EU schemes should be avoided. In particular it takes no account of differences in population growth, or differences in the initial levels of funding. The latter results from its use of nominal cash-terms changes in English budgets per person as the basis of changes in allocations to devolved governments. This can lead to spending levels to converge between England and the devolved nations: the so-called Barnett squeeze, which could be severe in this instance.
  • An Indexed Per Capita (IPC) formula could be used that avoided this problem. But the UK and Welsh governments may want to allocate funding in ways that account for more than just relative population growth and initial levels of funding. This could include using local, regional or national level characteristics, and competitive bidding processes. There are also decisions to be taken as to whether funding schemes will be designed and operated at the UK level, devolved government level, or some other level (e.g. city-region).
  • Different ways of allocating money would involve different incentives – including for growth and development and environmental improvements. They may also be associated with different outcomes. The optimum allocation method and governmental level for allocation decisions is likely to differ between funding purposes (e.g. between regional development funds and research funds).