Making sense of the Welsh Government’s Draft Budget for 2025-26

Following Rachel Reeves’ decisions on taxation, spending and borrowing, this was always going to be a “big” budget. The Welsh Government had significantly more funding to allocate than was expected under previous plans.

The budget allocates an additional £1.5 billion in resource and capital spending in 2025-26 compared to 2024-25 – a transformative picture compared to what would have occurred under both main party manifesto plans from the summer.

However, the front-loaded nature of the additional funding from the UK government means much of the increase in spending happens in this current year (2024-25). As a result, eventual spending increases in next year’s budget (2025-26) may be more modest than on first appearance.

This blog provides some initial thoughts on the budget plans.*

*Some of this analysis will be inevitably nerdy and technical and comes with some significant caveats (and copious footnotes!).

What’s included in the 2024-25 baseline?

In a way, this budget tells us where we’re going, but not how we’re getting there.

We now know what the Welsh Government intends to spend on all budget areas in 2025-26. What is harder to discern is how next year’s spending will compare to previous years.

Welsh Government draft budgets set new plans for the forthcoming year, compared against Final Budget plans for the current year (set back in February), and don’t account for in-year funding and transfers.

Usually, this doesn’t matter too much in practice. However, the 2024-25 budget is a completely different beast from that envisaged in February, with funding for day-to-day spending increasing by an estimated £1.2 billion from the time those Final Budget plans were laid out (see table below).

The Welsh budget acknowledges this significant additional funding and adjusts the baseline to account for larger-than-expected pay deals in 2024-25 and increased pension costs for public sector employers (i.e. SCAPE changes). Spending allocations for 2025-26 in the budget narrative and accompanying files are then compared to this revised 2024-25 baseline.

In the budget documents, day-to-day spending allocations increase by £959 million in 2025-26, on top of this revised 2024-25 baseline – or by 2% in real terms.

However, we estimate that there will be approximately an additional £557 million of day-to-day spending not included in that 2024-25 baseline. If it were included (and applying the IFRS16 accounting changes laid out in the Supplementary Budget in September), then spending would increase by a more modest £517 million from 2024-25 to 2025-26.

This would essentially mean no real terms growth in the size of the day-to-day budget from 2024-25 to 2025-26.[2] 

Why does this matter?

Perhaps this doesn’t matter a great deal in practical terms – local authorities and public bodies setting their own spending plans for next year want to know how much they have to spend in 2025-26. But these baseline issues make scrutiny of these spending plans more difficult than usual.[3]

This is because it means the stated growth in 2025-26 spending plans are likely to be overstated.

To take a very specific example, look at the ‘Schools Standards’ budget line. The budget narrative states that an “additional £7.8 million of resource funding will be provided through the Local Authority Education Grant to support schools and help raise schools standards”. The detailed Budget Expenditure Lines shows a corresponding increase in this budget from £160 million in 2024-25 to £168 million in 2025-26 (a 2.4% increase in real terms).

However, Cabinet Secretary for Education Lynne Neagle recently announced that “£20 million will be provided to schools and settings through the Schools Standards Grant, boosting this package of support to £180m in 2024-25.”[4]

Therefore, that specific budget line will eventually fall by 7% in nominal terms, or 9% in real terms, from 2024-25 to 2025-26.

Several other funding announcements have been made for 2024-25 over recent weeks that are not fully reflected in the revised 2024-25 baseline.[5]

How much will capital spending increase?

Following the UK government budget, the Welsh Government particularly welcomed a 7% real terms increase in its capital settlement in a single year.

However, the increase in the Welsh Government’s capital spending allocations to next year stands at 18% in real terms.

It appears that the 2024-25 baseline used doesn’t include the effect of IFRS16 changes, but the new spending plans for 2025-26 do incorporate these changes.[6] We know from the 1^st Supplementary Budget published in September that these changes increased Welsh Government capital spending allocations by £262 million (or £339 million including a ringfenced reserve).

This again means that the spending increases from 2024-25 to 2025-26 are overstated.

Take the Health and Social Care capital budget (a crucial area, considering the large NHS maintenance backlog and the need to boost NHS productivity and performance). According to the budget narrative:

“We are providing an additional £175m of capital funding bringing our total capital investment in this Draft Budget to £614m. This investment will help to maintain and improve the NHS estate infrastructure, as well as investing in new equipment and digital technology.”

This would imply a huge 36.6% real terms increase in spending in a single year.

However, the 2024-25 baseline will increase by £80 million once IFRS16 changes are applied – leaving an eventual increase of £95 million, or (a still sizeable) 16% increase in real terms.

How will spending change from 2023-24 to 2025-26?

The huge change in the Welsh Government budget for 2024-25 was always going to complicate analysis of 2025-26 spending changes.

However, in lieu of a detailed breakdown of intended 2024-25 spending, it would have been beneficial to have 2-year (2023-24 to 2025-26) spending growth comparisons, at least for major spending areas and budgets. This was how the UK government presented their own departmental spending plans back in October.

Over those two years, the Welsh Government’s day-to-day spending budget in 2025-26 increases by 5% in real terms compared to 2023-24, on a like-for-like basis.

Averaged over two years, this 2.5% a year increase in spending broadly follows the overall trend in funding from 2018-19 to 2023-24.

It is also below the average 4.3% a year increase in total UK government day-to-day departmental spending over this period.

It’s not entirely clear why this difference is so large. It may a combination of faster spending increases in reserved areas of spending, the Barnett squeeze effect, one-off drawdowns from the Wales Reserve in 2023-24 and no drawdowns in 2025-26, and a winding down of reconciliations for previous income tax forecast errors.

What can we say about Welsh Government spending choices?

As outlined above, the massive in-year changes to the Welsh Budget makes it unusually difficult to analyse spending choices in this Draft Budget.

With some health warnings, here is some initial analysis of day-to-day spending choices:

• NHS: The NHS gets an additional £400 million in 2025-26, on top of a 2024-25 baseline increased by £447 million. The eventual increase from 2024-25 to 2025-26 is likely to be smaller than this, given some funding has already been announced which hasn’t yet been included in the 2024-25 baseline.[7]Compared to the last published plans for 2023-24, this means NHS spending grows by an average of 3.7% a year from 2023-24 to 2025-26 in real terms. This is broadly in line with the increase laid out for NHS England at the Autumn Budget.[8]
• Local Government: The budget allocates an additional £253 million for core funding to Welsh local authorities, on top of a baseline increase for 2024-25 of £131 million.[9] A further £15 million support for social care is included in the Health and Social Care budget. Meanwhile, additional funding for local authorities in 2024-25 worth £120 million has been announced so far; this covers the pay pressures allocated in the 2024-25 baseline increase, but also includes other financial support.[10] This again means that the eventual increase in local government spending from 2024-25 to 2025-26 may be lower than implied by the headline increase in the settlement. From 2023-24 to 2025-26, the settlement grows by approximately 3.1% a year on average in real terms – a significant increase in its size, especially compared to trends since 2010-11.[11]
• Transport for Wales: Additional funding was provided to Transport for Wales in 2023-24 (£125 million) and 2024-25 (£111 million), funded by cuts to other spending areas. The initial justification for this additional funding was to support the organisation to deal with increased costs and a reduction in passenger numbers post-pandemic. This additional support has largely been maintained for another year in the “Rail Service Support” budget line.
• Non-Domestic Rates: The Welsh Government decided to cap the NDR multiplier at 1% rather than increase it by 1.7% (September CPI). The budget also provides 40% reliefs for retail, leisure and hospitality businesses. This will now be the sixth successive year of the temporary relief and risks being capitalised into higher rents paid by businesses, to the benefit of landlords. It reduces funding available for public services in 2025-26 by £78 million.
• All other Welsh Government spending: Detailed analysis of all other spending plans is not possible. However, we can calculate a residual estimate of the change in all other Welsh Government spending, after accounting for the growth in NHS and local government spending allocations. Although this estimate is highly uncertain, this analysis suggests that, despite increasing in cash terms from 2023-24 to 2025-26, other spending will fall in real terms over these two years.

Conclusion

Overall, therefore, this analysis implies that the Welsh Government has prioritised front-line services, increasing the NHS and local authority budgets significantly.

However, despite the large increase to the Welsh Government’s settlement in 2024-25 and 2025-26 announced at the UK’s Autumn Budget, the additional funding doesn’t appear to have left enough to avoid some real terms cuts in some spending areas. (A more detailed analysis of spending plans will be a job for another day.)

But this might be a sign of things to come. The UK government has pencilled in much tighter spending plans beyond 2025-26, which, if they are to be believed, would imply a difficult Spending Review to be published in the summer.

After this year’s ‘big’ budget, next year’s budget round promises to be more difficult, and might feel like a return to austerity for some public services.

[1] Based on 1^st Supplementary Budget for 2024-25 and Welsh Government response to Autumn Budget 2024.

[2] Caveat: This picture might change if the Welsh Government draws down resource funding from the Wales Reserve (up to £125 million) like it plans to do in 2024-25.

[3] A similar issue was raised by the Scottish Fiscal Commission in relation to the Scottish Government’s budget for 2025-26 last week: “This is a material limitation to information available to the Scottish Parliament for its scrutiny of the Budget and in the spending analysis we can do.”

[4] https://www.gov.wales/written-statement-additional-funding-support-education

[5] https://www.gov.wales/written-statement-new-funding-deliver-first-ministers-priorities

[6] From the Welsh Government 1^st Supplementary Budget for 2024-25: “IFRS16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires the majority of leases, other than those for low value items or for less than one year, to be treated in the financial statements comparably to owned assets. IFRS16 brings the vast majority of leases onto the balance sheet.” And from the 2025-26 Draft Budget: “Following the implementation of the IFRS 16 Accounting Standard, additional funding has been included in the UK Government block grant settlement to support the necessary technical adjustment in respect of the treatment of leases. Previously, this funding has been ring-fenced to address the impacts of IFRS 16 leases. From 2025-26 this allocation will form part of the general capital allocation.”

[7] See: https://www.gov.wales/written-statement-new-funding-deliver-first-ministers-priorities

[8] Caveat: some transfers are included in 2023-24 (e.g. Immigration Health Surcharge funding) which will inflate the 2025-26 figure once included. However, the impact of increased pension costs (SCAPE) in 2025-26 are not account for.

[9] That baseline increase presumably includes £60.7 million in SCAPE costs, £52.3 million for local government pay pressures, and £18.2 million for teachers’ pay.

[10] https://www.gov.wales/additional-funding-support-local-authorities

[11] Caveat: again doesn’t account for SCAPE costs.