‘Neutral’ or ‘Neutered’? Analysing the 2026-27 Welsh Government Outline Draft Budget

Guto Ifan, Ed Gareth Poole and Owain Cynfab

On Tuesday 14 October, Finance Secretary Mark Drakeford MS unveiled an outline of the Welsh Government’s tax and spending plans for next year.

As promised, this was a largely “neutral” budget. Spending allocations made for this year (2025-26) were restated and funding for each Welsh Government department was increased in line with forecasted inflation. This avoids real terms cuts to any part of the budget and leaves a significant amount of funding – some £380 million – to be allocated at the Final or Supplementary budgets.

But masked by the neutral and concise language of the document are a series of difficult and intensely political decisions which will need to be made over coming months and years.

Accounting for inflation

First and foremost, this is a very straightforward budget to understand. To reflect the Office for Budget Responsibility’s March forecasts for inflation (1.7%-1.9%) and average economy-wide pay growth (2.2%), the 2026-27 outline draft budget proposes a 2.2% uplift for every department for public-sector pay and a 2.0% uplift for everything else (non-pay elements, general capital, and financial transactions).

All in all, this adds an additional £467 million to baseline day-to-day spending plans for 2025-26. Other changes to spending plans amount to a further £41 million of day-to-day spending.

This leaves £231 million of day-to-day spending unallocated in the budget plans. The document states that the “Welsh Government hopes to find areas of common priorities with Members of the Senedd to enable this funding to be allocated at the Final Budget in January 2026”.

While theoretically leaving a large amount of funding for cross-party negotiations, there will be significant calls for additional allocations from all directions.

Health spending

The Health and Social Care budget increases by £261 million in 2026-27. This represents a 2.1% increase in nominal terms, or a 0.5% increase in real terms.

Assuming the core NHS budget grows in line with this departmental total, this would be an historically low increase in NHS spending. Although it may cover general inflationary costs and an increase in NHS pay (see below), it would not meet any demand pressures the health service would face next year. Given this implausibly low increase, it is highly likely therefore that the NHS will take the lion’s share of the unallocated day-to-day spending.

However, even if the NHS receives all this unallocated spending (i.e. an additional £231 million), the budget will only increase by 2.5% in real terms. This would be below the 3% increase planned for the NHS in England and well below the long-run historical growth rate in health spending (3.6%).

If the NHS budget increases instead by its post-2010 average of 2.1% per year (the period which included real-terms cuts in the first years of austerity), then this would leave only £45 million of unallocated funding for everything else.

Local Government

Although the local government settlement has not yet been published, in his budget statement, Mark Drakeford said that the local government settlement would increase by 2.5% in nominal terms to 2025-26, noting that local authorities would benefit from the assumed growth in Non-Domestic Rates revenue. Taking the settlement figure for 2025-26 and adjusting for baselined adjustments, this would equate to approximately an additional £156 million, or 0.8% in real terms.

With inflation levels coming down and assuming public sector pay increases in line with average pay growth, the growth in spending pressures faced by Welsh local authorities should be lower than in recent years, during which substantial resources have been drawn down from reserves. [1] However, a spokesperson for the WLGA warned of steep council tax rises or job cuts under the currently proposed settlement.[2]

Public sector pay

In deciding inflationary uplifts for departmental budgets, the Welsh Government provided a 2.2% uplift spending for the public sector pay elements within each area.

This essentially assumes that public sector pay deals would follow the OBR’s forecast for average pay growth across the UK economy. In the context of recruitment and retention issues, as well as recent industrial disputes, this could fall short of eventual pay deals.

Furthermore, this also assumes that the size of the public sector workforce stays the same. Yet recent trends suggest that this is unlikely to be the case, as headcounts have been increasing across most public sector professions.

Notwithstanding further funding to be allocated, this settlement for public sector pay budgets therefore implies a squeeze for non-pay budgets or a slowdown (or even reductions) in public sector employment growth.

Devolved taxes

Far from being the “Tory trap” feared by some a decade ago, devolved taxes continue to draw significant additional resources into the Welsh budget relative to a scenario in which all taxes remained reserved to the Westminster government.[3] Increases in Welsh tax receipts continue to outpace those in the comparator countries England and Northern Ireland, which mean that growth in devolved tax revenues continues to more than offset the (downward) adjustments to the Welsh block grant to compensate the UK Treasury for this foregone revenue. In 2026-27, the net effect of tax devolution is now positive to the tune of £486 million: an amount which approximates a 1.5 pence increase in income tax rates – despite tax rates remaining unchanged since their devolution. Tax devolution remains by far the strongest win for the Welsh budget over the past decade.

Non-Domestic Rates (NDR) revenues are assumed to grow in line with CPI inflation next year, as the effects of the revaluation come into force. Revenues will also be higher than in 2025-26 as the temporary reliefs for businesses in the retail, leisure and hospitality industries come to an end. However, the Welsh Government has consulted on introducing differential multipliers, aiming to rebalance the system by lowering the rate for small to medium-sized retailers. The final arrangements will be determined in the Welsh Government’s Final Budget, following the UK Government’s Autumn Budget later this year.

Options for a Budget deal

Despite its framing as a ‘neutral’ budget, at just seven months before an election we are now entering the most political stage of the budget cycle. The stakes are high – not only for the incumbent Labour government but for all opposition parties too.

In the budget documents the Finance Secretary clearly expresses his party’s wish that such a deal can be done: “My door therefore remains firmly open to working with other political parties in the Senedd who share my conviction that we have a collective responsibility to pass the Welsh Budget and believe a more ambitious budget could be agreed”. But how likely is it that this ambition can be achieved?

The Labour government’s traditional budget partners have been the Welsh Liberal Democrats and Plaid Cymru. Welsh Lib Dem leader Jane Dodds MS supported the budget last year by abstaining on final passage, but depending on the outcome of the Caerffili byelection her vote alone may be insufficient for the budget to pass in the new year. For Plaid Cymru, strategic calculus will be involved in any decision on what to do, and whether the political advantages of opposing the government before a major election outweigh the advantages of quick wins on party policies that could be presented to the electorate. The votes of two independent MSs are also possible for supporting or abstaining on the budget’s final passage.

The Welsh Conservatives – not normally Welsh Labour’s first point of call for budget deals –  yesterday raised the possibility that the Government might consider some of their own key priorities as part of deal. The key ask was scrapping the Land Transaction Tax for primary residential properties (a policy presumably stemming from Kemi Badenoch’s pledge on Stamp Duty in England and Northern Ireland in her speech to party conference last week). This would cost approximately £200 million next year – or just under 1% of day-to-day spending – and would take up most of the unallocated spending left in the budget.

Meanwhile, Reform UK have said that they would not support a budget that continues to fund the Nation of Sanctuary policy. This spending cut would primarily affect Ukrainians that fled the Russian invasion. At less than 0.05% of Welsh Government spending, in purely budgetary terms this would be amongst the cheapest budget deal asks in the history of devolution.

Future years and the Senedd election

Tabled just seven months before to a likely historic Senedd election, this budget is intrinsically connected with what comes next. The incoming government may have some additional funding to immediately allocate to its priorities, but it will face a very tough outlook for public spending in future years. This is because UK Chancellor Rachel Reeves has substantially frontloaded her plans for public spending.

While day-to-day spending is set to increase by under 2% in real terms next year, increases for 2027-28 and 2028-29 average just 1% per year. Presuming NHS spending continues to grow substantially above this rate, this leaves the prospect of spending cuts for other areas.

What was missing from yesterday’s announcements was the medium-term fiscal planning necessary to deal with this difficult fiscal outlook.[4]

Ahead of the election, we’re likely to hear significant tax and spending commitments by all parties. Those wishing to form the next Welsh Government will also need to think carefully about efficiency and productivity targets; service reforms to improve public service outcomes; devolved taxation levers; and what areas of spending they would prioritise, as well as the areas they would de-prioritise. There’ll be nothing neutral about the answers to these challenges.

[1] We’ll be publishing a full local government spending projection modelling over coming weeks.

[2] https://www.walesonline.co.uk/news/politics/welsh-councils-warn-massive-council-32677039

[3] Owen Smith attacks Welsh income tax proposals as a Tory ‘trap’, WalesOnline 5 Feb 2014. https://www.walesonline.co.uk/news/wales-news/labour-support-devolution-income-tax-6674714

[4] See for example, the Scottish Government’s fiscal sustainability plan: https://www.gov.scot/publications/scottish-governments-fiscal-sustainability-delivery-plan/