Spring Statement 2025 – the implications for Wales

By Guto Ifan, Owain Roberts and Ed Gareth Poole

With dark economic clouds gathering, the Chancellor decided to cut spending to meet her ‘iron-clad’ fiscal rules. This blog looks at some of the potential implications for Wales from yesterday’s announcements and published forecasts.

Fine-tuning the Fiscal Rules

Back in October, the Chancellor was meeting her pledge not to borrow for day-to-day spending, with a forecasted current budget surplus of £9.9 billion by 2029-30.

As anticipated, the underlying forecasts for the public finances have worsened. This was mainly driven by higher forecast debt interest spending, with higher market interest rates raising the cost of servicing government debt by just over £10 billion by the end of the decade. Alongside lower forecast tax receipts, this led to a £14 billion deterioration in the current budget balance (the white circles in Figure 1).

Figure 1: Changes in current budget deficit since October

In response, the Chancellor has made substantial cuts to public spending in later years of the forecast, most notably to incapacity and disability benefits as well as day-to-day departmental spending. There are also some increases in tax revenues from tax compliance measures, allowing additional Council Tax increases in England and increases to passport and visa fees. The OBR also judged that the government’s planning reforms in England will boost the economy by 2029-30.

All in all, there is almost no change in the forecast current budget balance in 2029-30 compared to October (the black diamonds in Figure 1). The Chancellor has seemingly precisely targeted a set of policies to get back to the exact same forecasted current budget surplus of £9.9 billion in 2029-30. Given the huge uncertainty surrounding forecasts, fine-tuning policies – some with inevitably painful consequences for vulnerable people – in the pursuit of a single-point target five years out looks slightly silly.

Welfare changes

In last week’ Pathways to Work Green Paper, Secretary of State for Work and Pensions Liz Kendall announced cuts to sickness and disability benefits payments. These included: increasing the threshold of disability severity needed to be awarded Personal Independence Payments (PIP); removal of the Universal Credit Health related top ups for those under 22; and halving of the Universal Credit health related top up (down to £50) for new claimants.

Yesterday’s Spring Statement included further cuts to help meet the Chancellor’s self-imposed fiscal targets; namely, a reduction in the previously stated amount that standard Universal Credit would rise by, and a freezing of the Universal Credit health element for new claimants (which had already been frozen for current recipients). After incorporating the additional cuts, the OBR estimated a reduction of £4.8 billion in welfare spending by 2029-30, while also noting that it didn’t have time to assess the full impact of these reforms.[1]

These cuts will have huge and concentrated effects. The changes to PIP (the largest contributor to the overall saving), is estimated to cause 370,000 current recipients to lose entitlement, with a further 430,000 would-be future recipients also missing out during the forecast period.[2] For the affected individuals, losses will average £4,500 per year.[3]

The impact assessment suggests that the reforms will push a further 250,000 people, including 50,000 children, into relative poverty. [4]

Across Wales, there are 275,000 people who receive the PIP and 110,000 people who receive Universal Credit and have Limited Capability for Work Related Activity.[5] Because of the higher proportion of the working age population receiving PIP in Wales (11%, compared with 7% in England), we would expect the impact of these cuts to be particularly pronounced in Wales.[6] The average per person PIP payment is also slightly higher in Wales, possibly indicating more severe disabilities on average.[7] We would expect to see the greatest impact in areas which have the highest claimant proportions and relatively low average per person payments, areas such as Merthyr Tydfil and Blaenau Gwent.

Implications for the Welsh budget

On the face of it, the statement had little direct consequences for the Welsh Government budget. Additional funding from the usual operation of the Barnett formula amounts to just £16 million for 2025-26. But beneath the surface there are some potentially significant changes.

First, inflation this year (as measured by the GDP deflator) is now estimated at 3.8%, rather than the previously forecast 2.4%. As with the post-pandemic inflationary pressures, higher inflation erodes the real terms value of the settlement the Welsh Government receivess. Although we previously expected the Welsh Government budget for day-to-day spending to increase by approximately 5% from 2023-24 to 2025-26 (on a broadly like-for-like basis), that will now be closer to 3% over two years. Simply put, it would require an additional £375 million next year to restore the real terms spending power of the Welsh Government caused by this inflationary pressure alone. Given the UK government previously prioritised a short-term cash injection for public services – pencilling in slower spending growth for future years – this is both politically and budgetarily significant.

Second, the UK government has cut back on planned departmental day-to-day spending by around £3.6 billion in 2029-30. This mainly reflects cuts to aid spending, which has shifted to more capital-intensive defence spending. In later years, there are unspecified cuts of £3.1 billion per year by 2029-30, perhaps reflecting the planned cuts to  ‘back office’ departmental administration budgets. There are some additional spending commitments made to non-devolved areas – such as defence, DWP, HMRC, and Employment Support – which won’t lead to additional funding for the Welsh Government. Overall, this suggests that yesterday’s announcements will result in tighter Welsh Government budgets by the end of the decade. This is also suggested by the significant reductions to the Scottish Government’s block grant in later years compared to previous forecasts.[8]

Third, some funding has been ‘brought forward’ to earlier years, namely a new ‘Transformation Fund’ – a total multiyear pot of £3.25 billion that is expected to distribute £1.8 billion in 2026-27 – alongside other unspecified announcements. This perhaps slightly improves the outlook for the 2026-27 Welsh Government budget that will need to pass through the Senedd a few months before the May 2026 elections. But this magnifies the ‘front-loaded’ nature of the UK’s spending plans, with capital budgets also set to start falling again by the end of the decade.

Future Welsh Government block grants for years beyond 2025-26 will be confirmed at the Spending Review in June, which will clarify the overall picture. But based on the UK government’s indicative spending plans published yesterday, we think the Welsh Government’s day-to-day spending could grow by approximately 1.4% per year in real terms on average over the three-year Spending Review period (2026-27 to 2028-29). To put this in context, if the Welsh Government decided to increase NHS spending in line with the long-run historical average (3.6% per year in real terms), this would require cuts of 0.8% per year to all other spending areas. Although this would not be on the same scale as the cuts implemented in the early 2010s, it would continue the trend in non-NHS spending under Conservative-led UK administrations from 2010-11 to 2023-24.

But some (further) good news on Welsh taxes

When the Welsh Government took on responsibility for devolved income tax, it was essentially taking on a bet. If revenues grew faster than the amounts taken away from the block grant, its budget would be better off. If revenues fell behind these Block Grant Adjustments (BGAs), however, the Welsh budget would be cut.

Back in 2016, the Welsh and UK government agreed to a new ‘Fiscal Framework’ agreement to operationalise the new devolved taxes.  In this agreement, the adjustments to the Welsh block grant are linked to the performance of comparable UK government revenues in England and Northern Ireland (Scottish taxes were already devolved). What this means is that it is the relative growth in the Welsh income tax base compared with England and Northern Ireland that determines the overall net effect on the Welsh budget.[9]

For the first time, the OBR have helpfully published the ‘net tax position’ for Wales. It’s increasingly evident that, at least for the first decade of income tax devolution, this bet has paid off handsomely for the Welsh Government.

Figure 2: Net effect of income tax devolution on the Welsh Government budget

The latest forecasts have increased the positive effect of income tax devolution by another £70 million per year on average from 2023-24 to 2029-30, relative to the October 2024 forecast. For the next Welsh Government budget in 2026-27, devolved income tax revenues are set to outpace the block grant adjustment by £312 million – in other words, the rates of growth in Welsh taxes continues to outpace those in England and Northern Ireland. Alongside likely positive reconciliations for previous forecast errors, this is a boost to the Welsh budget similar in size to a 1p increase in income tax.

Conclusion

Labour banked on economic growth as the key to avoid having to break otherwise incompatible promises on taxes, austerity and the fiscal rules. The pitfalls of this approach have been once again laid bare.

By leaving exactly the same amount of ‘headroom’ against the fiscal targets in four years time, the Chancellor once again risks having to make further difficult decisions later in the year. Given the state of the UK economy and the darkening clouds of the Trump tariff wars, she will have to be very lucky to avoid having to raise taxes or make further spending cuts to continue meeting the fiscal targets in the Autumn.

For the Welsh Government, some front-loading of spending and continued good news on devolved taxes has somewhat improved the outlook for the 2026-27 Draft Budget it will set later this year. However, this summer’s Spending Review will likely underline the tough fiscal – and political – challenges to come.

[1] CP 1289 – Office for Budget Responsibility – Economic and fiscal outlook – March 2025 (page 151)

[2] Spring Statement 2025 health and disability benefit reforms – Impacts (page 9)

[3] Spring Statement 2025 health and disability benefit reforms – Impacts (page 4)

[4] Spring Statement 2025 health and disability benefit reforms – Impacts (page4)

[5] See also: https://www.bevanfoundation.org/news/2025/03/bevan-foundation-responds-to-green-paper-on-benefits/

[6] ‘PIP cases with entitlement’ in Jan 2025 from; Stat-Xplore – Table View

Population estimates by local authority and year

[7] ‘PIP cases with entitlement’ in Jan 2025 from; Stat-Xplore – Table View

[8] Equivalent forecasts of the Welsh block grant are not produced by the Office for Budget Responsibility. See this analysis by the Fraser of Allander Institute on the changes to the Scottish Government budget.

[9] Any changes in the income tax rates by the Welsh Government would also have a direct effect on the Welsh budget.