The Welsh Government-Plaid Cymru Budget Agreement – an immediate reaction

On Tuesday 9 December, the Welsh Government and Plaid Cymru reached an agreement on the Budget for 2026-27, which will facilitate its passing through the Senedd in the new year.

This deal appears to prioritise frontline public services and meeting existing spending pressures, rather than funding new spending commitments or policy ‘wins’ usually associated with budget agreements.

This mainly reflects the fact that the ‘inflationary uplifts’ provided in the Draft Budget plans would have been insufficient to meet the spending pressures faced by public services, especially considering the latest forecasts from the Office for Budget Responsibility suggested inflation and pay growth next year would be higher than previously thought.

The deal provides greater certainty for public services next year and crucially avoids the doomsday scenario of massive cuts if the budget didn’t pass.

The local government settlement is the big winner from the budget deal and now looks set to increase by 4.5% in cash terms (2.3% in real terms) next year. That provides greater certainty and a more realistic prospect of meeting uncertain spending pressures next year without excessive Council Tax increases.

To put it in perspective, the additional £113 million is roughly equivalent to what a 5% increase in Council Tax bills would raise for local authority budgets.

As we anticipated, health spending gets the largest part of the unallocated funding. Depending on how the additional funding for the Health and Social Care budget is distributed, core NHS spending looks set to increase by approximately 1.7%-1.8% next year in real terms.[1] This compares with the 0.3% real terms increase implied by the Draft Budget plans and latest inflation forecasts.

From an historical perspective, this is still somewhat lower than recent trends (of 3.3% per year since 2018-19) and the long run historical average growth rate (of 3.6% per year since the 1950s). Further top-ups to may be necessary.

Based on our analysis of improved devolved tax forecasts and consequentials from the Autumn Budget, there is still some further day-to-day spending to be allocated at the Final Budget outside of this deal (perhaps worth some £160 million).

A large part of this funding will go towards the Non-Domestic Rates measures announced on 3 December (worth £112 million over the next two years). It could also be used to avoid real terms cuts in funding to some other areas of spending. However, it may also be needed to bolster funding for public sector pay deals, which are likely to be significantly above the 2.2% assumed in Draft Budget plans.

The Final Budget published in January will provide the full details of this budget deal, as well as the additional allocations made by the Welsh Government.

[1] The eventual change in health spending from this year to next year may actually be lower than this, since additional funding of £100 million to address waiting lists was not included in the ‘baseline’ for 2025-26.