The Welsh Government made significant commitments to support businesses and large additional allocations for the NHS and local government. However, these spending plans may fall short of the spending pressures faced by public services over coming years and sets a difficult outlook for public sector pay in particular.<\/p>\n
This blog provides some initial analysis of the additional allocations made by the Welsh Government and the implications for Welsh public services.<\/p>\n
Changes in funding for day-to-day spending<\/strong><\/h3>\nThe economic and fiscal outlook has changed dramatically since the Welsh Government set out indicative three-year spending plans for years 2022-23 to 2024-25 in December 2021.<\/p>\n
The Welsh Government claims the settlement could be worth up to \u00a33 billion less in real terms over the three years covered by the Spending Review, though the exact loss depends on the measure of inflation used. One of the reasons cost increases will be lower than this amount is that public sector pay (which accounts for over half of day-to-day spending) will likely be held down in real terms.<\/p>\n
Figure 1<\/strong> shows the changes in Welsh Government funding for 2023-24, as well as the how this additional funding was allocated.<\/p>\nAt the Autumn Statement last month, the UK government topped-up its spending plans in England, which resulted in a further \u00a3666 million in resource funding for the Welsh Government in 2023-24 and \u00a3509 million in 2024-25.<\/p>\n
Changes to devolved tax forecasts and associated block grant adjustments have a positive net effect on spending in 2023-24 (see page 17 here<\/a> for discussion). The Welsh Government increased its planned drawdown from the Wales Reserve by \u00a316 million in 2023-24 to \u00a338 million.[1]<\/a> There were also positive underlying changes to forecast revenues from Non-Domestic Rates in 2023-24.[2]<\/a><\/p>\nDespite the challenging outlook for the budget, the Welsh Government did not change the Welsh Rates of Income Tax, in line with the commitment not to do so \u201cas long as the economic impact of Covid-19 lasts\u201d. A 1p rise across the three Welsh Rates of Income Tax would have raised \u00a3273 million<\/a> next year, in a broadly progressive manner.<\/p>\nThe fact this option wasn\u2019t taken at one of the toughest budgets since devolution may raise questions about the usability of these powers \u2013 notably the lack of powers over thresholds which could protect lower earners from tax rises.<\/p>\n
The Welsh Government undertook a reprioritisation exercise to release funding from within existing plans, which amounts to \u00a387.4 million in 2023-24.<\/p>\n
Figure 1: Changes in funding and allocations for day-to-day spending plans for 2023-24<\/strong><\/h5>\n\n![\"\"](\"http:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-content\/uploads\/sites\/509\/2022\/12\/Figure-1.png\")
<\/figure>\n<\/figure>\nSource: Wales Fiscal Analysis calculations based on Welsh Government Draft Budget for 2023-24. Notes: changes exclude the effects of IFRS16 accounting changes. <\/em><\/h6>\nAlso affecting the Welsh Government\u2019s funding for day-to-day spending was the package of support for businesses through the Non-Domestic Rates system, worth more than \u00a3460 million over the next two years (\u00a3319 million in 2023-24). The measures broadly followed UK government announcements for England last month, which triggered additional funding for the Welsh Government.<\/p>\n
These include freezing the multiplier used to calculate liabilities in 2023-24 (at a cost of \u00a3200 million over the next two years); providing transitional relief for businesses facing a \u00a3300+ increase in their rates because of revaluation (\u00a3113 million over two years); and funding a 75% relief for retail, leisure, and hospitality premises in Wales in 2023-24 (capped at \u00a3110,000 per business).<\/p>\n
The apparent cliff-edge that loomed for these sectors as the last of the Covid-19 reliefs was set to expire has been averted. As it stands, non-domestic actors in other sectors, including the public sector, still face large increases to their energy bills when the UK government\u2019s cap expires in April.<\/p>\n
Additional spending allocations<\/strong><\/h3>\nAs a result of the various funding changes described above, the Welsh Government\u2019s budget for day-to-day spending will increase by an average of 0.8% per year in real terms between 2022-23 and 2024-25 \u2212 on a per person basis, this increase only amounts to 0.5%.<\/p>\n
Relative to initial spending plans, the Welsh Government had an additional \u00a3487 million to allocate to its spending plans in 2023-24 and a further \u00a3511 million to allocate in 2024-25. These additional allocations are shown in Figure 2<\/strong>.<\/p>\nFigure 2: Additional allocations for day-to-day spending in 2023-24 and 2024-25 (change from 2022-23 Final Budget allocations)<\/strong><\/h5>\n![\"\"](\"http:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-content\/uploads\/sites\/509\/2022\/12\/Figure-2.png\")
<\/figure>\nSource: Wales Fiscal Analysis based on Welsh Government Draft Budget for 2023-24 and Final Budget for 2022-23. NHS spending refers to Budget Expenditure Lines under \u201cDeliver of Core NHS Services\u201d (less non cash elements) and \u201cDelivery of Targeted NHS Services\u201d (less \u201cA Healthier Wales\u201d spending). This figure differs slightly from Figure 2.6 of the Welsh Budget Outlook report: the baseline is taken from Final Budget 2022-23 rather than the 1st<\/sup> Supplementary Budget; and non cash elements of NHS spending were previously unavailable in budget documents and were estimates only.<\/em><\/h6>\nAn additional allocation of \u00a3165 million was made to NHS spending in both 2023-24 and 2024-25, broadly in line with the additional consequentials received from higher health spending in England at the Autumn Statement. Spending on core NHS services is set to increase by \u00a3415 million next year and by \u00a3615 million by 2024-25.<\/p>\n
Despite this additional funding, spending plans remain significantly below what was initially set out in real terms. Original plans implied an average increase of 2.7% per year in real terms over the three years of the spending review period (from 2021-22 to 2024-25). This average increase is now set to be 2.4% per year, significantly below historical average increases in health spending.<\/p>\n
Given the increased cost pressures faced by the NHS, this means spending will likely fall short of the funding pressures felt by the health service in the aftermath of the pandemic. The additional funding is unlikely to address the lasting blow Covid-19<\/a> has dealt to the capacity of the NHS.<\/p>\nMeanwhile, local government was a relative \u2018winner\u2019 from the Draft Budget \u2013 an additional \u00a3227m has been added to the settlement next year (more than doubling the planned increase in funding), and an additional \u00a3268m has been added in 2024-25.<\/p>\n
Figure 3<\/strong> puts this increase in funding in an historical context. Under these new plans, local authority funding in 2024-25 will remain 1.5% short of its 2010-11 high. This is nevertheless an improvement on plans set out last year, which would have seen funding levels remain 6.6% below their 2010-11 peak after accounting for now-higher levels of inflation.<\/p>\nThis additional funding will alleviate the most acute cost pressures faced by councils over the next two years. But it is still likely to fall short of the amount required to absorb all inflationary and demand pressures (see chapter 3 here<\/a>) \u2212 potentially paving the way for large council tax increases next April.<\/p>\nFigure 3: Welsh Government funding for local authorities (excluding specific grants), 2022-23 prices<\/strong><\/h5>\n![\"\"](\"http:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-content\/uploads\/sites\/509\/2022\/12\/Figure-3.png\")
<\/figure>\nOutside these two areas of spending, the Welsh Government allocated an additional \u00a395 million on top of original spending plans (net of reprioritised funding).<\/p>\n
The Welsh Government made allocations to support those affected by the cost-of-living crisis in 2023-24. These allocations included a \u00a318.8 million allocation to the Discretionary Assistance Fund (which provides emergency support payments and support in kind) and \u00a39 million to the Pupil Development Grant. These allocations fall short of the significant cost-of-living measures which the Welsh Government were able to make in budgets for 2021-22 and 2022-23 (see Figure A1 here<\/a>).<\/p>\nOther significant allocations include \u00a340 million in 2023-24 and \u00a320 million in 2024-25 to support the response to the crisis in Ukraine, \u00a340 million to support public transport services, and \u00a318 million for apprenticeships.<\/p>\n
Overall, spending outside of the NHS and local government will fall in real terms next year. Many areas of the budget not receiving additional allocations will feel the full impact of the increase in inflation over coming years.<\/p>\n
Future pressures <\/strong><\/h3>\nAfter receiving no additional funding for capital spending at the Autumn Statement, the Welsh Government was not able to top up its investment plans and mitigate the impact of higher inflation. The value of the capital budget is set to fall by 8% in real terms by 2024-25 \u2013 with further real terms cuts pencilled in by the UK government thereafter.<\/p>\n
Capital borrowing is set to become more expensive, with the assumption of a 3% interest rate on borrowing in 2022-23 (up from 1.2%) and 3.7% in 2023-24. However, repayments are likely to remain relatively low as a share of the budget given tight borrowing limits.<\/p>\n
Based on the UK government\u2019s indicative spending plans, the outlook beyond 2024-25 also looks austere for day-to-day spending, with the Welsh Government expecting low levels of per person funding increases to continue to 2027-28. The Welsh Government will hope those plans \u2013 set for the period after the next UK General Election \u2013 will eventually change.<\/p>\n
Perhaps the biggest omission from the Welsh budget narrative was a clear plan for public sector pay over coming years. There was acknowledgement that the real terms pay squeeze is much more intense in the public sector, but there was no indication of whether the Welsh Government would (or could) go beyond current pay offers.<\/p>\n
As we outlined in our budget outlook report<\/a>, the current pay offers represent a significant source of additional spending pressures for public services, even though they imply a 7% real terms pay cut for most public sector employees over two years.<\/p>\nFor example, most of the additional NHS spending allocated at the Draft Budget will go towards meeting higher-than-expected pay deals. We estimate that the current pay offers this year (of around 5%) and a 3.5% increase next year would add \u00a3141 million more to the NHS pay bill than would originally have been budgeted for in 2023-24.[3]<\/a> However, these pay deals still risk further industrial action as well as recruitment and retention issues.<\/p>\nThe Welsh Government will argue that its hands are tied by a UK government-determined settlement and that it followed the recommendations of independent pay review bodies. The Draft Budget will set the context for those recommendations. With inflation likely to remain elevated for another year, public sector pay will be a source of strain on these spending plans over coming years.<\/p>\n
<\/p>\n
[1]<\/a> This means a further \u00a387 million could be drawn-down from the Wales Reserve to meet in-year pressures.<\/p>\n
At the Autumn Statement last month, the UK government topped-up its spending plans in England, which resulted in a further \u00a3666 million in resource funding for the Welsh Government in 2023-24 and \u00a3509 million in 2024-25.<\/p>\n
Changes to devolved tax forecasts and associated block grant adjustments have a positive net effect on spending in 2023-24 (see page 17 here<\/a> for discussion). The Welsh Government increased its planned drawdown from the Wales Reserve by \u00a316 million in 2023-24 to \u00a338 million.[1]<\/a> There were also positive underlying changes to forecast revenues from Non-Domestic Rates in 2023-24.[2]<\/a><\/p>\n Despite the challenging outlook for the budget, the Welsh Government did not change the Welsh Rates of Income Tax, in line with the commitment not to do so \u201cas long as the economic impact of Covid-19 lasts\u201d. A 1p rise across the three Welsh Rates of Income Tax would have raised \u00a3273 million<\/a> next year, in a broadly progressive manner.<\/p>\n The fact this option wasn\u2019t taken at one of the toughest budgets since devolution may raise questions about the usability of these powers \u2013 notably the lack of powers over thresholds which could protect lower earners from tax rises.<\/p>\n The Welsh Government undertook a reprioritisation exercise to release funding from within existing plans, which amounts to \u00a387.4 million in 2023-24.<\/p>\n Also affecting the Welsh Government\u2019s funding for day-to-day spending was the package of support for businesses through the Non-Domestic Rates system, worth more than \u00a3460 million over the next two years (\u00a3319 million in 2023-24). The measures broadly followed UK government announcements for England last month, which triggered additional funding for the Welsh Government.<\/p>\n These include freezing the multiplier used to calculate liabilities in 2023-24 (at a cost of \u00a3200 million over the next two years); providing transitional relief for businesses facing a \u00a3300+ increase in their rates because of revaluation (\u00a3113 million over two years); and funding a 75% relief for retail, leisure, and hospitality premises in Wales in 2023-24 (capped at \u00a3110,000 per business).<\/p>\n The apparent cliff-edge that loomed for these sectors as the last of the Covid-19 reliefs was set to expire has been averted. As it stands, non-domestic actors in other sectors, including the public sector, still face large increases to their energy bills when the UK government\u2019s cap expires in April.<\/p>\n As a result of the various funding changes described above, the Welsh Government\u2019s budget for day-to-day spending will increase by an average of 0.8% per year in real terms between 2022-23 and 2024-25 \u2212 on a per person basis, this increase only amounts to 0.5%.<\/p>\n Relative to initial spending plans, the Welsh Government had an additional \u00a3487 million to allocate to its spending plans in 2023-24 and a further \u00a3511 million to allocate in 2024-25. These additional allocations are shown in Figure 2<\/strong>.<\/p>\n An additional allocation of \u00a3165 million was made to NHS spending in both 2023-24 and 2024-25, broadly in line with the additional consequentials received from higher health spending in England at the Autumn Statement. Spending on core NHS services is set to increase by \u00a3415 million next year and by \u00a3615 million by 2024-25.<\/p>\n Despite this additional funding, spending plans remain significantly below what was initially set out in real terms. Original plans implied an average increase of 2.7% per year in real terms over the three years of the spending review period (from 2021-22 to 2024-25). This average increase is now set to be 2.4% per year, significantly below historical average increases in health spending.<\/p>\n Given the increased cost pressures faced by the NHS, this means spending will likely fall short of the funding pressures felt by the health service in the aftermath of the pandemic. The additional funding is unlikely to address the lasting blow Covid-19<\/a> has dealt to the capacity of the NHS.<\/p>\n Meanwhile, local government was a relative \u2018winner\u2019 from the Draft Budget \u2013 an additional \u00a3227m has been added to the settlement next year (more than doubling the planned increase in funding), and an additional \u00a3268m has been added in 2024-25.<\/p>\n Figure 3<\/strong> puts this increase in funding in an historical context. Under these new plans, local authority funding in 2024-25 will remain 1.5% short of its 2010-11 high. This is nevertheless an improvement on plans set out last year, which would have seen funding levels remain 6.6% below their 2010-11 peak after accounting for now-higher levels of inflation.<\/p>\n This additional funding will alleviate the most acute cost pressures faced by councils over the next two years. But it is still likely to fall short of the amount required to absorb all inflationary and demand pressures (see chapter 3 here<\/a>) \u2212 potentially paving the way for large council tax increases next April.<\/p>\n Outside these two areas of spending, the Welsh Government allocated an additional \u00a395 million on top of original spending plans (net of reprioritised funding).<\/p>\n The Welsh Government made allocations to support those affected by the cost-of-living crisis in 2023-24. These allocations included a \u00a318.8 million allocation to the Discretionary Assistance Fund (which provides emergency support payments and support in kind) and \u00a39 million to the Pupil Development Grant. These allocations fall short of the significant cost-of-living measures which the Welsh Government were able to make in budgets for 2021-22 and 2022-23 (see Figure A1 here<\/a>).<\/p>\n Other significant allocations include \u00a340 million in 2023-24 and \u00a320 million in 2024-25 to support the response to the crisis in Ukraine, \u00a340 million to support public transport services, and \u00a318 million for apprenticeships.<\/p>\n Overall, spending outside of the NHS and local government will fall in real terms next year. Many areas of the budget not receiving additional allocations will feel the full impact of the increase in inflation over coming years.<\/p>\n After receiving no additional funding for capital spending at the Autumn Statement, the Welsh Government was not able to top up its investment plans and mitigate the impact of higher inflation. The value of the capital budget is set to fall by 8% in real terms by 2024-25 \u2013 with further real terms cuts pencilled in by the UK government thereafter.<\/p>\n Capital borrowing is set to become more expensive, with the assumption of a 3% interest rate on borrowing in 2022-23 (up from 1.2%) and 3.7% in 2023-24. However, repayments are likely to remain relatively low as a share of the budget given tight borrowing limits.<\/p>\n Based on the UK government\u2019s indicative spending plans, the outlook beyond 2024-25 also looks austere for day-to-day spending, with the Welsh Government expecting low levels of per person funding increases to continue to 2027-28. The Welsh Government will hope those plans \u2013 set for the period after the next UK General Election \u2013 will eventually change.<\/p>\n Perhaps the biggest omission from the Welsh budget narrative was a clear plan for public sector pay over coming years. There was acknowledgement that the real terms pay squeeze is much more intense in the public sector, but there was no indication of whether the Welsh Government would (or could) go beyond current pay offers.<\/p>\n As we outlined in our budget outlook report<\/a>, the current pay offers represent a significant source of additional spending pressures for public services, even though they imply a 7% real terms pay cut for most public sector employees over two years.<\/p>\n For example, most of the additional NHS spending allocated at the Draft Budget will go towards meeting higher-than-expected pay deals. We estimate that the current pay offers this year (of around 5%) and a 3.5% increase next year would add \u00a3141 million more to the NHS pay bill than would originally have been budgeted for in 2023-24.[3]<\/a> However, these pay deals still risk further industrial action as well as recruitment and retention issues.<\/p>\n The Welsh Government will argue that its hands are tied by a UK government-determined settlement and that it followed the recommendations of independent pay review bodies. The Draft Budget will set the context for those recommendations. With inflation likely to remain elevated for another year, public sector pay will be a source of strain on these spending plans over coming years.<\/p>\n <\/p>\n [1]<\/a> This means a further \u00a387 million could be drawn-down from the Wales Reserve to meet in-year pressures.<\/p>\nFigure 1: Changes in funding and allocations for day-to-day spending plans for 2023-24<\/strong><\/h5>\n
<\/figure>\n<\/figure>\nSource: Wales Fiscal Analysis calculations based on Welsh Government Draft Budget for 2023-24. Notes: changes exclude the effects of IFRS16 accounting changes. <\/em><\/h6>\n
Additional spending allocations<\/strong><\/h3>\n
Figure 2: Additional allocations for day-to-day spending in 2023-24 and 2024-25 (change from 2022-23 Final Budget allocations)<\/strong><\/h5>\n
<\/figure>\nSource: Wales Fiscal Analysis based on Welsh Government Draft Budget for 2023-24 and Final Budget for 2022-23. NHS spending refers to Budget Expenditure Lines under \u201cDeliver of Core NHS Services\u201d (less non cash elements) and \u201cDelivery of Targeted NHS Services\u201d (less \u201cA Healthier Wales\u201d spending). This figure differs slightly from Figure 2.6 of the Welsh Budget Outlook report: the baseline is taken from Final Budget 2022-23 rather than the 1st<\/sup> Supplementary Budget; and non cash elements of NHS spending were previously unavailable in budget documents and were estimates only.<\/em><\/h6>\n
Figure 3: Welsh Government funding for local authorities (excluding specific grants), 2022-23 prices<\/strong><\/h5>\n
<\/figure>\nFuture pressures <\/strong><\/h3>\n