{"id":1940,"date":"2024-12-11T12:34:07","date_gmt":"2024-12-11T12:34:07","guid":{"rendered":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/?p=1940"},"modified":"2024-12-11T12:34:07","modified_gmt":"2024-12-11T12:34:07","slug":"making-sense-of-the-welsh-governments-draft-budget-for-2025-26","status":"publish","type":"post","link":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/making-sense-of-the-welsh-governments-draft-budget-for-2025-26\/","title":{"rendered":"Making sense of the Welsh Government\u2019s Draft Budget for 2025-26"},"content":{"rendered":"

Following Rachel Reeves\u2019 decisions on taxation, spending and borrowing, this was always going to be a \u201cbig\u201d budget. The Welsh Government had significantly more funding to allocate than was expected under previous plans.<\/p>\n

The budget allocates an additional \u00a31.5 billion in resource and capital spending in 2025-26 compared to 2024-25 \u2013 a transformative picture compared to what would have occurred under both main party manifesto plans from the summer.<\/p>\n

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\u2019s budget (2025-26) may be more modest than on first appearance.<\/p>\n

This blog provides some initial thoughts on the budget plans.*<\/p>\n

*Some of this analysis will be inevitably nerdy and technical and comes with some significant caveats (and copious footnotes!).<\/p>\n

What\u2019s included in the 2024-25 baseline?<\/strong><\/h4>\n

In a way, this budget tells us where we\u2019re going, but not how we\u2019re getting there.<\/p>\n

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\u2019s spending will compare to previous years.<\/p>\n

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\u2019t account for in-year funding and transfers.<\/p>\n

Usually, this doesn\u2019t 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 \u00a31.2 billion from the time those Final Budget plans were laid out (see table below).<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Change in resource funding from 2024-25 Final Budget plans<\/strong><\/td>\n<\/tr>\n
 <\/td>\n2024-25<\/strong><\/td>\n<\/tr>\n
Consequentials[1]<\/a><\/td>\n1,113<\/td>\n<\/tr>\n
of which: Spring Budget 2024<\/em><\/td>\n168<\/em><\/td>\n<\/tr>\n
of which: Main Estimates May 2024<\/em><\/td>\n171<\/em><\/td>\n<\/tr>\n
of which: Autumn Budget 2024<\/em><\/td>\n774<\/em><\/td>\n<\/tr>\n
Block Grant Adjustments (October 2024 forecasts)<\/td>\n-21<\/td>\n<\/tr>\n
Change in drawdown from Wales Reserve (from September 2024 1st<\/sup> Suppl. Budget)<\/td>\n39<\/td>\n<\/tr>\n
Change in Devolved Tax revenues (December 2024 forecasts)<\/td>\n78<\/td>\n<\/tr>\n
Estimated total change in resource funding (excl. other transfers from UK government)<\/strong><\/td>\n1,209<\/strong><\/td>\n<\/tr>\n
 <\/td>\n <\/td>\n<\/tr>\n
Baseline adjustments to 2024-25 included in Draft Budget for 2025-26<\/td>\n652<\/td>\n<\/tr>\n
of which: SCAPE costs<\/em><\/td>\n193<\/em><\/td>\n<\/tr>\n
of which: pay costs (implied)<\/em><\/td>\n459<\/em><\/td>\n<\/tr>\n
 <\/td>\n <\/td>\n<\/tr>\n
Additional 2024-25 funding not included in baseline<\/strong><\/td>\n557<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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.<\/p>\n

In the budget documents, day-to-day spending allocations increase by \u00a3959 million in 2025-26, on top of this revised 2024-25 baseline \u2013 or by 2% in real terms. <\/strong><\/p>\n

However, we estimate that there will be approximately an additional \u00a3557 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 \u00a3517 million from 2024-25 to 2025-26.<\/p>\n

This would essentially mean no real terms growth in the size of the day-to-day budget from 2024-25 to 2025-26<\/strong>.[2]<\/a>\u00a0<\/strong><\/p>\n

Why does this matter?<\/strong><\/h4>\n

Perhaps this doesn\u2019t matter a great deal in practical terms \u2013 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<\/strong>.[3]<\/a><\/p>\n

This is because it means the stated growth in 2025-26 spending plans are likely to be overstated<\/strong>.<\/p>\n

To take a very specific example, look at the \u2018Schools Standards\u2019 budget line. The budget narrative states that an \u201cadditional \u00a37.8 million of resource funding will be provided through the Local Authority Education Grant to support schools and help raise schools standards\u201d<\/em>. The detailed Budget Expenditure Lines shows a corresponding increase in this budget from \u00a3160 million in 2024-25 to \u00a3168 million in 2025-26 (a 2.4% increase in real terms).<\/p>\n

However, Cabinet Secretary for Education Lynne Neagle recently announced that \u201c\u00a320 million will be provided to schools and settings through the Schools Standards Grant, boosting this package of support to \u00a3180m in 2024-25.\u201d[4]<\/a><\/p>\n

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

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]<\/a><\/p>\n

How much will capital spending increase?<\/strong><\/h4>\n

Following the UK government budget, the Welsh Government particularly welcomed<\/a> a 7% real terms increase in its capital settlement in a single year.<\/p>\n

However, the increase in the Welsh Government\u2019s capital spending allocations to next year stands at 18%<\/em> in real terms.<\/p>\n

It appears that the 2024-25 baseline used doesn\u2019t include the effect of IFRS16 changes, but the new spending plans for 2025-26 do incorporate these changes.[6]<\/a> We know from the 1st<\/sup> Supplementary Budget published in September that these changes increased Welsh Government capital spending allocations by \u00a3262 million (or \u00a3339 million including a ringfenced reserve).<\/p>\n

This again means that the spending increases from 2024-25 to 2025-26 are overstated.<\/p>\n

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:<\/p>\n

\u201cWe are providing an additional \u00a3175m of capital funding bringing our total capital investment in this Draft Budget to \u00a3614m. This investment will help to maintain and improve the NHS estate infrastructure, as well as investing in new equipment and digital technology.\u201d<\/em><\/p>\n

This would imply a huge 36.6% real terms increase in spending in a single year.<\/p>\n

However, the 2024-25 baseline will increase by \u00a380 million once IFRS16 changes are applied \u2013 leaving an eventual increase of \u00a395 million, or (a still sizeable) 16% increase in real terms.<\/p>\n

How will spending change from 2023-24 to 2025-26? <\/strong><\/h4>\n

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

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.<\/p>\n

Over those two years, the Welsh Government\u2019s day-to-day spending budget in 2025-26 increases by 5% in real terms compared to 2023-24, on a like-for-like basis.<\/p>\n

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.<\/p>\n

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

It\u2019s 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<\/a>, 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.<\/p>\n

What can we say about Welsh Government spending choices?<\/strong><\/h4>\n

As outlined above, the massive in-year changes to the Welsh Budget makes it unusually difficult to analyse spending choices in this Draft Budget.<\/p>\n

With some health warnings, here is some initial analysis of day-to-day spending choices:<\/p>\n