{"id":1985,"date":"2025-03-27T10:52:31","date_gmt":"2025-03-27T10:52:31","guid":{"rendered":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/?p=1985"},"modified":"2025-03-27T12:55:51","modified_gmt":"2025-03-27T12:55:51","slug":"spring-statement-2025-some-implications-for-wales","status":"publish","type":"post","link":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/spring-statement-2025-some-implications-for-wales\/","title":{"rendered":"Spring Statement 2025 \u2013 the implications for Wales"},"content":{"rendered":"

By Guto Ifan, Owain Roberts and Ed Gareth Poole<\/em><\/p>\n

With dark economic clouds gathering, the Chancellor decided to cut spending to meet her \u2018iron-clad\u2019 fiscal rules. This blog looks at some of the potential implications for Wales from yesterday\u2019s announcements and published forecasts.<\/p>\n

Fine-tuning the Fiscal Rules<\/strong><\/h4>\n

Back in October, the Chancellor was meeting her pledge not to borrow for day-to-day spending, with a forecasted current budget surplus of \u00a39.9 billion by 2029-30.<\/p>\n

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 \u00a310 billion by the end of the decade. Alongside lower forecast tax receipts, this led to a \u00a314 billion deterioration in the current budget balance (the white circles in Figure 1).<\/p>\n

Figure 1: Changes in current budget deficit since October<\/strong><\/h5>\n
\"\"<\/figure>\n

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\u2019s planning reforms in England will boost the economy by 2029-30.<\/p>\n

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 <\/em>targeted a set of policies to get back to the exact same forecasted current budget surplus of \u00a39.9 billion in 2029-30. Given the huge uncertainty surrounding forecasts, fine-tuning policies \u2013 some with inevitably painful consequences for vulnerable people \u2013 in the pursuit of a single-point target five years out looks slightly silly.<\/p>\n

Welfare changes<\/strong><\/h4>\n

In last week\u2019 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 \u00a350) for new claimants.<\/p>\n

Yesterday\u2019s Spring Statement included further cuts to help meet the Chancellor\u2019s 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 \u00a34.8 billion in welfare spending by 2029-30, while also noting that it didn\u2019t have time to assess the full impact of these reforms.[1]<\/a><\/p>\n

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 <\/em>future recipients also missing out during the forecast period.[2]<\/a> For the affected individuals, losses will average \u00a34,500 per year.[3]<\/a><\/p>\n

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

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] <\/a>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]<\/a> The average per person PIP payment is also slightly higher in Wales, possibly indicating more severe disabilities on average.[7]<\/a> 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.<\/p>\n

Implications for the Welsh budget<\/strong><\/h4>\n

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 \u00a316 million for 2025-26. But beneath the surface there are some potentially significant changes.<\/p>\n

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 \u00a3375 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 \u2013 pencilling in slower spending growth for future years \u2013 this is both politically and budgetarily significant.<\/p>\n

Second, the UK government has cut back on planned departmental day-to-day spending by around \u00a33.6 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 \u00a33.1 billion per year by 2029-30, perhaps reflecting the planned cuts to \u00a0\u2018back office\u2019 departmental administration budgets. There are some additional spending commitments made to non-devolved areas \u2013 such as defence, DWP, HMRC, and Employment Support \u2013 which won\u2019t lead to additional funding for the Welsh Government. Overall, this suggests that yesterday\u2019s 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\u2019s block grant in later years compared to previous forecasts.[8]<\/a><\/p>\n

Third, some funding has been \u2018brought forward\u2019 to earlier years, namely a new \u2018Transformation Fund\u2019 \u2013 a total multiyear pot of \u00a33.25 billion that is expected to distribute \u00a31.8 billion in 2026-27 \u2013 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 \u2018front-loaded\u2019 nature of the UK\u2019s spending plans, with capital budgets also set to start falling again by the end of the decade.<\/p>\n

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\u2019s indicative spending plans published yesterday, we think the Welsh Government\u2019s 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.<\/p>\n

But some (further) good news on Welsh taxes<\/strong><\/h4>\n

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.<\/p>\n

Back in 2016, the Welsh and UK government agreed to a new \u2018Fiscal Framework\u2019 agreement to operationalise the new devolved taxes. \u00a0In 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<\/em> growth in the Welsh income tax base compared with England and Northern Ireland that determines the overall net effect on the Welsh budget.[9]<\/a><\/p>\n

For the first time, the OBR have helpfully published<\/a> the \u2018net tax position\u2019 for Wales. It\u2019s increasingly evident that, at least for the first decade of income tax devolution, this bet has paid off handsomely for the Welsh Government.<\/p>\n

Figure 2: Net effect of income tax devolution on the Welsh Government budget<\/strong><\/h5>\n
\"\"<\/figure>\n

The latest forecasts have increased the positive effect of income tax devolution by another \u00a370 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 \u00a3312 million \u2013 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.<\/p>\n

Conclusion<\/strong><\/h4>\n

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.<\/p>\n

By leaving exactly the same amount of \u2018headroom\u2019 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.<\/p>\n

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\u2019s Spending Review will likely underline the tough fiscal \u2013 and political \u2013 challenges to come.<\/p>\n

 <\/p>\n

[1]<\/a> CP 1289 \u2013 Office for Budget Responsibility \u2013 Economic and fiscal outlook \u2013 March 2025<\/a> (page 151)<\/p>\n

[2]<\/a> Spring Statement 2025 health and disability benefit reforms – Impacts<\/a> (page 9)<\/p>\n

[3]<\/a> Spring Statement 2025 health and disability benefit reforms – Impacts<\/a> (page 4)<\/p>\n

[4]<\/a> Spring Statement 2025 health and disability benefit reforms – Impacts<\/a> (page4)<\/p>\n

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

[6]<\/a> \u2018PIP cases with entitlement\u2019 in Jan 2025 from; Stat-Xplore\u00a0–\u00a0Table View<\/a><\/p>\n

Population estimates by local authority and year<\/a><\/p>\n

[7]<\/a> \u2018PIP cases with entitlement\u2019 in Jan 2025 from; Stat-Xplore\u00a0–\u00a0Table View<\/a><\/p>\n

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

[9]<\/a> Any changes in the income tax rates by the Welsh Government would also have a direct effect on the Welsh budget.<\/p>\n","protected":false},"excerpt":{"rendered":"By Guto Ifan, Owain Roberts and Ed Gareth Poole With dark economic clouds gathering, the Chancellor decided to cut spending to meet her \u2018iron-clad\u2019 fiscal rules. This blog looks at […]","protected":false},"author":1297,"featured_media":1931,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[60,1],"tags":[],"class_list":["post-1985","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","category-uncategorized"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p8iFWs-w1","meta_box":[],"jetpack_featured_media_url":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-content\/uploads\/sites\/509\/2024\/10\/starmer-and-reeves.jpg","_links":{"self":[{"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/posts\/1985","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/users\/1297"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/comments?post=1985"}],"version-history":[{"count":10,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/posts\/1985\/revisions"}],"predecessor-version":[{"id":1997,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/posts\/1985\/revisions\/1997"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/media\/1931"}],"wp:attachment":[{"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/media?parent=1985"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/categories?post=1985"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/wp-json\/wp\/v2\/tags?post=1985"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}