All parties fighting the Senedd election should be ‘more upfront about fiscal reality’

Martin Shipton

While Wales’s main parties’ visions for the next four years differ, they have one thing in common according to a leading think tank: the need to be more upfront about fiscal reality.

Presenting a report at an online event about the Senedd election, David Phillips, head of devolved and local government finance at the Institute for Fiscal Studies (IFS) said: “The outcome of the Senedd election on 7 May is both more uncertain and potentially more consequential than any other in devolution’s 27-year history.

“The major parties’ manifestos do have some things in common. All pledge significant improvements in the NHS, both in hospitals and through a focus on prevention and primary care, but with virtually no detail on how much they would spend. Schools are another focus, with standards, discipline and well-being highlighted by several parties.

“Housing is another battleground, with most parties targeting substantial increases in housebuilding, and some of those on the left planning caps on rents – a policy that experience suggests would help some tenants, but have undesirable consequences too. And, more generally, the cost of living looms large, with parties framing both tax cuts and new entitlements as helping with families’ budgets.

“But the parties also differ in important ways both in terms of broad vision and in terms of specific policy proposals.

“Reform UK and the Welsh Conservatives offer a vision of a lower-tax Wales, with cuts to income tax, business rates and, in the Conservatives’ case, land transaction tax too. Council tax increases above 5% would be subject to local referendums, like in England – although unlike any other tax. And on the spending side of the budget, they would boost investment in roads, with Reform UK saying they would help fund this by reducing investment in cycling and net zero schemes.

“In contrast, Plaid Cymru, the Green Party and the Liberal Democrats propose a significant expansion in the welfare state, with universal free childcare provision from 9 months until age 5. Plaid Cymru would hope to roll out a weekly top-up payment for families with children on universal credit. The Green Party says it would make bus travel free for children and young people, and cap fares at £1 for adults aged 22 to 59 – and it pledges big expansions and improvements to nearly all areas of health and social care.

“Welsh Labour’s proposals clearly align most with the other left-wing and centre-left parties, but are pared back by comparison. It would expand childcare, but to a lesser extent. It would cap bus fares, but at £2 for working-age adults. That would leave more money for existing services than under the other parties’ plans.

“Unfortunately, while differing in their proposals, the major parties have one thing in common: a need to be more upfront about the fiscal challenges facing the next Welsh Government.

“The combination of a slowdown in increases in UK government funding, and growing demands and costs for health and social care, will mean a Welsh budget under significant pressure. The fact that the current Welsh Government has not published spending plans beyond 2026–27 – unlike either the UK or Scottish governments – means that it is not yet clear which services will face cuts. But some will, especially in the first full Welsh budget of the next Senedd term covering 2027–28 – when overall funding will not increase at all, implying particularly deep cuts to other services if the next government wants to boost health spending.

“In this context, neither expansions of the Welsh welfare state without commensurate tax rises, nor definite tax cuts without similarly definite reductions in spending, are fiscally credible. In reality, there would need to be difficult decisions elsewhere in the Welsh budget to square the circle.

“The fiscal holes the parties would need to fill differ: the Greens’ expansive vision of the welfare state would require the most additional revenue or cuts elsewhere; Labour’s more pared-back vision for new entitlements would create the least additional pressure on the budget. The other parties lie somewhere in between. But all parties’ plans would add to the fiscal challenges facing the next Welsh Government, to some extent.

“One can have sympathy with the predicament Wales’s political parties find themselves in. Politics is easier when fiscal conditions allow for spending increases or tax cuts without difficult choices elsewhere. Voters, already unhappy after years of only slow economic growth, a rising cost of living, and public services that have failed to recover from the Covid-19 pandemic, may not warm to a dose of cold, hard fiscal reality. But the next Welsh Government will have to face up to it. And as the current UK government has found out, not preparing the public for difficult choices prior to an election can come back to bite you politically when the electoral dust has settled.”

The parties’ different visions for Wales

The report states: “Reform UK and the Welsh Conservatives put tax cuts at the heart of their manifestos – both to increase take-home pay (especially for higher-income individuals) and to make Wales more attractive to investors. Roads are another priority: they say they would build an M4 relief road around Newport, improve the A55 in North Wales and identify other priority schemes – the A40 in West Wales for the Conservatives and the North–South A470 for Reform UK.

“They share several education policies, with a focus on discipline, testing and league tables. And England is a source of inspiration for other policies: academies and free schools operating outside council control, and referendums for council tax increases above 5%. The Conservatives’ claims to favour a smaller state are stretched a bit, though, when they propose a long list of potentially costly spending increases alongside their tax cuts.

“Plaid Cymru, the Green Party and the Welsh Liberal Democrats are all more upfront about their desire to expand the scope of the welfare state. All propose big expansions of free childcare provision, between 20 and 30 hours for all children aged 9 months until age 5 for 48 weeks a year. The Greens propose free buses for those aged 21 and under and a £1 bus fare cap for those aged 22 to 59.

“Plaid Cymru want to trial and then roll out a £10 per child weekly top-up to universal credit for Welsh families. The Liberal Democrats propose an expansion of nursing care placements to help tackle ‘bed blocking’ in hospitals. Plaid Cymru and the Green Party also propose building more affordable and social housing (5,000 and 6,000 a year, respectively) than Wales has managed to build across all housing types in recent years.

“Welsh Labour’s vision is clearly much more aligned with this ‘left’ bloc than the ‘right’ bloc. But, perhaps reflecting the party’s incumbency, the scale of change proposed is more modest. Its childcare pledge – 12½ hours a week for 39 weeks a year for all children aged 9 to 36 months – would provide less financial support to families, but would also come with a much smaller price tag. £2 bus fares would cost travellers more, but the government less, than £1 fares.

“And its affordable and social housing target – 4,000 a year – would be a little less stretching, although still a step up on recent years. Welsh Labour’s proposals would therefore involve spending less on new support for families, but leave more money for existing services.”

A lack of fiscal realism among all major parties – albeit to different extents

The report states: “But like the other parties, Labour’s plans would still add to the fiscal pressures facing the Welsh budget post-election.

“The Green Party’s plans would create the biggest additional pressures on the budget – with no revenues identified for its sizeable expansion of the Welsh welfare state.

“The Liberal Democrats do raise the possibility of a 1 percentage point increase in income tax rates as an emergency measure to help improve social care services. But their childcare pledge is the most expensive at £600m or more a year, with no information on how this would be paid for.

“The Conservatives’ tax cuts would cost over £500m a year, with extra spending on farming, childcare and partial student loan write-offs for public sector workers adding to the spending side of the ledger too. “Their manifesto says this would be paid for by efficiencies, but little detail is provided – with a reduction in the size of the Senedd back to 60 members paying for just 3% of their tax cuts.

“Each of these three manifestos is perhaps better seen as a wish list for potential coalition arrangements, than as costed plans for government.

“Reform UK have set out more specific cuts to spending than the Conservatives, and point out they would only cut income tax in the final year of the Senedd term, costing £420m in that year. But the spending cuts they have identified cover only part of the ongoing cost of their tax cut from that point on, and capping civil service pay – one of the chunkier contributors to their proposed savings – is not riskless, with the potential to lose experienced staff.

“Plaid Cymru have said their plans, including a £400 million a year expansion of childcare, have been vetted as affordable. But that does not tell us much: many things are affordable, if additional revenue is raised or spending elsewhere cut. Plaid Cymru omit that side of the story. They have pointed to money set to be received as a result of reforms to special educational needs (SEND) provision in England, but recent trends suggest that will almost certainly need to be allocated to the NHS in Wales.

“Welsh Labour’s proposals involve the smallest amount of money for new welfare entitlements – or tax cuts – among the major parties, at least in the short term. From a purely fiscal perspective, that is a less risky approach. Their promise of a £4bn hospital construction programme, if funded in part by private investment in the short term, would squeeze budgets in the 2030s and beyond as service payments for those hospitals became due. But that would also be true if private investment was used to help fund an M4 relief road, as suggested by Reform UK.

“As IFS research has shown, the fiscal situation facing the next Welsh Government will be very challenging. Health and social care spending is currently set to fall in 2026–27 compared with the final budget set for 2025–26: preventing this will require the funding received as a result of SEND reforms in England to be allocated to the NHS in Wales. But that only pushes the pain back until 2027–28, the first full budget of the next Welsh Government. And if the next Welsh Government wanted to increase health and social care spending in line with planned increases in England in 2027–28 and 2028–29 (2.6% in real terms), and protect core funding for councils from cuts, other spending would need to be cut by nearly 5% a year in real terms – even before finding money for tax cuts or new welfare entitlements.

Further devolution would be no panacea for these issues

“Plaid Cymru, the Green Party, Welsh Labour and the Welsh Liberal Democrats all favour at least some further devolution to Wales – the former two as a stepping stone to eventual Welsh independence.

“All four favour the devolution of policing and justice. All bar Labour highlight full devolution of rail, additional tax powers and more borrowing powers as further priorities. Plaid Cymru also want devolution of powers over the benefit system.

“Additional devolution would mean more powers for the Welsh Government. But in itself it is not a panacea for the financial challenges facing the next Welsh Government. Policies and provision could be redesigned, potentially to provide a better fit for Wales. Powers over income tax thresholds as well as rates would make income tax a more flexible tool, for example.

“But new administrative apparatus may need to be set up – for example, to deliver Welsh benefits – potentially increasing costs. And devolution and resulting variation in policy can also increase compliance costs for taxpayers, as well as affecting their behaviour – not always in intended ways. Especially on the tax side, devolution proposals should be assessed on a case-by-case basis.

“Previous IFS research has shown that there is a case for some additional borrowing powers to enable the Welsh and other devolved governments to respond to unexpected events as they arise. But substantial new borrowing powers would potentially be unfair to England – there is no ‘England only’ borrowing, except by councils. And borrowing and public debt are already high in the UK: there may be a case for decentralising more borrowing powers, but not necessarily for increasing the overall amount of borrowing done on behalf of Wales.

“Devolution is therefore not an escape from the inevitable trade-offs over tax and spending. Wales can have lower taxes with a smaller state. It can have a bigger state doing more for its residents, if those residents pay more. It cannot simply borrow to avoid these difficult trade-offs.”