Crisis cuts for Welsh Government spending announced

Martin Shipton

A “hugely challenging” funding crisis made worse by higher than expected inflation is forcing the Welsh Government to make in-year budget cuts so it can make ends meet.

The outlook for next year is potentially even worse, with the UK Government grant for revenue expenditure rising by only 2% and an actual cut of 1% in capital spending.

Inflation

Finance Minister Rebecca Evans told the Senedd: “We are currently in the second year of a three-year financial settlement. Our revenue budget increased by just 5 per cent this year, against inflation running at 8 per cent on average so far this year.

“I am grateful to Cabinet colleagues for working hard in order to address these pressures, caused by the triple impact of inflation, the impact of more than a decade of austerity on public services, and the ongoing consequences of Brexit. These, combined with the UK Government’s economic mismanagement, including the disastrous ‘mini-budget’, have combined to place the devolved Welsh budget under unprecedented pressure.

“As a Cabinet, we have been guided by a number of clear principles in coming to the decisions we have, including protecting frontline services as best we can, supporting households who are hardest hit by the cost-of-living crisis, and prioritising jobs.

“I am pleased to report to the Senedd that through very careful financial management, guided by our principles and values, we have succeeded in putting together a package of financial changes which minimises the impact on people and the Welsh public services upon which they rely, while enabling us to meet our objective to mitigate the extraordinary pressures on our budget.

“As my colleague the Health Minister has set out, the NHS in Wales is facing the toughest financial pressures in recent history. This is because of the impacts of persistently high inflation on costs, including energy and medicines and pay-related pressures, not to mention more than a decade of underfunding of public services by a succession of UK Conservative governments.

“It is also dealing with ongoing Covid-related pressures and rising demand in both planned and emergency care.

“In recognition of these inter-related impacts, through this package of financial changes we will provide an extra £425m to support the NHS this year.

“But despite this additional support, it is clear that health boards will still need to make some extremely difficult decisions both this year and in the next financial year to balance their budgets.

“In addition, we have made a decision to protect the Revenue Support Grant to local authorities, which pays for schools, social care and much else besides, recognising the pressures on those services.

“Rail services are facing significant cost pressures stemming from the pandemic and changing patterns of use. We have been able to increase the budget for Transport for Wales by £125m in this year to safeguard services for passengers and to continue the programme of transformation currently underway.

“We should not underplay the challenges faced by these services, and others beside. But as a Cabinet we have sought to address these as directly as we possibly can in the current financial circumstances. I want to thank our Co-operation Agreement partners in Plaid Cymru for the positive and pragmatic way they have approached this too.

“The package of financial changes we will now implement has a number of components and I will deal with them each in turn.

“Every Ministerial portfolio was asked to make a contribution to meeting the pressures we face on a cross-government basis. To have the minimum impact on services, this has been done by re-prioritising spend and activity as much as possible, rather than cutting programmes as a whole.

“As a result, the departmental changes to revenue budgets in-year are as follows. The changes are broadly proportionate to the size of the departmental budgets as a share of the overall Welsh budget.

“The Education and Welsh Language budget will be revised down by £74.7m.

“The Finance and Local Government (excluding the RSG) budget will be revised down by £28.5m.

“The Economy budget will be revised down by £28.6m.

“The Rural Affairs budget will be revised down by £17.3m.

“The Social Justice budget will be revised down by £7m.

“And the budget for the running costs of the Welsh Government will be revised down by £27.5m.

“Two portfolios will see increases. Health and Social Services budget will increase by £425m which will see investment in the NHS increase year on year.

“The Climate Change budget will increase by £82.6m, which alongside other savings within the portfolio will enable £125m additional funding to Transport for Wales.

“In order to meet our overall pressures, we will also need to make changes to capital budgets.

“The Climate Change capital budget will change by £37.7m.

“The Education and Welsh Language capital budget will change by £40m.

“The Economy capital budget will change by £36.5m.

“The Rural Affairs capital budget will change by £20.2m.

“The Finance and Local Government and Social Justice capital budgets will also change by less than £10m each, with Health and Social Services capital remaining unchanged.

“Taken together, this package should enable us to operate within our overall budget this year, as well as meeting some of the specific pressures faced by our public services as a result of inflation and austerity.

“Turning to the next financial year, I want to be clear with the Senedd. Our revenue budget is set to increase by just 2 per cent and our capital budget will actually fall by 1 per cent. With inflation still stubbornly high, the pressures we have sought to address this year will be even more difficult next year. We will simply not be able to do all the things we will wish to do.

“We will continue to make financial decisions guided by our principles and values, protecting the people of Wales and Welsh public services as much as possible from the current pressures that we face.”

Pressure

It’s clear that the Welsh Government realised the current year was going to be “a tough one” when the initial budget was set in December 2022. It was aware of a number of pressure areas at that point. Its spending power this year is about £900m less than originally thought back in 2021, when preparations for the 2023-24 budget began.

Things have turned out worse than expected. Inflation has stayed higher than it was forecast to be even earlier in the year, and particularly pay inflation in the public sector has been a lot higher than ideally it would have been from a budget management perspective. Newly published ONS data has revealed that public sector pay ran at 6 8% in the period between June and August this year which is the highest since records began over 20 years ago. There has been no additional funding from the UK Government to help with that at all.

Unusually, therefore, the Welsh Government has had to re-plan mid-year to deal with forecast overspends in some of its budgets.

The Welsh Government stresses that this isn’t something it alone is grappling with. The same challenges are being faced in Scotland, Northern Ireland and England, for that matter. The UK Government is calling it a “productivity review”, but it’s the same kind of exercise to find ways of mitigate big pressures on spending.

Challenging

As a result of the challenging situation, the Welsh Government has had to examine its budgets and re-prioritise.

Nevertheless, more money will be spent this year. Additional funding is being made available for health (£425m) and climate change, mainly on rail (£82m). Nevertheless, although there will be additional money, health boards will still need to make some difficult decisions to balance the books throughout the year.

Extra money – up to £100m – will be made available from the Welsh Government’s reserves while retaining a “prudent” level as a contingency.

It’s expected that further consequential funding from Westminster totalling around £150m will become available because of increased spending primarily on NHS pay in England.

Permission is being sought from the Chief Secretary to the Treasury to convert some capital spending into revenue spending – meaning, if agreed, that there will be less money available for capital spending like building schools and more for the cost of keeping services running. This has never been done before by the Welsh Government, although UK Government departments have done so. The Welsh Government wants permission to switch up to £200m in this way, although currently it is looking at £147m.

Reductions have been made to some budgets, either as a result of lower than anticipated demand or the use of additional income through the year, as well as reductions in uncommitted funding. The government has not had to look at cancelling programmes outright. Such budget cuts total around £200m.

Poor managment

Plaid Cymru spokesperson for Finance and Local Government in the Senedd, Peredur Owen Griffiths MS said: “Poor management from the Labour government in Cardiff and an unfair funding formula from Westminster has left the Welsh Government scrambling to fill gaps in already stretched public services.

“Labour have been telling us since August that they’ve been working to address a £900m blackhole in their budget – which is almost 5% of the entire block grant for the current financial year. I’m sure many will be scratching their heads as to how they’ve been able to find an additional £550m now.

“There are vast discrepancies here between the level of initial allocated funding and the actual level of spending. This raises questions over how the figures were derived in the first place. It doesn’t add up.

“Meanwhile, the London parties remain wedded to giving Wales an unfair funding settlement and refuse to give us greater powers over our economy which would allow us to control our finances better.

“Meanwhile, the London parties remain wedded to an unfair funding settlement which leaves Wales at a great disadvantage.

“In light of the changes to their spending commitments, the Labour Government must provide assurance to the public that frontline services will be sufficiently supported, especially with the inevitable challenges to come through the winter months.

“Adding to the shortfall in the NHS will put extra pressure on health boards to break even and must raise questions as to whether the government expects the escalated levels of government intervention to be a long-term feature – adding to the pressure being felt by our health service. We must protect such services, particularly for those vulnerable communities that rely upon them.”

Accountable

Secretary of State for Wales David T.C. Davies said: “The Welsh Government is responsible for its own spending choices on devolved matters and is held accountable by the Senedd for those decisions.

“This includes spending £33m on a blanket 20mph speed limit and £120m on more Members of the Senedd.

“For our part, we are providing Wales with the largest funding settlement in the history of devolution – £18bn per year, which is increasing in real terms over the 2021 Spending Review period. This amounts to around £120 per person for every £100 per person of equivalent UK Government spending in England, helping it to meet its devolved responsibilities.”

The UK Government made further points:

* As a result of UK Government tax and spending decisions, devolved administration funding is increasing by around £3.4bn over 2023-24 and 24-25 – around £1.2bn of which is for the Welsh Government.

* Wales has benefitted more than other areas of the UK in spending per head as a result of two rounds of direct Levelling Up funding announced by the UK Government.

* Every part of Wales is now covered by four Growth Deals – North Wales, Mid Wales, Swansea Bay and Cardiff Capital Region – which are key to our levelling up ambitions. The UK government is investing £790m into the Growth Deals alongside local authorities to help rebalance the Welsh economy.

* Rail: The UK Government has also provided over £390m of investment in Welsh rail and has just announced a £1bn plan for electrification of the North Wales main line. The UK Government is responsible for heavy rail investment across England and Wales, so spends money directly in Wales rather than funding the Welsh Government to do so. As we shift our focus to local transport alternatives in England, the Barnett formula will apply for the Welsh Government.

* Coal tips: Responsibility for coal tip safety is devolved. The Welsh Government is more than adequately funded to manage the costs of its responsibilities. The Welsh Government has a record funding settlement of more than £18bn a year. It is for the Welsh Government to determine how its budget is spent across its devolved responsibilities, including coal tip repairs.

* Cost of living: The best way we can help families and support growth across Wales is to have low inflation which is why we’re sticking to our plan to halve it this year – something which the majority of major forecasters expect us to do. In the meantime, the Government is providing a second round of additional Cost of Living Payments of up to £900 for low-income households in receipt of a qualifying means-tested benefit over 2023/2024 which will benefit up to 422,000 households in Wales.

* 456,000 pensioner households in Wales are also estimated to receive a £300 Cost of Living Payment with their normal Winter Fuel payment and 433,000 disabled people in Wales were estimated to receive a Disability Cost of Living Payment in the summer.

* We have also raised benefits – including Universal Credit – by 10.1% this year and are committed to raising the National Living Wage again.