Growth in Welsh Government’s Budget lower under Labour than under the previous Tory UK Government

Martin Shipton

Fiscal analysts at a university think tank have concluded that the implications of the UK Spending Review for Wales are bleak, with the Welsh Government’s budget growing at a lower rate than under the previous Tory administration.

Researchers Guto Ifan, Owain Cynfab and Ed Gareth Poole of Cardiff University’s Wales Governance Centre say on their Wales Fiscal Analysis blog: “While the announcement of rail funding dominated the headlines in Wales, the Spending Review provided crucial detail on the outlook for Welsh Government spending. This will set the fiscal context for next year’s Senedd election and much of the preceding political debate.

“The return to a multi-year spending review provides welcome clarity on the medium-term outlook for the Welsh Government budget. The block grants for day-to-day spending have now been set to 2028-29 and the capital block grants up to 2029-30. Crucially, this will provide a firmer basis for assessing party manifesto plans at next year’s election.

“The block grant for day-to-day spending will grow by around 1.2% per year in real terms on average from this year to 2028-29. After accounting for faster growth in devolved taxes – relative to the corresponding Block Grant Adjustments – we estimate that day-to-day spending will grow by approximately 1.4% per year in real terms on average.

“Meanwhile, the capital block grant will grow again in real terms next year, before falling quite significantly over subsequent years. Overall, the capital block grant will be approximately 3.6% lower in 2029-30 than in 2025-26.”

Choices

Setting out the choices facing the Welsh Government, the analysts state:

“The UK government plans to increase day-to-day spending on the NHS in England by 3% per year in real terms over the next three years. This has triggered the lion’s share of additional funding for the Welsh Government: we estimate that consequentials deriving from NHS and schools spending in England equate to around 91% of the additional funding announced for the Welsh Government in 2028-29.

“Passing on these consequentials to equivalent services in Wales would still leave NHS funding growing at below its long run historical average (3.6%). But this would still see other services facing tight budgets over coming years, leaving them – at best – flat in real terms.

“Following the pattern of recent years, the funding is also frontloaded, with faster growth in spending in 2026-27 followed by leaner budgets in 2027-28 and 2028-29.

“This is good news for the current Cabinet Secretary for Finance [Mark Drakeford], who may be able to avoid having to cut services in next year’s budget, which will need to pass through the Senedd a matter of months before the election.

“It’s worse news for whoever is Cabinet Secretary after the election, who could face the prospect of having to cut non-NHS spending by 1.4% per year in real terms in 2027-28 and 2028-29.

“The Spending Review calls the block grant settlement ‘the largest settlement in real terms since devolution in 1998’. Given the propensity of public spending to grow over time, this is not a significant claim.

“Taking a longer-term view, over the current UK parliament (from 2023-24 to 2028-29), the Welsh Government budget for day-to-day spending will grow by 1.6% per year in real terms on average. This compares with 2.6% annual growth in real terms over the course of the previous parliamentary term [from 2018-19 to 2023-24 – when there was a Conservative government at Westminster].

“Therefore, although Labour have significantly increased departmental spending relative to their manifesto spending plans, there has not been a big change of course in the path of spending on public services since they came to office. This is the slowest growth in Welsh Government day-to-day spending outside of the austerity decade of the 2010s.

Rail funding

On rail funding, the analysts state: “The Chancellor announced £445m over 10 years for rail infrastructure enhancements in Wales. It was later clarified that £348m would be spent over the current Spending Review period (2026-27 to 2029-30), with £48m of this relating to enhancements on the Core Valley Lines (CVL).

“While any additional investment in Wales’ rail network is welcome, this quantum of funding is underwhelming. Contrary to comments made after the announcement, this funding does not come close to compensating Wales for the loss incurred from HS2, which will grow to £845m by 2029-30 (with far more to come over subsequent Spending Review periods).

“Professor Mark Barry has noted that, ‘to be comparable with England, Wales needs … circa £250m per annum for enhancements on both the CVL and the NR [National Rail] network in Wales for 15 years”. This announcement falls far short of this. It also leaves the systemic problems with how Welsh rail infrastructure spending is funded in place.

“Welsh Government ministers and officials no doubt worked extremely hard to ‘win’ this additional investment for Wales. However, if this is what counts as a success, it merely underlines the problems with the current system.

“The biggest win for the Welsh Government from yesterday’s announcements would be the funding for coal tip safety. The £118m new spending over three years, on top of the funding announced back in the autumn, looks broadly in line with estimated long-term costs of the problem.

“On post-EU structural funding, there was some good news on the quantum of funding; spending on schemes through the new local growth fund in Wales will remain at the same level in cash terms as under the Shared Prosperity Fund in 2025-26 (£210m). However, despite Wales retaining a higher-than-population share of spending, this appears to be lower than what Wales would have received under the previous EU schemes per year.

“At the Welsh Labour conference in 2023, Keir Starmer had promised to return control over the funds to the Welsh Government. The Spending Review states that the Wales Office will work with the Ministry of Housing, Communities and Local Government to implement the new local growth fund in Wales, with a vague commitment of ‘working in partnership with the Welsh Government’.

Fiscal Framework

The analysts state that one particularly disappointing element of the Spending Review was the absence of any changes to Wales’ Fiscal Framework: “Specifically, the limits placed on the Welsh Government’s budget management tools and borrowing powers remain unchanged in cash terms since they were set at their agreed levels in December 2016.

“Inflation has significantly reduced these strict, fixed limits. For example, the current overall capital borrowing limit for Wales is £1bn. Even simply adjusting this in line with inflation since 2016-17 would have increased the Welsh Government’s borrowing capacity by more than £343m.

“The UK Labour Manifesto in 2024 conceded that the Welsh Fiscal Framework was ‘out of date’. The Statement of Funding Policy also outlines how the Scottish Government’s borrowing and budget management powers now grow in line with inflation. In that light, a Spending Review that entirely ignores the issues is disappointing and significantly hampers the Welsh Government’s ability to properly manage its budget.

“The current system of occasional, ad-hoc flexibilities afforded to the Welsh Government in terms of reserve limits and drawdowns – at the Treasury’s discretion – is simply inadequate for a democratically elected government with substantial tax and spending powers.”

Clearer picture

In conclusion, the three analysts write: “The Spending Review has provided a clearer picture for public spending in Wales over coming years.

“Given the likely growth in NHS spending over coming years, the scope for big additional spending commitments in party manifesto plans remains limited – unless of course, they leave open the possibility of using the Welsh Rates of Income Tax to raise additional revenue.

“The big lesson from the last decade of budgets is that spending plans change – successive Chancellors have eventually topped up budgets between Spending Reviews, while higher inflation or increasing cost or demand pressures can blow spending plans off course. But the fiscal constraints the UK public finances face are real, in the context of the Chancellor’s “iron-clad” fiscal rules and the promises of no further major tax increases.

“The task for the Welsh Government – along with all Welsh parties ahead of the election – will now be to determine their own spending priorities and face up to some of the difficult decisions that the outlook points towards.”