UK Budget leaves bleak prospects for the Welsh Government

Martin Shipton

Public services in Wales are facing a bleak outlook following the UK Budget this week, according to economic analysts from Cardiff University.

The Wales Fiscal Analysis team from the university’s Wales Governance Centre point out in a briefing paper that Chancellor John Healey’s emphasis was on cost-of-living interventions, rather than stabilising the public finances over the long term or protecting public services from rising inflation.

The headline measure was a £100 payment to households in council tax bands A–D in England to offset higher energy costs – a benefit that the Welsh Government has confirmed will be extended to Wales.

Other measures include plans to abolish gas standing charges by the end of 2027, extend the temporary VAT cut on electricity bills, maintain the fuel duty freeze until July 2027 and raise the tax-free allowance for pensioners who rely solely on the state pension.

The paper states: “These interventions, which will be welcomed, were funded from a much weaker fiscal position than the Chancellor inherited just three months ago. Since the Office for Budget Responsibility’s (OBR) previous forecasts in March, higher interest rates and inflation have increased the cost of borrowing by an average of £11bn a year before any policy decisions had been made, and cut the margin against the fiscal rules to £15bn, down from £24bn in March.

“The Budget also included some targeted investments in Wales, including £30m to progress Cardiff Parkway railway station, £20m ‘to support UK reindustrialisation and high-value jobs in AI hardware, building on existing strengths in semiconductor clusters including South Wales’, £11m towards replacing Aberavon Bridge in Port Talbot, and £2.5m to expand the M-SParc science park on Anglesey. These relatively modest investments, again while useful, fall well short of the Welsh Government’s objectives, particularly the announcement’s extremely limited ambitions with respect to rail infrastructure.

“Beyond these cost-of-living and Wales-specific measures, the much bigger story for Wales is how little the Budget did to compensate public services for higher inflation.”

Iran

Authors Owain Cynfab and Ed Poole go on to write: “The global energy price shock linked to the war in Iran has pushed inflation back up, with direct consequences for public sector pay awards and therefore for public budgets. In March, the OBR expected CPI inflation to fall to 2% from 2027 onwards. It now expects inflation to average 3.4% in 2027.

“For households, this means higher energy, fuel and grocery costs. But the other victim of higher inflation is public services, as higher-than-expected pay and non-pay costs erode departmental budgets.

“The scale of the problem was well known before the Budget. The OBR estimates that, compared with its March forecast, departmental spending in cash terms would need to be on average £2bn higher every year across the Spending Review period to maintain its real value, and around £7bn per year higher compared with the inflation forecast on which the original spending plans were set. Yet the Chancellor did little to reinforce public sector budgets against these higher costs.

“Policy decisions do add an average of £3bn a year to UK departmental resource spending in 2027-28 and 2028-29 (excluding an accounting adjustment for pensions), but this is primarily higher defence funding, a reserved area of spending which is not subject to Barnett.

“All of this matters in Wales because the block grant – which makes up 80% of the Welsh budget – follows UK Government spending decisions for England under the Barnett formula.

“The Chancellor’s limited compensation for inflation is now a major problem for [Finance Minister] Elin Jones as she prepares her Draft Budget, due on 17 November.

“The Chancellor’s announcements added £199m to the Welsh Government’s day-to-day funding for the current year. Elin Jones has already pledged to pass on the £100 payment to households in bands A-D, which we estimate, using a rough population share, would cost around £120m. This would leave around £80m of additional funding available for other priorities.

“Adding this new £80m to the £187m that remains unallocated for 2026–27, and after accounting for other smaller changes to the Welsh Government’s funding outlook, leaves an estimated £280m of resource funding to be allocated for this financial year.

“As a working assumption, suppose that every penny of this £280m goes to the NHS. That would move the NHS from a real-terms cut of around 1% this year to a real-terms increase of around 1.3%. This would be a clear improvement, but even with an ‘all-in’ payment such as this, growth would be little more than a third of its historical average of 3.6% a year.

“This starting point also shows how much inflation is eroding public budgets. When we analysed the Supplementary Budget agreement between the Welsh Government and Welsh Labour just two weeks ago, core NHS spending was set to fall by roughly 0.4% in real terms, even after its £100m uplift. The OBR’s new inflation forecast has now deepened that projected cut to around 1.0%. The additional funding remains in place, but higher inflation means it will not go as far as anticipated when the agreement was reached.”

The Welsh Government’s Budget for 2027–28, which will be proposed in November, faces an even bleaker outlook.

A zero-sum game

The paper states: “Despite the additional funding announced by the Chancellor, the Welsh Government’s total resource financing (including non-domestic rates revenues) is projected to remain broadly flat in real terms in 2027–28. This makes the draft budget next month essentially a zero-sum game, where any real-terms increase in spending necessitates cuts elsewhere.”

Thus, if NHS spending were to match its historical average real-terms growth of 3.6%, the rest of the budget would need to be cut by around 3.8%.

Alternatively, if the NHS budget increased at just half its historical growth rate, or 1.8%, average cuts of around 1.9% would be required across the rest of the budget.

The authors state: “These are difficult choices. The first scenario would mean significant cuts to local government, education, transport and other services. The second would leave the NHS with growth far below its long-run trend, despite continued pressures from waiting lists and upcoming pay rounds.

“Elin Jones will therefore face a much harder task in repeating Mark Drakeford’s 2026–27 ‘neutral’ budget, which promised every department at least last year’s funding in real terms. And this comes at a time when councils and NHS bodies are already warning that their funding is insufficient to cover rising costs.

“In effect, the UK budget has deferred its hard choices. The Chancellor has prioritised immediate support for households, with the measures to pay for it concentrated in later years.”

Tax devolution

Tax devolution, however, has cushioned the blow, they point out: “Devolved taxes are forecast to make a net contribution of £546m to the Welsh Government’s budget in 2026–27 and £709m in 2027–28.

“The latest forecasts represent a significant improvement on those published in March, with the net contribution revised upwards by £184m in 2027-28. That upgrade is larger than the £165m of additional resource consequentials from the UK budget in the same year. Without tax devolution, the budget-cutting scenarios presented above would be even more difficult.”

The authors conclude: “Earlier this month we described the Supplementary Budget deal as the easy part and the winter as the real test. The UK Budget has not eased that test. By leaving departments to absorb the cost of inflation, it has handed the difficult decisions to Cardiff Bay.”