As long as people continue to feel aggrieved and undervalued, Labour’s attempt to persuade them that things are getting better is doomed

Martin Shipton

Mark Drakeford, back for another stint in his old role as Finance Secretary, laid it on thick when he delivered the Welsh Government’s draft budget for next year the other day.

Without preliminaries, he immediately drew a stark contrast between the respective allocations to Wales made during 2024 by the Tory former Chancellor Jeremy Hunt and his Labour successor Rachel Reeves: “[We] have seen two UK budgets in this calendar year, and the contrast between them could not have been more vivid. For today, just one set of figures must suffice to illustrate that difference.

“In March, in the final budget of the Chancellor Jeremy Hunt, we saw an uplift in the capital budgets available to the Welsh Government. In an era of rampant construction cost inflation, for all the investment needed in our schools, hospitals, housing and transport, all he could offer was £1m in additional funding. Fast forward now to October 30: now, a Labour chancellor, determined to put our economy back on the path to growth, recognised that this can only be achieved by investment—investment in the conditions that allow an economy to grow.

“[This] was not just a theoretical recognition, but one that was intensely practical. Instead of presenting a budget to you today with only £1m of additional capital to allocate, this draft budget reflects in full the additional £235m in capital provided by Rachel Reeves in October, and more. That is why this draft budget really is a budget for a brighter tomorrow, providing public services and Welsh citizens with investments in their future that have been denied to them for far too long.”

Spending increases

After announcing spending increases for the NHS and local government that were described by Plaid Cymru as “a drop in the ocean”, the former First Minister laid into Plaid mercilessly: “There is a day of reckoning coming for Plaid Cymru, though, isn’t there, on the budget? This is a budget that will provide faster treatment for thousands and thousands of people here in Wales. This is a budget that will build thousands of homes for people who so badly need them. This is a budget that will see all those children whose additional needs have not been met having those needs met in the future, and they will vote against them all.

“That’s the day of reckoning for Plaid Cymru. How many Plaid Cymru spokespeople did I hear tell me that there wasn’t enough money in this budget for local government? There’s £253m extra for local government, and when you vote against the budget you’ll be saying to those local authorities that you don’t want them to have a single penny of it. That’s what serious politics is about.”

Turned a corner

Wales has turned a corner, according to Mr Drakeford’s narrative, and is on the way to becoming a land of milk and honey.

Of course it’s positive that more money in real terms is available for some of our public services, but too raucous a celebration would be premature.

The extra money follows 14 years of austerity, during which the public sector has been subjected to a succession of cuts that has left services creaking and in deficit, with staffing levels cut and fewer job opportunities for those completing their education.

But there are very considerable negative points to be made that cast doubt on whether the future will be as bright as Labour politicians would have us believe.

Guto Ifan, of Cardiff University’s Wales Governance Centre, has pointed out that the funding increases will be front-loaded, meaning that extra money will be more scarce in subsequent years.

The increase in employers’ national insurance contributions (NI) is likely to be pretty damaging. Ross Clark wrote in the Spectator: “[What] this government has done is add a serious burden on service industries (as well as manufacturing ones) in the form of the rise in (NI) contributions.

The effect is especially pernicious at the lower end of the earnings range – thanks to the salary threshold at which employers’ NI becomes due falling from £9,200 to £5,000. If you employ a part-time worker on £10,000 a year – as many service industries do – the cost to the employer will rise by £600 a year. Employers have been warning of just how serious this is for them, and how it will lead to job losses, or to fewer jobs being created.”

Efficiency savings

And then despite the expansionist tone adopted by Mr Drakeford, it seems that the UK Government is calling on all departments to make “efficiency savings” of 5%. What this means in real terms was spelt out in a Guardian article that said: “Ministers are planning to cut more than 10,000 civil service jobs as Whitehall departments battle to stay within spending limits under a new government efficiency drive. Multiple sources said there was an acceptance that the civil service had become too big and unwieldy after expanding owing to the demands of Brexit and the Covid pandemic.

“With Rachel Reeves, the Chancellor, having ordered departments to find 5% cuts to their budgets as part of a spending review, insiders said job cuts would be inevitable. One Cabinet Office source said departments would have to make some ‘very hard choices’ about headcount if they were going to stay within budgets set by the Treasury.”

This revelation came in the same week as former Deputy Economy Minister Lee Waters released a podcast in which he and others argued that the Welsh Government doesn’t have a big enough civil service to deliver efficiently and effectively the policies that politicians from the ruling party want to see implemented.

Then on Friday GDP figures were published that showed the UK had negative growth for the second month running. This was particularly worrying, given that both Ms Reeves and Sir Keir Starmer have made it clear that Labour’s future spending plans are entirely dependent on growing the economy.

So what of the government’s pledge to “reset” relations with the EU by easing trade restrictions? The new trading rules it has pledged to negotiate with the EU will do little to offset the economic damage caused by Brexit, according to analysis carried out by the Centre for European Reform (CER).

John Springford, an associate fellow at the CER, estimates that a “reset of the relationship” of the sort Labour set out in its election manifesto, combined with the demands the EU is making in return, will raise economic activity in the UK by between 0.3% and 0.7% in the long run.

According to the Office for Budget Responsibility (OBR), the government’s economic forecaster, the Brexit deal secured by Boris Johnson’s government will leave the UK economy 4% smaller in the long run than it would otherwise have been.

The OBR, which has cited Springford’s work in the past, has said it believes much of that 4% “hit” has already been felt.

Springford himself found that the reduction in UK Gross Domestic Product caused by Brexit to be greater – around 5% by the summer of 2022.

‘Make Brexit work’

Sir Keir Starmer has promised to “make Brexit work” by “tearing down unnecessary barriers to trade”, but he has also pledged not to restore the free movement of people between the UK and the EU and ruled out rejoining both the Single Market and the Customs Union.

On Monday, Rachel Reeves will become the first British Chancellor to attend a meeting of European finance ministers since Brexit.

The government believes improving trade with the bloc is vital to boosting growth.

We have an idea of the sort of deal the UK is hoping to secure, but not the full details, and we haven’t been told what the UK is prepared to offer the EU in return.

Springford has carried out what he calls a “rough and ready” set of estimates of the benefits of the “Brexit reset” as it has been explained.

He concludes that the prize glitters brightly enough to make it worth having but no more – that the negotiating demands for a new economic partnership don’t really add up to very much.

A “veterinary agreement” to reduce the need for paperwork and border checks on trade in food and agricultural products between the UK and the EU, combined with a deal to ease visa and transport restrictions on performing artists touring in the EU, would “raise GDP by around 0.1% in 10 years”.

Tiny

This is tiny. While alignment with EU animal and plant health rules could lift trade in food and agricultural products substantially, the sector makes up a very small part of the UK economy.

Springford estimates that an agreement on the mutual recognition of professional standards, another Labour manifesto pledge, allowing UK lawyers and architects to practice freely in the EU, would also lift growth by around 0.1%.

Springford believes a Youth Mobility Scheme of the sort the EU is demanding would have a more significant impact on UK economic output than anything the government proposes.The EU wants 18 to 30-year-olds to be able to move freely between the UK and the EU, to live, work or study, for up to four years. But the UK Government has already rejected the idea. Forecasting migration is notoriously tricky but Springford says a “high estimate” – in which net migration in the UK increases by 30,000 a year – would lift GDP by 0.45% in 10 years time.

An EU proposal to allow UK and EU students to pay the same tuition fees as home students in each other jurisdictions (UK universities currently treat EU citizens as “international students” and charge £12,000 more in tuition fees) could raise GDP by an extra 0.1%, as more EU students move here and spend money in the UK.

Last week, the German Ambassador to the UK told ITV News the government’s decision to rule out rejoining the EU’s single market and its customs union means that the economic gains Reeves can achieve will be very limited at best.

Springford’s analysis supports that view. He told ITV News that the pitch was being “oversold”, despite there being some helpful changes, Springford said: “To the average person on the street I don’t think they are really going to notice more money in their pockets or cheaper goods and services.

“Far from ‘tearing down’ barriers to trade and migration, Britain’s proposed reset is likely to do little to offset the costs of Brexit,” he concludes.

And of course it’s also the case that most people make a judgement about how the economy is doing based on their own circumstances. The majority feel worse off now than they did some years ago, and that’s largely because their pay increases haven’t matched inflation.

Sadly, Starmer and Reeves take the view that they can’t be honest with people and explain that rejoining the Single Market and the Customs Market would be the best way to achieve the economic growth that delivery of their own manifesto promises depends on.

The point remains – and Welsh Labour needs to be conscious of this in the run-up to the Senedd election in May 2026 – that for as long as people continue to feel aggrieved and undervalued, Labour’s attempt to persuade them that things are getting better is doomed to backfire.