IFS - Welsh Government faces difficult budgetary trade-offs and uncertain times

15 Sep 2016 08:59 AM

Given the plans and forecasts set out in the UK government’s March 2016 budget, the Welsh Government’s budget could be cut by 3.2% in real terms over the next three years, with cuts largest in 2018-19 and 2019–20.

If the Welsh Government chooses to protect the NHS budget in the same way as the English NHS budget then other spending would face cuts averaging 7.4% in real terms.

The new chancellor might reduce these cuts in the short run. But that would likely come at the cost of additional – and possibly even larger – cuts later on.

Complete Loss of EU grants, if not made up by additional grants from Whitehall, would see the Welsh Government losing over £500 million a year following Brexit. This would more than double the overall budget cut.

Local councils in Wales are likely to face a particularly tough time. Budgets may fall by an additional 5.9% or more in real terms, on top of recent cuts.

These are among the main findings of a new report by researchers at the Institute for Fiscal Studies, published as part of the Wales Public Services 2025 programme, hosted at Cardiff Business School. Other key findings in relation to the Welsh Government’s budget include:

• Increases to the NHS budget of 2% a year (well below historic norms) while protecting funding for councils’ education and social services responsibilities would lead to ‘unprotected’ areas facing cuts averaging 18% over the next 3 years given current plans and forecasts.
• If income tax were to be partially devolved increasing rates across-the-board by 1p in the pound could offset almost half the overall cuts to the Welsh Government’s budget.
• However, in the run up to the 2016 Assembly elections there was more talk of tax cuts than tax rises. An across-the-board 1p in the pound cut in income tax rates would increase overall budget cuts from 3.2% to 4.7% by 2019-20.

The report also considers the costs the Welsh Government may face if the EU funding Wales currently receives is not fully replaced:

• The UK government has stated that funding for payments to farmers will be guaranteed until 2020 but funding for areas like rural development and regional development projects will not be guaranteed unless projects were signed off by the time of the upcoming Autumn Statement. Later projects will instead be funded on a case-by-case basis. If only half were funded, real terms cut to the Welsh budget by 2019–20 could rise from 3.2% to 4.3%.
• It is even less clear what funding will be available for schemes currently funded by the EU after 2020. If no additional funding was provided, the Welsh Government would have to find over £500 million a year from its existing budget if it wanted to continue to fund these schemes. This could more than double average budget cuts to 6.9% in 2020–21 (assuming the remainder of the Welsh Government’s funding was unchanged).

Finally, the report considers the implications for Welsh councils:

• If the Welsh Government protects NHS funding and cuts grants to councils in line with the rest of its spending, grants would be cut by 7.4% in real terms by 2019–20. The OBR forecasts Welsh councils will increase council tax bills by an average of 4% a year in each of the next 3 years. Accounting for the resulting increases in their council tax revenues, this would result in an overall drop in councils’ budgets of 5.9% in real-terms over the same period, unless they drew down their reserves (which is unsustainable in the long term).
• If councils were to protect education and social services from real-terms cuts, other service areas could need real-terms cuts averaging 23% to deliver a 5.9% overall budget cut. This would come on top of the real-terms cuts of between 20% and 50% that areas like housing, culture and leisure, and planning and development, have already faced since 2009–10.
• Because council tax revenues make up very different portions of councils’ budgets, council tax increases can do much more to offset budget cuts in some areas than others. For instance, raising council tax bills by an additional 10% by 2019–20 – taking average annual increases in bills to over 7% – could reduce the scale of cuts by more than half in Monmouthshire but little more than one-fifth in Caerphilly.

Polly Simpson, a research economist at the IFS and an author of the report said“This research highlights the difficult budgetary tradeoffs the facing the Welsh Government. Protecting such large areas of spending as health, social care and education would require substantial cuts to other areas of spending that have often already had to absorb 7 years of real-terms cuts. It is also important to realise that increases in the taxes under Welsh Government or councils’ control is unlikely to be a panacea. For instance, even increasing council tax by over 7% a year, could still leave some council services facing double-digit cuts over the next 3 years.”

Michael Trickey, director of Wales Public Services 2025 added “The tough times for public services in Wales are far from over: austerity still has some way to run and further cuts seem unavoidable over the next 3 years. This will intensify the pressure on public services to increase the scale of change and mitigate the impact on communities. But there are also big questions for politicians and the public about the services and priorities we want for the future.”

Notes to editors

1. For queries, please contact: Bonnie Brimstone at IFS: 020 7291 4818 /bonnie_b@ifs.org.uk;

2. ‘Welsh Budgetary trade-offs to 2019–20’ was launched at Ty Hywel, Cardiff Bay at 12:30 on Wednesday 14th September, 2016 and is available here on the IFS website;

3. Wales Public Services 2025 provides independent analysis of the fiscal, economic and policy challenges facing public services in Wales.  Hosted by Cardiff Business School, the Programme is co-funded by Cardiff University and five national bodies in Wales (the Welsh Local Government Association, the Wales Council for Voluntary Action, SOLACE Wales, Community Housing Cymru, and the NHS Wales Confederation