Joseph Ogle and Daria Luchinskaya unpick the Budget announcement and what it means for Wales
We have become so accustomed to austerity that even a few, in some cases fairly modest, spending announcements get big headlines. The main focus of yesterday’s Budget was the economy and taxation, with Brexit looming in the background, rather than major changes to the UK Government’s spending plans. The well-trailed announcements on public services will have less impact on the Welsh budget than the headlines might imply. It looks as though the additional money for the Wales budget will amount to £200 million (capital and resource) phased in over the next four years. On the basis of figures seen so far, the addition to the Resource DEL (day-to-day spending) would reach just over 1% by 2019-20 compared with 2017-18.
Against this modest increase, there are two offsets. The Chancellor re-affirmed his adherence to austerity and last week’s letter from the Treasury asked Whitehall spending departments to find £3.5 billion of ‘efficiency savings’ by 2019-20. The letter excludes spending on NHS and schools and includes a provision for ‘reinvesting’ £1 billion on priorities. How this will impact on the Welsh budget is to be confirmed – but a straight Barnett consequential would amount to a hit of around £175 million a year. This would dwarf any good news from yesterday’s announcements.
The other offset is the impact of inflation. The Office for Budget Responsibility’s latest Economic and Fiscal Outlook published updated inflation forecasts, including GDP deflators and CPI measures. Adjusting government spending for inflation typically uses GDP deflators, while consumer-related items, such as wages, benefits, etc., are deflated by the CPI. The new CPI outlook is 2.4% in 2017, 2.3% in 2018, and 2.0% thereafter. These forecasts are still higher than those of March 2016, with CPI inflation likely to put pressure on the public sector pay settlement.
The GDP deflators have also been revised upwards over 2017 compared to the November 2016 Outlook, reflecting the upward revision in the CPI over the same period. After 2017, the GDP deflators will be lower than the last forecast. [Footnote: The lower GDP deflator is driven by downward revisions to the CPI, projected strengthening of the sterling, and a lower government consumption deflator (stemming from methodological changes, see OBR March 2017 EFO para 3.103 for more detail).] These changes will reduce the purchasing power of government spending in the short term, but increase it after 2017, compared to previous deflator series.
The expected announcement of additional resource support for adult social care was delivered in the form of an additional £2bn grant funding to social care in England over the next three years, with £1bn available in 2017-18. However, it is not clear whether all of this additional funding will feed through as a Barnett consequential. Be this as it may, were all of this additional funding specifically allocated to older adult social care, this would not fully address the per-capita decline in spending reported in our analysis of social care spending, with an additional £134 million required in 2020-21 relative to 2015-16 to bring spend per head back up to its 2009-10 levels.
In addition to the main social care announcement, we expect several other areas of the Budget to have consequentials for Wales, including: increased investment funding for schools (£320 million for new free schools, and £216 for renovating existing schools), and investment for technical education and academic research. In addition, the Chancellor announced a total of £435 million support measures for business rates for smaller enterprises (enabling local authorities to have £300 million discretionary relief to businesses most affected by the revaluations, and business rate discounts to pubs with a rateable value up to £100,000).
The Welsh Government has already announced measures to provide business rates relief (£10m transitional rates relief scheme, announced in November, and £10m for high-street retailers most in need, announced in December 2016). We expect these measures to have modest consequentials for capital and resource DEL.
However, no mention was made of the Swansea Bay City Deal, and discussions are apparently continuing.
Overall, this Last Spring Budget does not really alter the broad picture facing public services provision. The Autumn Budget is likely to be more significant in setting the future directions for the UK and Wales. In the meantime, we will be looking into the programmes highlighted above in our future work.
So far as I can see the situation is as follows. We are living with the aftermath of the 2008 crisis when GDP fell by 7 per cent and took years to get back to that level. The government deficit blew out, as it will in recession, to 10 per cent of GDP and has taken nine years of austerity to come down to 3 – 4 per cent. In the early 2000s we thought trend growth was 2 – 2 1/2 per cent and that tax receipts would grow slightly faster than that. We didn’t notice that much of the growth in taxes came from the financial sector as the private economy overdosed on debt. The financial sector was hardest hit by the crisis and doesn’t pay so much tax any more. Growth has slowed too and now we get excited and congratulate ourselves on growth in the 1 1/2 – 2 range. All that means that the tax base is smaller than expected. Meanwhile demands for public spending continue to grow as the population ages. The squeeze on public services has reached a critical point in many areas and continued refusal to provide adequate funding threatens a collapse of some services and a change in the nature of society. On the other hand the government is quite right that you cannot go on borrowing for ever. The answer is obvious. We either become Hong Kong or tax rates have to rise. The fuss about national insurance increases is comical. A responsible UK government would slap several pence on all income tax rates and have done with it.