Eurfyl ap Gwilym analyses the impact George Osborne’s intervention will have on Welsh spending
First reactions to a budget are not always the most reliable. A few days’ reflection often helps to put matters into a better perspective. Budgets which are well received on the day often turn out not to be too successful, whilst those which appear to be more controversial may turn out, with hindsight, to be sound.
From an economic viewpoint many will question the need for another budget so soon after the one published in April by the outgoing government. That budget together with the one in April 2009 set out, albeit in opaque terms, plans for cutting public expenditure sharply from 2011. In clearer terms, they also set out tax increases, some of which came into force in April of this year with the balance coming into force next year.
Under Labour’s plans capital investment was to be cut by 45 per cent in real terms over the three years to 2013-14 whilst departmental expenditure, excluding social projection, was to be cut by approximately 3.2 per cent per year in real terms. In the case of Wales the funding of the Welsh Government was to be cut by 9.6 per cent in real terms by 2013-14. Given such material cuts and given the fragile economic recovery, many felt that Labour had gone far enough in terms of what is euphemistically called ‘ financial consolidation’.
Politically the incoming coalition government wished to put its own stamp on the public finances. The Conservatives have consistently called for more radical measures to address the fiscal deficit and having assumed office were obliged to hold an emergency budget to cut further. If they had not done so the markets would have taken fright and pushed up the cost of public borrowing, not because the economic fundamentals justified this but because the incoming government was not to be relied upon to keep its promises. Thus the public are arguably hoist by the Conservatives petard. As has been noted by the Financial Times this budget was indeed a Conservative budget.
In a nutshell the emergency budget plans to cut the deficit by £113 billion by 2014-15 compared with 2009-10. Labour had planned to cut the deficit by £73 billion. The coalition government has increased this by a further £40 billion of which £8 billion is the net tax increase and £32 billion additional expenditure cuts. Thus this budget adds considerably to the shocks that are to be endured by the economy over the coming years. It represents a high risk strategy.
Will the combination of tax increases and expenditure cuts free up the private sector to revive and take up the slack in the economy as the public sector shrinks? Or will the fragile economic recovery falter, growth stall (or even contract) and unemployment grow. Surprisingly the Office for Budget Responsibility forecasts that UK unemployment will peak at 8.5 per cent this year and then decline to 6.1 per cent by 2015. At the same time the Office has downgraded its forecast for economic growth but only by a very small amount. If its judgements are correct then at a macroeconomic level the shock treatment being administered to the economy might be justified. However, this does not take into account the considerable risk being taken. It is to be hoped that the Chancellor has a Plan B ready in case growth stalls, or at best stagnates, unemployment rises and the deficit does not decline as planned. There is no doubt that the pain will be considerable. The question is, will the reward be commensurate with the risks being taken?
What of Wales in all of this? Listening the Chancellor’s speech a key ‘time bomb’ which is yet to detonate in the public mind is the commitment to cut departmental expenditure by 25 per cent in real terms over the coming four years, with exception of the NHS in England and international aid. More details of these cuts will be published as part of the Spending Review, delayed by Labour, and now due for release on 20 October.
How does this compare with Labour’s plans as set out in its 2009 and 2010 budgets? I have estimated that Labour’s plans would cut the funding of the Welsh Government by 9.6 per cent in real terms by 2013-14 or an average annual real terms cut of 3.3 per cent. I estimate that after allowing for the ring fencing of health spending in England and allowing for Barnett convergence, the annual real terms reduction in funding for the Welsh Government under the coalition government’s plans will be 4.2 per cent per year for each of the next four years.
According to the Wales Audit Office there are 319,000 people employed in the public sector in Wales. If the Welsh Government decided to follow England in ring fencing health spending and assuming that the jobs of 77,000 people employed by the NHS are safeguarded, then the remaining 242,000 public servants in Wales will be in departments that are subject to very sharp cuts in spending, either by the Welsh Government or directly by Whitehall departments which employ 39,000 people in Wales.
It has already been announced that there will be pay constraint in the public sector over the coming two years which will reduce pressure, but it is difficult to see how major job losses can be avoided. Public procurement from the private sector which is worth approximately £5 billion a year, may take more than its share of the strain but this will pass the pressure on to the private sector.
If the coalition government’s strategy is to work then the private sector will need to revive in order to take up the slack in the jobs market. Included in the budget statement were plans to stimulate the private sector: corporation tax is progressively to be reduced from 28 per cent to 24 per cent over four years and in areas such as Wales, for the next three years, anyone setting up a new company will enjoy an employer’s national insurance contribution holiday for up to ten employees. Whilst welcome, these measures appear rather puny compared with the challenge of stimulating the private sector to be the generator of new jobs as employment in the public sector shrinks.
On a number of occasions the Prime Minister has drawn attention to the way that the previous government had allowed an over-dependence on financial services to develop over the last decade or more. He has also called for a more regionally balanced economy. In his budget speech George Osborne drew attention to the striking fact that between 1998 and 2008 for every ten jobs created in London and the south of England one only had been created in the North and Midlands of England.
The Chancellor has promised a White paper on regional development. In the meantime it was disappointing that more recognition was not given to this issue in Tuesday’s budget. The fear is that those nations and regions of the UK more dependent on the public sector will suffer disproportionately from the cuts planned in the budget, and that the private sector will not be strong enough to come to the rescue.