Where the cuts will fall

Deuparth gwaith ei ddechrau, two thirds of a job is starting it, suggests Eurfyl ap Gwilym

In the run up to the UK General Election one issue clearly divided the political parties. The Conservatives committed to making public expenditure cuts of £6 billion within the current fiscal year and claimed that it was vital that a start be made on fiscal consolidation without delay. If this were not done the markets could react badly. At best the cost of public borrowing would be higher and at worst it could prove difficult for the UK Government to borrow the additional sums required over the coming years. While accepting that the deficit would have to be tackled, Labour and Plaid Cymru favoured delaying action until there were unequivocal signs of an economic recovery. The Liberal Democrats, after initially favouring ‘savage cuts’ back in April 2009, subsequently softened their position and favoured delaying action until economic recovery was underway.

It was perhaps inevitable that the new coalition government in London would be obliged to initiate cuts this year. After all, once the Conservatives had committed themselves to making such in-year cuts it would have been extremely damaging had they not done so. They, or perhaps more accurately the UK citizen, was hoist by the Conservative’s petard. In the event the incoming government moved with alacrity and announced £6.2 billion cuts last week. There was little science in the £6 billion figure other than it is approximately 1 per cent of total managed public expenditure. David Cameron claimed that it should be perfectly possible within the current year to identify and eliminate waste equating to 1 per cent of public expenditure.

Without being provided with much greater detail it is difficult to assess the realism of the current expenditure reduction plans. For example, in the ‘Department-by-Department briefing’ document released by the UK Government there are plans in the case of the Department for Education to cut £100 million ‘from reducing bureaucracy’ and £110 million ‘from doing things more cheaply’. Such ‘plans’ inspire little confidence bearing in mind that in the past the National Audit Office has reported that of the savings claimed under Labour’s Gershon programmes, only 25 per cent could be supported by evidence. Meanwhile, there was some evidence in the case of another 50 per cent, and in the case of the remaining 25 per cent there was no evidence at all for the claimed savings.

In fairness, this time there are examples of more specific and credible planned savings such as the case of the Department of Transport ‘saving £77 million from cutting departmental running costs including through a recruitment freeze’. One large spending cut is the scaling back and then ending of payments to the Child Trust Fund which will save £320 million this year.  The largest saving is the total reduction of £1.165 billion in funding of Local Government. Is this last an example once again of passing the buck to local authorities? A harsh but telling test to see if the savings are real or not will be to look for a reduction in public sector employment over the coming years.

In the case of Wales most attention has understandably been focussed on the cut in the block grant to the Welsh Government. The cut was £187 million but £24 million of this was earmarked for ‘recycling’, resulting in a net reduction of £163 million or 1 per cent of the £15.7 billion Welsh budget. The Welsh Government was also given the flexibility either to make the cuts this year or to postpone them until 2011-12, when it will face much deeper cuts as fiscal consolidation starts in earnest.

To put the current net cuts of £163 million in context, if the UK Government sticks to Labour’s plans, the Welsh block grant will be cut in real terms by approximately £500 million a year for each of the three years starting in April 2011, leading to a cumulative loss of £3bn. Thus the £163 million equates to approximately 10 per cent of the annual cuts to be made by 2013-14 under Labour’s plans.

The Welsh Government has yet to announce whether or not they will make the cuts this year or take advantage of the opportunity to delay them for a year. An argument for delaying is that the private sector may be reviving more strongly by then and in particular may be hiring additional people. This would mean that the impact of the inevitable job cuts in the public sector could be ameliorated. Delaying could also give more time for the Welsh Government to plan carefully where to make the cuts.

On the other hand ‘deuparth gwaith ei ddechrau’ (two thirds of a job is starting it), and the sooner a start is made the better. We know from statements made by the First Minister before the election that the Welsh Government had been planning major cuts from April 2011. As part of that exercise they must have identified wasteful and lower priority spending that could be addressed within this year. The Welsh Government could also make some of the £163 million cuts this year and delay the balance until next year.

Whilst the Welsh media concentrated on cuts to the block grant, little attention was paid to the other public spending cuts that will directly impact Wales. The block grant represents 62 per cent only of total identifiable public expenditure in Wales. Out of a total identifiable of £27.6 billion spend in Wales in 2008-09, the balance of £10.5 billion, 32 per cent, is money spent in Wales by UK Government departments. Whilst the bulk of this is in the area of Social Protection (including the state pension, housing allowances, disability benefits and unemployment benefits), £1.5 billion was spent by other UK Government departments and many of these are being cut as part of the cuts totalling £6.2 billion.

In 2008-09, the most recent year for which the Treasury has published figures, £613 million was spent on Economic Affairs including transport, and £627 million was spent on Public Order and Safety, including police, law courts and prisons. As yet neither the UK nor the Welsh Government has clarified by how much these programmes will be cut this year, although in this case there is no flexibility to delay the cuts until 2011.

On 22 June the UK Government will announce its budget for the balance of 2011-12, including any taxation changes and perhaps give some hints regarding future spending plans. It will not be until the autumn that the outcome of the Spending Review will be announced which will set out the Government’s plans for the period 2011-12 to 2013-14. If the last Labour Government’s plans are anything to go by we can expect cuts leading to a reduction in the Welsh budget of 10 per cent or more in real terms by 2013-14. Cuts to the Welsh budget will be imposed by the coalition Government in Westminster. How and where to make such cuts is likely to be a centrepiece of the elections to the National Assembly next year.

Eurfyl ap Gwilym sits on the boards of a number of public companies and is an Economic Adviser with Plaid Cymru.

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