Welsh Government should invest more to safeguard jobs

Eurfyl ap Gwilym argues that reducing the cuts in the Welsh budget’s capital spend would provide a counter-cyclical stimulus to the economy

On 17 November the Welsh Government’s Finance Minister announced details of the draft budget from 2011-12 together with indicative figures for the following two years. Details of the departmental spending plans have already been summarised on Click on Wales here. The Government’s approach had already been signalled by the First Minister in a speech at the Cardiff Business School on 2 November when he claimed that his first priority was to ameliorate the impact of the spending cuts on the most vulnerable and to be guided by the principle of ‘chwarae teg’ (fair play). Whilst such a principle sounds reasonable one person’s understanding of ‘chwarae teg’ may be sharply different from another’s.

This is the first of a series of commentaries we shall be publishing on the Welsh Government’s draft budget on ClickonWales in the coming week. Tomorrow: Peter Black, Liberal Democrat AM for South West Wales

One factor that inhibited the First Minister from reacting too critically to the UK Coalition Government’s cuts is the fact that they differ little from those set out in Labour’s 2009 UK budget. Between 2010-11 and 2013-14 the Welsh Budget will be cut by £1.52 billion which compares with independent estimates made in 2009 of £1.50 billion for the corresponding period under Labour’s plans.

Indeed, despite the draconian cut of 41 per cent in capital investment in Wales over the next four years, in 2009 Labour planned to cut such spending by 45 per cent. The principal differences between the present UK coalition government’s plans and those of Labour are that the cuts will be deeper next year (£860 million compared with £500 million). To this must be added the very material cuts being made to the welfare budget which will lead to a reduction of almost £1 billion in such expenditure in Wales by 2014-15 (such spending by-passes the Welsh Government and is paid directly to recipients).

How closely does the Welsh budget fit with the priorities of the government as set out by the First Minister? From the viewpoint of revenue expenditure the answer is quite well. Bearing in mind that, in order to balance the books, overall revenue (current) expenditure has to be cut in real terms by 7.1 per cent over the first three years of the next spending review period:

  • Health will be cut by marginally less, 6.3 per cent.
  • Education by 5.9 per cent;
  • Local government by 7.1 per cent.

The deepest cuts will be in the smaller budgets such as Central Services and Administration (17.7 per cent) and Public Services and Performance (18.1 per cent).

Capital investment has to be cut by 33 per cent in real terms over the next three years, with the deepest cuts again falling in 2011-12. Here the cuts are fairly evenly spread with Education being the one area having a lower than average cut of 27 per cent.

Capital expenditure is distinct from current expenditure because it creates assets that can be used repeatedly to produce goods and services and generally have an economic life of more than one year. There is strong evidence to suggest that public investment is an important contributor to the vibrancy and long term growth prospects of a modern economy. The corollary is that failure to invest jeopardises longer term economic performance. The spending settlement imposed on the Welsh government will undermine the longer term economic competitiveness of Wales.

What should be the response of the Welsh government? It should consider reallocating some current expenditure to capital investment. Given that spending overall is set to reduce this would not be easy and would be politically unpopular. Nevertheless a reallocation of £100 million a year (say) would mean that the reduction in capital spending would fall from an average of about 12 per cent per year to 4 per cent. The corollary is an increase in the average annual reduction in current spending in real terms from 2.2 per cent to 3.0 per cent. Table 1 sets out the present spending plans.

Table 1: Welsh Government current spending plans 2010-2015 – £m real terms

2010-11 2011-12 2012-13 2013-14 2014-15
Revenue 13,445 13,015 12,795 12,602 12,301
Capital 1,674 1,244 1,139 994 1,007
Total 15,119 14,259 13,934 13,597 13,318

Table 2 indicates how a revised plan might look with an additional £100 million a year being switched to capital investment.

Table 2: Revised Welsh Government spending plans 2010-2015, with increased capital investment – £m real terms

2010-11 2011-12 2012-13 2013-14 2014-15
Revenue 13,445 12,915 12,595 12,302 11,911
Capital 1,674 1,344 1,339 1,294 1,407
Total 15,119 14,259 13,934 13,597 13,318

Could this be done in practice? In March 2010 the First Minister stated that in the case of Wales the planning assumption being used for future spending plans up to 2013-14 was that revenue expenditure would be cut by 3 per cent a year in nominal terms and capital expenditure by 10 per cent. At the time I pointed out that this was a far more pessimistic assumption than justified either by Labour’s plans in its 2009 and 2010 UK budgets, or in the subsequent plans of the new coalition government in London as set out in their Emergency Budget in June 2010. I noted that it would overstate the cuts to the Welsh budget by approximately £1 billion by 2013-14. This has proved to be the case with the actual planned spending for 2013-14 being £1.2 billion higher than that arising from the Welsh Government’s cautious planning assumption.

Given that there are detailed departmental plans for these deeper cuts, would it not be sensible to use some of this money to boost capital investment over and above that set out in the draft budget? Such a move would be a counter- cyclical stimulus to the Welsh economy and would safeguard jobs in the construction industry which employs over 100,000 people in Wales and accounts for 7 per cent of total GVA.

The investment could also lead to an improvement in our economic infrastructure and also raise the quality of our housing stock. In the short term the measures would help sustain employment at a time when between 25,000 and 35,000 public sector jobs are at risk. In the longer term the Welsh economy would benefit from the return such infrastructure investments generate by way of enhanced competitiveness.

Of course, critics of the draft budget will focus on those areas of spending which they think are being cut too deeply. The onus on those singling out programmes for special treatment is to state where they would make corresponding and deeper cuts. For once this is, indeed, a ‘zero sum game’. At the end of the day a fixed sum of money has been made available to the Welsh Government and a lower than average cut in one area has to be counterbalanced by deeper cuts elsewhere.

Another factor is that the Welsh Government’s spending is dominated by health which accounts for approximately 40 per cent of the block grant. Thus any attempt to protect health means that such savings would have  to be off-set by cutting the remaining 60 per cent of spending that much deeper (see below for detailed estimates). In setting its expenditure plans for the next four years the UK Government had much greater room for flexibility because expenditure on the NHS in England accounts for only 15 per cent of total public expenditure.

It is for this reason that the Conservatives in Wales opened themselves up to ridicule when seeking to follow their colleagues in London by declaring that not only would they ring fence health spending but would protect capital investment as well as revenue expenditure. Conservatives in England are cutting capital investment in health by 17 per cent in real terms over the coming four years.

Furthermore they would peg spending using the Retail Price Index rather than the GDP deflator. This might sound a pedantic point, but according to Office for Budget Responsibility forecasts, RPI will increase by 13.6 per cent over the coming four years compared with an increase in the GDP deflator of 9.8 per cent. Such an approach means that on average spending in all other departments in Wales, including education, housing and social services would have to be cut by almost 25 per cent over the coming four years. Perhaps it is not surprising that the Conservatives are vague regarding where exactly they would make the additional cuts to pay for their health plans, other than calling for the elimination of universal benefits. Cutting such expenditure would save approximately £100 million  a year. This is not a trivial sum but makes only a modest contribution to the £622 million additional money the Conservatives would spend on health compared with the government’s plans set out in the draft budget.

Nevertheless, the ‘plans’ set out by the Conservatives in Wales have served a useful purpose. Firstly, they have highlighted the fact that protecting any one departmental budget necessitates even deeper cuts elsewhere and that advocates of such protectionism will need to explain how they will pay for them. Secondly it was interesting to hear the reaction of the BMA spokesperson in Wales who declined to call for making an exception of the NHS and observed that public spending on  other programmes such as housing and education had a crucial knock-on effect on health. There is a high correlation between poor housing and poor health. Poor educational attainment leads to unemployment or poorly paid work which in turn undermines health.

Perhaps we need to think about public expenditure from a different viewpoint. Traditionally we have looked at spending through the prism (or silos) of departments such as health, education, transport and housing although we all know that their impacts are interconnected. In seeking to protect ‘front line services’ and in looking for efficiency savings perhaps the focus needs to  move to also analysing public expenditure in terms of front and back office functions with an emphasis on protecting the front line and seeking rationalisation and major savings in the back office. Such an approach has been taken in many private sector companies over recent years and the public sector could take advantage of the lessons learnt.

Impact of freezing health expenditure on other Welsh departmental budgets

In the case of England the UK Government has committed to ‘protecting’ spending on the NHS by increasing departmental expenditure by 10.2 per cent in nominal terms over four years (Table 2.2 Comprehensive Spending Review, October 2010). Taking inflation into account, this is equivalent to an annual real terms increase of 0.2 per cent. Current real terms spending will increase by ~0.4 per cent per year. Given this commitment in the case of England the question arises as to what would be the effect on other departmental budgets in Wales if spending on Health and Social Services in Wales were ‘protected’. Table 3 sets out the impact on the spending of other departments collectively if total health spending (current and capital) was held constant in real terms.

Table 3: Welsh budget 2010-15 (£ billion real) assuming Health and Social Services spending frozen at 2010-11 level in real terms

2010-11 2011-12 2012-13 2013-14 2014-15 Annual average growth rate Cumulative change
Health and Social Services
























It will be seen that on average the cumulative cut in spending over the coming four years for other departments would have to increase from 11.9 per cent to 20.4 per cent.

The dramatic impact on other departmental spending is not surprising bearing in mind that spending on Health and Social Services represents approximately 40 per cent of total expenditure in Wales.

As a rule of thumb for every additional spend of 1 per cent on health, other spending would have to be cut by 0.7 per cent. Thus freezing real terms spending on health rather than cutting it by 12 per cent implies cutting other expenditure by 12 x 0.7 = 8.4 per cent. Because the Conservatives in Wales have committed to using RPI rather than GDP deflator as the index this will add almost another 4 per cent to spending on health by 2014-15 which implies average cuts in other departments of 23 per  cent.

Eurfyl ap Gwilym is Plaid Cymru’s Economics Adviser and a Trustee of the IWA.

Also within Politics and Policy