Dr Daria Luchinskaya reviews the Welsh Government’s final budget for the next year.
The flurry of pre-Christmas fiscal activity in Wales will not much affect the fundamentals for public services for next year although there is some good news. Some of the longer-term implications may prove more significant.
The Final Welsh Budget, tabled yesterday, more or less reflects the main decisions in the better-than-expected Draft Budget in October but is able to finance some new commitments by drawing on the larger than usual reserves (a hedge against uncertainty) as well as utilising the additional funding released through the Chancellor’s Autumn Statement. The Autumn Statement added just £35.8m for day-to-day (resource) spending (0.26%) in 2017-18 and £442m for capital (8.7%) 2017-18 to 2020-21 to the Welsh Budget (1).
The Final Welsh Budget primarily passes on the increased capital allocation over the next four years in the form of extra spending, including £53.4 million ‘to accelerate our commitment to 20,000 affordable homes’, £50 million for regeneration, £40 million for energy efficiency, £33 million for flood alleviation, £20 million for rural communities and £41.5m on health innovation and health estate (2).
Some money has been reallocated from reserves for modest increases in a couple of areas of day-to-day (resource) spending for 2017-18, e.g. £10m for social services, £10m for support for high-street business ratepayers, and £6m for homelessness. It looks as though not all the social services money is new, some appears to have come from adjustments to the NHS budget.
The Budget only covers day-to-day resource spending for 2017-18 and it will be for next year’s budget to deal with the tightening in the UK Government’s current plans for the following two years. The prospects are clouded by the uncertainties around Brexit and the performance of the economy remain. For example, finance ministers across the UK will be closely watching the inflation figures in 2017 for their impact not only on costs of goods and services but also on the climate surrounding pay negotiations. Real terms reductions in public sector pay to date have been key to mitigating the impact of spending cuts but the past may not be a good guide to the future.
Which is why this week’s agreement between the Treasury and Welsh Government on a Fiscal Framework could be so important (3).
The least exciting part of the deal is the increase in Welsh Government borrowing powers to finance capital expenditure to a total of £1 billion (£150 million in any year) from April 2019; the current ceiling is £500 million (£125 million in any year). The new £150m annual limit represents just 10% of the current Welsh capital budget (4) and not a major addition to the Welsh Government’s armoury.
Much more significant are the introduction of a Welsh reserve to enable the budget to be better managed, not least around the end of the year; a transitional and long-term needs-based element into Barnett, building on the ’Barnett floor’ announced in the 2015 Spending Review; and a new model for calculating how the block grant will be adjusted (offset) to take account of Welsh tax decisions. Much of this will start to take effect from 2018-19 and will be particularly important if and when Welsh income tax rates start to be set, possibly from 2019. This is complex territory and exactly what it is all likely to mean will be explored in detail by the Wales Governance Centre in the New Year.
Although the prospect of tax-raising powers sets some hearts racing, we should not expect a big impact on public service spending, at least for a time. The block grant from the Treasury will still account for most of the money available to the Welsh Government for the foreseeable future and the marginal impact of changes in Welsh taxation rates is likely to be limited. But the agreement of the Framework represents an important maturation stage in the devolution story.
(1) http://gov.wales/about/cabinet/cabinetstatements/2016-new/autumnstatement/?lang=en ; In detail, this included an extra £450m under the Barnett formula: £16m for day-to-day (resource) spending between 2016-17 and 2019-20, and £434 for capital between 2016-17 and 2020-21. In addition to the Barnett consequentials, Wales received extra capital funding for the City Deals (details still to be announced) and extra resource funding for the Apprenticeship Levy.
(2) See Welsh Government Final Budget 2017-18 Explanatory Note, pp. 5-6: http://gov.wales/docs/caecd/publications/161220-note-en.pdf
(4) The Final Welsh Budget capital budget for 2017-18 stands at £1,487m.