Public spending in Wales: a squeeze without end?

The UK government’s policy of reducing public spending year by year, so-called austerity, has created acute problems for the public sector in Wales.  The policy is set to continue. Its duration and intensity may well be increased by Brexit. A hard Brexit by reducing GDP growth and foreign investment in the UK would reduce tax revenues and require longer spending restraint to achieve the balanced budget the government is targeting.

 

The imminent devolution of income tax to Wales in 2019 introduces a further risk to the Welsh public sector.  It will make the money available to the Welsh government depend for the first time on how the Welsh economy behaves.  Some 15 per cent of revenue in future will come from Wales’ own taxes, replacing part of the block grant it receives. There are reasons to think Wales could be hit harder by Brexit than the UK as a whole, which implies Welsh tax revenues could fall below the money it was receiving in block grant form.   There are moreover grounds for doubting whether the funds Wales receives from the EU, though guaranteed to 2020, will be replaced thereafter by the UK government. It all adds up to the prospect of a continuing squeeze on public spending.

 

The UK Context

Official UK data on the total identifiable public expenditure by country in real terms (i.e. after allowing for inflation) shows expenditure in Wales has been broadly flat over the last five years despite an increasing and ageing population. The strategy of the UK Government continues to be that of ‘balancing the budget’ in the near to medium term while not materially increasing taxation: this means that given weak economic growth there will continue to be pressure to cut or at least contain public spending. Expenditure as a proportion of GDP has fallen from a post-financial crisis high of 45 per cent in 2010-11 to 38 per cent in 2017-18 which was also the level immediately before the crisis.

 

Public Spending in Wales

Looking to the recent past and near-term future Table 1 shows the total Departmental Expenditure Limit (DEL) for Wales in real terms: DEL are firm plans for three years for specific parts of Wales’s expenditure and include health and education.  DEL approximates to the funding available to the Welsh Government from the UK’s block grant. By 2019-20 there will have been a real-terms cut of ~£1bn or 6 per cent over seven years.

 

Table 1: Total Departmental Expenditure Limit for Wales in real terms (£million).

2013-14

outturn

2014-15

outturn

2015-16

outturn

2016-17

outturn

2017-18

outturn

2018-19

plans

2019-20

plans

15,960 15,987 14,928 14,768 15,114 14,936 14,951

 

The further future

Austerity is not likely to end in 2019-20.  Paul Johnson, IFS director and an author of a report published in May said: “Leaving the EU would most likely increase (UK) borrowing by between £20 and £40 billion in 2019–20. Getting to budget balance from there, as the government desires, would require an additional year or two of austerity at current rates of spending cuts”.

 

In any case from 2019-20 onwards the DEL will not tell the whole story.  Some 13 per cent of the spending is supposed to come from Wales’ own income tax revenues.  In the event of a hard Brexit, these will be affected and probably by more than tax revenues in England. Given the uncertainties it is very difficult to quantify the effect but let’s throw caution to the winds and try to establish a ball-park .  The National Institute of Economic and Social Research and HM Treasury estimate in the case of a hard Brexit that UK GDP could be over 7 per cent lower in 2030 than it would otherwise have been. The direct trade effects on UK GDP are estimated by NIESR at -3.2 per cent, with other effects like reduced inward investment and reduced migration accounting for the rest.  Yet whereas 48 per cent of UK exports went to the EU, for Wales that proportion has been 67 per cent in recent years. If the percentage fall in those exports were similar in Wales as for the UK, the direct trade effect on Welsh GDP would be greater – over 4 per cent. Moreover. that is just direct exports but much of Welsh production goes to England and is incorporated into exports from there.  This effect is likely to be of the same order of magnitude as direct exports, perhaps another 3 ½ per cent. It is impossible to quantify the indirect effects stemming from reduced inward investment but on a range of plausible assumptions about such things it is possible to generate an overall effect on GDP easily into double figures.

 

If such an outcome were to arrive (and it is a big if), Welsh income tax revenues would behave like GDP.  Instead of growing at 2 per cent a year as Welsh GDP averaged this century up to 2016, they would average growth of under 1 per cent in real terms.  Meanwhile the block grant, after stagnating to 2022 if the IFS is correct, would grow at just 1 ¼ per cent for the rest of the decade. Overall resources available to the Welsh government would grow at only 1 per cent on average through the 2020s.  Precise numbers are speculative but a picture of resources growing slowly is likely, given Brexit and very likely given a hard Brexit.

 

Furthermore, Wales gets some £650 million a year from the EU, mainly in regional development funds and agricultural support.  The latter goes directly to farmers but the former, some £375 million, supports capital spending by the Welsh public sector. The UK government has guaranteed these supports will continue until 2020 but has given no guarantees thereafter.  No doubt there will be British government schemes of regional and agricultural support but it is highly unlikely that Wales will get the same share of those as it does of EU funds coming to Britain, which are allocated according to assessed need.  David Phillips of the IFS has calculated what would happen if the UK government devoted similar money to agriculture and the regions but allocated it according to the Barnett formula. Even if the overall allocation rose by 2 per cent a year, the money coming to Wales would fall by 1 per cent a year through the 2020s and by 0.5 per cent through the 2030s.

 

All in all, there is a risk that the growth of government revenues in Wales could be very slow in the next decade, particularly in relation to the needs of an ageing population. Practically, four sorts of response are possible:

  • Withdraw government from some areas in order to concentrate spending on doing essential things as well as possible
  • Find ways to raise public services’ productivity so more can be done with less money
  • Increase revenue by charging for public services that have been free, raising rates on existing taxes or introducing new taxes
  • Find ways to accelerate economic growth over a reasonably short time period in order to increase the tax base.

 

The third option would be unpopular but may be inevitable if the electorate wants a good standard of health, education and social care provision.  There is a limit, however, to how far a small, highly open economy like Wales can raise tax rates above those of its neighbours without losing business and higher-rate taxpayers.  The fourth option is very difficult to achieve and impossible to do so in the short-to-medium run without taking risks. What about options one and two?

 

Scope for Savings

In looking for potential savings in expenditure a comparison between relative spending levels across the countries of the UK may suggest areas of potential savings. However, no broad category of public spending in Wales stands out like a ‘sore thumb’ when compared with the other countries of the UK. It follows that if economies are to be sought then the Welsh Government needs to look in greater detail at expenditure within the major spending programmes.  Spending on health has been rising and with social care now accounts for almost half the total Welsh budget.  Given the demands of an ageing population the risk is it will soon swallow more than half. It is within this area that efficiencies most urgently need to be sought.

 

One factor worth analysing in greater depth is the much higher proportion of people in Wales who are employed in the public sector. In March 2018, 22.3 per cent of employees (308,000 out of 1.381 million) worked in the public sector in Wales compared with 16.6 per cent in the UK. If the level in Wales was the same as that of the UK there would be 78,000 fewer people employed in the public sector. With greater needs for public expenditure in Wales than in wealthier parts of the UK it is natural there would be a greater need for public-sector employment. Still, the numbers raise the question: could better organisation allow a reduction of bureaucracy with more of the workforce being employed on front-line services?

 

All articles published on Click on Wales are subject to IWA’s disclaimer.

 

Eurfyl ap Gwilym and Gerry Holtham are trustees of the Institute of Welsh Affairs

15 thoughts on “Public spending in Wales: a squeeze without end?

  1. This makes for grim reading. However, I’d be interested in qualifications for the statistics mentioned. Are these official Welsh Government figures, or are they from research the authors conducted themselves? Where can these statistics be found?

    I am by no means an expert in funding arrangements and taxation, as the authors are, but there is also no comment about innovation in taxation. Could the Welsh Government use it;s new powers to create new methods of taxation to fill in the shortfall from Income Taxation rates and the block grant? Or is this beyond the remit of their powers?

  2. As I understand it the Conservative UK Government reduces its income with austerity. This results in a continual downward spiral of reducing expenditure chasing reduced income. The alternative being to borrow money when it’s cheap, increase Government Expenditure and thereby increase your income to pay off the debt.

    So austerity is political dogma. But what I don’t understand about the UK figures is that in 2008 the crash happened to the Labour Government when they had a (small) deficit of £35b. Labour bailed out the banks to the tune on £90b, a total of £125b. So, how is it the deficit has slowly come back down over 10 years to £35b?

    Wasn’t the bailout a single event? The Government deficit should have been a spike of £120b then a return to about £35b again shouldn’t it?. That’s how bailouts work isn’t it? Maybe over two years, but ten?

    Are the Conservatives paying Banksters an average of about £40b a year to keep “their people” comfortable? Or is it being spent on something else?

    My experience of the Conservatives, and most English companies, is that they consider investment to be unwarranted expenditure, unless it’s spent on senior managers who don’t need it.

    The only interest the UK unionists have in Wales is to exploit us to their profit and when nothing’s left – dump us. Look at their Empire last century!

    England has never been a “Trading Nation”. That’s not what Empires do. What they have done more than anyone else is find evermore complex ways to con people out of their money and to give the impression that there’s more money in the system than reality.

    We all know there’s another crash coming thanks to Financial Fraud and Trump’s Economic warfare. Never mind he might find a real war against us instead.

  3. “England has never been a “Trading Nation”. That’s not what Empires do.”

    Firstly it’s “Britain” that was ever the “trading nation”; that’s Britain including Wales and Scotland. Modern Welsh prejudice likes to disassociate our own people from all involvement in the Empire building of previous centuries. Empires rise and fall around trade and an island people are more dependent on trade than any other; those countries with the greatest markets have the greatest power and only the recent “Liberal World Order” is responsible for the more restrained trade agreements of recent times.
    Without the consensus amongst trading nations that gave us the WTO we would get…Trumponomics; “we have the biggest market and the biggest army and we will force you to give us the best deal”.
    That aside, Wales can decide what it wants to be; a modern trading nation or a begging bowl economy. If we trade, we trade with England above all and the animosity we show to them is just bad business.
    As far as costs are concerned; we have had the opportunity to cut our 22 Local Authorities and that has been rejected by the LAs themselves. We could go the whole hog and abandon the costly Welsh Assembly and the extra layer of government that entails or we could abandon our costly and hugely restrictive spider web of Welsh language legislation and measures.
    Any of that seem likely to you?
    Poverty it is then.

  4. The higher proportion of people employed in the public sector in Wales compared to the UK is striking. However, could this be as much about fewer people being employed in the private sector than wealthier parts of the UK as it is about a relatively high number of people employed in the public sector?

  5. J. Jones, you obviously haven’t noticed that trade at the point of a gun it as much trade as is a contract at the point of a gun. That is neither qualifying as a contract nor trade.

  6. We have the choice of having the Welsh language or poverty.!!!!!!!!!!!!

    Even Boris Johnson would have been too embarrassed to say such nonsense

  7. In response to some of the questions raised:

    The data in the original piece are official, published as Public Expenditure Statistical Analyses by HM Treasury. Relevant data are also published by the Office of National Statistics and on the Welsh government website. The estimates of future revenues are ours but based on estimates for the UK by the Treasury and National Institute of Economic and Social Research.

    The Welsh government does have the power to levy new taxes but it has to get the agreement of the UK government for any new tax it proposes. It has canvassed opinion in Wales about what new taxes the public would support. The proposed tax bases – things like a tax on sugary drinks or a tourist tax – would be fairly small however and would not realise enough money to change the big picture.

    The reason for the persistent UK deficit is the drop in tax receipts after 2008. Corporation tax receipts are particularly sensitive to economic growth. Before the crash the financial sector was booming at an unsustainable rate but that generated strong corporation tax receipts. The shrinking of profits in that sector combined with slower economic growth meant tax revenues fell and then recovered only slowly after the recession ended. As revenues were on a slower growth path, the growth of government spending had to be curtailed too. Government spending growth was slowed below that of the economy as a whole, hence the reduction in the deficit. It is quite true that if government spending had not been cut so much the economy would have grown more quickly. While that would have resulted in more revenue it is not clear that the extra revenue would have matched the extra expenditure. People would have been better off but government debt would probably have been higher. That was a possible choice but the other political choice was made.

    It is true that higher relative public employment in Wales reflects weakness in the private sector. The Treasury has recently accepted the conclusions of the Holtham report that public spending needs in Wales are 15-16 per cent higher than in England because of poverty, demography leading to higher dependency ratios etc. However the share of Welsh public sector employment is more than 15 per cent above the English share so it is worth looking for efficiencies.

    The cost of Welsh self-government is small relative to an annual budget of £15 billion. One or two good decisions would be sufficient to recoup the cost. Bad decisions could, of course, increase the net cost. The quality of governance in Westminster is not obviously better and there the incentive to pay much attention to Welsh interests is lacking. This way the Welsh public can get an attentive government if they pay attention, participate in elections and vote in their own interest.. For that reason devolution seems appropriate to me.

    The language issue seems to be very emotive in Wales, to a puzzling extent. Smaller European countries have all become proficient in English, which is taught from primary school, but they don’t seem to find it a burden to maintain the native language too – even Icelanders who have the same population as Cardiff. Swiss Cantons educate children in three or four languages as a matter of course without obvious ill effects. There is evidently something amiss with Welsh education that it cannot deliver bilingualism without language segregation and people still get aerated about the extra burden on their kids. Not being an educationalist I don’t have an answer.

  8. To defend myself in the face of criticism from Philip above I would just say that the Welsh language legislation that we have in Wales has costs that Eurfyl and Gerry cannot quantify. Why? Because no one records them. Try asking the Welsh government or any Local Authority how much is spent as a result of the dual language policies operating in Wales.
    It isn’t just the direct financial cost however; we have duplication of personnel and functions throughout Wales and we have a restricted pool of employees applying for public service employment. For instance, there are three times as many applicants for each teaching position in an English medium school as there are for each teaching position in a Welsh medium school.
    We also know that 21% of Welsh medium secondary level teacher trainees have an initial degree in a STEM subject but 41% of of English medium secondary level teacher trainees have an initial degree in a STEM subject. We know that 30% of teacher trainees entering Welsh medium courses have a degree in Welsh but only 2% have an initial degree in English. We also know that, not only is Wales the worst performing UK country in PISA tests but that we have significantly lower percentages of pupils attaining at the highest level, level 5 and 6.
    In John Jerrim’s PISA report:-
    http://dera.ioe.ac.uk/27969/1/161206-pisa-2015-en.pdf

    At 6.5 page 118 you can see the very serious shortcomings in the measured achievement of one section of the pupils in Welsh medium schools and if you visit:-
    https://gov.wales/about/open-government/freedom-of-information/responses/?lang=en

    You can see my own FOI response at ATISN 12553 which shows that pupils from Non Welsh speaking homes who are placed in Welsh medium schools are behind on average in all subjects in comparison with pupils in similar English medium schools and well behind their fellow classmates who come from Welsh speaking homes by the end of primary phase.
    If I thought that Eurfyl ap Gwylym or Gerry Holtham cared one bit about the implications of using early submersion teaching techniques, something UNESCO preaches against worldwide, I would continue at length but I just ask that they consider this; we have made the economy of Wales subservient to the culture and language of Wales for 40 years and more. We are expanding Welsh medium education whilst failing to address the wider implications of making pupils learn through the medium of a second language and Wales will end up poorer for this failing.
    Yes Gerry, many countries in Europe successfully teach their school pupils a second language; that language is the most ubiquitous, easily accessible and economically useful language on earth; English. One thing they do insist on though; early learning, literacy and numeracy, the building blocks of academic achievement, is all through the FIRST language of the child.

  9. J. Jones

    “We could go the whole hog and abandon the costly Welsh Assembly and the extra layer of government that entails or we could abandon our costly and hugely restrictive spider web of Welsh language legislation and measures.
    Any of that seem likely to you?
    Poverty it is then.”

    Your statement Mr Jones.
    We keep the WAG and we have poverty
    We keep Welsh language legislation and we have poverty

    With the WAG we have poverty. Actually with the WAG we have had increased investment, the fastest growing GDP of the 4 nations of the UK, an historical high level of unemployment, and have had lower unemployment in Wales than in the rest of the UK.

    My statement Mr Jones
    “Even Boris Johnson would have been too embarrassed to say such nonsense”

    None of your statistics back up your statements Mr Jones, that keeping the WAG means Wales will exist in poverty, that keeping Welsh language legislation means Wales will exist in poverty. They seem like the constant, meaningless, soundbites of an Abolish Wales Party / Glasnost foot solider following orders by parroting the usual anti-WAG propaganda and hijack every topic and turn it into an anti-WAG and anti-Welsh language rant.

  10. An apology and a mystery. Firstly when I said (above) that :-

    ” …if you visit:-
    https://gov.wales/about/open-government/freedom-of-information/responses/?lang=en

    You can see my own FOI response at ATISN 12553 which shows that pupils from Non Welsh speaking homes who are placed in Welsh medium schools…”

    I had not checked that the response had actually been published. It hadn’t.
    The mystery comes from this statement by Philip from Monmouthshire (where they have no WM secondary schools):-
    “None of your statistics back up your statements Mr Jones”

    It almost suggests that Mr Hughes isn’t interested in the data at all since he can’t have looked for it. My broad point is this; the economy and future prosperity of Wales DOES in large measure depend on how well we have equipped our young people to contribute to the country’s wealth. How the WG has handled education so far has been a disaster but in case anyone thinks that I am holding England up as a paragon of virtue when it comes to education policy…I’m not. The only reason that Wales does not look worse by comparison is the failure of the Westminster government to boost standards in England.

  11. Mr Jones I think you will find that it is actually you who hasn’t done any research on this issue. There are indeedy Welsh Medium Schools in the great Welsh county of Monmouthshire, including some in my home town, now city, of Newport.

    Again your statement Mr Jones.
    We keep the WAG and we have poverty
    We keep Welsh language legislation and we have poverty

    Your link simply shows your prejudice against the Welsh language. We should take the education system in Wales (and England) as a whole and not fixate one or two facts which happen to back up a union nationalists fantasy.

    Where is your evidence that Welsh language legislation will keep Wales in poverty. For that matter where is the evidence that bilingual countries are failed countries? We are not seeing it.

    You have even managed to contradict yourself by admitting that England also has problems with falling education standards. So England and Wales have major issues with their education system. Both are falling down the PISA tables, although both are ahead of the USA. We need to keep things in perspective my dear Mr Jones. This is not the fault of Welsh language legislation. Let’s not play nationalistic politics with education.

    We need grown up thinking on our education, not the silly games of unionist nationalists who claim to be seeing monsters under the bed.

  12. Mr Jones

    The links your have provided, and which you are obviously so proud of, simply state that in some aspects of education children from English speaking homes do marginally less well than children from Welsh speaking homes.

    Your statement Mr Jones.
    We keep the WAG and we have poverty
    We keep Welsh language legislation and we have poverty
    How does that equate to keeping Welsh language legislation means we have poverty? Can you kindly provide an answer to your original statements Mr Jones and not go off at

    Mr Jones, if you don’t mind me saying old chap, you seem to have put yourself behind the 8 ball

    ps there are actually Welsh medium schools in the great, and sadly historic, county of Monmouthshire, including my old school

  13. I can’t help thinking it’s time somebody enforced the Comments Policy.

    Meanwhile, any chance of a more relevant financial comparison between Wales and a similar NUTS1 Region in England – the North East springs to mind?

    In terms of perceived need they don’t look too far apart and the North East has the unique distinction, I would say advantage, of having voted in 2004 against the crippling extra layer of legislative devolution which appears to be significantly responsible for the dire state of front-line services in Wales. Looking at how the money is spent, Wales has an Assembly it doesn’t need, 60 politicians and their entourages it doesn’t need, a government it doesn’t need, numerous duplications of facilities which already exist at UK level it doesn’t need, as well as the promotion and facilitation at unknown cost of one language more than the vast majority of people in Wales actually need.

    Some people in the political class in Wales seem to be incapable of differentiating between what the people of Wales need and what they as a group want. So far, what they want and how they have chosen to spend the available funding seems to have been incredibly wasteful and destructive. With no end in sight…

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