Harry Thompson analyses the Welsh Government’s budget, highlighting its demonstration of the weaknesses in the devolved fiscal settlement.
This week, the Welsh Government published its Draft Budget for 2023-24, with bleak news across the board.
The Welsh Government is attempting to position itself as the provider of some shelter from a ‘perfect storm of financial pressures’. Although there may be some substantial holes in that shelter, they are hoping that people in Wales consider themselves better off with it than without it.
In this budget, that shelter includes £165m extra for the NHS and an additional £227m for local government, which will help to deliver a welcome measure in continuing to pay the living wage to social care workers. It also includes a £460m 2-year business support package, consisting of frozen business rates and increased rates relief for retail, leisure and hospitality businesses, increasing from 50% to 75%.
But these are directed at services, authorities, and businesses that are fighting inflation themselves. Both the health and social services and the local government and finance budgets will rise by around 6%, falling far short of inflation. This extra cash will not prevent the need to deliver vital services that are facing continuously increasing demand with fewer resources and staff members.
The holes in the shelter provided are also growing wider. The budget told us that the Welsh Government’s winter fuel support scheme will end next year, meaning that warm home payments of £200 for those on benefits to keep the heating on will come to an end.
Wales is one of the poorest parts of this now-poorer union.
This will have an impact on the most financially precarious. Wales is a poor country by European standards. Resolution Foundation analysis in 2020 found that benefits make up 15% of Welsh average incomes, compared to 10% of the UK average. Clearly, this is concentrated amongst the lowest earners, who will feel such changes acutely, whilst being least able to cope with price rises.
That same analysis (using 2017-18 data, so partially outdated) found that around 70% of the Welsh population earns under £20,000. The Financial Times recently described Britain as ‘a poor society with some very rich people’. This is accurate. The living standards of many British people have suffered a relative collapse over the last decade or so, particularly among lower- and middle-income earners.
Consider our closest neighbour. Analysis by the Financial Times finds that in 2005 Irish disposable household income in the 5th percentile (ie, the poorest group) was $17,890. In the UK it was lower, but comparable at $14,070. In 2021 the Irish figure was $27,280 and the UK figure was $16,670. Comparable living standards for the poorest have collapsed.
This is not just true for the poorest – in the 50th percentile the Irish figure was $43,230 in 2005, and the UK figure was $38,480. Today the Irish figure is $56,690 and the UK figure is $43,610. Meanwhile, unsurprisingly, the UK and Irish figures for the 97th percentile (ie, the wealthiest) are extremely similar. The incomes of the wealthiest have continued to grow, whilst the economy has simply stopped delivering an improvement in living standards for low- and middle-income earners.
This is replicated across comparisons with countries the UK would previously have seen as its peers.
The Resolution Foundation’s Living Standards Audit 2022 highlighted that the median UK non-pensioner income grew by 12% between 2004-05 and 2019-20, compared to the previous average since 1961 of 40% growth every 15 years. Across Europe, only Greece and Cyprus saw less spending power growth from 2007 to 2018. Typical incomes rose by 27% in Germany and 34% in France but fell by 2% in the UK during this period. Typical incomes in the UK are now 10% lower than in France and 19% lower than in Germany.
The Welsh Government has very few tools to rectify the UK’s comparative decline in living standards
The sudden surge in inflation means that this living standards crisis is being felt as an event – the ‘cost of living crisis’ – but it has in fact been a process of degradation over the past two decades. The UK Government has indulged in bad practice: whether that is pulling money out of the economy during times of weak economic growth, pulling support from citizens to educate and upskill themselves, or removing the capacity of public services to deliver pre-emptively and preventatively, instead waiting for health and social issues to reach more expensive crisis levels.
Wales is one of the poorest parts of this now-poorer union. Incomes in Wales are around 7% below the UK average. The Welsh Government supposedly operates on a ‘reserved powers’ basis, with everything outside a proscribed list being devolved to the Welsh Government and Senedd. It may not be considered to have constitutional sovereignty, but in its devolved responsibilities it is meant, in many ways, to be the centre of decision-making for people’s lives in Wales.
But what practical tools does the Welsh Government have at its disposal to rectify this decline in living standards for low- and middle-income earners?
The answer, as the budget demonstrates, is very few.
The Welsh Government can mostly tinker within the economic reality that the UK Government creates
However the Welsh Government is not entirely powerless to act. It can think creatively. For example, it has embarked on large projects and reforms before: the South Wales Metro will leverage hundreds of millions to provide a genuine uptick in public transport provision in south east Wales, and the 21st Century Schools programme has delivered higher quality schools across Wales. The recent announcement of a publicly-owned renewable energy generator has the potential to finally allow people in Wales to benefit from their energy resources.
Creative ideas are out there, including well-established ones, such as using income tax powers to pay for social care. Newer ideas to Scotland and Wales that have caught attention include rent freezes, or even the Welsh Government playing a fuller role in housing to replace landlords withdrawing from the private rented sector – benefiting from rent payments.
However, this budget serves mostly as a stark reminder of the extent to which the Welsh Government can only tinker within the economic reality that the UK Government creates.
The IWA raised the Welsh Government’s lack of ‘fiscal firepower’ as a key consideration for policy-makers in our recent report, published in October. This budget demonstrates why. Existing constitutional powers mean very little in a world of consistent retrenchment of budgets. The Welsh Government may well have full responsibility for running the NHS, but ultimately it is Westminster that sets the block grant that makes up 80% of the Welsh Government’s budget, of which 50% is absorbed by the health service.
Declining budgets mean the power to run the NHS boils down to the power to manage its decline
If that budget is facing proportionate decline to the increasing demands of ageing on the NHS, then the power to run the NHS in many ways simply boils down to the power to manage its decline, which is what we have seen in recent years.
Unlike its UK counterpart, Welsh Government budgets are usually non-events. There are some high-stakes decisions to be made, particularly around local government funding. But in most scenarios the die is already cast by the decisions made in Westminster.
Taxation of products and corporations is mostly set in Westminster, as is the power to create new taxes, both permanent and windfall. The UK Government has given operational independence to the Bank of England, but it can rely on its decision-making to drive decisions around monetary policy and ‘printing’ of new money. And it can use this to borrow more ably. The UK Government deficit in the financial year to October 2022 was £84.4 billion. The Welsh Government can borrow to a total cap of £1bn in perpetuity, and only for capital spending (ie infrastructure projects).
There are of course calls for the Welsh Government to use one of its very few taxation powers, amending the 10p in every £1 in each band of income tax that it receives directly. Again, this is inflexible. Unlike in Scotland, the Welsh Government cannot create new bands or alter the current ones. And the current thresholds are not set for a Welsh income base. In 2022-23, around 0.6% of Welsh taxpayers will pay the Additional rate of income tax leveraged on earnings of over £150,000, compared to 2% in England. If you were designing an efficient system of income taxation for Wales, the bands would not look like this. They were designed on UK averages.
The Welsh Government’s budget contained few surprises because the real decisions had already been made in Westminster
This means that the Additional rate of income tax as it is currently set in Wales could raise only a very small amount of money, and if income tax powers are to be used for a real purpose rather than symbolically, the money would mainly be raised from Basic rate taxpayers.
In Scotland, there is a vastly different tax system. The tax-free personal allowance is reduced by £1 for every £2 earned between £100,000 and £125,000. There is a lower 19p ‘starter rate’ of tax on earnings between £12,571 and £14,732. Their higher rate is taxed on earnings over £43,663, rather than the £50,271 it is leveraged on in Wales, and it is to be increased to 42p. And the top rate of tax threshold is to be increased from its current 46p to 47p.
The Welsh Government’s budget contained few surprises because the real decisions had already been made in Westminster. In the face of an ageing population and rising demand on services, governments ultimately have two choices. One is to increase spending, and the other is to remove or water-down service provision. In its actions, the UK Government has clearly set a path of the latter for the entirety of the UK, and Wales does not have the ability to choose a different path.
The thread that runs through this budget is the impotence of devolution in Wales
Within the economic reality the UK Government has created, the Welsh Government budget contained important decisions that will provide a modicum of breathing space for local authorities and the health service. However, double-digit council tax rises are on the cards, and it is hard to describe the NHS as even treading water at this stage, never mind thriving.
There is more that can be done at a devolved level, but for the IWA, the thread that runs through this budget is the impotence of devolution in Wales. Devolution to Wales is strong in many areas, but far less so on economic policy. A lack of real ability to tax, to regulate, to reform industrial relations, and to borrow marks Welsh Government budgets as an exercise in managing the circumstances handed to them, rather than shaping the circumstances themselves.
Without change, we can predict with reasonable confidence that the next budget will be the same. The Welsh Government says in its programme for government that its ambition is to create a strong, green, and fair economy for Wales. It will only truly set us on this path when it stops trying to provide shelter from the storm and instead begins to create the political and economic weather itself.