IWA Analysis: Budgetary pressures in Wales are here to stay

Joe Rossiter argues budgetary pressures in Wales are here to stay following the announcement of a budgetary shortfall

Joe Rossiter writes that Wales’ next First Minister will need to act boldly in the face of systemic challenges, following the announcement of a budget shortfall

Yesterday Welsh Government provided a written statement detailing how their financial position after the UK Spring Budget was up to £900 million lower in real terms than when the budget was set by UK Government. The statement describes how this is ‘the toughest financial situation we have faced since devolution.’

To anyone familiar with economic policy in Wales, this is not particularly surprising. Nor is the fact that Welsh Government put this shortfall down to the UK Government ‘mismanagement of the economy.’ Inflation is biting the UK economy, and it’s biting hard. The UK has the highest inflation rate in the G7, and higher than the US and the Eurozone average, both of whom seem to be in the process of bouncing back. Inflation in the UK, however, has remained at around a 40-year high.

When it comes to Wales, this means that its £20 billion budget is worth much less. In simple terms, we get less for the money than we used to. Whether revenue or capital funding, this cuts across the entire budget. It goes without saying that a £900 million shortfall is significant.

Whilst this budget shortfall is catastrophic, it is only the long-term fixes to our fiscal framework and a much more productive and collaborative relationship with UK Government which will help revive Wales’ economy.

It’s important to state that negative UK economic events, like inflation, have a disproportionate impact on people in Wales, a nation with lower incomes (and disposable incomes), lower productivity and higher poverty rates than most of the other UK nations and regions. It means people in Wales are at the sharp end of economic hardship that comes from economic failure. Whether that’s through real terms wage decreases, food and energy price rises, or cuts to services which are targeted at helping those most in need.

Whilst Welsh Government have rightly highlighted the need, when making cuts, to prioritise protecting essential public service delivery and helping those in greatest need, this process will be painful. After over a decade of austerity economics, which has cut public service delivery in Wales to the bone, this will cause further harm to communities. These cuts are also coming at a time when people across numerous income brackets are already feeling a significant squeeze on living standards. Consecutive interest rate rises from the Bank of England play into this.

So, budget cuts are coming, whether they come from public service delivery, the removal of support services, or pulling back from vital investments that are needed to decarbonise and transform our economy for the future. And they will be keenly felt. Welsh Government have made it clear that all parts of government must make budgetary cut plans. So no area is out of scope from the scissors.

I wrote about the Spring Budget here earlier in the year. At the time I noted how, even without the gap, the budget failed to deliver for low-and-middle income households in Wales. That we are in this situation will bring unbearable pressure to many. We should anticipate more physical and mental stress as well as financial.

This is a bleak picture, with real challenges ahead for Welsh Government and public services and, most importantly, people in Wales.

Gofod i drafod, dadlau, ac ymchwilio.
Cefnogwch brif felin drafod annibynnol Cymru.


Yet the systemic economic challenges facing Wales go far beyond the budget shortfall. As the IWA’s Fiscal Firepower paper clearly articulates, the big challenges we face, whether decarbonising our economy, tackling regional inequality, restoring our crumbling infrastructure, or lifting people out of poverty require transformative economic interventions. Such policies, those that could truly impact lives, are unattainable for a Welsh Government whose borrowing powers sit at £150 million a year, and whose annual budget cycles constrain long-term policy and investment.

Whilst this budget shortfall is catastrophic, it is only the long-term fixes to our fiscal framework and a much more productive and collaborative relationship with UK Government which will help revive Wales’ economy. Sticking plaster solutions to seemingly-terminal conditions will not cut it. But who in Wales is willing to administer a cure?

Challenges for who comes next

The budget shortfall announcement coincided with the newspiece that First Minister Mark Drakeford is set to leave the Senedd at the next election in 2026.

That’s not incredibly surprising news. We’ve known for a while that Professor Drakeford planned to stand down as Welsh Labour leader ahead of the next election. But the loss of such an experienced politician from the Senedd as a whole is to its detriment.

This re-announced news will act as the starting gun for those who wish to succeed Drakeford and become the next Welsh Labour Leader and First Minister. The IWA’s the welsh agenda print magazine has featured two of the expected runners-and-riders for the role as cover stars of the last two editions (available to buy online). Where Welsh Labour choose to go next, at a time when Wales is facing such daunting challenges as highlighted above, will be instructive.

Now is the time for candidates to think boldly, but realistically, about the policy direction they want to take Wales in. All of which are dependent on a spluttering economy that is failing to deliver for low- and middle-income households. Our economy must sit at the heart of the campaigns to succeed Mark Drakeford.

The UK Context

A broader question for any candidate is, with Labour riding high in the UK polls, what do they expect to change if they were to be met with a Prime Minister with a red rosette? For too long scrutiny and transparency of responsibility for Wales’ economic failings have been the result of political football. The Welsh Conservatives blame the Welsh Government, Welsh Government blame a Conservative UK Government. But were this to change, what then?

Only a radical rethink will meet the challenge. Which candidate for First Minister in 2026 is willing and able to provide this?

It is unlikely that a UK Labour Government would turn on the fiscal taps for Wales, or look to offer any constitutional change that puts economic policy levers into Welsh hands (beyond the intention to give Welsh Government control over post-EU funding, which is in itself significant). UK Labour strategy on the economy seems so far to be not to over promise ahead of an election, due to the economic realities they would likely inherit. Fiscal responsibility and the economic orthodoxy of the last decade look set to remain at a UK level, and any new First Minister would be wise to be aware of this.

Wales’ economic challenges are now all too clear to see. Now is no time for timidity: we need long-term, system-wide policy interventions to create the successful, green and fair economy we all want to see. Yes, Wales’ fiscal hands are tied behind its back by the UK Government, and the economic context does Wales no favours. But any would-be successor to Mark Drakeford has to tackle these challenges head on, offering transformative solutions to transformative problems. Whether this is attracting private finance, looking to invest in renewables in Wales, work for our economy, or through raising borrowing powers to invest in the infrastructure of the future, there is plenty of space for Wales to go in a different direction and deliver for its people.

Only a radical rethink will meet the challenge. Which candidate for First Minister in 2026 is willing and able to provide this?

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Joe Rossiter is the IWA's Co-Director, responsible for the organisation's policy and external affairs.

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