IWA Analysis: Setting Wales’ economic course – the Spending Review from a Welsh lens

Yesterday’s UK Government spending review is a vital milestone which sees the government setting out its spending priorities for the next three to five years. With a considerably under-pressure budget and an uncertain economic context, the government has indicated which areas will receive more cash and which will receive real-term cuts. Difficult trade-offs on priorities have been made in what is a tight fiscal position.

It’s important to state at the outset that this is a spending review and not a budget, with the UK Government committing to one fiscal event a year (in the annual Autumn budget). As such, this review is not about tax policy changes or changes to how the government raises revenue more broadly, but where money is being spent and what UK Government departments spending envelope is for the next three to five years.

The consequences for the review in Wales are two-fold. It sets UK Government departments’ spending commitments in Wales in the years ahead, including the Wales Office, but also indicates the future of Welsh Government’s budgets: around 80% of Welsh Government’s budget is set by the UK Government block grant. Where UK Government allocates funding in areas devolved to Wales, Wales will receive Barnett consequentials for what Welsh Government can spend. This is particularly the case for areas like education, health, housing and local government.

In Wales, the spending review will also have distinct political implications ahead of the Senedd elections next May. This review will frame the terms of the debate and form the basis for spending commitments put forward in the forthcoming party manifestos.

Importantly, this should not just lead to debates around the relationship between Welsh and UK Labour (and what this is or isn’t delivering), but also lead to meaningful debate around the budget realities that await the next Welsh Government.

Importantly, this should not just lead to debates around the relationship between Welsh and UK Labour (and what this is or isn’t delivering), but also lead to meaningful debate around the budget realities that await the next Welsh Government. This is the economic and fiscal framing that the next Welsh Government will be working with and will set the conditions for what they are able to practically deliver.

Here is our immediate reaction to the spending review and what it means for Wales.

Transport, rail and the challenges with the Barnett Formula

The key Welsh theme coming from the Spending Review was that of rail investment. Rail funding has become a totemic political issue in Wales, with historic underfunding received by Welsh Government from projects based in England. 

The Spending Review sees the announcement of £445m for rail investment in Wales. It is without question that this funding is significant and represents much needed investment in Wales’ rail network, which is a cornerstone of the nation’s future transport system. It’s important to note that this spending will be spread out annually over the next 10 years (albeit with some spending frontloaded in the next three years), which looks far less transformative. 

The Treasury and Welsh Labour will champion this figure as a result of ‘two Labour governments working in partnership together’ and seeking to deliver tangible benefits to Wales that formed the basis of the Welsh Labour campaign in last year’s General Election. 

Plaid Cymru, Reform, the Welsh Conservatives and the Welsh Liberal Democrats have all stated that the funding is not enough to make up for historic underfunding on rail. Similarly,analysis by Wales Fiscal Analysis suggests that funding is not enough to compensate for the designation of Hs2 as an England-and-Wales project, with them branding today’s announcement on rail ‘underwhelming’.

This shows that the way Welsh Government is allocated funding through the Barnett Formula, particularly on rail investment, is unclear and lacks transparency. Decisions on allocation of spending should be apolitical and represent a technical way to derive Wales’ fair share of funding. This should not be about the Secretary of State for Wales having to fight for fair funding. Reform is badly needed to a creaking system which has underdelivered for Wales for years.

Furthermore, a fortnight ago, the Welsh Cabinet Secretary for Transport Ken Skates outlined his vision for rail investment in north Wales. His proposals for a north Wales metro service and wider upgrades were costed at £2.1bn. With a £445m investment from UK Government for projects in both north and south Wales, how, and whether, these figures will stack up remains to be seen. Nonetheless, the figures certainly show that, whilst yesterday’s figure is welcome, sustained investment is required in Wales’ rail network, not to mention further investment in bus services and active travel infrastructure.

To put the £445m figure into further context, last week the Chancellor announced £15bn for transport projects across England, outside of London. Other UK regions investment levels include: £2.5bn for Greater Manchester, £2.1bn for West Yorkshire and £1.6bn for the Liverpool city region. The West of England, which has a similar amount of the UK’s rail network, will receive £800m. The headline figure announced for rail in Wales is, therefore, part of a wider UK Government strategy of investing in transport infrastructure outside of London in an attempt to increase economic growth, productivity and improve living standards in a tangible way. Whether or not this funding represents a ‘win’ for Labour will continue to set the framing for the Senedd elections, but the fundamentally arbitrary nature of rail funding to Wales remains a systemic issue.

Focus will now shift to how the UK Government can ensure that the investment is delivered effectively – on budget and on time. They will also hope that public investment will crowd in private sector investment in order to further increase economic activity.

Implications for the Welsh Government Budget

With increased spending on devolved areas in England, the Welsh Government budget has been uplifted, with an increase of £1.6bn on average per year. Welsh Government will receive £22.4bn annually on average in 2026-27 and 2028-29 from the Welsh Block Grant. This is an uplift from the £21bn for the current Welsh Government Budget (25-26).

This increased figure provides the majority of spending available to Welsh Government, typically accounting for 80% of the whole Welsh Government budget.

Much of this uplift comes from increased spending from UK Government on reserved policy areas. This is particularly the case with health, the big winner in this Spending Review, which will receive a 3% real-terms increase in spending per year. With health and social care, particularly tackling waiting lists, a policy priority shared by both UK and Welsh Governments, one would expect this funding to be kept in the health budget in Wales.

As always with Barnett consequentials, how this money is allocated  will be up to the current Welsh Government and then the parties campaigning to form the next one after the 2026 Senedd election. Difficult decisions will still remain, with potential for cuts to some departments in the years ahead, particularly given the frontloaded nature of funding. These will be problems that the next Welsh Government will have to grapple with for 2027-28 and 2028-29 budgets.

Coal tip safety

The Chancellor announced £118m of investment for coal tip safety, in order to maintain and ensure the safety of communities having to deal with the legacy of disused coal tips.

Earlier this year, the Welsh Government estimated that up to £600m would be needed to ensure the safety of old coal tips. Some local authorities in Wales have also indicated that more money will be required from UK Government, in evidence to the Welsh Affairs Select Committee earlier this week.

Seemingly, any further funding provided by Welsh Government to ensure the safety of coal tips and undertake remediation work will come at the cost of other parts of Welsh Government’s budget.

Investment

The spending review unleashes a raft of public investment in order to stimulate economic activity and drive growth rates, which have been stagnant for over a decade. This has partially been enabled by a reform to the Chancellor’s fiscal rules. It is welcome that UK Government are investing in long-term projects to boost the economy. That such spending is spread across the UK also suggests a revival of a more place-based economic strategy, reminiscent of the levelling up approach. Wales could stand to benefit from an approach which recognises the role of more evenly distributed investment across the UK.

Areas of government which gain particularly from this investment include transport, energy, housing and defence. This focus on long-term capital expenditure comes at the cost of revenue, or day-to-day spending, where the settlements are less generous.

The hope with these investments is not only to increase living standards, but to grow the economy. Yet, the trade-offs required to achieve this increased investment will likely become apparent in the Autumn Budget, where the Chancellor will likely have to raise revenue in order to pay for investment. In the longer term, if these investments don’t add up to growth, the cost of debt repayments to pay for increased borrowing will continue to be onerous.

Focus will now shift to how the UK Government can ensure that the investment is delivered effectively – on budget and on time. They will also hope that public investment will crowd in private sector investment in order to further increase economic activity.

This Spending Review sets the economic context for parties going into the Senedd 2026 election, and the political reaction to it highlights that the Senedd campaign is well and truly underway. 

The Spending Review is not the end of the story on investment, with the Industrial Strategy expected to be published imminently. How much investment Wales may get from this remains to be seen, but some focus areas align with areas of strength in the Welsh economy such as advanced manufacturing, clean energy, life sciences and the creative industries. With this sector-based approach seemingly putting different parts of the UK in competition with each other for investment, how Wales performs will be of importance. Similarly, how Wales benefits from the increase in defence spending announced in the Spending Review will become more apparent in the months ahead.

The economic context is set

So, what does this Spending Review mean for Wales? It means an increased Welsh budget in the future and an increase in investment not only in Wales, but also the rest of the UK. Although we welcome a move towards a long-term approach to investment, whether this investment in capital projects will be enough to grow the economy and ease pressures on the UK budget remains to be seen.

Whilst this is a moment when spending commitments are made, it’s important to also note that how and where this money is spent is equally important, especially when it comes to delivering the industrial strategy and investment in defence and energy.

This Spending Review sets the economic context for parties going into the Senedd 2026 election, and the political reaction to it highlights that the Senedd campaign is well and truly underway.

The Review will be felt more keenly by Welsh Labour, who cannot afford to wait to see tangible benefits delivered from investment. All election campaigns must also meaningfully engage with the fiscal and budgetary pressures they will encounter should they form part of the next Welsh Government. We know the envelope, we know the challenges, so lets have meaningful, costed policies to put it to best use, whilst also acknowledging the shortcomings of the current budget allocation process.