Joe Rossiter considers Senedd manifestos in the context of a tight fiscal context
With all parties manifestos now launched and campaigning well underway, we can finally start discussing the ideas of this Senedd election. Specifically, we can start to scrutinise the plans put forward by all parties to spend Wales’ £27.5bn budget over the next four years.
Further to my chance to discuss these issues on the IFS Zooms In podcast, I’m going to discuss some reflections that cut across all of the manifestos, identifying some key themes.
The next Welsh Government faces a list of systemic challenges, a limited budget and only some of the policy levers with which to solve them. It’s a tough task.
Facing up to fiscal reality?
As expertly laid out by both the Wales Governance Centre (WGC) and the Institute for Fiscal Studies (IFS), the broad fiscal picture facing the next Welsh Government is going to be considerably challenging. The pace in the real terms increase of the Welsh Block Grant is forecast to slow over the course of the next Senedd. All of which is predicated on UK Government not changing their planned spending commitments, which is something that devolved actors can’t control or plan for anyway.
The WGC note that ‘if NHS spending grows by the long-run historical average of 3.6% per year in real terms (as it has since 2019-20), then non-NHS spending would have to fall by 2.7% per year in real terms to 2030-31’. As no party is going into the election stating they will significantly cut spending on health and social care, these cuts are almost baked in for the next Welsh Government.
As such, there isn’t much money in the pot waiting for the next Welsh Government and they are expected to tackle some systemic challenges with it.
Fundamentally then, parties will need to balance the books if they offer new spending commitments or decrease the amount of revenue coming into the Welsh Government budget (through cutting devolved taxes, for example). Or they need to outline cuts to public services.
But, are parties facing up to this fiscal reality? It doesn’t appear so.
Navigating the trade offs required?
Despite this context, all parties remain conspicuously silent on the trade offs required to deliver each of their ambitious policy agendas in what will be a very tight Welsh Government budget in the years ahead.
Failure to meaningfully engage in the fiscal reality they seek to inherit stores up challenges for the future. Not least risking an electorate which becomes increasingly suspicious of promises which will struggle to meet the scale of their stated ambitions.
Is it unreasonable to expect a clear articulation of policy trade offs from manifestos? Manifestos are, after all, not programmes for government, or budget documents. But, at this stage, they have become little beyond a suite of retail policy offers.
In a Welsh context, with devolved budgets and policy levers constrained, if everything is a priority, nothing is. Thus, to an even greater extent than the UK Government, we have neither the powers nor funding to do it all.
The need for trade offs is broadly alluded to in a couple of manifestos, but this is insufficient. It’s one thing to say you would concentrate resources on fewer government initiatives or that you will eradicate inefficiencies. But what initiatives that stack up to the size of either cuts to government revenue or increased spending commitments?
We need honest engagement with these questions, rather than hoping that we can ride notably weak public scrutiny on the policy detail. Indeed, recent research by Cardiff and Swansea Universities suggests that the media are not challenging policy proposals during the campaign to date, providing coverage, rather than much needed scrutiny.
Syniadau uchelgeisiol, awdurdodol a mentrus.
Ymunwch â ni i gyfrannu at wneud Cymru gwell.
We need to see engagement with the fundamental questions which public services in Wales face. Given the budgetary position, what are the priorities and where is spending going to be cut to enable that prioritisation? With multiple public services facing unsustainable long-term funding pressures, what will be reformed to enable them to improve their performance? Will services be cut or will revenue be raised to increase spending?
The value of kicking these difficult conversations to an independent commission to consider is also limited. We’ve been there and done that. Successive Welsh Governments certainly haven’t been shy of establishing independent commissions. These commissions do not negate the need for difficult policy decisions to be made – they merely delay them (in the best case scenario).
A more proportional electoral system – two competing visions for Wales’ future
This election sees the application of our new electoral system in Wales, the closed proportional list system. This will make it near impossible for one party to form an outright majority. Instead, coalitions and collaboration between parties (whatever form this takes, whether in minority government, a confidence and supply agreement, or a formal coalition) will be essential to maintaining the stability of the next Welsh Government.
Put simply, parties are going to have to work together, however formally, in order to pass budgets and deliver their policy agendas.
A number of key policy proposals are shared across multiple parties’ manifestos. Lots of parties are occupying similar policy ground in this campaign, especially in regards to how they plan to use the Welsh Government budget in the years ahead.
We can, thus, broadly speaking, split the 6 parties in prime contention for seats into two blocks.
We have a right-of-centre block who are proposing to cut devolved taxes. These come in the form of tax cuts on Welsh rates of income tax as well as cuts to devolved taxation like Business Rates and Land Transaction Tax. These cuts will be costly to the Welsh Government’s budget, especially as they are a growing source of revenue. To pay for these cuts, parties point to some areas for consideration, improving the efficiency of Welsh Government, closing overseas offices and dissolving quangos. The Welsh Conservatives also propose expanding spending on childcare, as one example of increased spending.
A challenge with these proposals is that the efficiency savings indicated are minimal in comparison to the size of the Welsh Government budget and further cuts may well have an impact on the delivery of public services. Which is not to say that we shouldn’t heavily scrutinise every pound of public sector spend – but a vision for a lower tax nation, inherently requires correspondingly lower spending.
A second challenge is that dissolving quangos doesn’t necessarily mean saving all of the money allocated to them at face value. Taking the most significant of the quangos proposed, in Natural Resources Wales (NRW) as an example; NRW manages 7% of Wales’ land, manages 56 nature reserves and delivers projects on critical issues like flood defences and responding to incidents. These activities, even if NRW was abolished, would still need to see public spending allocated to them.
Gofod i drafod, dadlau, ac ymchwilio.
Cefnogwch brif felin drafod annibynnol Cymru.
The second block is broadly left-of-centre, or progressive, who promise new spending (albeit of differing scales), but provide less detail regarding where the corresponding cuts to other budget pots will come from or outline revenue increases required in order to balance the budget. New spending on areas like capital investment, housebuilding, investment in social care, enhanced childcare offers or new social security support all will necessitate taking money from other government spending areas. But what will be cut to enable this spending to happen is not discussed in any clear detail.
These two competing visions for Wales’ future are both legitimate and credible. A vision for Wales that has lower tax and spending and a Wales which has higher spending (with higher taxation or cuts to some areas necessary). But the manifestos do not reckon with the budgetary realities of delivering either of these visions under the current fiscal conditions.
Health and social care – an example of a lack of meaningful engagement of policy trade-offs
An example of where the need to negotiate trade offs is perhaps most stark is in the health and social care sector.
Our health and social care services badly need a shift in governance, it will take political bravery to make these decisions.
Increasingly, delivering health and social care services is what devolved government does, encompassing 50% of the entire budget. Demographic shifts (an ageing population and a decline in the working age population) over the next couple of decades suggest that we are charting an unsustainable course, with more demand on services and fewer people to pay for them.
Multiple parties aim to move our system towards a more preventative health system. That is, investing in projects which improve the health of our population, keeping them healthier and away from hospital care, which is most expensive to deliver (as need is most acute and thus treatment is more expensive). Most parties make a commitment to move funding from secondary care (hospitals) to primary care, delivered closer to communities.
The reality of delivering this approach also doesn’t just mean moving money around within the health and social care budget itself, but also moving it out of it altogether. A preventative, public health approach to our health system means investing in a different way, towards long-term aims. It means building active travel networks and funding local authorities to build and manage leisure facilities, for example.
At the same time, all parties also prioritise tackling spiralling waiting lists for procedures and shortening A&E wait times. Is it possible to do both? Can you continue to increase investment in the health and social care budget whilst also moving money out of secondary care and the health and social care budget altogether? The nature of the budgetary outlook suggests this is a near impossibility.
Political leadership is needed to make the tough choices required transition to a more preventative health system. It means applying a long-term lens to our systemic health challenge. It also means making a political argument for why shifting investment away from hospitals will be beneficial in the long-run. Instead, we are seeing parties promise to do so, whilst not indicating where cuts to primary care will take place or what other budget lines will pay the price.
Our health and social care services badly need a shift in governance, it will take political bravery to make these decisions.
Offsetting tough decisions for the second half of the 7th Senedd
Numerous parties have also suggested that they would achieve their more ambitious spending priorities by the later years of the 7th Senedd. In part, this is an attempt to recognise the challenges of immediately achieving policy goals if they were to form the Welsh Government for the first time, which is sensible. Yet, it is also used to provide less detail on how these projects will be affordable.
Whilst budgets beyond 2027-28 may be not as tight, they do not offset the need to make trade offs. Difficult decisions need to be made – offsetting them until the second half of this Senedd does not make them go away.
A profound lack of fiscal firepower
The IWA have long called for Welsh Government to gain enhanced powers over its budget. Welsh Government has fewer borrowing powers than local authorities and have inflexible year-to-year budget setting arrangements with only limited ability to carry money across financial years or move spending from capital to revenue.
Tax
Furthermore, Wales has a low tax base, with few additional or higher tax payers (89% of Welsh tax payers are on the basic rate, likely rising due to fiscal drag). As such, any increase in tax, in order to raise any meaningful level of revenue, would have to hit basic rate tax payers. No political party has found this route politically attractive. Hence why devolved powers to alter the rate by 10% either way have never been used.
Whilst Scotland has the ability to alter the number of income tax bands (a power it has used, with them now having six bands rather than three). Some parties have proposed that granting Wales similar powers would enable a future Welsh Government to make more progressive changes to its income tax collection and raise additional revenue. Yet, such a solution does not fundamentally change the tax base Wales has. Again, calling for these powers, however justified, does not mean that raising tax revenue will not leave some median income households losing out. To collect more tax, someone has to pay. Council tax revaluation is certainly a good place to start, however.
Where devolved tax powers have been used to date, they have been used to grant powers to local authorities in Wales to collect new taxes, such as the tourism tax or new tax rules for second homes. These forms of taxation are certainly welcome. Yet, they do not generate income for Welsh Government and are mainly a means of incentivising or disincentivising behaviours which have a cost to communities. Whilst these taxes are welcome, they are not large revenue raisers which will meaningfully impact the Welsh Government budget in the years ahead.
Private Investment
Due to devolved government’s severely constrained and inflexible budget and borrowing powers, some parties, across the political spectrum, rely on private investment to fill some of the budget holes required to deliver the large capital investment projects they seek to deliver.
For example, Reform UK relies on this to deliver landmark road building schemes such as an M4 relief road, pledging to ‘seek private investment.’ Welsh Labour rely on the mutual investment model to deliver its headline £4bn (over ten years) hospital capital investment pledge.
The mutual investment model means the private sector bears the immediate cost of delivering large scale capital investment projects. The private sector gets paid this money back through ‘service payments,’ plus interest, which last for a lengthy period of time. In the process, projects delivered this way are estimated to be more expensive to deliver.
The problem with this model is that it pushes the cost of paying for projects onto younger and future generations alike, contributing to rising intergenerational unfairness. These payments will also eat into day-to-day spending in future budgets, further constraining future Welsh Government’s already limited fiscal room for manoeuvre.
Whilst using the mutual investment model or relying on private investment to deliver capital projects is a symptom of our limited fiscal firepower, it remains a fairly unattractive option.
Public service performance against spending
Welsh Government has real power over our lives – but none more so than overseeing the management of key public services in Wales, from health and social care, education and through local government. Both the IFS and WGC’s have undertaken recent work to determine the level of public spending on devolved services in Wales compared to England’s per head of population. The WGC suggests this that Welsh spending per head is around 115% of Englands, whilst the IFS suggest this figure is higher, at over 120%. That this figure is quite so difficult to determine highlights the lack of clarity over levels of public spending between different levels of government, which is unhelpful for both public understanding and for enabling scrutiny. The Holtham Commission (albeit conducted over a decade ago in 2010) estimated that Wales required roughly 115% of the per-capita spending of England to deliver equivalent services in Wales as opposed to England.
The implications of this are twofold.
Firstly, parties who are calling for the replacement of the (however imperfect) Barnett Formula (which sets the size of the Welsh Block grant, uplifted annually based on English spending on English services) with a ‘fairer’ funding model for Wales, need to outline what ‘fair’ means to them. What increased figure is enough to recompense the higher need of delivering services in Wales with our poorer, less well and more spread out population (which are significant)? Additionally, this also means acknowledging the reality that there is little appetite in Westminster or Scotland for fundamental reform to the fiscal settlement
Secondly, there is an important conversation to be had both in this election campaign and the years ahead about the poor performance of public services in Wales, from health, to education. A clear analysis of what isn’t working and what fundamental reform to how we deliver services is needed. As the IFS analysis points out, part of the poor performance ‘reflects policy choices, and decisions taken by devolved administrations over how’ public services should be ‘organised and operated.’ In answering these questions we have to either answer how we would seek to use existing funding to deliver better outcomes or how you would raise revenue to spend more money on delivering them. Sufficiently answering both of these fundamental questions is critical.
A key question in the years ahead will be how to undertake reform in the delivery of key public services, which are underperforming and whose budgets are on an unsustainable path i.e. health and social care, education, higher education, local authorities, childcare and improving perpetually poor economic outcomes.
Conclusion
The next Welsh Government faces a list of systemic challenges, a limited budget and only some of the policy levers with which to solve them. It’s a tough task.
Clear priorities and meaningfully engaging with the trade offs required to solve any of them are therefore critical. Importantly, this involves orienting our budgets and governance to delivering better outcomes.
To be successful, the next Welsh Government will need to engage in these fundamental questions. Translating manifestos into delivery will be considerably harder given the lack of transparency over how commitments will be funded.
If you want to support our work tackling Wales’ key challenges, consider becoming a member.
