In squeezing public spending for another four years to 36% GDP, the November Spending Review contained several stings in the tail. As well as the zig-zag on tax credits (deferred to Universal Credit not abandoned), the 4.5% real terms reduction cut in the Welsh block over the next four years (2016 -2020) is back-loaded, deepening from 2017. The draft 2016-17 Welsh Budget last week was greeted with some relief across many public services (though not all) but there will be tough decisions ahead for whoever forms the post-election Welsh Government. Another, less noticed, headline is the degree to which the Spending Review is widening the gulf between England and Wales in the approach to public services. Some knock-on impact on Wales seems likely, despite the radically different philosophies.
A joint presentation last week on the Spending Review and its fallout in Wales by the Wales Public Services 2025 Programme and the Bevan Foundation pointed out that the total devolved resource budget will have fallen by over 12% in real terms over the decade.
The vagaries of Barnett mean that even the positive news on front-loaded NHS spending in England did not translate fully into consequentials for Wales, among other reasons because the Whitehall Department of Health budget contained partially offsetting cuts in public health and other preventative activity.
The Welsh Government was able to increase health spending this year but, given the impact on the consequential for Wales as the real terms increases for NHS England tail away over the Spending Review period, it may be more difficult in future years. NHS England is seeking to address future demand and cost pressures through a heroic £22 billion efficiency drive which, if delivered, will dwarf the increased funding announced by the Chancellor. Will Wales have to go down a similar road or are there other options ?
The 1.4% cut in local government aggregate exchequer funding in Wales in 2016-17 was seen as comparing well with England (recognising that there are still winners and losers). But the whole local government model in England, including its relationship with central government, is changing fast. If George Osborne is successful in his devolution drive, with English local authorities becoming self-financing through council tax and business rates, it will contrast deeply with the current model in Wales. But can Wales completely avoid the implications if, for example, the local government revenue grant in England comes to an end?
Similar questions may arise with social housing. The Spending Review’s headline-grabbing commitments on housing were primarily about fostering private building and ownership, social renting did not really figure – other than the downward pressure of capping housing benefit in line with Local Housing Allowance. The signals in the Welsh draft Budget reflect a continued commitment to social housing but long-term questions include the impact of the changes to the UK tax and benefit system on social tenancy in Wales and on the Welsh block if perceptions of a diminishing role for social renting in England are born out.
The fundamentals of the benefit changes did not change much and will hit the poor hard. The Bevan Foundation presentation showed that some low-income groups could lose as much as £1,500 a year as the package of tax and benefit changes works through. The implications for poverty levels should not be understated – they continue to pose one of the toughest challenges for policy-makers and public services in Wales.
Reports that the Spending Review marked the end of Austerity proved premature. There are difficult shoals ahead for Wales to navigate. Even if the Barnett floor is satisfactorily negotiated and Wales takes on income tax varying powers, their impact on public spending levels is unlikely to be significant this side of 2020. The common assumption is that UK public spending will start to rise again from 2020, in line with national income, once the UK budget has gone into surplus. But, depending on the Westminster appetite for the small state, it may be wise not to bank too much on that happening.
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