1. Austerity and uncertainty: Welsh budgetary trade-offs to 2019-20
David Phillips and Polly Simpson
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2. Introduction
IFS funded by Wales PS 2025 to look at how the Welsh Government’s budget may change over the next 3 years
And what the knock-on effects to local government may be
Funding from the UK Treasury set out to
But might this change, especially in light of Brexit?
Might devolved taxes change the public spending picture?
Look at a number of scenarios for Welsh Government and council budgets and explore the financial trade-offs when allocating to different spending areas and setting taxes
A subsequent report by Wales PS 2025 researchers will examine the longer run picture
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3. The rest of this presentation...
The economic and fiscal context
The Welsh Government’s budget and budgetary trade-offs
Our budget baseline
What about Brexit?
What about tax powers?
Welsh councils’ budgets and budgetary trade-offs
What about council tax?
Concluding remarks
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4. The UK’s fiscal situation (I)
UK is part-way through a planned decade-long fiscal retrenchment to close a budget deficit that reached 10% of GDP in
Net tax rises and investment cuts complete
Still substantial cuts to day-to-day public service spending to do
Aim was to have a budget surplus by
New PM confirmed this target is to be abandoned following EU vote
Is this just a recognition that the target is no longer feasible?
Consensus (among economists) that Brexit will weaken economy and public finances
Or will existing spending plans be boosted and/or taxes cut to provide a ‘fiscal stimulus’ to a potentially weaker economy?
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5. The UK’s fiscal situation (II)
We don’t know!
Chancellor will announce updated plans in Autumn Statement on November 23rd
After the Welsh Government will set out its draft budget for next year
Still significant uncertainty about economic and fiscal outlook
Unclear what our future relationship with EU will be
If Chancellor loosens purse strings in the short-term budgetary pain will be delayed rather than avoided
Cuts may eventually need to be bigger (if economy is smaller)
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6. Welsh Government resource budget in 2016-17
Main expenditure group
2016–17 budget (£m)
Total DEL + NDR allocated to departments
13,744
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7. Welsh Government resource budget in 2016-17
Main expenditure group
2016–17 budget (£m)
Health, Well–being and Sport
6,572
of which: Core NHS
6,329
 of which: Public Health
177
of which: Social Services 66
Total DEL + NDR allocated to departments
13,744
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8. Welsh Government resource budget in 2016-17
Main expenditure group
2016–17 budget (£m)
Health, Well–being and Sport
6,572
of which: Core NHS
6,329
 of which: Public Health
177
of which: Social Services 66
DEL funding support for Local Government
3,302
Other local government spend 32
Communities and Children
358
Economy and Infrastructure
597
Education
1,339
Environment and Rural Affairs
275
Central Services and Administration
294
Total resource DEL allocated to departments
12,767
AME support for Local Government (NDR)
977
Total DEL + NDR allocated to departments
13,744
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9. Our baseline projection for Welsh Govt’s budget
Based on UK government’s March 2016 budget plans and forecast
And assumes £3.5 billion of planned but unallocated cuts go ahead
Welsh budget would fall 3.2% in real terms by
0.3% in , 1.4% in and 1.6% in
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10. Trade-offs when allocating across services
Protecting core and central NHS budgets in same way as England would deliver 1.6% real-terms increase by
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11. Real-terms change in budget, 2016-17 to 2019-20
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12. Real-terms change in budget, 2016-17 to 2019-20
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13. Trade-offs when allocating across services
Protecting core and central NHS budgets in same way as England would deliver 1.6% real-terms increase by
But require cuts to other areas, including local government of 7.4%
Also protecting the ‘formula grant’ councils receive for education and social services would reduce overall cut to this grant to 4%
But would mean cuts to other areas of 11.9%
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14. Real-terms change in budget, 2016-17 to 2019-20
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15. Trade-offs when allocating across services
Protecting core and central NHS budgets in same way as England would deliver 1.6% real-terms increase by
But require cuts to other areas, including local government of 7.4%
Also protecting the ‘formula grant’ councils receive for education and social services would reduce overall cut to this grant to 4%
But would mean cuts to other areas of 11.9%
If increase NHS budgets by 2% a year (6.1%) in total and protect ‘formula grant’ for education and social services
Other areas of spending face average 18.2% real-terms cut
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16. Real-terms change in budget, 2016-17 to 2019-20
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17. Trade-offs when allocating across services
Protecting core and central NHS budgets in same way as England would deliver 1.6% real-terms increase by
But require cuts to other areas, including local government of 7.4%
Also protecting the ‘formula grant’ councils receive for education and social services would reduce overall cut to this grant to 4%
But would mean cuts to other areas of 11.9%
If increase NHS budgets by 2% a year (6.1%) in total and protect ‘formula grant’ for education and social services
Other areas of spending face average 18.2% real-terms cut
Difficult trade-offs between NHS, key council-run services, and other areas like higher education, environment, etc.
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18. What about Brexit?
Figures above based on inflation forecasts as of March 2016
If post-referendum fall in pound pushes up inflation, Wales would face bigger real-terms cuts unless Chancellor boosted spending
If Chancellor pares back budget cuts in the short term, more money would be available over next 3 years
But even if Chancellor cancels all cuts, boosting NHS spending by 2% a year and protecting schools and social services would mean cuts of 8% to other areas over 3 years
And remember, Chancellor needs to cut eventually
Wales receives over £500 million in EU funding a year
Farm payments guaranteed to 2020 but other projects not
If, after 2020, Wales had to find money for all EU schemes from own budget, overall cuts more than double to 6.9% (from 3.2%)
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19. What about Welsh Taxes?
The new Land Transactions Tax and Landfill Disposals Tax will be too small to be used to generate sizeable additional revenues
e.g. Revenues from landfill tax would need to increase 5-fold to generate amount equal to 1% of Welsh Govt spending
If income tax were partially devolved, across-the-board 1p in the pound increase in rates could halve budget cuts faced
Although still tricky trade-offs
Across-the-board 1p in the pound cuts in rates would increase cuts from 3.2% to 4.7% by , making trade-offs trickier
Protecting NHS would require 10% cuts elsewhere (rather than 7.4%)
Need to carefully consider knock-on effects to spending if vary income tax policy
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20. Council revenues and spending
Budgeted spending by local authorities in Wales is £6.2billion in (excluding police)
18% council tax, 14% specific grants, 67% formula grant
Two-thirds of the budget is spent on schools (42%) and social services (27%)
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21. Spending changes since 2009-10 (I)
Spend area
budget (£m)
Change since
Education
2,660.3
-6%
Social care
1,583.2 1%
Total service expenditure
5,629.3
-10%
Total revenue expenditure
6,158.0
-7%
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22. Spending changes since 2009-10 (II)
Spend area
budget (£m)
Change since
Education
2,660.3
-6%
Social care
1,583.2 1%
Housing exc HB
111.8
-26%
Environment and regulatory services
373.3
-16%
Highways and transport
283.3
-21%
Cultural and related
207.8
-36%
Planning and development
80.9
-52%
Fire
133.9
-15%
Central services
194.8
-13%
Total service expenditure
5,629.3
-10%
Debt financing costs
332.5
Other revenue expenditure
196.2
219%
Total revenue expenditure
6,158.0
-7%
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23. Our baseline project for councils’ budgets
Based on the our baseline scenario for the Welsh Government’s budget
UK goes ahead with March plans
Health protected but not local government
Grants to councils could be 7.4% lower in
OBR assumes council tax increases of 4% to bills and 0.6% to the tax base per year
Real terms increases of 2.7% a year
Offsets a quarter of the fall in grants
Overall 5.9% cut to councils budgets’
Assuming no further draw downs from reserves
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24. Trade-offs when allocating across services
Overall 5.9% cut to councils budgets’
If councils protect real-terms spending on social services and education
Would require cuts to other service areas of 22.7%
Varies across scenarios from 16.4% to 34.7%
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25. What about council tax? (I)
Remember: OBR assumes real-terms council tax increases of 2.7% a year
Offsets a quarter of the fall in grants
Additional increases in council tax of 3.3%pts a year
Offsets an additional 33% of the fall in grants.
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26. What about council tax? (II)
Local councils will differ in their ability to offset cuts with council tax increases
Figure: Proportion of cuts to local government grants offset by additional increases in council tax of 3.3ppts per year, by local authority
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27. What about council tax? (III)
Overall budget falls by 3.9% instead of 5.9%
To achieve this council tax bills would have to go up by over 7% a year
Substantial increases in council tax will not offset the fall in grants, even in large tax base areas.
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28. Concluding remarks
Uncertain economic and fiscal backdrop to the upcoming Welsh draft budget
Based on current plans, (back-loaded) budget cuts over the next 3 years and tricky trade-offs between key service areas
Brexit may have a number of different effects on Welsh budget
Will know more following Autumn Statement
Local government will also face difficult trade-offs
Potential for further large cuts to services already cut by up to 50%
Even larger council tax rises could offset some but unlikely all the cuts, and would generate more for some councils than others
No easy options for Welsh and local government – careful planning will be required
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