The economy and post-Brexit uncertainties was clearly uppermost in the Chancellor’s mind yesterday rather than public services. The Autumn Statement, informed by the OBR’s first forecasts since the Referendum, contained mixed news for Wales. While we are awaiting full details, the main takeaway messages for Wales are:
- An additional £400 million of capital investment funding for the Welsh Government between now and 2020-21 via the Barnett formula – equivalent to an extra 8% on top of the £5 billion of general capital funding the Treasury has already allocated to the Welsh Budget for the same period;
- A recommitment to City Deals, including progress with discussions on the Swansea Bay City Region, proposals for a North Wales growth deal, and continuing implementation of the £1.2bn Cardiff Capital Region deal;
- But austerity in day-to-day spending on public services looks set to be prolonged, with an additional year (2021-22) pencilled in, meaning 12 years of cuts to many service areas;
- The announcement of a number of UK-wide tax and welfare changes (see below) which some commentators believe will still mean that poorer families are likely to be worse off. However, outweighing any gains made from the tax and benefit changes is the 3.7 percentage point downgrade to real earnings (driven by lower growth and higher inflation forecasts), which will hit families in Wales.
The economic outlook
Forecast growth in potential output (that is the level of economy activity that can be sustained without stoking inflation) has been downgraded by a total of 1.5 percentage points over the next 5 years. This is a smaller downgrade than most other forecasters predicted but reflects the fact the OBR would have increased its forecast by about 0.9 percentage points in the absence of the vote to leave the EU.
As a result of the fall in the pound that followed that vote, the OBR has increased its forecast for consumer price inflation (CPI). Higher inflation could become a factor in future pay negotiations in a context where, for example, teachers’ pay is to be delegated to Wales. However, it is worth noting that the OBR actually downgraded their forecasts for earnings growth over the next few years. This would suggest it is workers, rather than public and private sector employers, who will bear the cost of higher inflation. Indeed, the GDP deflator, an alternative measure of inflation focused on the domestic economy (unlike the CPI which includes imports), which is often used to proxy inflation for the public sector, is actually forecast to be lower than back in March. But measures like the apprentice levy and increase in the national living wage will push up labour costs for many public and private sector organisations in Wales and the rest of the UK.
The public finances and investment spending
A weaker economic outlook was the main reason the OBR revised up its forecast for government borrowing. In addition, the Chancellor is borrowing additional money to fund new policy measures, most notably the National Productivity Investment Fund (NPIF). This is designed to help the UK address its productivity gap and improve its economic growth by investing £23 billion on new homes, science and innovation, transport, and digital infrastructure, among other investment areas, between 2017-18 and 2021-22.
As a result, the Welsh Government will receive an additional £400 million for its capital spending through the Barnett consequential through to 2020–21 (equivalent to an extra 8% on top of the £5 billion of general capital funding already allocated to the Welsh Government by the Treasury over the same period), which it can allocate as it wishes.
While the Chancellor has found extra money for capital (primarily through borrowing), what about the £3.5bn unspecified public spending cuts that were pencilled in to 2019-20, as announced in the March budget? The Chancellor has suggested that £1bn of these will be ‘re-invested’ in key priority areas, thereby alleviating the cuts pressures on selected areas of public spending. The Welsh Government will have to decide how best to allocate the funding between public services when faced with this trade-off.
In addition, departmental day-to-day spending will see an extra year of austerity: resource DEL will be frozen in real terms in 2021-22. This means that although the day-to-day spending pressures in 2019-20 are likely to ease, this will be followed by an extended real-terms freeze in 2021-22, in addition to the freeze planned for 2020-21 that was announced last March.
Despite increased pressure on public services spending and widely expressed concerns about social care in particular, the Autumn Statement did not include any spending changes to NHS, social care, or local government.
The Chancellor referred to the intention in the next Spending Review to revisit spending priorities and look at the challenges of rising longevity and fiscal sustainability. Whether this is, as some have speculated, a reference to the future of the triple lock for pensioners and the ring-fencing of NHS spending is a matter of conjecture.
Tax and welfare
While there were fewer tax and welfare measures than we have become accustomed to in the Autumn Statement, a number of UK-wide measures were announced, chiefly:
The ‘giveaways’: raising the national living wage (over-25s minimum wage) to £7.50 per hour from April 2017 (10p less than estimated by the Low Pay Commission in April 2016); reducing the Universal Credit (UC) taper rate from 65p per pound to 63p; and freezing fuel duty for the 7th year running.
The ‘takeaways’: taxing benefits in kind, and introducing higher taxes on insurance premiums.
The Resolution Foundation has concluded that existing welfare cuts and weaker earnings growth mean that the poorest third of UK households are set to face falling household incomes over the parliament. Ultimately, the upwards revisions to inflation, and downwards revisions to cash-terms earnings growth mean real earnings are forecast to be 3.7 percentage points lower in 2021 than previously forecast, which far outweighs the small gains made from giveaways on UC and fuel duty.
The main message of this Autumn Statement is the need for fiscal flexibility in an uncertain economic climate. While some additional capital for the Welsh Government was announced, the pressure on resource budgets remains. In a context of higher consumer inflation and extended austerity, the pressure on resource budgets is likely to intensify.
Our future work will include a more thorough analysis of the Autumn Statement and its implications for Wales, out on the 30th November 2016.
Dr Daria Luchinsakya, Research Associate, Wales Public Services 2025 with contributions from David Phillips, Senior Research Economist, Institute for Fiscal Studies and Michael Trickey Programme Director.
Wales Public Services 2025 will be giving a fuller briefing on 30th November. There will be a presentation by Dr Luchinsakaya along with some time for discussion. If you wish to attend please register by following this link – https://www.eventsforce.net/cbs/256/home.
 See http://www.walespublicservices2025.org.uk/2016/09/14/new-report-from-the-institute-for-fiscal-studies-welsh-budgetary-trade-offs-to-2019-20/ & http://www.walespublicservices2025.org.uk/2016/10/14/report-by-the-health-foundation-the-path-to-sustainability-funding-projections-for-the-nhs-in-wales-to-201920-and-203031/