Does the deal with the DUP signal an end to Austerity? A furious row has broken out about the extent to which the UK Government has by-passed the Barnett mechanism in making the £1 billion two-year deal for Northern Ireland and undermined the whole approach to devolved funding. It also prompts the question about what happens at the end of the two years and whether the DUP will be seeking further largesse.
But is this a one-off or does it tell us something about the future of Austerity?
The messages are not clear. On the one hand, the UK Government has acknowledged that the public is weary of austerity and ‘seven years of hard slog’. It has said that it ‘will reflect on the message voters sent at the General Election.’
Meanwhile, the Chancellor has reaffirmed the position he took last November when he reset the fiscal rules, committing to achieving fiscal balance but over a longer timescale, creating ‘additional fiscal space to support the economy, if needed’. Deficit eradication may have been pushed back to 2025 but it is still the UK Government’s goal.
In line with this, the Queen’s Speech talks of ‘improving public finances’ and keeping taxes low. The Prime Minister has since reaffirmed the intention to proceed with cuts in the rate of Corporation Tax announced in March.
So far, there is no sign of the UK Government commissioning the usual Spending Review, looking forward over the next 4 – 5 years, and we may have to wait until the Autumn Budget to get a firm sense of its intentions on public service spending. Uncertainties about the economy, including the unfolding impact of Brexit, provide a rationale for keeping plans as flexible as possible.
The Chancellor is certainly under pressure to loosen the purse strings, as the debates about public sector pay and the aftermath of the Grenfell tragedy show. For other clues as to possible future direction, it is worth looking back at those Conservative manifesto commitments which may still be in play and what they might mean for Wales.
The manifesto was famously un-costed but it did include some spending pledges on public services. The biggest pledge was to increase NHS England spending by a minimum of £8 billion in real terms over the next five years. Drawing on Health Foundation analysis, we estimate that this would generate a ‘consequential’ for the Welsh Budget of about £478 million by 2022-23. Lest that sound like a bonanza, this would still leave a significant shortfall (around £892 million a year) between such extra money and projected NHS Wales cost and demand pressures.
We wait to see the future direction on social care – but the Prime Minister’s a commitment to a cap on care costs paid by an individual could give rise to a Barnett consequential for Wales at some point.
On education, there was a manifesto commitment to a £4 billion increase in the England schools budget by 2022, but this was in cash terms only. How much of this would be new money, rather than internal reallocation within the UK education budget, is not clear. A resulting cash increase for Wales of between £80 – 100 million (our rough estimate) would not amount to real-terms increase at all over the period between 2017-18 and 2021-22 in a context where local authorities in Wales allocated £2.6 billion to school budgets in 2015-16.
The Queen’s Speech also reaffirms a manifesto commitment to improving technical education and an additional £0.5 billion, as previously announced in the March budget, although this looks likely to be slow coming on stream.
Observers think that the Chancellor has some potential wriggle room in his spending plans: this should be helpful for Wales. But, if Austerity is no longer at the forefront of UK Government rhetoric, it does not mean that it has been abandoned. The Welsh Government is likely to face difficult choices on spending for some time to come. Wales Public Services 2025 will be setting out shortly an analysis of some of the options and choices which lie ahead.