A challenging year? Draft budget revealed and allocations analysed.

The allocations are in the details: 2019-20 looks set to be a challenging year

The outline Welsh Draft Budget 2018-19 showed that overall, the total planned resource allocations to departments (MEGs) were about 0.4% lower in real terms than the current 2017-18 June supplementary budget (0.5% if we include business rates), and about 1.7% lower in the indicative 2019-20 allocations compared with 2017-18. Previous figures based on current UK spending plans have suggested that 2019-20 could be a challenging year for the Welsh Budget. We highlighted that only two MEGs, Health, Well-being and Sport (over 90 per cent of which is the Welsh NHS) and Communities and Children were the only two Welsh Government departments that will have seen an increase in allocations over the two-year period compared to the 2017-18 budget. This week, the detailed budget shows exactly where the reallocations have occurred. We focus on allocations to the NHS and to Local Government.

The analysis is complicated by within-MEG reallocations, switching Budget Expenditure Lines (BELs) between different Spending Programme Area (SPA) groups, and creating new BELs. We set our detailed analysis on NHS and local government spending below but here are the main points from the full budget:

  • Core NHS spending will increase in real terms from £6,793m in 2017-18 (First Supplementary Budget 2017-18) to £6,903m in 2018-19 (Draft Budget 2018-19) and to £6,989m (indicative) in 2019-20. This is a year-on-year real-terms increase of 1.6% and 1.2% respectively.[1] This analysis excludes the £89m (cash) that was previously located in the ‘Public Health & Prevention’ SPA and that has been moved to ‘Delivery of Core NHS services’ SPA in the Draft Budget 2018-19 for consistency with previous years.

 

  • Funding Support for Local Government will decrease in real terms from £3,257m in 2017-18 (First Supplementary Budget) to £3,250m in 2018-19 and to £3,116m (indicative) in 2019-20 (2017-18 prices). This is equivalent to real-terms year-on-year cuts of 0.2% in 2018-19 and 4.1% in 2019-20, despite the transfer of social care and other specific grants worth £92m in cash terms (not new money) into the general Local Government Revenue Support Grant (RSG) in 2018-19. If we adjust for the £92m in the 2017-18 Funding Support for Local Government allocation (i.e. convert £92m to 2017-18 prices and add this into the local government settlement as though this money were treated as part of general funding in the 2017-18 First Supplementary Budget), the 2018-19 allocations to Funding Support for Local Government are 2.9% lower in real terms than the adjusted 2017-18 allocations.[2] If local government continues to protect social services and schools, what will this mean for other local government funded, unprotected services (such as local environmental services, roads and transport, and cultural and sports services)?

 

  • For Communities and children MEG, the largest chunk of additional allocations is in the capital DEL: £138m of Social Housing Grants as part of the ‘Increase the Supply and Choice of Affordable Housing’ Action, and £6m to the ‘Communities and Tackling Poverty’ Action (both figures in cash terms). Looking at resource allocations, there are additional increases to the Supporting Children Action, (£16m in 2018-19 and £20m in 2019-20, cash terms). However, there are offsetting cuts of around £13-£14m (efficiency savings) to the ‘Early Intervention, Prevention & Support’ Action in both years. The Welsh Government has stated that the creation of a single grant paid to local authorities, with the aim of streamlining service provision and supporting redesigning these services to fit with the aims of the Well-being of Future Generations Act, will enable the £13-£14m efficiency savings. Supporting People grant, Homelessness prevention, and Violence Against Women, Domestic Abuse and Sexual Violence Services grant are among the grants that may be affected (see Draft Budget 2018-19 detailed narrative p. 22).[3]

 

  • There are other changes, too many to list here individually. The main issues are that, in Economy and Infrastructure, capital is set to increase in cash and in real terms compared to the 2017-18 Final Budget (but will still be lower than the 2017-18 First Supplementary Budget), while Economy and Infrastructure resource spending will see cash cuts of £8m in 2018-19 and of £33m in 2019-20. Increases to the Education resource budget in 2018-19 will be largely offset by cuts in 2019-20. Environment and Rural Affairs will also see resource cash cuts of around £6m and £9m in 2018-19 and 2019-20 respectively. Furthermore, £35m for the Waste element of the Environment and Rural Affairs Single Revenue Grant (specific grant) to local government has been transferred to the general RSG in the Local Government MEG.[4]

Overall, the detailed Draft Budget 2018-19 and indicative allocations for 2019-20 confirm the broad directions of the outline budget. It looks like the coming two years, and especially 2019-20, will be tight for public services provision. In the context of ongoing austerity, and as less funding becomes available from the UK Treasury through the block grant, Welsh Government decisions about providing public services become increasingly difficult, and reallocations from different parts of the budget start to play a more important role. Whether and how the OBR’s warnings about downward productivity revisions will feed into the UK Budget, expected on the 22nd of November, will shape future directions for Welsh public services. We will be reviewing the implications of the UK budget for Welsh Government decisions later next month.

 

The detail – Health, Well-being and Sport

The main area of interest here are the plans for the NHS Delivery and Health Central Budgets, which together form Core NHS spending. Since the First Supplementary Budget 2017-18, the Draft Budget 2018-19 has created a new Budget expenditure line (BEL), ‘Other Direct NHS Allocations’, which comprises around £255m in 2018-19 in cash terms. This new BEL contains funding issued to NHS bodies outside of the core local health board revenue allocations, which has been taken from ‘Delivery of Core NHS services’ (around £55m), and from ‘Delivery of Targeted NHS services’ (around £200m, both figures in cash terms).[5] When we look at Core NHS as the sum of Total NHS Delivery and Health Central Budgets, these reallocations largely cancel each other out because we aggregate across budget lines that have been assigned within-MEG increases and decreases.

An additional complication is that the Draft Budget 2018-19 shifted £89m that was previously located in the ‘Public Health & Prevention’ SPA as a ‘Sponsorship of Public Health Bodies’ BEL to ‘Delivery of Core NHS services’ SPA as ‘Public Health Wales’ BEL. For consistency with previous years, we exclude this £89m from our analysis of Core NHS budgeted allocations.

The detailed Draft Budget 2018-19 indeed shows an additional £230m cash increase in 2018-19 and a £220m cash increase in 2019-20 for ‘Core NHS Allocations’ BEL as a part of ‘Delivery of Core NHS Services’ Action. However, when we look at Core NHS (the sum of Total NHS Delivery and Health Central Budgets, excluding Public Health Wales), the Draft Budget 2018-19 shows a cash increase of £218m in 2018-19 compared to the First Supplementary Budget 2017-18, and of £205m (indicative) between 2018-19 and 2019-20. This is less than the £230m and £220m allocated in the outline budget for several reasons. First, the 2017-18 revised baseline for Core NHS is £8m lower than the 2017-18 First Supplementary Budget because of a number of changes (details are in the outline budget narrative, Appendix C, p. 60). Second, there is a net negative £7m impact of between-MEG and within-MEG allocations in Core NHS. Third, the total additional allocations to Core NHS (including the £230m) sum to £234m. Adding together these three numbers yields £219m (differences due to rounding). Similar reasoning shows why the 2019-20 indicative Core NHS allocations are lower than £220m (in 2019-20, it is largely to do with a £14m cash reduction to Delivery of Targeted NHS services, and a £2m cash reduction to the Substance Misuse Action Plan Fund).

In real terms (2017-18 prices), Core NHS spending will increase in from £6,793m in 2017-18 (First Supplementary Budget 2017-18) to £6,903m in 2018-19 (Draft Budget 2018-19) and to £6,989m (indicative) in 2019-20. This is a real-terms increase of £110m in 2018-19, and of £85m in 2019-20, or a year-on-year real-terms percentage increase of 1.6% and 1.2% respectively.

 

The detail – Local Government

The Local Government MEG shows that, as a result of changing selected specific grants social care and environmental grants to general grants, there is a between-MEG reallocation of £92m into the local government settlement. Notably, there are £30m of social care specific grants and £27m of the Welsh Independent Living Grant, transferred out of the Health, Welfare and Sport MEG and into the local government general funding.[6] In terms of new allocations, there is almost nothing except a £2.5m increase to ‘Police General Revenue Funding’ BEL, which is more than offset by a £10m cash reduction to ‘Local Government General Revenue Funding’. Overall, there is a £8m cash reduction to the Local Government MEG in 2018-19, and a £86m indicative cash reduction in 2019-20, which is mostly taken from the ‘Local Government General Revenue Funding’ BEL.

The Draft Budget 2018-19 detailed narrative states that the local government settlement includes £62m for schools in 2018-19 and £108m in 2019-20 (cash terms) to ensure that the ‘assumed Welsh Government share of core spending’ on schools funding is maintained at 2017-18 levels. However, these figures are not evident in the provisional local government settlement (released October 10th), where the numbers indicate a cash change of almost £35.5m on 2017-18 in the schools allocation. Taking account of forecast inflation, the total schools component of the settlement will rise by £1.7m in real terms (2017-18 prices), or by 0.01%.

The Draft Budget narrative also states that the local government settlement includes £42m for social care in 2018-19, and £73m in 2019-20 (cash terms). Looking at the Personal Social Services (PSS) RSG allocation in the provisional 2018-19 local government settlement, the like-for-like cash difference on 2017-18 is just over £21m. In real terms, the total PSS budget will fall on a like-for-like basis by 0.2% between 2017-18 and 2018-19.

Why is there such a discrepancy in the additional figures? Looking at the budget tables sheds little light on how the Welsh Government figures have been calculated because the ‘Local Government General Revenue Funding’ BEL entry gives the overall RSG only. We may need further clarification from the Welsh Government on this issue.[7] Furthermore, it is important to highlight that the overall (adjusted) RSG is set to decline by 2.9% in real terms, as we noted earlier. It is difficult to see how the allocations amount to protections in this context, if what is being maintained is the 2017-18 spending share of a shrinking budget. This is especially important given the social care demand pressures discussed in our earlier research.[8] We will be looking at some of these issues in more detail in our forthcoming local government finances paper next month.

Business rates (non-domestic rates) revenues categorised as ‘Non-Domestic Rates Distributable Amount – AME’ in the ‘Funding Support for Local Government’ Resource AME, are forecast to be £1,052m in 2018-19 and £1,078m in 2019-20 (in cash terms). These figures are slightly higher than the PESA July 2017 plans (£1,039m and £1,077m respectively, cash terms).

If we compare the changes to the ‘Funding Support for Local Government’ Action since 2017-18, this amounts to a real-terms decrease from £3,257m in 2017-18 (First Supplementary Budget) to £3,250m in 2018-19 and to £3,116m (indicative) in 2019-20 (2017-18 prices). This is equivalent to almost no change between 2017-18 and 2018-19 (a 0.2% real-terms fall), and to a 4.1% cut between 2018-19 and 2019-20. If we convert the 2018-19 £92m RSG increase (funded from elsewhere in the budget, and not by new money) to 2017-18 prices, we get around £90.6m. Adding this £90.6m to the ‘Funding Support for Local Government’ funding allocation in the 2017-18 First Supplementary Budget as released in June yields £3,347m. Using this adjusted figure as our starting point, the 2018-19 allocations are 2.9% lower in real terms than the adjusted 2017-18 allocations.

 

Blog by Daria Luchinskaya and Joseph Ogle

[1] Since we are comparing to the First Supplementary Budget 2017-18, it is likely that further positive Core NHS allocations will be made in the Second Supplementary Budget 2017-18 (expected in February 2018), in which case the real-terms change between the SSB 2017-18 and the DB 2018-19 would be slightly smaller.

[2] Note that our figures pertain to Welsh Government support to local government through the RSG only, and therefore exclude business rates.

[3] The Supporting People grant has been allocated £10m (cash) each year to maintain grant at the current level as part of the Budget Agreement with Plaid Cymru. The Supporting People BEL allocation is maintained in cash terms in 2018-19 and 2019-20, and in 2019-20 is amalgamated into the single local authority grant.

[4] See Draft Budget 2018-19 Detailed narrative, “In this budget, we are transferring £35m from the specific local government environment single revenue grant to the un-hypothecated local government Revenue Support Grant (RSG) to give local government greater flexibility.” (para 7.13, p. 49) and see also the Finance Minister’s written statement of the provisional local government settlement 2018-19, http://gov.wales/about/cabinet/cabinetstatements/2017/provlgsettlement/?lang=en and the note to Table 9 in the provisional local government settlement 2018-19 tables.

[5] The detailed budget narrative explained this as follows: “We will confirm the individual allocations for local health boards for 2018-19 later in the Autumn. To aid transparency of the funding for the NHS, we have established a new BEL titled “Other Direct NHS Allocations” which will contain funding issued to NHS bodies outside of the core local health board revenue allocation. This budget includes some realignment of existing BELs to achieve this transparency for future budgets.” (para 2.18, p. 6).

[6] The Draft Budget 2018-19 Detailed Narrative explains the reallocations as follows: “In 2018-19, more than £90m of funding, previously provided through specific Welsh Government grants from other portfolios, will transfer into the Local Government MEG to be provided to Local Government as part of the core Welsh Government funding allocation. […] Significant transfers into the 2018-19 settlement and beyond include: £35m – the waste element of the Environment Strategic [sic] Revenue Grant from the Environment and Rural Affairs MEG; £27m – Welsh Independent Living Grant from Health, Well-being and Sport MEG; £30m – social care specific grants from Health, Well-being and Sport MEG.” (paras 3.13 and 3.15, p. 14). The £30m social care specific grants from Health, Well-being and Sport MEG have been treated as a baseline adjustment (out of the Health, Well-being and Sport MEG and into the Local Government MEG), whereas the £35m waste element of the Environment Single Revenue Grant from the Environment and Rural Affairs MEG and the £27m Welsh Independent Living Grant from the HWS MEG have been treated as ‘between MEG allocations’. This adds up to a £92m transfer to the RSG from elsewhere in the budget. Some of this transfer has been partially offset by other baseline changes and between-MEG reallocations.

[7] Regarding social care, it certainly isn’t the case that the Welsh Government have simply compared the 2017-18 financial year figure unadjusted for transfers with the comparable figures in the provisional settlement (this would generate a cash difference of £77.7m, over and above the Welsh Government’s estimate. It is possible that the definition of the term ‘social care’ used in the Minister’s letter to local authorities is key (http://gov.wales/docs/dsjlg/publications/localgov/171010-settlement-2018-19-letter-en.pdf). Social care – when discussed among policy circles at least – almost universally means ‘Older adult social care’, i.e. just one element of the PSS budget. If we assume that the Minister’s reference here does in fact refer to resource pertaining to the care of the 65+ population, then several possible explanations follow: (a) £42m may refer to the ‘Older adult  social care’ component of the unadjusted £77.7m change; or (b) While the notional social care allocations pertaining to younger adults and children’s services in the SSA have been cut by £21m relative to the adjusted 2017-18 figures, the older adult social care notional allocation was raised by £42m, leaving a net cash rise in the PSS column of £21m.

[8] http://www.walespublicservices2025.org.uk/files/2017/03/Wales-health-and-social-care-final_amended_04-2017.pdf

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