First impressions of the Autumn Budget 2017 impact on Wales

In this blog we share some of our first impressions of the Autumn Budget 2017 and the impact on Wales.

Downward revisions to OBR forecasts

The downward revisions to the OBR productivity forecasts f overshadowed the Autumn Budget. The OBR have revised productivity growth down by 0.7 percentage points a year on average, leading to lower real GDP growth forecasts over the period (0.4 percentage points a year on average below the March 2017 forecasts). These downward revisions have a depressive effect on government revenues and household incomes over the medium term, decreasing the Chancellor’s fiscal headroom. As has been widely reported, borrowing is now forecast to be considerably higher over the next few years than was the case in the March 2017 budget, and the fiscal target to eliminate the deficit by the middle of the next decade looks much more difficult to meet.

A modest Autumn Budget 2017

There were few giveaways in the Budget, and fewer still that would make their way through to Wales under the Barnett formula. On the resource side, the good news was that the remaining planned efficiency savings for 2019-20 were scrapped, and that there was some extra cash for the NHS. Brexit preparations were allocated £3bn over 2018-19 and 2019-20, but it is unclear how this will affect Wales. Welfare cuts have also not gone away. Capital spending, more so than spending on day-to-day services, was at the centre of the budget. Despite some easing to public services cuts, the economic uncertainty and downward revisions to key macroeconomic fundamentals suggest that austerity is far from over.

Resource and capital impact for the Welsh budget

The modest spending increases arising in the Budget have translated into a small increase to the Welsh Government budget, announced as £1.2bn (a cash-terms figure over 2017-18 to 2020-21). The £1.2bn includes increases to day-to-day running of services (resource), and capital budgets. The overall increase also includes around £65m resulting from the needs-based factor, which came into effect as a result of fiscal framework negotiations last year.[1]

The increase to the resource budget is around £215m, a large part of which is attributable to the NHS England increases. The capital figure, however, includes so-called ‘financial transactions’, i.e. repayable loans, which amount to around £650m, or around half of the overall reported budget increase (see Figure 1).

 

 

 

 

 

 

 

 

 

 

 

The increase in the traditional capital budget amounts to around £360m. The overall resource-capital split is therefore around 18% resource to 72% capital (including financial transactions) or 37% resource to 63% capital (excluding financial transactions).

A strong regional emphasis in the Budget included encouraging signals about UK government support for North and mid-Wales growth deals, some rail infrastructure improvements, as well as setting up a ‘Tech Nation’ regional hub in Cardiff.

Efficiency review ‘scaled back’

The long-unresolved issue of £3.5bn of unallocated efficiency savings (of which £1bn would be re-invested into key areas, i.e. £2.5bn net cuts) has now been resolved – the remaining cuts scheduled for 2019-20 have been scrapped. The Budget Red Book explained the scaling back of the planned efficiency review for 2019-20, saying that £1.4bn of savings have already been made in the previous Parliament[2] and that the remaining £1.1bn spending reduction for £2019-20 will not go ahead. According to the Budget, departmental spending in 2019-20 will be £2.1bn (cash) higher than planned at Budget 2016. It looks like this figure includes the £1bn reinvestment. The Welsh Government highlighted the potential (worst-case scenario) impact that the £3.5bn cuts, were they to go ahead, would have on the Welsh block grant, in its draft budget.[3] Scrapping some of these cuts is likely to give the Welsh Government slightly more breathing room.

NHS funding

The Chancellor’s allocated an additional £6.3bn (cash terms) to NHS England over the course of the current Parliament to 2022-23. This looks to be broadly in line with the Conservatives’ manifesto commitment. The Budget details that of the £6.3bn, £3.5bn is capital investment, and £2.8bn is additional resource funding.  The resource funding is split into £335m to be made available immediately to cover the pressures over winter, £1.6bn in 2018-19, and £0.9bn in 2019-20. The Barnett equivalent to Wales from this announced increase would be around £19m in 2017-18, £96m in 2018-19, and £54m in 2019-20 (cash figures, adjusted for the needs-based factor from 2018-19 onwards).

On capital for NHS England, an extra £3.5bn has been promised over the course of the Parliament, in addition to £425m announced in the March 2016 Budget. Applying the Barnett formula and the needs-based factor suggests that the Welsh share of the £3.5bn will be roughly £200m (cash) over the same period.

Tax changes

In an effort to improve affordability of housing, the Chancellor abolished stamp duty for first-time buyers on the purchases of homes up to £300,000, and on the first £300,000 of homes up to £500,000. The OBR, however, have highlighted that this is a costly policy that may inadvertently push up property prices. The cost of the policy from 2017-18 to 2022-23 amounts to over £3.2bn (cash terms). [4] The policy will apply in Wales until April 2018, at which point the devolved Land Transaction Tax comes into effect. By reducing revenues in the rest of the UK, the policy means that the Block Grant Adjustment (the amount taken away from the Welsh block grant to account for tax devolution) will also fall, boosting the Welsh Government budget by around £66m (cash terms) over this period. The Welsh Government can now decide whether to use this revenue to replicate the UK government’s policy after next April, or use it for other priorities.

Business rates (local tax payable on non-residential properties) are currently linked to RPI, and were scheduled to be re-indexed to the CPI in 2020. The Chancellor has brought forward this re-indexation by two years, at a cost to the Treasury of £2.3bn of taxes over 2017-18 to 2022-23 (cash terms). Since business rates are devolved, the Welsh Government will have to decide whether it will follow suit.

The threshold for personal allowance has continued to rise as planned (to £11,850 in 2017-18). This is likely to affect revenues from the Welsh rates of income tax, which will be devolved from April 2019. This will affect a greater portion of the Welsh tax base, though the Block Grant Adjustment mechanism agreed last year should mitigate against any negative impact on the Welsh budget. Several commentators have also highlighted an additional point regarding inequality: while the increase in the personal allowance threshold benefits everyone earning money, higher earners will additionally benefit from the increase to the higher-rate threshold, and by proportionately more so.

Pay issues

While it looks as through the public sector pay 1% cap has been lifted, the question of how pay increases will be funded remains moot. The Budget explicitly mentioned NHS pay, saying that “the government is also committing to fund pay awards as part of a pay deal for NHS staff on the Agenda for Change contract, including nurses, midwives and paramedics”. But, as pointed out by the IFS, Agenda for Change contracts comprise only three quarters of NHS staff costs[5] – they exclude doctors, dentists, and most senior managers.[6] The Welsh Government has said previously that a 1% increase to devolved public sector pay would cost an additional £100m. The question of funding for lifting the pay cap for other public sector staff (e.g. teachers) was not addressed in the Budget.

Planned increases in the minimum wage for the over-25s are going ahead, with the amount reaching £7.83 per hour. Although welcome news for minimum-wage workers, this increase may forms a pay pressure (albeit predictable), which, for public sector organisations such as schools and the NHS, could come on top of the potential requirement to fund any increases to the 1% public sector pay cap from existing budgets.

Summary

Despite some extra money to the NHS, skills, and infrastructure, and some tax giveaways, the Budget did not mention social care or allocate it any additional funding.

There is a question about how the Welsh Government’s Final Budget, due on the 19th of December 2017, will respond to the UK Budget.

In the next few weeks, we will be looking at how the Autumn Budget 2017 policy decisions may affect decisions around Wales’ public services provision over coming years, revisiting some of the headline figures from our Welsh Government Budgetary Trade-offs report published in September.[7] The UK Budget’s decisions to cancel the remaining efficiency savings and to increase funding to the NHS are reasonably approximated by the second block grant scenario (R2) in our report. With new data about the direction of UK spending now available, we will focus on what the block grant trajectory suggested by this UK Budget could mean for Welsh public services.

 

Blog by Daria Luchinskaya, Wales Public Services 2025

With thanks to Guto Ifan, Wales Governance Centre, for comments on the Fiscal Framework

[1] The Fiscal Framework increases any positive Barnett consequential (population-adjusted proportion of spending on English services that are devolved to Wales) by 5% as a result of the new needs-based factor. However, it is unclear whether the needs-based-factor applies to additional capital from financial transactions.

[2] Through a combination of low value spend savings (around £0.5bn) and “lower than forecast Official Development Assistance (ODA) spending”, saving around £0.9bn over 2017-18 and 2018-19.

[3] See, for example, the Welsh Draft Budget outline narrative, p. 1, “[W]e are still facing the very real prospect of further spending cuts to come from the UK Government – £3.5bn of cuts to public spending are planned for 2019-20, which if they all fall in devolved areas, could mean up to £175m of further cuts to the Welsh budget.” http://gov.wales/docs/caecd/publications/171003-budget-narrative-a-en.pdf

[4] See Policy costings, Autumn Budget 2017.

[5] https://www.ifs.org.uk/uploads/Presentations/Autumn%20Budget%202017/Carl%20Emmerson%2C%20spending.pdf

[6] http://www.nhsemployers.org/agendaforchange

[7] http://www.walespublicservices2025.org.uk/2017/09/21/welsh-government-budgetary-trade-offs-looking-forward-to-2021-22/

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