A little extra for health & social care and local government will help but does not reverse austerity

The final Welsh Budget laid on the 19th of December 2017 allocated an additional £251m for day-to-day resource spending over the next two years compared to the draft Budget published in October but decisions about additional capital allocations have been deferred to 2018.

The extra £251m stems from two sources. One is £210 million from the so-called Barnett consequentials, the Welsh share of the additional resources allocated in the 2017 UK Autumn Budget, uprated from April 2018 by the new needs-based factor of 5% agreed in the Fiscal Framework. The remaining £41 million includes money released as a consequence of the Chancellor’s Autumn Budget decision not to proceed further with the programme of efficiency cuts. Around £50m of allocations were announced previously, including decisions on tuition fees, the higher capital limit on residential care charges and changes to business rates indexation.[1] The new decisions included an extra £160 million for health & social care, local government along with funding for action on homelessness. There is another £36m of smaller allocations linked to the Welsh Government’s national strategy, Prosperity for All, for 2019-20. It should also be noted that the total resources allocated in the budget add up to £286,707m (see Table 5.4 in the Budget Note).[2]

However, despite this additional spending, all MEGs apart from Health and Social Care (and Local Government and Public Services in 2018-19) will see real-terms cuts compared to the 2017-18 First Supplementary Budget. The withering of the 1% public sector pay cap means that pay pressures will become more significant in 2018-19. The local government employers in England and Wales are already offering 2% and the recent Scottish Budget announcements on public sector pay, including 3% for lower paid employees, may well add fuel to the debate.

There are three things points of interest on the taxation element in the Final Budget.

The Budget reports that the revenues from the newly devolved tax revenues are now being forecast to be lower than previously anticipated. The figures are not large but are a reminder that the buoyancy of devolved tax revenues is going to be an increasingly important issue for Wales.

Second, the final Budget announced that as a consequence of the Chancellor’s scrapping of stamp duty on properties up to £500,000 for first-time buyers, the Welsh Land Transaction Tax threshold is being revised up to £180,000, which will apply to homebuyers in general. This is £30,000 higher than the threshold set out in the October draft Budget (DB1819, p. 19).

Third, the decision to follow England in indexing business rates from 2018-19 onwards in line with CPI rather than RPI will represent a cost to the Welsh Budget of £17 million by 2019-20 (£2m less NDR revenue in 2018-19 and £15m less in 2019-20 compared to the draft Budget). The Welsh Government has allocated £31m over the two years to assist with the shortfalls, and £11.7m of NDR Rates Relief. The total cost from the lower revenue and the extra spending is around £60m (£17m + £31m + £11.7m).


The detail

Comparing the final Budget to previous budgets is complicated by the reorganisation of Welsh  Government ministerial portfolios following the November reshuffle and the consequent reorganisation of the Main Expenditure Groups (MEGs).[3]

There are now six MEGs, with what was previously Communities and Children split such that children’s services now part of the Health, Wellbeing and Sport (now Health and social services) MEG, and the majority of communities services now part of Local Government (a small amount are part of Central Services and Administration). Some between-MEG reallocations have also taken place, for example, services related to skills policies have moved from Economy and Infrastructure to Education, while Health, Wellbeing and Sport has lost the Sport (now in Economy and Infrastructure, called Economy and Transport).[4]

The Welsh final Budget sets out the allocations of the £1.1bn of Barnett consequentials arising from the UK Autumn Budget 2017 over 2018-19 and 2020-21. In practice, only £210m of the consequentials are for resource spending. The rest is £328m of conventional capital and £557m of financial transactions capital (the figures in our previous blog were slightly different, this is because we included the allocations for 2017-18 whereas here we focus on 2018-19 onwards). The total resource funding being allocated in the final Budget is £251m, however, including the extra capacity from the conclusion of the Whitehall efficiency review. The following analysis is predominantly about the additional resource allocations.

The headline number in the media was a “£160m boost for public services”, which included an extra £50m to the Welsh NHS in 2018-19 and 2019-20, and £60m to local government (£20m in 2018-19 and £40m in 2019-20). Every little helps at a time when public services are stretched, but compared to the core NHS services delivery allocations of around £6.6bn in the draft budget 2018-19, the extra £50m is an increase of just 0.8 per cent. Similarly, £20m extra to Local Government accounts for just 0.6 per cent of the Local Government Revenue Support Grant in 2018-19, and £40m accounts for about 1.3 per cent of the RSG in 2019-20.

Still, the NHS and local government figures only add up to £160m. What has happened to the remaining amount? The biggest allocations are related to business rates support and adjustment to CPI indexation, and delivery of Prosperity for All priorities.

  • The figures for Local Government General Revenue Funding (RSG & NDR) are £31.5 in 2018-19 and £61.8m in 2019-20 in cash terms. They include the aforementioned £20m and £40m increases in support for local government in 2018-19 and 2019-20. They also include support for the shortfall in business rates revenues as a result of the indexation switch from RPI to CPI from April 2018 (£9m and £22m in 2018-19 and 2019-20 respectively). An additional 5.2m and £6.5m have been allocated as business rates relief in the two years. Excepting the £60m local government support, these allocations amount to £31m + £11.7m = £42.7m over the two years.
  • Furthermore, £10m has been allocated in 2019-20 to target youth homelessness in particular, in the Local Government and Public Services MEG. Running total £52.7m.
  • Prosperity for All priorities support comes in in in 2019-20, and includes allocations of £8m to Economy and Transport MEG, £18.3m to Education MEG, £5m to Energy, Planning and Rural Affairs, and £5m to Central Services and Administration to support the delivery of Prosperity for All. This amounts to £36.3m; running total £79m.
  • There are other additional bits and pieces over the two-year period, such as £6.7m for improving skills as part of Further Education, £5.6m to improve air quality for Energy, Planning and Rural affairs.

Looking at the across-MEG changes using the new MEG classification, we can compare the changes between the restated supplementary Budget 2017-18 and the final Budget 2018-19 (see also Budget note Table 6.2).

  • The Health and Social Services MEG is 1.7% (per cent) higher in real terms in 2018-19 than the amount allocated in the first supplementary Budget 2017-18, and 1.6% higher in 2019-20 than in 2018-19.
  • Local Government (including business rates) is just 0.3% higher than FSB 2017-18 in 2018-19, but the 2019-20 figures are 2.1% lower than 2018-19.
  • The final Budget shows substantial cuts to the Energy, Planning and Rural Affairs MEG (14.3% in 2018-19 and 2.6% in 2019-20, and cuts to Economy and Transport of 3.6% in 2018-19 and 4.1% in 2019-20. This is similar to our analysis of the draft budget published in November.

Overall, the final budget has allocated a little more as a consequence of changes at the UK Government level, but the growing demands on public services in Wales remain a pressing issue. In the next few months we will be exploring the impact of austerity on Welsh public services in more detail.

[1] £31m for changes to business rates indexation, £10m to HEFCE in relation to keeping tuition fees fixed at £9,000, £7m to Local Government to assist with the increase in the capital threshold before people are charged for social care, and £1.8m to assist with the new Local Government funding floor such that no single local authority faces reductions of more than 0.5 per cent.

[2] http://gov.wales/docs/caecd/publications/171219-note-en.pdf

[3] See: http://gov.wales/about/cabinet/cabinetstatements/2017/ministerialchanges/?lang=en]

[4] A full summary of the changes is available here: http://gov.wales/funding/budget/draft-budget-2018-19/?lang=en

Author: Daria Luchinskaya

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