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Funding co-operation agreement policies achievable given fiscal outlook, report says

8 December 2021

UK government spending decisions have boosted the Welsh budget and made the ambitions of the co-operation agreement between the Welsh Labour government and Plaid Cymru affordable, a report concludes.

The findings, from Cardiff University’s Wales Governance Centre, show day-to-day spending next year is set to be £1.6 billion higher than analysts expected just two months ago, following the UK chancellor’s budget announcement. Excluding COVID-19 funding in 2021-22, the revenue budget will grow by £2 billion next year, and by £2.9 billion by 2024-25, according to the report’s data.

The researchers expect the NHS to absorb over half of the projected increase in funding. Initial policies announced by the Welsh Labour government and Plaid Cymru, including expansion of free school meals and childcare provision, are also likely to benefit.

Lead author Guto Ifan, a Research Associate at the Centre’s Wales Fiscal Analysis Unit, said: “The experience of recent months has again shown the huge impact UK government fiscal policy can have on the Welsh budget outlook. The UK government’s turn towards tax increases and higher departmental spending has transformed the Welsh government’s ability to meet spending pressures and expand devolved services over the coming years.

“The turn away from over a decade of fiscal austerity means that policies in the co-operation agreement between the Welsh government and Plaid Cymru look broadly achievable and affordable.”

The team analysed the funding confirmed for the Welsh government at the UK government’s Spending Review 2021 in October, along with the latest forecasts for devolved revenues, to assess the funding outlook for the Welsh budget up to 2024-25.

These projections were combined with assessments of various spending pressures facing devolved public services, such as the NHS, social care and schools, to explore some of the options and trade-offs facing the Welsh government as it prepares to publish its draft budget later this month.

The report also found that increasing NHS funding in line with the consequential funding resulting from health spending in England should be broadly sufficient to cover COVID-19 related pressures and tackle the growing backlog in waiting lists.

But researchers say these increases in capital spending on the NHS to recover from the pandemic as well as climate change investments will require difficult choices for other capital spending, given a declining capital block grant and very limited capital borrowing powers.

Further challenges are highlighted in local authorities’ spending, with underlying cost and demand pressures, the lingering effects of the pandemic, and the need for additional spending in schools.

Guto Ifan added: “A key question for Welsh government is the extent to which these funding pressures should be met by central government funding as opposed to council tax increases. There is no doubt the outlook for household finances will be challenging for some time to come.

“Our report shows how spending decisions by the UK chancellor continue to have a decisive impact on what the Welsh government can deliver for its citizens.

“This means that when thinking of the longer-term sustainability of Welsh public services and new policy proposals, Welsh policymakers still need to be mindful of potential future changes in the direction of UK fiscal policy.”

Read the Welsh Budget Outlook 2021.

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