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Record inflation to squeeze Welsh budget, says Wales Fiscal Analysis

5 December 2022

Record-breaking inflation has eroded the real terms value of the Welsh Government’s spending plans to the tune of £800m in 2023-24 and £600m in 2024-25 – despite additional funding from the Autumn Statement - according to a new report from the Wales Fiscal Analysis team.

The Welsh Budget Outlook report was launched today by Cardiff University’s Wales Governance Centre at a briefing event for policymakers, researchers and students.

The report analyses the options available to the Welsh Government as it prepares its Draft Budget for 2023-24, to be published on 13 December.

It highlights that even after accounting for additional funding from the Autumn Statement, NHS spending will likely fall short of post-pandemic funding pressures.

Welsh public sector pay could be cut by 7% in real terms over two years. However, this will still increase the size of the Welsh devolved pay bill by £288m by 2023-24 relative to originally budgeted plans – equivalent to the cost of around 7,000 public sector workers.

The Welsh Government faces a tricky balancing act between higher costs for budgets and the risks of slow pay growth – from recruitment and retention issues, industrial action, and a deterioration in public services.

As part of the analysis, the WFA team note that devolved tax powers could be used to increase the size of the Welsh budget. A 1p increase in all three Welsh Rates of Income Tax would increase the Welsh Budget by 1.4% next year; this would reduce the inflationary losses to the Welsh budget to approximately £340m in 2024-25.

Finally, there is some moderately good news for local government where the additional funding announced for schools and social care in England last month could more than double the planned increase to the Welsh local government settlement next year from £175 to £360 million. But the researchers warn in their report that “lean” public spending plans further down the line will perpetuate a growing deficit in local government finance between what local authorities receive, and what they need to meet cost-demand pressures.

The full budget outlook report is available here.

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