£2.8 billion Cuts Over Next Four Years

The headline figures differ only slightly from those contained in the budget back in April. The forecast net public borrowing for 2009-10 at £178bn was only slightly higher than the £175bn forecast at the time of the budget. Indeed, this was a particularly modest increase given that the economy is now expected to contract 4.75 per cent this year – almost 1 per cent more than at the time of the budget.

The Chancellor has decided not to publish a Spending Review which means that we are in the dark regarding departmental spending plans after 2010-11. It is planned to increase total public spending by 0.8 per cent per year in real terms. However, this small increase will be more than swallowed up by growth in social security (1.5 per cent per year) and interest payments on the national debt expected to grow at 10.7 per cent per year. The remainder of public spending will have to be cut.

Statements were made regarding which services would be ‘protected’ but even here it is not clear that protecting front line services necessarily means that the corresponding Departmental Expenditure Limit is also protected. Whilst the Chancellor was prepared to say that he planned to protect services he was not prepared to say what would be cut. This reluctance is understandable from a political viewpoint. Why give your opponents ammunition?

However, the price for this lack of clarity will be paid by taxpayers thanks to the negative reaction in the bond markets. They assume that lack of clarity reflects a reluctance by the Government to face up to the financial mess they have helped create: there has been a sell-off of gilts and an attendant increase in interest rates.

What impact will the Pre-Budget Report have on the Welsh Government next year and for the Spending Review period from 2011-12 to 2013-14?  In the case of 2010-11 there is no material change. Expenditure will increase by about £500 million in nominal terms which is essentially flat in real terms (after taking account of inflation) given that the GDP deflator is now forecast to be 2.4 per cent.

It is now expected that, overall, Departmental Expenditure Limits will decline in real terms by an average 3.2 per cent per year over the Spending Review period. This compares with 2.9 per cent in the Budget, the difference being principally due to higher base expenditure arising from the cost of the war in Afghanistan.

A difficulty in making estimates is the claim by the Chancellor that he will ‘protect’ front line services in health, schools and Sure Start which will all have a knock-on effect in Wales thanks to the Barnett Formula. The Institute for Fiscal Studies has estimated that other Departmental Expenditure Limits will have to be cut by 6.4 per cent per year in 2011-12 and 2012-13 (a cumulative cut of 12.3 per cent) to pay for this protection.

Yet even this is unclear because ‘protecting front line services’ in education does not prevent a cut in the overall Departmental Expenditure Limit. The Institute for Fiscal Studies has also estimated that capital expenditure is now expected to decline by 19.2 per cent a year compared with 17 per cent at the time of the budget.

Due to the fog surrounding the Pre-Budget report there is little point in seeking to revise earlier estimates of the likely Departmental Expenditure Limit for Wales over the next four years. What remains clear is that there will be sharp cut in spending in real terms from 2011-12 onwards and that for those three years the Wales Departmental Expenditure Limit is likely to face  a cumulative real cut of about £2.8 billion.

In the case of current expenditure it will not be possible in the face of a reduction of some £1.3 billion to rely on efficiency gains to fully protect services. In the case of capital investment there will be severe cuts of approximately £1.6 billion. Reality will have to be faced but that will be after the next UK General Election. In the run up to Assembly election in May 2011, the Welsh Government will be in the unenviable position of acting as the agent of the UK Government in planning and then delivering the cuts.