Spending Review 2: Torrid time awaits local government

When the Chancellor George Osborne sat down after delivering his Comprehensive Spending Review it was greeted with a mix of incredulity in parts of the UK and with resigned sigh of some relief in others. On the surface the headlines were nowhere near the carnage for the devolved nations that was inflicted on English local government which suffered cuts of 33 per cent in real terms. As I toured the Welsh media after the event one journalist crystallized this with the question “Not too bad then?”

Spending Review Special This is the second in a series of four articles we are publishing this week analysing the Comprehensive Spending Review which will determine much of what happens in Welsh public life during 2011. Tomorrow: Phil Cooper, Chief executive of Venture Wales that provides business support for SMEs. This article is from the current issue of the IWA’s journal Agenda, issued three times a year. To receive Agenda and get unlimited access to the IWA’s online archive, click here.

The headline figures seem to confirm this. True, the Welsh budget takes a bigger hit than the other devolved nations, However, according to Treasury figures the Welsh Government will see a 7.5 per cent real terms reduction in revenue and another 41% reduction in capital funds. Ironically it seems that everyone’s favourite financial accounting ‘hate figure’ the Barnett formula, which received a ‘knock-out blow’ with Gerry Holtham’s review, had somehow got back on its feet and come out fighting. The protection of the NHS in England and more limited protection of schools were largely the services which delivered this outcome for Wales.

Any document marked with the words Treasury emblazoned on the front requires time to analyse and digest. All UK Budget statements are complex documents full of more dark arts than the collected works of J K Rowling. Approach with care should be the warning. Objectively it is the case that the outcome is at the better end of Welsh Government assumptions in revenue terms. Yet the 3 per cent revenue a[JO1] [JO2] nd 10 per cent capital annual cuts formula put forward by Finance Minister Jane Hutt were precisely that, planning assumptions. They also served to challenge the public sector and begin the process of galvanising new thinking about different ways of delivering services under the auspices of the Government’s Efficiency and Innovation Board. In local government these assumptions also allowed councillors and officers to start to think the unthinkable and begin what will be very difficult ongoing negotiations with the trade unions.

Undoubtedly we are in for a torrid time in local government as is the wider public sector in Wales. Others can argue about the smoke and mirrors of Treasury accounting, but the fact remains that taken together the Welsh Government’s budget will see a revenue and capital reduction next year alone of nearly £582 million. Similarly while this accounts for over half of public expenditure in Wales (£15 billion) there are other huge budgets within the welfare system, in non-devolved departments like Environment, Food and Rural Affairs and in Home Office Services which take the totality of public expenditure to some £28 billion. Indeed across the four forces the Welsh police are working on a real terms cut of some 20 per cent. This is equivalent to £80 million, a figure which is not far short of Dyfed Powys Police entire revenue budget of £93 million. It is hardly a great shock therefore that the idea of Elected Police Commissioners has been greeted in Wales with the same enthusiasm as heavy rain at the Ryder Cup.

Welsh local government will be tasked with delivering huge cuts to housing and council tax benefit in communities which are some of the poorest in the UK. This is at a time when services like social care are straining under the weight of growing numbers of looked after children, particularly post Baby Peter, and a potential adult social care bill which has already headed off the graph towards the stratosphere.

Is it surprising that there are huge fears of a visibly creaking social care system shunting huge costs to a protected NHS? In education the gap between spending per pupil in England and Wales could potentially grow larger than the current £527 per annum, while the level of repairs required to dilapidated Welsh schools is estimated at £2.2 billion by the Wales Audit Office at a time when capital spending is decimated. I could also highlight other massive service pressures such as municipal waste costs but a Prozac would be required.

Then there is the assumption that the private sector will arrive just in time like the proverbial Seventh cavalry coming over the Beacons to save us. The public sector in Wales spends over £4.3 billion a year on goods and services with the private or voluntary sector. Discussions are underway on how new service models might be developed with these sectors to maintain provision. That said, jobs that would have been largely private sector based in terms of large capital projects like the Severn Barrage and the St Athan Training Academy will not materialise. The groan of Welsh town planners, architects and construction workers looking to these projects as the salvation for their jobs was audible.

The relative structural weakness of the Welsh private sector is at the heart of this. Despite the spend per head on economic development being higher in Wales than in any other part of the UK (equivalent to £80 for every Welsh person), our gross value added per head has fallen further behind the UK average, from 80 per cent in 2002 to 74 per cent in 2008.

It is imperative for the Government to tackle the huge structural deficit. It is also time to fully come to terms with the fact that we will wait decades to see a repeat of what has been a golden age of public expenditure over the past ten years. Welsh local government awaits with a real measure of trepidation the Assembly draft budget and the local government provisional settlement in late November.

Welsh Ministers have worryingly indicated a desire to protect acute health care at a time when everyone agrees that there should be a  resource shift to primary and social care (those NHS consultants don’t ever give up). Skills and schools are also in the frame for protection plus the controversial universal services. Yet when Assembly politicians tramp the roads next April what the Welsh public will tell them is that the services they care most about are within one hundred yards of their front doors. They include refuse collection, street lighting, the the dreaded potholes in local roads, that pesky dog mess, and those leisure services which provide much more than a game of squash.  Protecting these services will be impossible if the cuts are too deep.

The scale of challenges ahead for the Welsh local authorities is enormous and the pace of change will be relentless. Some will undoubtedly merge. Others will shift service provision to regional or even national levels. The use of other providers in the third sector or business will be a key factor. And if the truth be told the long sought after reorganisation is occurring, but in functions and not structures.

Finally what happens if the UK Government’s hugely ambitious assumptions about private sector job creation and cost benefit savings simplydon’t materialise? John Kenneth Galbraith once colourfully stated that “the only function of economic forecasting is to make astrology look respectable”. While no one can know whether the Chancellors strategy will work, what we do know is that it will hurt in Wales.