Transcript Public service spending in Scotland: current patterns and future issues

Austerity and uncertainty: Welsh
budgetary trade-offs to 2019-20
David Phillips and Polly Simpson
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Introduction
• IFS funded by Wales PS 2025 to look at how the Welsh
Government’s budget may change over the next 3 years
– And what the knock-on effects to local government may be
• Funding from the UK Treasury set out to 2019-20
– But might this change, especially in light of Brexit?
– Might devolved taxes change the public spending picture?
• Look at a number of scenarios for Welsh Government and council
budgets and explore the financial trade-offs when allocating to
different spending areas and setting taxes
• A subsequent report by Wales PS 2025 researchers will examine
the longer run picture
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The rest of this presentation...
• The economic and fiscal context
• The Welsh Government’s budget and budgetary trade-offs
– Our budget baseline
– What about Brexit?
– What about tax powers?
• Welsh councils’ budgets and budgetary trade-offs
– Our budget baseline
– What about council tax?
• Concluding remarks
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The UK’s fiscal situation (I)
• UK is part-way through a planned decade-long fiscal retrenchment
to close a budget deficit that reached 10% of GDP in 2009-10
– Net tax rises and investment cuts complete
– Still substantial cuts to day-to-day public service spending to do
• Aim was to have a budget surplus by 2019-20
– New PM confirmed this target is to be abandoned following EU vote
• Is this just a recognition that the target is no longer feasible?
– Consensus (among economists) that Brexit will weaken economy and
public finances
• Or will existing spending plans be boosted and/or taxes cut to
provide a ‘fiscal stimulus’ to a potentially weaker economy?
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The UK’s fiscal situation (II)
• We don’t know!
• Chancellor will announce updated plans in Autumn Statement on
November 23rd
– After the Welsh Government will set out its draft budget for next year
• Still significant uncertainty about economic and fiscal outlook
– Unclear what our future relationship with EU will be
• If Chancellor loosens purse strings in the short-term budgetary
pain will be delayed rather than avoided
– Cuts may eventually need to be bigger (if economy is smaller)
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Welsh Government resource budget in 2016-17
Main expenditure group
Total DEL + NDR allocated to departments
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2016–17 budget (£m)
13,744
Welsh Government resource budget in 2016-17
Main expenditure group
2016–17 budget (£m)
Health, Well–being and Sport
6,572
of which: Core NHS
6,329
of which: Public Health
177
of which: Social Services
66
Total DEL + NDR allocated to departments
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13,744
Welsh Government resource budget in 2016-17
Main expenditure group
2016–17 budget (£m)
Health, Well–being and Sport
6,572
of which: Core NHS
6,329
of which: Public Health
177
of which: Social Services
66
DEL funding support for Local Government
3,302
Other local government spend
32
Communities and Children
358
Economy and Infrastructure
597
Education
1,339
Environment and Rural Affairs
275
Central Services and Administration
294
Total resource DEL allocated to departments
AME support for Local Government (NDR)
Total DEL + NDR allocated to departments
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12,767
977
13,744
Our baseline projection for Welsh Govt’s budget
• Based on UK government’s March 2016 budget plans and forecast
– And assumes £3.5 billion of planned but unallocated cuts go ahead
• Welsh budget would fall 3.2% in real terms by 2019-20
– 0.3% in 2017-18, 1.4% in 2018-19 and 1.6% in 2019-20
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Trade-offs when allocating across services
• Protecting core and central NHS budgets in same way as England
would deliver 1.6% real-terms increase by 2019-20
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Real-terms change in budget, 2016-17 to 2019-20
W1: Protect NHS
W2: Protect NHS,
schools and social
services (SASS)
W4: 2% NHS increases,
protect SASS
10%
5%
0%
-5%
-10%
-15%
-20%
NHS
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Local government
Other
Total
Real-terms change in budget, 2016-17 to 2019-20
W1: Protect NHS
W2: Protect NHS,
schools and social
services (SASS)
W4: 2% NHS increases,
protect SASS
10%
5%
0%
-5%
-10%
-15%
-20%
NHS
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Local government
Other
Total
Trade-offs when allocating across services
• Protecting core and central NHS budgets in same way as England
would deliver 1.6% real-terms increase by 2019-20
– But require cuts to other areas, including local government of 7.4%
• Also protecting the ‘formula grant’ councils receive for education
and social services would reduce overall cut to this grant to 4%
– But would mean cuts to other areas of 11.9%
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Real-terms change in budget, 2016-17 to 2019-20
W1: Protect NHS
W2: Protect NHS,
schools and social
services (SASS)
W4: 2% NHS increases,
protect SASS
10%
5%
0%
-5%
-10%
-15%
-20%
NHS
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Local government
Other
Total
Trade-offs when allocating across services
• Protecting core and central NHS budgets in same way as England
would deliver 1.6% real-terms increase by 2019-20
– But require cuts to other areas, including local government of 7.4%
• Also protecting the ‘formula grant’ councils receive for education
and social services would reduce overall cut to this grant to 4%
– But would mean cuts to other areas of 11.9%
• If increase NHS budgets by 2% a year (6.1%) in total and protect
‘formula grant’ for education and social services
– Other areas of spending face average 18.2% real-terms cut
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Real-terms change in budget, 2016-17 to 2019-20
W1: Protect NHS
W2: Protect NHS,
schools and social
services (SASS)
W4: 2% NHS increases,
protect SASS
10%
5%
0%
-5%
-10%
-15%
-20%
NHS
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Local government
Other
Total
Trade-offs when allocating across services
• Protecting core and central NHS budgets in same way as England
would deliver 1.6% real-terms increase by 2019-20
– But require cuts to other areas, including local government of 7.4%
• Also protecting the ‘formula grant’ councils receive for education
and social services would reduce overall cut to this grant to 4%
– But would mean cuts to other areas of 11.9%
• If increase NHS budgets by 2% a year (6.1%) in total and protect
‘formula grant’ for education and social services
– Other areas of spending face average 18.2% real-terms cut
• Difficult trade-offs between NHS, key council-run services, and
other areas like higher education, environment, etc.
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What about Brexit?
• Figures above based on inflation forecasts as of March 2016
– If post-referendum fall in pound pushes up inflation, Wales would
face bigger real-terms cuts unless Chancellor boosted spending
• If Chancellor pares back budget cuts in the short term, more
money would be available over next 3 years
– But even if Chancellor cancels all cuts, boosting NHS spending by 2%
a year and protecting schools and social services would mean cuts of
8% to other areas over 3 years
– And remember, Chancellor needs to cut eventually
• Wales receives over £500 million in EU funding a year
– Farm payments guaranteed to 2020 but other projects not
– If, after 2020, Wales had to find money for all EU schemes from own
budget, overall cuts more than double to 6.9% (from 3.2%)
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What about Welsh Taxes?
• The new Land Transactions Tax and Landfill Disposals Tax will be
too small to be used to generate sizeable additional revenues
– e.g. Revenues from landfill tax would need to increase 5-fold to
generate amount equal to 1% of Welsh Govt spending
• If income tax were partially devolved, across-the-board 1p in the
pound increase in rates could halve budget cuts faced
– Although still tricky trade-offs
• Across-the-board 1p in the pound cuts in rates would increase cuts
from 3.2% to 4.7% by 2019-20, making trade-offs trickier
– Protecting NHS would require 10% cuts elsewhere (rather than 7.4%)
• Need to carefully consider knock-on effects to spending if vary
income tax policy
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Council revenues and spending
• Budgeted spending by local authorities in Wales is £6.2billion in
2016-17 (excluding police)
– 18% council tax, 14% specific grants, 67% formula grant
• Two-thirds of the budget is spent on schools (42%) and social
services (27%)
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Spending changes since 2009-10 (I)
Spend area
2016-17 budget (£m)
Change since 2009-10
Education
Social care
2,660.3
1,583.2
-6%
1%
Total service expenditure
5,629.3
-10%
Total revenue expenditure
6,158.0
-7%
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Spending changes since 2009-10 (II)
Spend area
Education
Social care
Housing exc HB
Environment and regulatory services
Highways and transport
Cultural and related
Planning and development
Fire
Central services
Total service expenditure
Debt financing costs
Other revenue expenditure
Total revenue expenditure
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2016-17 budget (£m)
Change since 2009-10
2,660.3
1,583.2
111.8
373.3
283.3
207.8
80.9
133.9
194.8
5,629.3
332.5
196.2
6,158.0
-6%
1%
-26%
-16%
-21%
-36%
-52%
-15%
-13%
-10%
-6%
219%
-7%
Our baseline project for councils’ budgets
• Based on the our baseline scenario for the Welsh Government’s
budget
– UK goes ahead with March plans
– Health protected but not local government
• Grants to councils could be 7.4% lower in 2019-20
• OBR assumes council tax increases of 4% to bills and 0.6% to the
tax base per year
– Real terms increases of 2.7% a year
– Offsets a quarter of the fall in grants
• Overall 5.9% cut to councils budgets’
– Assuming no further draw downs from reserves
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Trade-offs when allocating across services
• Overall 5.9% cut to councils budgets’
• If councils protect real-terms spending on social services and
education
– Would require cuts to other service areas of 22.7%
– Varies across scenarios from 16.4% to 34.7%
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What about council tax? (I)
• Remember: OBR assumes real-terms council tax increases of 2.7%
a year
– Offsets a quarter of the fall in grants
• Additional increases in council tax of 3.3%pts a year
– Offsets an additional 33% of the fall in grants.
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What about council tax? (II)
• Local councils will differ in their ability to offset cuts with council
tax increases
60%
55%
50%
40%
30%
22%
20%
10%
0%
Figure: Proportion of cuts to local government grants offset by additional increases in council
tax of 3.3ppts per year, by local authority
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What about council tax? (III)
• Overall budget falls by 3.9% instead of 5.9%
• To achieve this council tax bills would have to go up by over 7% a
year
• Substantial increases in council tax will not offset the fall in
grants, even in large tax base areas.
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Concluding remarks
• Uncertain economic and fiscal backdrop to the upcoming Welsh
draft budget
• Based on current plans, (back-loaded) budget cuts over the next 3
years and tricky trade-offs between key service areas
• Brexit may have a number of different effects on Welsh budget
– Will know more following Autumn Statement
• Local government will also face difficult trade-offs
– Potential for further large cuts to services already cut by up to 50%
– Even larger council tax rises could offset some but unlikely all the
cuts, and would generate more for some councils than others
• No easy options for Welsh and local government – careful
planning will be required
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