The financial challenges faced by the next Welsh Government

As we approach the business end of the elections for a new Welsh Senedd, all the parties will be preparing to publish their manifestos, complete with a list of expensive promises and actions that they believe will transform Wales, however the reality might prove more difficult to navigate than they think.

The Institute for Fiscal Studies has published its own analysis that suggests that the next Senedd is not going to be an easy ride for whoever forms the next government.

The IFS say that increases in resource funding are set to slow significantly and capital funding is set to fall over the next few years, which will mean tough choices over tax and spending allocation for the next government. Their press release says that:

After increasing by an average of 2.5% a year in real terms so far in the 2020s, the Welsh Government’s funding for day-to-day (resource) spending is set to increase by an average of just 1.1% a year over the next three years. Funding for investment (capital) spending has increased by even more over the last few years but is now set to fall by an average of 1.3% a year.

In both cases, this more challenging funding outlook is driven by the UK government’s decision to have lower growth in overall spending across the UK in coming years as it seeks to reduce a large budget deficit and stabilise debt levels. In the context of spending pressures in areas such as health, social care and special educational needs provision, it will mean whoever is in government in the next Senedd term will face difficult decisions on tax and spending. Indeed, without increases in revenues – whether through a boost to Welsh economic growth or increases in tax rates – and/or major improvements to public sector productivity, cuts to some services are highly likely to channel money to other services with growing spending needs. This is important context for any promises made during the election campaign.

It has been suggested that a move to a needs-based funding formula for allocating funding to the Welsh Government could help address these challenges. At least on the basis of currently available assessments of Wales’s relative spending needs, such a move could in fact exacerbate the challenges. The 2010 Holtham Commission estimated Wales’s spending needs per person were around 14% to 17% higher than those of England. We estimate that UK government funding for the Welsh Government was 25% higher per person in 2024–25 than the amount spent on comparable services per person in England. That is the equivalent of around £1.5 billion a year more than would be received if funding was instead 17% higher than in England.

This assessment means that scrutiny of those manifestos must be much more thorough than usual.