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Inflation bites into Wales' £15bn Reserves raided to stop cutbacks
(about 6 hours later)
Rising inflation is expected to have a major impact on ministers' plans to fund public services next year in Wales. The Welsh Assembly Government is planning to raid its reserves to protect public services as inflation eats into its spending plans next year.
Although cash increases will be announced later, cuts in real terms, after inflation, are likely. It will take over £200m from reserves, cutting them to 1% of the total budget, as spending rises to £15.2bn.
The 2009/10 budget forecasts were based on 2.7% inflation, whereas prices are actually rising by about 4.7%. The money released will fund priorities including £60m over two years for the Foundation Phase education for three-to-seven-year-olds.
The Labour-Plaid assembly government may have to focus on fewer priorities and cut or delay other spending plans. But opposition parties said local government was being "clobbered".
Next year, is the second of a three-year budget plan first published in November 2007, and it was already expected to be tight. There will also be £63m extra next year to get NHS waiting times down.
The lower inflation estimate, 2.7%, would have meant health and social services receiving a real terms increase of 0.4% next April. Health research and public transport receive cash injections, with more money also invested in flood risk management and preparing for any possible outbreak of pandemic flu.
Economy and transport's budget would have shrunk by 1.8% in real terms, if funding for regional European projects is taken out of the figures. The current global economic uncertainty clearly underlines the vital need to remove inefficiencies in the public sector Andrew Davies, Finance Minister
Based on 4.7% inflation, health and social services may now face an effective cut of 1.6%, education and heritage 1.7% and social justice and local government 1.9%. Local government is set to receive 2.8% funding increase, but based on the current rate of inflation there is a danger this could amount to a substantial cut in real terms.
Environment could experience a funding cut of 2.1% after inflation, rural affairs 2.8% and economy and transport around 3.8%. The Consumer Price Index (CPI) measure of the cost of living has put inflation at 4.7% since August, meaning local councils could in reality be facing a drop in funding of nearly 2%.
Higher energy, fuel, food and other general costs are also likely to limit the assembly government's room for manoeuvre as it attempts to shift funds from one budget to another to protect spending priorities. Based on this inflation rate, all assembly government departments, apart from health and education, would face shrinking budgets in real terms.
Its attempts to encourage private sector investment across a range of schemes could also be curtailed by the financial downturn. The health and social services cash rise is 5.3%, equating to 0.6% after inflation is taken into account.
The details of the draft budget are expected to be outlined to assembly members in the Senedd this afternoon. The children, education, lifelong learning and skills budget rise is 5.5%, but this would only be an extra 0.8% on the same basis.
Speaking beforehand, the Welsh Conservatives called for an era of "smart spending" to protect frontline public services. The economy and transport department would face a 2.3% cut, as its budget is rising 2.4% in cash terms.
They also called on the government to "ditch expensive gimmicks and freebies" such as universal free prescriptions and free school breakfasts. The environment, sustainability and housing budget would face a 1.6% drop in its funding, as it is due to get a 3.1% cash increase.
They want resources to be focused on issues such as closing a funding gap in higher education, increasing resources for councils, and building more affordable housing. Rural affairs and heritage are due 3.4% and 3.8% respectively, amounting to effective cuts of 1.3% and 0.9%.
/> 		There are some predictions that inflation will fall in the coming months, relieving some of the pressure on public services.
So what should we look out for? 'Clobbered'
There are some obvious financial solutions such as scrapping free prescriptions or making students in Wales pay for their higher education just as they do in England. Nevertheless, Finance Minister Andrew Davies was under no illusions that pressure on public finances would remain intense.
Both of these would free-up tens of million of pounds for other priorities but would the political price for sacrificing such flagship policies be too high a price to pay? "The current global economic uncertainty clearly underlines the vital need to remove inefficiencies in the public sector, and ensure that we get value for every Welsh pound we spend which focus on outcomes that directly benefit the people of Wales," he said.
What other issues may be involved? Mr Davies said the assembly government was now spending more than £5,000 for every single person in Wales "double the amount we spent at the start of devolution in 1999".
Will there be significant extra cash to help eradicate child poverty, reduce fuel poverty and tackle the problems of the lack of affordable homes in Wales? If not, then where does that leave the government's own targets? Welsh Conservative leader Nick Bourne said it "seems extraordinary" that during the economic crisis, the economy and transport budgets had "taken the biggest hit".
Will there be extra investment in the Foundation Phase for three-to-seven-year-olds, worth around £25m? "Local government too is being clobbered with budget increases well below the rate of inflation," he said.
Will there be specific extra assistance for local authorities in order to stave off either cuts in local services or council tax increases - or maybe both? Mr Bourne also expressed disappointment that more money had not been found for affordable housing.
Will specific pledges such as the free laptops trial go ahead and will schemes such as bovine TB culling go ahead at the same pace and same cost? Liberal Democrat Jenny Randerson warned local government was getting a "raw deal".
How much money will be available for changes such as the NHS restructuring process or will these kinds of costs have to flow from efficiency savings made within the NHS, or will they be delayed until the financial situation improves?
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 "The danger is that local authorities will once again face the impossible choice between cutting services or raising council tax - as a direct result of this Labour-Plaid (assembly) government's neglect of local authorities," she said.
The Welsh Local Government Association said councils were being underfunded in comparison to the NHS.
"It is totally bemusing that the assembly cabinet continues to treat local government as the 'Cinderella' of Welsh public services when all the evidence points to the fact that our services are central to the quality of life for our communities," said leader Cllr John Davies.
Iwan Guy, acting director of the head teachers' union, NAHT Cymru, welcomed the funding for play-based learning.
"This additional funding can now secure a proper roll-out, benefiting children in Wales," he said.
  • An inquiry into how the assembly government is funded by the UK Treasury began work on Tuesday.
    • The three member commission, led by Gerald Holtham, is investigating the way Wales is funded through the so-called Barnett formula.
    It will also consider whether the assembly government should have tax varying and borrowing powers and is due to report back in two years time.