Written By:
Edward Thomas Jones
Senior Lecturer in Economics
Bangor University
___________________________________________________________________________________________________________________________
No festive joy for the struggling economy and further pain for the public sector
January and February are the most depressing months of the year. The winter blues hit hard during these months as skies turn grey, the air becomes colder, the sun is rarely seen, and the impact of excessive celebrations of the festive seasons are truly felt. Recent economic news has added to this feeling of gloom.
In the week before Christmas the Welsh Government announced its draft budget for the upcoming year, which outlined how it would spend £23bn (80% of this comes from the UK Government through the block grant and the remaining comes from income raised through devolved taxes). Prior to this announcement, Welsh Government ministers had been busy preparing the public for bad news and the Finance Minister didn’t disappoint.
The budget clearly prioritises core NHS Wales services, with health and local councils the only areas which were not bit by cuts for the year ahead. This wasn’t a surprise given NHS Wales is contending with record high waiting times and growing wage bills, while junior doctors are likely to go on strike in January 2024. The health service budget is set to increase by 4.4%, which is on top of the financial boost it received back in October. Despite this increase, some health-related services will be cut back, including mental health treatment, support for drug and alcohol misuse, and obesity and smoking prevention.
Local Councils provide many of the core public services that people rely on, including schools, bin collections, road repairs, libraries, and social care. While they also received an increase (3.5%), the amount that each council will receive varies. Newport will receive the largest percentage increase (4.7%), followed by Cardiff (4.1%) and Swansea (3.8%), while Conwy and Gwynedd will get the smallest increases at 2% each, followed by Caerphilly and Monmouthshire at 2.3%. Despite this increase, the future for Local Councils is bleak and they will need to make difficult decisions in terms of the service they provide and if they should increase the taxes they charge to cover any shortfalls.
The rural sector was the biggest casualty of the budget. While the basic payment scheme for farmers was protected, the budget for rural affairs will be down 9.0%. This will be a devastating blow to the rural economy, and the associated food and drink industry, which is already facing huge uncertainty and higher costs. Tourism was another sector that came off poorly from the budget, with hikes in the takes they pay. Business rate relief for pubs and restaurants, which were brought in during the pandemic, will be cut from 75% to 40%. Comparable business rate relief remains at 75% in England which puts the Welsh sector at a disadvantage.
When adjusted for the Welsh government's measure of real terms, which takes inflation into account all areas apart from health have less to spend. In December, the Office for National Statistics announced that UK inflation slowed sharply in November to 3.9%. This was the lowest inflation rate since September 2021, and considerably lower than the 11.1% seen in October 2022. Despite the fall in inflation, prices remain high – lower inflation does not mean that prices come down. In simple terms, the public sector will get less for the money than it used to because of inflation.
The Welsh Government budget has been finalised against a backdrop of extremely challenging public finances across the UK and conditions are unlikely to improve as there continues to be pressure on the public purse due to the slowing economy.
The ONS announced in December that the UK economy shrank slightly in the third quarter of 2023 given GDP fell by 0.1 per cent in the three months to September. The UK economy had also fell by 0.3 per cent in October (compared with September), suggesting the country is stuck in a lacklustre state as it struggles with high borrowing costs and the legacy of the worst inflationary upsurge for a generation. Further declines in overall activity would increase concerns that the UK could be heading into a technical recession, with two consecutive quarters of falling GDP.
What can be done to turn the economy around? A positive step would be to provide support for our entrepreneurs. By creating new products and services, entrepreneurs simulate new employment, which ultimately results in the acceleration of economic growth. To flourish, entrepreneurs need three things: a predictable policy regime, open collaboration with international partners, and targeted support for fundamental research and early-stage development. All three can be provided by policymakers in Cardiff and Westminster. If we want to see a change in our economic fortune, let’s make sure our entrepreneurs have the right environment to flourish.
