Things will only get difficult

Adrian Masters
BBC Dragon's Eye presenter

The Finance Minister Andrew Davies is a worried man. When I spoke to him in his office in the assembly earlier this week in an interview for the Dragon's Eye programme, he was his usual calm, understated self - but what he had to tell me should send shockwaves through the Welsh public sector.

His message, in a nutshell, is this. There's trouble - possibly big trouble coming our way, and unless we take some tough decisions now, they'll be taken for us in a spending squeeze unprecedented in the ten years of Assembly Governments to date.

The immediate problem facing him is 2010-11. If the full implications of the Chancellor of the Exchequer's �5bn efficiency saving target in last year's pre-Budget report is passed on to Wales (that is, if it falls on devolved areas like health, education and local government, rather than defence, social security and foreign aid) then we could be looking at a budget cut of nearly �300m.

Add that to a potential capital budget reduction of around �200m caused by bringing spending forward and other changes, and you've got a nice - or not so nice - round figure of half a billion pounds missing from that year's budget of around sixteen billion pounds.

The budget squeeze at the Treasury is set to be passed onto Wales

What's also leaving the finance minister with bitten fingernails is whether the Treasury's going to start future budgets from a base line minus that half a billion - so hobbling any spending plans beyond 2011.

Looking to the future, things are - in his own words - going to get difficult.

The Institute for Fiscal Studies, backed up by the Treasury's own predictions, foresee a serious squeeze on public spending, from a combination of plummeting tax revenues, fiscal stimulus measures like the VAT cut, a growing social security budget, and increases in debt and interest payments. From 2011 onwards, many areas of the public sector could be looking at frozen budgets. And that's in stark contrast to recent years. From the inception of the Assembly in 1999, the Welsh block grant has grown rapidly, from around seven billion then to around sixteen billion next year.

'The good times are certainly over'

What does this mean? It means that the music's stopped, the party's over - however you want to describe it.

So does that mean cuts? Far too early to talk of cuts, Mr Davies told me. But certainly time to talk efficiencies - and major ones. What's interesting is the area he chooses to focus on in our interview. In a word - councils. They're by no means the biggest call on the assembly government's budget.

But it's clear the finance minister has them in his sights.

Twenty two local authorities delivering 22 separate services? Daft.

Room for improvement? Huge.

Irritation levels within the Welsh Local Government Association at being singled out again? You decide.

It's hard to see where the wriggle room is going to come. Governments have three ways of balancing their books in difficult times. Tax more, borrow more, or spend less.

The problem for the assembly government is that the first two aren't an option. They, like the Scottish executive, don't have borrowing powers - and even if they did, the Treasury could simply lop the money borrowed off the block grant. The assembly government certainly don't have tax raising powers - that's probably for the referendum after next. So that leaves - spend less.

And for all the finance minister refuses to talk about cuts, most people's understanding of working more efficiently is to deliver services using fewer resources.

So where does all this leave us? From Andrew Davies's perspective, it's a wake up call to the large proportion of the Welsh population employed in the public sector. The good times are certainly over - the question now is how bad things could now get. The private sector in Wales is already in deep recession. The public sector's recession could be a year or so round the corner.

Dragon's Eye is on BBC One Wales on 2235 GMT on 12 February and is also available on the i-Player.