Q&A: The Budget and Wales

By Toby Mason
BBC Wales political unit

Alistair Darling will expect efficiency savings in Whitehall - with a knock-on effect in Wales

When the chancellor rises to deliver his budget on Wednesday, it will be watched very closely by the Welsh Assembly Government.

It is no exaggeration to say there is near panic within the devolved administrations about the implications of what he'll announce. Here's why.

In the pre-Budget report last autumn, Alistair Darling announced that Whitehall departments would be expected to find £5bn in efficiency savings in the financial year 2010-11. This immediately rang alarm bells in Cardiff Bay, Holyrood and Stormont - since the Barnett formula dictates that the block grant given to each of the three devolved administrations is directly linked to the level of spending in the Whitehall departments which cover devolved functions (such as health, education and agriculture for example).

So how vital is Wednesday's Budget?

What we will find out on 22 April is where those cuts will fall in Whitehall - and then we'll see what the impact will be here. If all of them fall on departments like health, education, agriculture and so on, then the potential cut to the Welsh block grant is estimated at £292m (out of a total budget of around £16bn).

However, this is very much a worst-case scenario. Inevitably, some of the savings will be made in non-devolved areas such as defence, foreign affairs and the Department of Work and Pensions. The big question for Wednesday's Budget is where the cuts will fall most heavily. Only then will we find out exactly how much less Wales will get to spend on public services in 2010-11.

Importantly, the money comes as a block to Wales, and then the assembly government has complete freedom to spend it as it wishes. So, for example, a big cut in the health budget in England would result in a big cut in the overall Welsh budget but not necessarily any cut in the Welsh health budget if the finance minister decides that other departments should take the pain.

Why are these cuts happening?

UK government borrowing has now reached unprecedented levels. The debate now is how it can be paid back. There are strong advocates of the view that efficiency savings in public expenditure can be a good thing.

These will force government departments to become leaner, meaner and more efficient, and therefore in better shape when the upturn comes. It also limits the impact on the tax bill, which should keep more money in the economy.

The other point of view, expressed forcefully by the assembly government is that it would be madness to impose cuts on public spending during a downturn, when private sector expenditure and investment is being cut back.

What about the "£500m cut" to the Welsh budget we have heard so much about?

The finance minister Andrew Davies has been unusually vocal and forceful in terms of laying out the implications of what cuts in expenditure by the UK Government could mean for public services in Wales.

He has laid out a "perfect storm" scenario which at its worst means a £292m cut from the efficiency savings, a loss of £120m from the capital budget because of money being brought forward to combat the recession, and a £75m cut in capital spending due to capital underspends in the UK department of health.

Taken together, that brings you to around the £500m but it must be stressed that this is the absolute worst case scenario at this stage, and the fact that Mr Davies has been so vocal on that figure may be tactical - it means he can claim a partial victory from his lobbying of the Treasury if the actual cuts are less than that. The £120m and £75m are basically done deals - so all eyes are on the efficiency savings.

How worried is the assembly government?

Really worried. Following the pre-Budget report and the calculation of the £292m potential figure, the first minister was asked what he thought the implications would be. He said it was too early to say before the Budget is published but that anything more than a £160m cut would be very difficult indeed for assembly government.

It is understood that all public sector organisations in Wales have been asked to "war game" the implications of a 2% cut in their budgets, but also a 5% cut for the financial year 2010-11. Most have told BBC Wales that 2% is "do-able" with internal cutbacks and belt tightening - anything more than that is a major problem.

Five per cent would mean unavoidable reductions in head count and cuts to services. What will have given added worry to the assembly government is that the £5bn cuts in 2010-11 announced in the pre-Budget report could now be greater given the deteriorating state of the public finances.

Also, the briefing ahead of Budget day indicates that there may be a rolling £15bn programme of efficiency savings in the coming years. This would indicate that the assembly government is looking at year-on-year cuts to its budget.

And the advent of a Tory government would not make any real difference - the shadow chancellor George Osborne told Andrew Marr on BBC1 last Sunday that a future Conservative government would seek to repair the public finances by cutting public spending (or severely restricting its growth) rather than tax increases. This is seriously ominous for the assembly government and the other devolved administrations.

What can the assembly government do to mitigate the effects?

Virtually nothing. The assembly government is exposed here because it has no borrowing or tax raising powers. The block grant is basically it. So the only way it can deal with the settlement is to make its own efficiency savings and try and spread the pain across various Welsh departments.

It important to remember that UK government departments also spend significant amounts of public money in Wales outside the block grant - most notably the the Department of Work and Pensions. Assembly government budget reserves are also at historically low levels, so it can't fall back on its savings to get itself through the lean years ahead.

What is likely to be the reaction?

Anticipate anger from the opposition parties. What will be interesting is whether there will be a strong official reaction from the assembly government itself or whether it will allow its backbenchers (Labour and Plaid) to voice its criticism. Plaid are already claiming that the £15bn figure on efficiency savings is £10bn more than the pre-Budget report - although this is to be spread over a number of years.