Lower income households and public services to feel the squeeze from higher inflation

The UK Spring Statement fails to provide targeted support for the worst hit households or to shield public services from rising inflation, according to analysis from Cardiff University’s Wales Governance Centre.

Researchers from the Wales Fiscal Analysis project have published their analysis of the Chancellor’s announcements and their implications for Wales. The main findings are:

• That the Chancellor announced tax cuts to provide broad-based support to households across the income distribution to assist with the cost of living. The measures do not however target the worst-hit, lower-income Welsh households, who benefit less from the fuel duty cut and the increase in the national insurance threshold.
• A combination of tax policy changes and energy price increases will leave average Welsh households £315 a year worse off, even after the measures announced yesterday and in February have been applied. Welsh households in the poorest income decile will see the largest hit to their finances, exacerbated by a real terms reduction of more than 4% in working-age benefits, pension credit and the state pension.
• Rising inflation has wiped out 16% of the planned real increase in Welsh Government day-to-day spending by 2024-25, with no new funding announced. This will squeeze public services and public sector workers during a time of huge demand pressures in the aftermath of Covid-19.
• There was some better news for the Welsh Government in the OBR’s latest assessment of devolved taxes. Forecast growth in devolved revenues were once again revised upwards, suggesting the Welsh Government may have an additional £175 million in 2024-25 relative to what it currently plans to spend. Including projected reconciliations for forecast errors in previous years, the net effect of tax devolution could reach nearly half a billion pounds by 2024-25.

Co-author of the briefing, Cian Siôn, commented:

“In the face of price rises and a real reduction in incomes, the Chancellor was under considerable pressure to announce further measures to assist households with the cost of living. But by opting for tax cuts rather than more targeted measures, there was little in the way of additional support for those most affected by the cost-of-living crisis. The failure to uprate benefits by inflation this year is particularly disappointing.”

Guto Ifan added :

“The Welsh Government’s block grant settlement announced in October now looks considerably less generous due to rising inflation. The inflationary pressures on public services will be influenced by pay settlements determined later this year – holding down nominal pay awards could have a detrimental impact on recruitment and retention of staff during the Covid-19 recovery.

“The outlook for devolved revenues continues to improve, which could provide a welcome boost to the Welsh Government’s spending power over coming years. However, these projections are based on forecasts, which are inherently uncertain.”