Wales waiting for dust to settle following budget

Welsh ministers may have to manage cuts of around £2bn over four years

As the dust begins to settle after George Osborne's first budget, the specific implications for Wales remain unclear.

Whilst the budget has been described as an "eye-watering" announcement and a "defining moment" for the country, the details of many of the cuts that could fall in Wales will have to await the autumn's comprehensive spending review.

However, in addition to a wide range of changes to the taxation and benefits regimes, early indications suggest that in real terms, Welsh ministers may have to manage cuts of around £2bn to their spending power over the next four years.

In addition, poorer paid workers and those that receive benefit payments could be hit disproportionately hard in Wales, because of lower average incomes.

Chancellor George Osborne told members of parliament that the coalition government would seek a balance of 77% in spending cuts and 23% in tax increases, in order to rebalance the nation's finances.

The scale of changes to the taxation and benefits systems in this budget are therefore merely a foretaste of the cuts to public spending that will have to be identified by the time the comprehensive spending review is published at the end of October.

There was more than a hint of the pain to come however, as the chancellor outlined bad news for all spending departments, revealing that the scale of the national debt demands additional cuts which amount to an average real terms cut of 25% over the next four years (apart from health and international aid, plus some undefined leeway for spending in education and defence).

The assembly government currently spends around £6bn of its budget on health and social services, which suggests in the broadest terms that the remaining £9bn could be subjected to this level of cuts.

Although all spending decisions and allocations are decided by the assembly government, this could mean a real terms cut (after inflation is taken into account) in the region of £2bn or more over four years - which corresponds to a rough figure of over £500m per year over the same period.

In real terms, it is thought this could mean an effective reduction of 15% in the assembly government's overall budget by 2014/15.

Public sector workers in Wales will be hit by the budget

Some of these cuts could perhaps be offset by the chancellor's decision to impose a two-year freeze in public sector pay - although the lowest paid civil servants earning below £21,000 will still get a flat pay increase of £250 per year.

This will hit workers in Wales particularly hard.

Last year 30.5% of people working in Wales were employed in the public sector, with areas such as Swansea (38.2%), Ceredigion (35.5%), and Blaenau Gwent (34.2%) particularly exposed to cuts in public spending, as well as this freeze in public sector pay.

However, there was some potentially good news for the assembly government in terms of capital spending - to build new schools, roads or hospitals for example.

Mr Osborne said there would be no further cuts in capital spending programmes, but that the UK government's priority would be to provide funding for "projects with significant economic return to the country".

This may provide some comfort for Welsh budget minister Jane Hutt, who briefed journalists ahead of the budget that the assembly government still backed the policy of pump priming the Welsh economy with government spending.

Weekly earnings

"Fiscal stimulus has not gone out of fashion here in Wales," she said, and argued that this was still a good way to boost the construction industry.

Just like in the rest of the UK, Welsh consumers will all face higher costs for goods after 4 January, as VAT increases from 17.5% to 20% - with many critics already warning that this tax will hit lower income families disproportionately.

On the other hand, with lower average incomes in Wales than the rest of the UK, the increase of £1,000 in the personal income tax allowance in April to £7,475 is expected to raise around 50,000 of the poorest paid Welsh workers out of income tax, as well as being worth £170 a year to basic rate taxpayers.

Average gross weekly earnings in Wales was just £506.40 in 2009, which was the lowest income of all the nations and English regions.

The wide-ranging reform in benefit payments will also have a significant impact in Wales, where official assembly government statistics show that Wales has one of the highest number of benefit claimants across the whole of the UK.

For example in 2009, there were 15.7% annual out-of-work benefit claimants in Wales, compared to just 8% in the south east of England, and an average rate of 11.8% across Britain as a whole.

Finer details

With a total of £11bn of cuts announced to the welfare and benefits budget as a whole, including tax credits, the abolition of the health in pregnancy grant, a three-year freeze in child benefit payments, and the reform of housing benefit and the disability living allowance, this will have a significant impact for many thousands of households in Wales.

Welsh Assembly Government officials and politicians will now start to chew over the figures - and will have to review their financial planning assumptions in the light of the finer details of this budget.

No early decisions are expected on whether to match the demand in England for a freeze in council tax, although pensioners in Wales will benefit from the chancellor's announcement that the earnings link will be restored to the basic state pension from April 2011.

Ministers will gather in Cardiff Bay for a special cabinet meeting on Wednesday morning although they have yet to decide whether or not to defer cuts to this year's budget, let alone reaching any conclusions about these significant cuts in the future.