Welsh Draft Budget approach increased the risk of unaffordable election pledges

The approach taken in this year’s Welsh Draft Budget

Last week (October 14th 2025), the Welsh Government published its Draft Budget for the coming financial year, 2026–27. This comment assesses the approach to allocating funding between service areas and the risks this entails. It complements evidence I will be giving to the Senedd Finance Committee today (October 22nd 2025) – which will also cover a range of other issues on the tax and spending sides of the Welsh Government’s Budget.

The approach taken in the Draft Budget was previewed in a statement to the Senedd back in July. With an election looming, the Welsh Finance Secretary said he was planning for a ‘business-as-usual’ Budget, with budgets for each service area increased in line with inflation. Given a 2% above-inflation increase in the Welsh Government’s overall funding, and the hope of carrying forward some funding via the Wales Reserve, this would provide hundreds of millions of unallocated money for the new Senedd, plans for which could be ‘put before the Welsh electorate in [parties’] manifestoes’. That sounds like a laudable aim.  

The Draft Budget published last week is broadly in line with that approach. Because the Welsh Government has used the Office for Budget Responsibility’s March forecast for average cash-terms earnings growth in 2026–27 to index budgets for labour costs (2.2%), and a 2.0% cash-terms increase for other budgets (just above forecast whole-economy inflation), each broad service area receives a small above-inflation increase in its core budget of around 0.3% to 0.5%. (Service budgets also gain or lose typically small amounts of money related to one-off commitments, and changes in ring-fenced funding from the UK government.) That leaves unallocated funding equivalent to a further increase in day-to-day spending of 1.1% on top of 2025–26 levels (£231 million) and a further increase in investment spending of 4.1% (£136 million). These are modest but not inconsequential amounts. Any money that can be carried forward in the Wales Reserve and used next year would come on top of this.  

This is not a ‘business-as-usual’ approach

The Finance Secretary has not defined what he means by ‘business-as-usual’. But a reasonable interpretation is a Budget that allows different service areas to continue to deliver broadly the same range and quality of provision next year as now.  

Using that definition, increasing spending on each service area by a similar, very small amount above inflation is not really a ‘business-as-usual’ approach to budgeting. Different service areas face different spending pressures – and not just because labour and non-labour costs make up a different share of their budgets. An ageing population and new costly treatments are leading to rising demands for health and social care spending, which has been growing as a share of overall public spending over time in Wales and the UK as a whole. In contrast, falling numbers of children help offset some of the other upwards pressures on school and childcare funding.  

Meeting ‘business-as-usual’ spending pressures would therefore likely require bigger differences in allocations between services, and an average increase in day-to-day spending of more than 0.5% above inflation. Much if not all of the unallocated funding for day-to-day spending would need to go to health and social care spending. Analysis for Wales from before the pandemic, as well as more recent analysis for England and Scotland, suggests above-inflation increases of between 2% and 3% are likely to be needed to maintain, let alone improve, services in the face of rising costs and demands. If all £231 million of the currently unallocated funding for day-to-day spending was allocated to the health and social care department, that would enable a 2.3% above-inflation increase in spending.  

Why this approach entails risks

If the Budget were to be passed in its current form, it would create risks for service provision and the public finances in Wales. Different services and local councils would need to wait until some time after the Senedd elections in May 2026 for more realistic budgets (for a financial year that starts in April). This could make it harder for them to plan their activities (such as recruitment and investment in new equipment), potentially harming service provision. The contrast with England would be stark, where three-year spending plans were published in the Spending Review in June 2025 (although these are, of course, subject to some potential changes, especially in later years).  

With an election looming, the suggestion that there are hundreds of millions of unallocated funding on top of the ‘business-as-usual’ allocations for services could also lead parties to claim new policies could easily be funded. Indeed, we have already seen something like that, with Plaid Cymru recently claiming that an expansion of childcare costing £500 million a year by the end of the decade was ‘money that we know we can afford’ if existing service budgets are increased only in line with inflation in the coming year. In reality, finding money for major new policies, while feasible, would require difficult decisions on tax and other areas of spending – because, as explained above, ‘business-as-usual’ pressures will likely absorb currently unallocated funding.  

In evidence to the Senedd Finance Committee after the Draft Budget was published, the Finance Secretary has tried to address these issues. In particular he has recognised that the funding allocated to the health service so far ‘won’t do everything that [it] need[s]’ given it ‘faces increasing pressures every year’, so will need ‘a share’ of the unallocated funding. And he has said that ‘no one should believe’ that the unallocated funding is ‘sitting there for lots of shiny new things’. But it is still unfortunate that the public finance waters have been muddied by the initial messaging around the Welsh Draft Budget.  

Is it the basis for negotiation instead?

In July the Finance Secretary signalled his openness to agreeing a ‘more ambitious budget’ with other political parties. In his speech alongside the Draft Budget last week, he emphasised this point, saying that the Draft Budget was a ‘starting point of the budget process, not the end of it’. And he ‘urged’ all Senedd members to engage in Budget discussions, to enable changes in the Final Budget due to be voted on in January 2026.  

Given the risks described above, allocating more of the available funding across service areas before the new fiscal year and the election campaign proper begins would be a desirable outcome. The money still to be allocated is more significant than in most other years. This provides the other parties with more opportunity to shape the Final Budget than in typical years – bearing in mind the different pressures facing different service areas. It may also lead to them being seen as more accountable for potentially tricky Budget decisions too.