Will families in Wales be hardest hit by coalition budget?

By Guto Thomas
BBC Wales political correspondent

image captionThe chancellor is expected to make deep cuts in public spending

There will be nowhere to hide when the Chancellor George Osborne stands at the despatch box to deliver his maiden Budget.

The theme of the Budget will be simple - to start on the long process of re-balancing the nation's financial books.

The diagnosis will involve a complex mix between deep cuts to public spending, a reduction in benefit payments, and increasing the revenue gathered to the treasury's coffers through general taxation.

But how much pain will Welsh families have to endure over the next few years, before this harsh economic treatment takes effect?

There has been a good deal of debate as to the real impact of cuts to public spending in different parts of the UK.

The Financial Times argued on Monday that poorer areas, which tend to be more dependent on social security payments and non-ringfenced government spending, could be hit twice as badly as more affluent areas.

The FT's analysis estimates that a 20% cut in public spending (in areas such as education, defence and public administration) could lead to a reduction of 3.3% in the size of the local economy in west Wales compared to just 1.5% in a more prosperous area such as Cheshire.

Cuts versus taxes?

The key question of the likely impact on families in Wales will have to await the finer details of the chancellor's speech in the Commons, and in particular for any evidence of the coalition government's pledge to a "progressive" approach to its economic policies.

There has been unconfirmed speculation that the chancellor could outline the nature of the fiscal belt-tightening as 80% cuts and 20% tax rises.

Last month, the Conservative - Liberal Democrat Coalition announced plans to cut over £6bn of total spending in this financial year - with a demand for net cuts worth over £162m from the Welsh Assembly Government's budget for 2009/10.

Cabinet ministers in Cardiff Bay will be bracing themselves for an indication of the scale of further cuts that will impact the amount they will receive from the treasury, although the details for future spending will depend on this autumn's Comprehensive Spending Review.

The level of cuts Mr Osborne is expected to announce equate roughly to the total size of the assembly government's budget for the next three and a half years - something in the order of £16bn next year, £18bn in 2012-13, £18bn in 2013-14 and £4bn in 2014-15.

This could mean cuts of well over half a billion pounds each year for Wales - a bitter pill for Welsh ministers after a decade and more of constant increases from the treasury.

Public sector braced for cuts

Whatever the outcome, ministers are painfully aware that the high degree of dependency of the Welsh economy on the public sector, means that Wales could be hit badly by cuts in public spending.

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, or any potential freeze in public sector pay.

The chancellor faces an unenviable dilemma.

On the one hand, increasing income tax or national insurance contributions would reduce the spending power of all earners - decreasing their ability to spend money to help bolster the wider economy, and tending on the whole to hit middle income earners hardest.

On the other hand, any increase in VAT (either by applying it to new areas, or increasing the level from 17.5% to 20%) would have an impact on all individual spending power - with a disproportionate impact on lower income families.

Matthew Elliott, Chief Executive of The TaxPayers' Alliance, said: "VAT hits the poor twice as hard as the rich, and it would be deeply unfair of George Osborne to increase it. Both Coalition parties told voters they wouldn't hike VAT, and people will be very angry if they backtrack on that. The Government has no mandate for this tax rise at all."

Poor relation

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

In the same year, the average wage in the north east of England was £509.70, in Northern Ireland it was £511.20, Scotland was £555.40, and in London it was £784.50.

Official assembly government statistics also show that Wales has one of the highest number of benefit claimants across the whole of the UK.

In 2009, there were 15.7% annual out-of-work benefit claimants in Wales, compared to just 8% in the south east of England.

Only the north east of England (16% in 2009) has a higher rate of benefit claimants, with an average rate of 11.8% across Britain as a whole.

There is widespread speculation that just like in the rest of the UK, Welsh consumers will be hit by increases in alcohol and cigarette duties, although any freeze in council tax in Wales would have to await decisions by the assembly government and Welsh local authorities.

Welsh ministers will meet to consider the implications of the budget for Wales at a special cabinet meeting at 0830 BST on Wednesday.

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