What assumption in relation to the average level of a) inflation and b) public sector pay increases underlie the Welsh Government's draft budget?
The real terms year-on-year growth figures in the draft Budget narrative and tables use the GDP deflator forecast published by the Office for Budget Responsibility in its November Economic and Fiscal Outlook. There are also references in the narrative and the Chief Economist’s Report to the size of the inflation shock since the UK Government’s spending review last October. There are reasons why this is unlikely to be fully captured by the change in the GDP deflator forecast over the last year. The OBR has said the true impact of the inflation shock on government spending probably lies between the GDP deflator and Consumer Price Index inflation measures. On that basis the draft Budget notes that the change in the outlook for inflation since last year has reduced our settlement in real terms by up to £3bn over the spending review period and £1bn in 2023-24.
In the absence of UK Government funding for pay settlements, funding for pay deals needs to be afforded within existing budgets that have been eroded by a range of inflationary pressures.