Martin Shipton
Higher-than-expected inflation caused by the US and Israel’s war on Iran will have a negative impact on the Welsh Government’s spending plans, according to a briefing by Cardiff University academics.
In an analysis of Plaid Cymru’s Supplementary Budget deal with Labour and the prospects for the 2027-28 Budget, Ed Gareth Poole and Owain Cynfab of the Wales Governance Centre state: “Unlike previous rounds of inflation which had multiple causes, the unexpected jump in prices in 2026 has one primary cause: a global energy price shock linked to the conflict in Iran.
“Before the start of this war, CPI inflation was expected to ease to around 2% from April and stay there for the rest of the year. Because of significantly higher gas, petrol and diesel prices, and because the UK is a net energy importer, inflation reached 3.1% in August, up from 2.9% in July. The Bank of England now expects it to rise to around 3.7% in 2026 Q4 [Quarter 4] and around 4.2% in 2027 Q1 [Quarter 1].
“The Institute for Fiscal Studies’ Green Budget, published on October 12, quantifies the effects of that higher inflation for the public sector. The new Chancellor, John Healey, inherited spending plans that already looked incredibly tight before prices began rising faster than expected.
“The IFS calculates that simply keeping departments whole for higher pay costs could require an additional £3bn of budget pressure in 2028-29, and if future pay awards follow recent forecasts for average earnings growth, this pressure could reach £7-9bn.
“Meanwhile, the effects of higher inflation on the non-pay components of department budgets could reduce the value of non-pay day-to-day budgets by £4-8bn in 2028-29 and the value of capital budgets by £2-4bn.
“For Wales, while we cannot calculate the impact directly (because the Welsh Government’s block grant follows spending decisions for England under the Barnett formula), how far the Chancellor tops up English departments for inflation later this month will largely determine what reaches Cardiff Bay.
“This matters, because the previous Welsh Government’s 2026-27 budget promised every department at least the same funding in real terms as the prior year, including an uplift for inflation and pay, and councils and NHS bodies across Wales have warned that their funding isn’t rising enough to cover higher costs.
“Earlier this year, in our elections analysis work funded by the Nuffield Foundation, we cautioned that a tough spending outlook will make improving services especially difficult for the new Welsh Government.”
The deal between Plaid and Labour followed the first-ever defeat of a Welsh Government Supplementary Budget in July.
The agreement provides £60m for additional learning needs (ALN) in 2026-27, of which £44.8m will go directly to schools, £11.2m to local authorities, £2.5m to further education and £1.5m towards developing a long-term sustainability plan.
Although no figure has been announced for subsequent years, the accompanying ministerial statement notes that “funding allocations for ALN for future years will be considered as part of our preparations for the Draft Budget for 2027-28, in the context of a need to reach cross-party support”.
The analysis states: “Although adult and children’s social care remains the most acute pressure facing local authorities, ALN spending is clearly an enormous budgetary challenge. Ministers say ALN spending has grown 2.5 times faster than overall education spending over the last decade and is heading towards £1bn per year.
“In that context, in the absence of wider reform or definitive commitments regarding future funding, this can best be seen as a stopgap measure. The deal also does not appear to have resolved the trade dispute declared by NAHT Cymru and ASCL Cymru in July, which covers pay as well as ALN.”
Budget cooperation
According to the analysis, the main significance of the agreement is political: “It shows that Plaid and Labour can reach a deal and that ALN is a bridge to wider budget cooperation, albeit after a very extended period of negotiation.
“The 2027-28 Budget, worth around £27bn, is the much bigger test. The Plaid Cymru administration will need to show that it can make additional progress on its major childcare commitments in a budget in which calls for funding will be intense in every single department.
“The Supplementary Budget agreement is a useful, if modest, milestone. It gives the Welsh Government the legal authority to spend new in-year monies. But a one-time £60m for ALN is a stopgap rather than a settlement, and the deal leaves the wider budgetary pressures largely unresolved.
“The real test is still to come. The 2027-28 Budget will be far larger and far less forgiving, with childcare commitments to fund, pressure in every department, and inflation driving up what pay and services cost.
“Much will depend on how the Chancellor allocates funding across the UK government departments in his budget later this month, and particularly the extent to which English spending departments will be compensated for higher inflation via budget top-ups – if this happens at all.
“In retrospect, this agreement may be seen as the easy part; next year’s annual budget will show whether this first deal was a genuine foundation for cooperation or whether it merely postponed hard choices until winter.”
The post Iran war will hit Welsh Government spending plans, say academics appeared first on Nation.Cymru.