You’ve probably all seen this. You’ve probably all said this.
When spending decisions are debated or announced – whether it’s at a council, Welsh Government or UK Government level – someone will trot out these immortal lines:
“What a waste of money!”
“Nice to know my taxes are going to good use!”
Or my personal favourite:
“We should be spending this on the NHS/social care/fixing potholes/housing veterans etc. etc.”
The politics of priorities always comes into this. There are certain spending decisions that people are never going to agree with. More often than not though, the anger might be misplaced because of the mix up between capital and revenue spending.
Politicians (of all colours; this isn’t a party issue) want you to be confused about this because they think your anger around certain spending decisions will benefit them in some way or rally people to a “cause”.
People often call for this – and, as mentioned, the Welsh Government want an OK from the UK Treasury to do it – but it’s a bad idea and a sign that a public authority is losing control of its budget. So when this is suggested, you should be asking questions.
I’m going to simplify things, but let’s return to the £32million capital spending on the 20mph speed limit. What if that was redirected to the NHS’s revenue budget instead?
NHS Wales’ revenue budget was £10.1billion in 2023-241. So the £32million amounts to a 0.35% increase – the NHS would go through that in a little over a week.
Also, as it was originally capital spending it’s been budgeted as a one-off. If you wanted to maintain that cash boost for three years, the original £32million could turn into something closer to £100million which the government hadn’t originally planned on spending.
So moving funding from capital to revenue budgets isn’t normally allowed under UK public finance rules. It’s using money designated for one-off spends to fund ongoing commitments. All it does is postpone a bigger cut in spending a few years down the line. It’s happened in the NHS in England and it’s led to maintenance backlogs and deteriorating facilities3.
Capital projects are normally planned years in advance. In the NHS’s case, providing extra capital funding is fine but you still need to find the money from the revenue budget to cover the cost of running any extra services that would be needed as a result. For example, you could buy state-of-the-art diagnostics equipment (capital) but the NHS might need to hire or train extra staff to use it, or the equipment may cost more to run (revenue).
So if a council or government wanted to meet a funding shortfall in its revenue budget, it would normally either cut revenue spending, move money from reserves, increase taxes or borrow more.
To add to the confusion, there’s nothing preventing councils and governments from moving funding from revenue to capital – though it would probably need to have a good reason. For example, a council might want to buy land or a building (capital) using council tax receipts (revenue).
Summing up, the important take aways from this:
- Capital and revenue budgets are separate.
- Capital spending “funds new things” and is usually a one-off; revenue spending funds day-to-day public services and meets an ongoing commitment.
- Capital spending doesn’t redirect money from frontline public services.
- Under public finance rules councils and governments normally can’t move money from capital budgets to revenue budgets to cover shortfalls or prevent cuts – and when it does happen, it’s rare.
- Capital and revenue budgets are pre-planned between one and three years in advance; apart from emergencies there are usually “no big surprises”.
1. Welsh Government, “Welsh Budget 2023-24” (p3). Available at: https://www.gov.wales/sites/default/files/publications/2022-12/draft-budget-2023-2024-leaflet.pdf
2. Based on the average nursing salary of £33,400 per year. More at: https://www.nurses.co.uk/blog/a-quick-overview-of-nurses–salaries-in-the-uk/
3. National Audit Office, “Review of capital expenditure in the NHS” (p20-24). Available at: https://www.nao.org.uk/wp-content/uploads/2020/02/Review-of-capital-expenditure-in-the-NHS.pdf
