Finance Committee

Felly, gwnawn ni symud ymlaen at eitem 2, sef nodi'r papurau. Rydyn ni wedi gweld y papurau o flaen llaw—dwi'n meddwl bod yr Aelodau wedi eu gweld nhw. Dwi'n mynd i dderbyn y rheini fel papurau i'w nodi oni bai fy mod i'n clywed gan rywun arall yn wahanol i hynny. Dyna ni. Gwych. Gwnawn ni nodi'r rheini. Diolch yn fawr.

Gwnawn ni symud ymlaen at eitemau 3 a 4 ar yr agenda. Rydyn ni'n mynd i gymryd y rhain efo'i gilydd. Felly, mi fydd yna ambell i gwestiwn am eitem 4 yn dod i fyny, ond gwnawn ni gyfro hynny yn ystod y sesiwn.

Minister, it's lovely to see you this morning on a bright morning like this. If you and Andrew would like to just state your names and roles for the record, please.

Good morning, Chair and committee. I'm Rebecca Evans, Minister for Finance and Local Government.

Hello. My name's Andrew Jeffreys, I'm director of the Welsh Treasury.

Diolch yn fawr. We'll move on. I think we've got you for about two hours this morning, so that's good. We'll start with some questions. I'd like to head off with some questions around budget timings. While we appreciate your constructive engagement before the budget was published and that UK Government timetables are outside your control, some stakeholders feel that they have not been able to feed into detailed scrutiny of your proposals due to timing and understanding the impact of budget allocations in their areas. What commitment can you give to ensure that sufficient scrutiny time is available both to committees and stakeholders in the future if there is any further uncertainty of timing of UK fiscal events?

Thank you, Chair. I do agree that the timing of UK fiscal events doesn't respect the devolved nations, and it certainly doesn't assist the Senedd scrutiny process or the ability for other outside organisations and interested individuals to scrutinise either. But, that said, I do make a really strong point of trying to engage as widely as possible with stakeholders before we even know our settlement, so at least we have a strong idea of stakeholders' broad areas of interest and broad priorities. I do that in a number of ways. For example, through the autumn, I engaged with a range of stakeholders, including all of our statutory commissioners. I had a round-table event with them, which was really helpful, and that's something that I make a point of doing every year. I also engage with the third sector, local government representatives and our social partners to hear their priorities as well. So, lots of work does go on even though we don't know the actual settlement that we'll receive.

That said, I'm always keen to improve the way in which we engage as part of our budget process. Early on in my time in this portfolio, I introduced our budget improvement plan, which is a rolling five-year plan in which we can demonstrate how we will be improving our budget process. That's a really important piece of work, as is the work that we'll be doing to formally establish now a budget impact and improvement advisory group, which will have the opportunity to influence and improve the budget process and the tax processes. That will then support the delivery of the budget improvement plan as well. So, I think that we do try and carve out as many opportunities for engagement as possible. I'd also just add that it's important as well that interested organisations engage directly with their portfolio Minister, who will have a big say in terms of the way in which their budget is managed and the priorities that are identified at main expenditure group level. So, that work is also very, very important.

And then, finally, just to refer to our protocol that we have between the Welsh Government and the Finance Committee, which I think is really important in terms of ensuring that there is sufficient time for budget scrutiny, albeit this year I know we had to convene during the Christmas recess, which, of course, isn't ideal. But it was a feature, unfortunately, of the late settlement notification that we received.

We heard a bit from stakeholders during our evidence sessions that they were interested in seeing individual sector budgets be more clearly identified. What further work could you do in terms of budget presentation to make allocations for individual sectors more clear?

I'll probably, Chair, wait for your recommendations as a committee on that, because you will have heard directly from people making those arguments. I'm always really keen to improve the way in which we present our budgets. Over recent years, I think that colleagues will recognise that there have been improvements in the narrative—we try to include much more information there. We've got our excellent chief economist report, we provide information on taxes. Also, alongside that, we're trying to do more work in terms of our distributional analysis, which is another really exciting and important innovation. We've got our new Wales infrastructure investment strategy, and the finance plan that sits underneath that—again, something new and fresh, which, I think, supports our budget plans. So, if there are different ways of presenting information that committee or stakeholders would find interesting, obviously I'd be open to consider those and potentially test them out through the new budget improvement advisory group.

I think Andrew wanted to come in at that point.

Thank you. I think part of what is being asked for by stakeholders is more clarity about the funding for their specific area. I think the real issue there has been that up until 28 October, when we had our spending review settlement, we genuinely had very little idea of what our funding levels would be for next year. So, we really had a very rapid piece of work to do between 28 October and 20 December, when we eventually published the budget, to turn that macro-level funding allocation to the level of detail that we publish at draft budget—the budget expenditure line tables, which is quite a detailed level but clearly doesn't provide all of the detail that stakeholders sometimes need to understand what their funding levels are going to be. Now that we've got a three-year funding settlement, for the budgets for next year and the year after, there should be much more information available to stakeholders about the funding levels they're likely to get in future years in the next two budgets than there has been in the last couple. So, some of this will improve just because of that. But, as the Minister says, we're very, very interested in specific suggestions for how we can improve the way we present information.

I think Rhianon has a quick question to come in. Could we unmute Rhianon, please? There we are.

Thank you. Just a quick question around your comments, Minister, around the distributional analysis, which is welcome. There was felt to be a need for more meat on the bones around that, but obviously in regard to the context that Andrew has set out, the small amount of time and the now three-year duration, hopefully that will be there, or I'm sure will be there, in the future. My question really is, briefly, if I may: you've mentioned that there's a potential refresh of the budget advisory group and the implementation of the new budget group coming forward, with regard to impacts. Could you give us a little bit of clarity around that, briefly?

We previously had what was referred to as BAGE, which was the budget advisory group on equalities, and we discussed with members of that group whether they felt that they were getting the maximum opportunity to understand the budget process, to influence the budget process. But I think that everybody agreed that there were better ways in which to do that. So, we had some round-tables and workshops with those stakeholders in particular, and others, to understand the best way forward. I'll provide some more information on the work that we're going to do as we look to formally now establish that group, and perhaps share the terms of reference of that group with committee. We're still at the point of finally pulling all of this work together, but I'd be more than happy to provide further detail, when we come to the conclusion of that piece of work, with committee.

We would be very interested in knowing the composition of it as well, who you've got on there. That would be really interesting.

Yes, absolutely. We'll share more as we finalise those details. As Andrew was talking, it made me think of the work that we're doing in terms of our approach to grants. We know it's not helpful for organisations when they have a one-year grant allocation, for example, so we've been doing more work now across Government to see how we can provide longer term grants for organisations. We've been looking at what we could do to potentially roll grants forward for more years at the end, if those organisations are meeting all of the things that are expected of them in terms of the grant. And we're potentially looking at whether we can introduce benchmarking, for example, to ensure that we are getting the right outcomes from those grants, in terms of deciding whether or not to roll them forward with those organisations. Again, that's a piece of work we've been doing in partnership with the third sector. It's currently, again, being finalised and pulled together now, but it's something perhaps that committee will be interested in in future as well, because I think it will help those organisations particularly who have been calling out for a long time for longer term certainty of funding, and it will help, I'm sure, drive value for money so that they're able to make different decisions if they have a longer term outlook as well.

Great. Thank you. In December you talked about the prior—. The prioritisation process—I'll get my teeth in now—prior to the budget and the difficult decisions that accompanied that. Can you provide some examples of those decisions, in particular those areas where you had to deprioritise to maximise spending elsewhere?

I think, because we had a budget settlement that did provide us with an uplift, it did mean that we were looking to where we would make additional allocations. But, that said, when I did a commission right across Government so that colleagues could identify the funding that they felt they needed to deliver programme for government commitments for other portfolio priorities, inevitably what comes back is much greater than the funding that you have available. It does mean that we have to temper ambitions in some areas, in terms of cutting our cloth accordingly. But, also, I think that we can be really proud of the way in which we have prioritised across Government. Another example of where we've done this in a particularly focused way would be with the zero-based review of our capital budgets, where we've built those budgets from the ground up, very much in line with our Wales infrastructure investment strategy and the focus there on achieving net zero. That, I think, is another example of where we've done things differently. We can always do more if there's more funding available. But, that said, I think that the priorities that we've set out are the right ones.

Okay. Thank you very much. I want to move on to decisions you've already made in the final budget, particularly regarding financial transactions capital. When you spoke to us in December you said that financial transactions capital allocations would be made in the final budget. Is this still your intention? If so, where will significant amounts of the £265 million funding be spent?

I can confirm it is still my intention to make the financial transactions capital allocations at the final budget, and an exercise is currently under way across Government to identify those allocations and where they'll be made. So, until that exercise is complete, I don't want to pre-judge what decisions might be arrived at. But that exercise, as I say, is under way and it will be completed in time for the final budget so that I can make those announcements at that point.

But I'd just also add that we're continuing to maximise our existing portfolio for financial transactions capital investment. We're investing over £1.7 billion in a large variety of projects that are supporting our business and housing sector in particular, benefiting of course many parts of our society and our economy. And, of course, there are restrictions on how we can use financial transactions capital. It can only be used to provide loans to third parties outside of Government accounting boundaries, and/or equity investments in third parties. So, our preference would always be for general capital. However, we try to be as creative as we can in terms of using the financial transactions capital as well.

I think that Mike might want to come on this.

Very briefly, I think it also can't be used for local government. In fact, it excludes any public sector organisation. What I would like to ask is—and I asked it in the business statement—will you publish exactly how it has been spent, and how you intend to spend it, and how people can get access to it?

I'll ask Andrew Jeffreys just to provide an outline of what we do publish already in terms of financial transactions capital, and then we can explore with committee if further information is required. But I think that highlighting the availability of the financial transactions capital to interested parties is really important, and lots of it goes through the DBW; the majority, actually, is managed through the Development Bank of Wales, and they have a large team of investment managers, who are based all across Wales, and they engage directly with businesses in particular to highlight what's available in terms of financial transactions capital. Also, they have hubs across Wales, and are very active on social media, and have a comprehensive website showing the various funds that are available for businesses to access, including those that are supported through financial transactions capital. But, of course, we will look for additional ways to promote the funds if needed, and what's really important, really, is creative thinking across Government from my colleagues in terms of ways in which we can best allocate financial transactions capital. I'll ask Andrew to say a bit more on this.

Yes, Andrew, if you've got some brief comments on that.

Yes, sure. We have previously published details of all of the investments, the £1.7 billion that the Minister touches on, but maybe it would be helpful if we provided a note to the committee to bring all of that together, because we make the announcements when they're made, and perhaps it would be helpful ahead of the final budget if you had that kind of summary.

That would be very useful, thank you. Can you summarise for us any other the funding announcements that have been made since the draft budget was published that will be included in the final budget?

As part of this multi-year budget, a new fiscal strategy has been adopted so that we're able to maximise the available funding. So, from 2023-24, the Wales reserve will be used to manage the in-year financial position without holding any unallocated DEL, with any draw-downs included within the appropriate supplementary budget. So, we are taking a different approach, and what it does mean, in this year as well, is we've allocated I think all that we can allocate, so I don't expect there to be any major allocations of new money between the draft and the final budget. There might be some technical changes, there might be some things that emerge in budget scrutiny across all the various committees in the Senedd that need attention, but I haven't made any allocations and I wouldn't expect to, pending of course the results of scrutiny.

One of the things that we've been hearing about a lot in Plenary and obviously in talking to constituents out there in the real world, as it were, since the draft budget was laid, is that the cost-of-living crisis has deepened, and I was wondering if there are any steps that you will be taking between the draft and the final one to make some allocations that directly address some of those issues.

Yes, the cost-of-living crisis is of real concern, and I'm concerned also that it's going to start really pinching as we get towards March/April, and from then on, when we see the impact of the national insurance contributions decision by the UK Government, for example, which we know will have a particularly severe impact on the lowest paid workers. So, that's obviously a concern.

I think that lots of the levers in this area do lie with the UK Government, in respect of energy, for example. So, the social tariff accounts for around 15 per cent of the bill. If what's driven through the social tariff could actually be driven via general taxation, then I think that you could have an immediate way of making bills fairer for lower income households. That's something that I pressed the Chief Secretary to the Treasury on in our meeting, I think it was last week, and it's something I know that Jane Hutt has raised with her counterparts in the UK Government as well. So, that's just one example, and I know that Jane's letter included a number of examples of actions the UK Government could take.

I do think that, when it comes to the big levers that put money in people's pockets—the benefits system, for example—they do lie with the UK Government. There's no doubt about that. That said, we will do what we can. So, our investment in the discretionary assistance fund, for example, is really important in terms of supporting people who are really finding themselves in an almost destitute situation. I think that the work that we're doing with the £100 payment to help with winter fuel bills in this financial year is another important example, and the work that we do through the single advice fund is important, because we know that lots of people at the moment aren't claiming all of the things to which they're entitled through the benefits system. So, we can maximise the income that families have through that. And we know that we've ensured that millions of pounds are put into people's pockets across Wales through the advice that people get just so that they know how to access what's available to them.

Gareth, did you want to come in? There we are.

Diolch, Cadeirydd. Thanks, Minister. I just wanted to pick up on the discretionary assistance fund that you've just referred to, and I'm wondering whether the remit of the DAF is fully met, or whether there's anything more that the Welsh Government can do to achieve under the umbrella of the DAF, if you like, because in my experience it's used for specific items that a person might need at that time. But, have you exhausted it to its parameters, or is there more scope to do more with it under that DAF umbrella?

Well, there are two parts to the DAF. So, the first allows people to access funding for white goods, for example. So, if somebody's fridge breaks down or washing machine breaks and they simply can't afford a new one—essential items—they can access funding through the DAF to replace those important white goods. Then the other part of the DAF is the funding where people can access a small amount of money straight into their bank accounts to support them with paying urgent bills, for example, or being able to buy food. But, people are only able to access that five times a year. It used to be three, but through the pandemic, we've increased it to five.

I think that there is a limit to what the DAF can do, in the sense that we are talking about money for people who are finding themselves in emergency situations. What we really need is for people to have more money in their pockets, generally speaking. So, reinstating the £20 uplift on universal credit I think would be a really important step. And we've seen that applications for DAF have increased following the reduction or the removal of the £20 universal credit. DAF is important for people in emergencies, but I think we need to be careful about thinking that it can solve all problems, because it is quite a focused fund. And, at the end of the day, it's not Welsh Government's responsibility to be stepping into the welfare space, even though through the DAF we're doing that in a sort-of way.

Thank you, Chair, for that.

The increases in the budget, as you've said yourself, are front-loaded, so there's a lot of investment in this year, and we've seen wages, inflation, COVID recovery costs and the impact of those. How are you planning to deliver your objectives in 2023-24 and 2024-25, because this is a three-year settlement? What provisions have you made to actually manage that all the way through because, basically, by the end of 2025, the cupboard will be bare if you've front-loaded everything upfront?

This is a particular challenge for us in terms of the profile of the allocations from the UK Government over the next three years. As you say, it's very much front-loaded. We've responded, really, by prioritising public services to ensure that they have significant uplifts in the first year, which, hopefully, will be able to put them in good stead for future years in a couple of ways. So, UK Government has subsumed COVID funding into baseline budgets, so there's no specific COVID funding, but we do know, of course, that responding to the pandemic is going to continue to be a feature in the next financial year, for sure. You would hope that, in the two years that follow that, the COVID response will not be such a huge feature. So, money that will be spent on the COVID response next year you would hope then could be redeployed to other areas. So, I think that that would be one of the things that is behind the thinking of the UK Government, and it could present an opportunity for public services in future years as a result of that. So, that's partly behind the profiling.

Also, I think the fact that we do have a three-year spending review is very helpful. Even though it doesn't meet the challenges that we're facing, the fact that public services can now plan on a three-year basis will allow them to make different decisions in terms of investments, and potentially changes that they want to introduce and that can drive better value for money. So, that was something that the Welsh Local Government Association reflected on in their evidence to the Local Government and Housing Committee just last week as something that might help in terms of managing what's quite a difficult profile. But, no, you're absolutely right that it is a problem.

Rhianon, I think you wanted to just come in briefly on this one.

Very briefly, in regard to that incorporation into baseline budgets and the long-term anticipated and projected impact and effects of COVID across the public sector and beyond, what is your view, Minister, in regard to sufficiency around that uplift in the longer term?

I think the uplift clearly doesn't erase 10 years of austerity. It's not sufficient to meet the challenges. As the Chair was saying at the start of the meeting, difficult decisions still have to be made, because when we look across Government at all of the things that we would like to do and all of the things that we want to do to the maximum to deliver on our programme for government, then we absolutely would require further funding to be able to do that. So, the funding that we've received, even though the uplift is significant in the next financial year, it still isn't sufficient to meet the challenges that we face.

Andrew.

It's probably worth differentiating between the revenue settlement and the capital settlement, where the capital settlement is actually negative in real terms across the three-year period. So, we've actually got less capital in each of the next three years than we've got this year. So, that presents a different kind of challenge than on the resource side, where we have that big uplift in year 1 and then flat in real terms thereafter. So, the picture on the two sides of our budget is quite different.

Okay. Thank you very much. There are just a couple of areas to cover off before I move on to Gareth. We're a little bit behind time, but we're okay—we're having a good discussion, so that's good. While the review of inter-governmental relations published last week states that disputes will still be managed through arrangements in the fiscal framework, will this review have any positive impacts on the way funding disagreements are discussed and resolved with the UK Government and Treasury?

Well, I certainly hope so, because, up until now, the UK Government has been the judge and jury. We've had to convince the UK Government that there's been a problem—for example, when Northern Ireland had the £1 billion extra funding. Obviously, we don't begrudge a penny to Northern Ireland, but we do think that, obviously, Wales should have its fair share. And that's set out in the statement of funding policy, which is the basis upon which these allocations should be made in respect of consequential funding and so forth.

So, we've been short-changed badly in the past. I would hope that the new mechanisms for raising disputes will provide a new way in which we can get some fair play from the UK Government. We wouldn't want to be using the mechanisms too often because we would want to be in a situation where having fair play was just routine and run of the mill, but, unfortunately, we've seen too many examples over recent years as to where that hasn't been the case. Examples would include the way in which HS2 has been dealt with, in terms of consequentials or otherwise to Wales, and also the ongoing issues around farm funding and EU funding, which are problematic for us. So, I hope that the new system will provide a fairer way to raise issues, and then have them resolved, which we haven't had up til now.

Okay. Lovely, thank you very much. We're moving on to tax forecasts and policy. I've got a couple of questions, and then I'm going to bring Gareth in straight after. The first question I have is: what criteria do you consider that the programme—? Let me start again, sorry: what criteria will you consider that the programme for government commitment not to raise Welsh rates of income tax for as long as the economic impacts on the pandemic have been met—? Well, arguably, it could be forever, and it could be over and done with. So, what criteria will—? When will you be in a position to be able to consider potentially raising any income tax rates in Wales?

Yes, that's a good question, and we set out alongside the budget some important documentation, particularly the Office for Budget Responsibility's Welsh taxes outlook, and the chief economist's report. I think those documents provide important context on the impact of COVID on the economy going forward, as well as some of the longer-term trends and challenges that both predate the crisis and are also likely to persist beyond it. And I think that that's helpful. I think that what it says, really, is that it's too early to take a view over the medium-term effects of the pandemic, because we don't yet know, really, what the impact of measures such as furlough have been. I think that it'll take some time yet before that becomes clear.

And also we're facing new challenges in terms of labour shortages and energy price increases. So, they're holding back growth and impacting on inflation, and, obviously, putting pressure on wages as well. So, lots in the mix. I would say that we're definitely not in the space now where we're not feeling the impacts of the pandemic, and I think that that will continue for some time.

I also think it's important to recognise that, although we have this commitment not to raise Welsh income tax for as long as the economic impacts of the pandemic last, it doesn't mean that there's going to be a trigger point where we decide, 'Oh, so we're not feeling the impacts anymore; up go the Welsh rates in income tax.' Those two things aren't linked. And it's important to recognise that we take these decisions on an annual basis, considering all of the information available to us about the needs of the Welsh budget, the situation affecting Welsh households and what we understand then from the chief economist's report, and others, in terms of the outlook.

I don't know if Andrew's got anything else he could add, perhaps, in terms of what the OBR is saying in this space.

Yes, I suppose the only thing I would add is just that, since the programme for government commitment was made, the UK Government has increased national insurance contributions. So, that's one of the other things that is a factor in this consideration: what's the overall tax burden, particularly on earned income, and income in general. So, in addition to the broader economic context, we look at the specific tax burden on people in Wales. And so the rate of taxation on income has gone up in this period without anything being done by the Welsh Government, and that clearly would be a factor in any consideration of what the Welsh rates of income tax should be going forward.

And I think, in terms of people understanding the framework by which we operate, we've been as transparent as we can in the sense that we have the tax policy framework and that sets out our commitment to ensure that our taxes remain proportionate, that they remain progressive and they deliver a clear, stable and simple tax system that is supported by evidence-based policy. And then we also publish our tax policy work plan, which sets out the priority areas for us over the next five years in terms of delivering our strategic priorities, whilst ensuring that we have the revenues we needed to support public services for citizens as well.

So, I think that we provide, again, a lot of information and detail on the kinds of things that inform our thinking, but I think the real point is that there's not going to be a trigger point at which we decide the impacts are no longer being felt and that knock-on effect is that taxes go up, because, as Andrew set out, there's so much that is considered in this space, particularly the impact on individuals and families.

I did have one more question, but I think I'll keep it until the end, if we've got time, and move on to Gareth, because I'm conscious about time moving forward. Gareth.

Thank you very much, Chair. And I'll kick off with a question about landfill disposals tax, if I may, because in your explanatory memorandum accompanying your LDT regulations, you noted that the Welsh Revenue Authority is about to launch the first live test of its powers to charge tax on authorised disposals of waste. What is the purpose of this test and why is it happening now, given the LDT has been administered since April 2018?

Yes, well, the WRA's been working really closely with Natural Resources Wales to establish that partnership approach to investigating and charging LDT on unauthorised disposals of waste and that builds on a successful delegation model that they introduced for LDT on authorised landfill sites. So, lots of background work does need to go on in order to prepare for something and to get it right when we start moving down what is really new territory for us and for the WRA.

I do think that the impact of the pandemic can be seen on the speed at which this work has been able to be undertaken. There's no doubt that the WRA, although they managed to continue their operations throughout, did also divert some of their resources to help Welsh Government's overall response to the pandemic. If I recall correctly, some of their team assisted with some of the data analysis, for example, which helped us understand the impact that the pandemic was having. So, the team wasn't operating completely business as usual; they did divert some staff from some of their roles as a result of the pandemic. So, I think that that has had an impact. But, as I say, it's important that we get this right because the WRA's going to learn a great deal from the cases that they do take forward, and, obviously, I'm sure they would have wanted to go down this road—which is really quite an exciting and new path—sooner, but the pandemic unfortunately has had an impact.

Okay, thanks for that—understood. Just to move on from that LDT—it was just to kick us off, really—the OBR noted it will be conducting work into understanding the differences between Welsh and UK income tax bases this year to inform future forecast judgments for the Welsh rates of income tax. What are your expectations for this work and how do you engage with the OBR to ensure it continues to deliver such projects to improve the accuracy and value of their modelling forecasts and outputs?

Yes, I engage regularly with the OBR, as does Andrew and his team. I meet with the Chair and also we have representations from the OBR at our annual tax conference, which is really helpful in terms of sharing their knowledge with our tax community in Wales more widely.

The work that will be undertaken will help inform future judgments about relative growth in income tax revenues in Wales as compared to elsewhere in the UK, because, at the moment, the OBR's forecast methodology assumes the same growth rates across the UK, adjusted for expected relative population movements and the impact of policy changes. It also uses HMRC real-time information in the near term as well.

Any further insight into relative changes in the tax base here and elsewhere will of course be really valuable, because it's the relative growth in tax revenues that impacts on our budget arithmetic. Again, I'll ask Andrew if he wants to reflect on any of his discussions with the OBR, but I know that the relationships are very, very good, and we're pleased with the quality of the work that they do for us.

Yes, I think the engagement between Welsh Government officials and OBR officials is really good on all of this. As the Minister said, there is a key assumption in the income tax forecast—it's an implicit assumption, anyway, at the moment—that the tax bases grow consistently across the UK, and so that's kind of what this work will test, really, whether there's a better way of looking at that, because obviously the tax base in Wales is a bit different from the tax base in the UK on average. So, there are, for example, more basic rate tax payers as a share of the overall tax base in Wales than in the UK as an average. Some of those differences are picked up by the work that is done on understanding the impact of policy changes. So, one of the features of the OBR's forecast is that the Welsh income tax base grows slightly quicker in this forecast period than the UK average, and that's driven by the differential impact of policy changes at a UK level. So, freezing allowances, for example—that increases tax base growth in Wales slightly faster than tax base growth in the rest of the UK, because we have more people that are around about the tax-free allowance threshold than there are in the UK on average. So, I think a lot of the differences in the tax base are picked up in the forecast by that analysis of the impact of policy changes, but, still, we're interested to understand whether there's a better way of forecasting growth in the tax base going forward than the current approach, and that's hopefully what this piece of work will tell us.

Thanks for that. Whereas discussions are good, and, like you've alluded to, Welsh forecasts are generally based on UK data due to a lack of Welsh-specific data, with that in mind, is that the consideration that you're giving to develop the Welsh data needed to model future Welsh tax forecasts, given the lack of Welsh-specific data to model tax bases on? So, is that something that you're going to consider, moving forwards?

I think LTT, land transaction tax, is a really good example of where things can be done differently. So, most of the main economic input measures used for our Welsh tax forecasts have historically moved broadly in line with the UK, including elements such as house prices and transactions, but, through the pandemic and as a result of the pandemic, I think we have seen some short-term divergence between Wales and the UK, particularly on house prices, and so the forecast inputs have been adjusted to reflect these differences. So, for example, in the most recent forecast there's a Wales-specific house price uplift to reflect the recent elevated price growth in Wales as compared to the UK. So, I think that that shows one of the ways in which we can tailor these forecasts a bit more closely to what's happening in Wales, which is really useful.

Yes. Thanks for that. The IFS suggested that it was unable to verify why a retail, leisure and hospitality rates relief scheme in Wales that is similar to what's been implemented in England would require £20 million more in funding than the relevant consequential. Can you briefly explain the differences in the relative tax bases that result in this difference?

Yes. So, overall the costing of the NDR retail, leisure and hospitality rates relief in both Wales and England does inevitably, I think, involve a certain level of estimation. We don't know how the UK Government calculated the estimated cost of the scheme for England, but in Wales our scheme has been estimated using the latest available NDR rating list information, which has been collected from local authorities. It is the case that the scheme is likely to cost more per head in Wales than in England, and there are two reasons for that. The first is because we have a higher proportion of properties with lower rateable values compared to England, so that brings more in scope, and that's one of the important factors. And then secondly, it's the £110,000 cap on retail, leisure and hospitality rates relief per business. It's the same for Wales as in England, so therefore, in practice, the cap limits the amount of rates relief provided to proportionately fewer businesses in Wales. For example, large supermarket chains will get £110,000 relief in England and in Wales, even though there are significantly more large supermarkets in England as compared to the number in Wales. So, matching the UK Government's £110,000 cap per business across Wales does result in arguably a more generous scheme and it does cost more per person in Wales, which is the basis for the Barnett consequential calculation. So, there are two reasons behind that.

Thanks. I'm glad you mentioned local authorities, because the funding for the council tax reduction scheme is widely welcomed, but has remained at a constant level. So, how have you arrived at this figure of £244 million, and how is the demand for taking up this benefit changing?

So, £244 million was added to the revenue support grant for the council tax reduction scheme in 2013-14, which is when this responsibility was passed to Welsh Government. It was passed with a 10 per cent cut, so it comprised a fixed budget of £222 million transferred from the UK Government. So, we made up the gap of the £22 million to enable local authorities to maintain full entitlement to support all eligible applicants, and we've maintained those arrangements ever since.

I think that it's important to recognise that case loads have generally fallen from 330,000 in 2013 to approximately 270,000 during December 2021, and that I think correlates with what the Office for National Statistics reports in terms of unemployment also falling since 2013. Most of the increase in the value of the scheme arises from local decisions on increases in council tax, and I think it's important as well to recognise that the scheme's a shared endeavour between Welsh Government and local government. Cases did increase significantly during the course of the pandemic, so we added an additional £11 million to local government to help them manage the unplanned increase. We've seen that fall off again now. But also, I think it's important to recognise that, in Wales, we have this Wales-wide approach, whereas across the border, each local authority has to introduce its own kind of scheme, and by having this Wales-wide approach, we do save local authorities in Wales significant funding and also make things much more streamlined and simpler. So, in that sense, I think that the funding that we provide for it is important, but as I say, it's a shared endeavour with local authorities.

Thanks. Just to move on to the planned tourism levy consultation, are you satisfied that all providers have had the opportunity to have their views considered regarding the tourism levy?

We haven't launched a consultation yet, but we will absolutely go to all possible lengths to ensure that people have the opportunity to contribute to the consultation when it is launched. It's important that we hear from all interested parties. We want to hear directly from local government, because the thinking at the moment is that this would be a power that local authorities could choose to use locally, to introduce an overnight levy should they wish to do so, so there will be lots to discuss with local authorities, but then also a great deal of engagement to be undertaken with the tourism and overnight accommodation sector more generally.

So, obviously, I would encourage everyone with a view to respond to the consultation when it's published, but I also want to ensure that we undertake some consultation events, so that providers who prefer to provide their feedback in that kind of more interactive way can do so as well, rather than—or as well as—providing written responses. So, we want to engage properly and listen to all sectors on this, because I know there are significantly diverging views on it.

Minister, is there a specific timetable for consultation?

I'd like to do it this year. We haven't got a date yet as to when we will launch that consultation, but I would hope to provide a written statement with an update before too long and then, hopefully, that will be able to set out a bit more of a timescale.

Okay. I appreciate that. Thank you. Just finally from me, you have described to us how the co-operation agreement was finalised towards the end of the budget process this year. With that in mind, how will this agreement change the way that the budgetary decisions are made in-year and across the three-year horizon of the agreement?

So, we've got the co-operation agreement, which has a number of elements within it that have finance attached to them. One of the big-ticket examples would be the decisions relating to free schools meals and childcare would be another. And then there are other items within the co-operation agreement that also have financial implications: Arfor would be an example and the national construction company. So, we'll be working closely with Plaid Cymru to ensure that all parties are satisfied in terms of the commitments that we've made in respect of that funding.

At the moment, we are at the very start of a journey, so we're feeling our way through the mechanisms document and the various structures that will be put in place. A finance committee has been set up to monitor and evaluate the progress on those 13 areas where there is finance attached, so, we'll be looking at that. There'll be a role, I think, within that finance committee for me to be providing updates on the financial position, for example, in respect of any UK Government budgets or statements on what that means for Wales as well. As I say, we're setting up the finance committee, we're feeling our way through all of this because it's all new to us, but I think that that committee will particularly have an interest in the areas where there is finance attached to commitments within the programme for government.

That said, I want to ensure to ensure that we deliver all of our programme for government, and now our commitments within the co-operation agreement are part of our programme for government. I don't see the Welsh Government programme for government as the motorcycle and then the co-operation element as a sidecar; it's just one big vehicle that we need to be getting to its destination. That was a weird way of describing it. [Laughter.]

I understand what you're saying. Just on that, really, is there funding to support that agreement or are there to be further discussions around that, given the positive and negative consequentials? So, essentially, I'm asking: is the money just for the agreement or are there wider implications of that as well?

So, the funding will be for the specific areas that have funding attached to them within the programme for government and the co-operation agreement with Plaid Cymru. That said, we'll be monitoring spend closely. We've had to, to some degree, provide estimates for what we think free schools meals will cost, for example, based on what we expect the level of uptake to be, based on what we understand it to be at the moment. There will be always, I think, an element of estimation, so we need to just watch closely that if those commitments do require additional funding, then we can explore ways in which that could be done within the relevant MEG, for example. I think it's just a case of watching closely to ensure that we are delivering on the commitments made and that funding isn't an impediment to delivery.

Thank you.

Thank you very much. I'll come on to Mike Hedges now.

Diolch, Cadeirydd. First of all, I welcome the figure of £1.8 billion targeted investment for the climate and nature emergency. What has the Minister said she will achieve via that expenditure?

This is a really important part of our budget. I referred earlier to the zero-based review and this is the culmination of that. You can see that the climate change MEG does have the lion's share of our capital investment. You'll see in the budget documentation, in the narrative document, that there's a section in there on a greener Wales, and that will set out what we would expect to achieve as a result of it. But you'll see lots of that as well in our infrastructure finance plan, which was published alongside the budget.

Just to give some examples and flavour, really, we're looking at funding within that in terms of innovation in new renewable energy technology to drive—[Inaudible.]—decarbonisation to support the green economy. So, there is £24 million of capital investment over three years to develop our marine energy programme, and that includes a tidal lagoon challenge fund, which I know Mike and I are particularly interested in, and also delivering port infrastructure to allow floating offshore wind industries to develop in Wales. So, that's just one example and you'll see lots of them in the budget documentation. I'm happy to talk through some more of those if it would be useful.

I won't ask you to talk through them, but can you publish what is expected in each area, so that we know that if we're spending money in housing, for example, and zero-carbon housing, how many zero-carbon houses we expect to have, and if we're spending money on tidal lagoons, et cetera, when we expect it to come to fruition and what we expect to achieve? I get boring on this, but I'm really interested in outcomes.

I hope we've increased the level of information that we've provided this year. So, there is some of that in chapter 4 of the narrative document with the budget, but then also within the infrastructure finance plan, which sets out the specific funding allocations that we'll be making, and it hopefully sets out what the intended outcome and outputs are. But if there's more that we need to do, perhaps some examples would be helpful and we can explore with Ministers as to how we can do that. But I think we've improved what we've done this year through the infrastructure finance plan.

I think Andrew wants to just come in on that, if he may, Mike, before moving on.

Yes. It's just worth noting that that £1.8 billion covers a very diverse portfolio of things. So, it covers, for example, investments in the decarbonisation of homes, air quality, biodiversity, coal tip safety, flood risk management. So, I think in trying to put all of the outcomes of all of that different stuff into the budget, you'd end up getting, probably, too much information, so there's a kind of happy medium. I think maybe we haven't quite achieved it this time, but that's what we try and do is to provide a sensible, high-level view of things in the budget document, but without going into all the kind of detail that—. For example, if you're publishing, in the housing portfolio, what you're doing on energy efficiency and housing over the next five years, that's where more detail would be found.

I won't push it any further, but surely, when you decide to give money to each portfolio, they make a case and that case has outcomes relating to that case, and I'm just asking that we have the same knowledge as the Minister and the department on what outcomes they expect to have from it.

But, if I can move on—

If I may, and just to emphasise slightly that point that Mike was making, but also, certainly back to the question we had earlier in terms of budgeting in different areas, we heard from the business community on Wednesday that they would really appreciate joining the dots across as well to see, if the £1.8 billion is being invested in a wide range of areas, how that impacts on different industries and maybe doing a bit more work on the joining up across departments, as opposed to just being in silos.

Yes, we'll take on board these comments as we think about our budget improvement for future years and the way in which we present information. So, that's helpful, thank you.

Just moving on to the same area, how does the budget support green industry and what are we going to see in terms of increasing green industries?

Again, there's a lot of work going on within the budget in terms of green industries. The serious amount of money that we're investing in housing is going to be important, not only in terms of building our commitment for 20,000 social homes that are low carbon, but also the optimised retrofit programme. So, we're investing £580 million over the next three years to improve and decarbonise the existing housing stock, including £150 million to expand our flagship optimised retrofit programme. That, obviously, will seek to improve the energy efficiency of existing social housing stock and identify the most effective investments to deliver our longer term decarbonisation plan. That is, I think, one example of a big chunk of the climate change portfolio's capital spend that will be important. Another example would be the £900 million that we're spending on school infrastructure. Again, that's a focus on zero-carbon schools, which goes further than we've been before in this area as well. I think we're seeing not only a continued and increased spend in areas that we've already invested in in the past, but, actually, a change in focus in the outcomes that we want from those investments.

Moving on. We've had the carbon budget, we've had the financial budget. How do they align and what do you expect the carbon impact of this year's budget to be?

We worked really closely to ensure that the Wales infrastructure investment strategy, which is our new 10-year strategy, published alongside the budget this year, aligned closely with the Net Zero Wales plan. Both the plan and the strategy were developed in tandem, and officials worked really closely to ensure that our strategy reflected net zero. I think you can see that in the investments that we've been making, particularly on the capital side.

The climate change MEG has capital allocations of more than £4.8 billion—that's over half of our capital departmental expenditure limit budget over the next three years. So, you'll see significant investment in that area, and it's driven by our net-zero plan, which, as I say, is formed in tandem with the strategy. So, it has been a seamless piece of work that has focused, really, on rebuilding our budgets from the ground up, but doing so in a way that aligns our spend with our net-zero and decarbonisation agendas.

In terms of the work to set out the carbon impacts of our spend, obviously, again, that zero-based review has been important. If you look at the investment section of the infrastructure finance plan, you'll see the capital allocations that have been made, and it sets out some of the carbon impacts. So, within the health and social services narrative, the emission-reduction targets included within the decarbonisation strategic delivery plan for the NHS in Wales shows that the plan is for 16 per cent by 2025 and a 34 per cent reduction by 2030, compared to 2018-19. So, they're very clear targets set out there.

Also, you'll see some clear detail in the public transport sector. The carbon impact that achieving modal shift is likely to achieve is set out in terms of the emission savings in tonnes of carbon dioxide between now and 2040. So, there are some very specific things within the finance plan that set out the carbon impact of choices and what we expect to achieve as a result of them. And, again, I think that's taking us a step forward on this journey of demonstrating the carbon impact of our choices.

Thank you. You moved on to healthcare, which is where I was going to go next. You say addressing the backlog of treatment delayed by the pandemic is the Welsh Government's highest priority. I'm sure it's the highest priority of everybody around the table today—well, not the table, the virtual table. What targets or outcomes have you set for the additional £170 million a year to strengthen planned care services and £20 million a year for value-based healthcare? Basically, what is this meant to achieve?

The investment in recovery will achieve a number of things. There'll be a number of things that are supported, particularly in terms of supporting some of the high-volume services that may be better delivered in a regional context. They would be, namely, orthopaedics, cataracts, endoscopy and diagnostics generally. Transformation and redesign will have to play a key role in recovery. You'll see that supported by the planned care five goals for recovery, which the health Minister set out. That seeks to have that whole-system approach, linking with public health, primary care and value-based care. The health Minister, I know, has made it clear that recovery timelines and details will need to form part of the health boards' integrated medium-term plans. Those are due by the end of March, and so I'll perhaps ask the health Minister to provide some detail there.

And then, in terms of the value-based investment of £20 million, that's going to complement the £170 million recurrent funding, supporting NHS organisations to make progress with adopting a value-based approach, particularly through improving the data that we have on patient-reported outcomes and through the implementation of evidence-based best practice clinical pathways. Again, the health Minister is leading on this, and she's asked for clear evidence in organisations' plans that they are embedding value-based approaches in their services, going forward. So, I might, on this, ask the health Minister, once she is satisfied with the integrated medium-term plans in respect of recovery and value-based approaches, to provide more detail on that. It's an ongoing piece of work.

I'll be raising this with the health Minister personally as well. Certainly, the key point, I think, and I hope the health minister will as well, is the variable performance between different health boards and variable performance between different hospitals inside the same health board. That's something I'll be pursuing. Will you be pursuing it with the Minister as well?

I have regular meetings with the Minister for health, and we discuss a whole range of things. I think we probably meet at least once a month to discuss various issues. We have budget bilaterals where we talk about the budget, but then individual meetings where we talk about things that are of mutual interest. For example, we were meeting weekly at one point to discuss the real living wage for social care workers. I will obviously reflect on the issues that are raised outside my portfolio in committees with colleagues and make sure that they're aware of these concerns and have the chance to consider how to respond to them. So, yes, I'll definitely do that.

Thank you. You're taking me on to the next area now. No-one could say that the budget allocations for local government and health are not generous, certainly in the context of the last 10 years. Perhaps in the context of the first 10 years of devolution, they probably aren't, but in the context of the last 10 years they are. But there are also significant pressures within those sectors that I'm sure you're aware of. One of them is workforce pressures, the need to increase salaries for recruitment, and the problem of the real living wage being met. I speak as someone who has argued for the real living wage for the past 20 years, so I'm not objecting to the real living wage, I think everybody should be paid that. But these are pressures that are coming in. And, also, social services directors have told us that they are dependent on the funding for the local authority hardship fund. Will funding be made available in 2022-23? If not, what are the consequences?

I'll take the hardship fund point first. There won't be a continuation of the local government hardship fund in the next financial year, and that's partly because there is no specific COVID funding for us in the next financial year. The only way, really, I could have created a hardship fund would have been to take money out of the RSG and create a hardship fund. But I think that, given the generous settlement to local government next year, there's an expectation that they would manage any remaining COVID pressures within that uplift—the average overall of a 9.4 per cent uplift, with no authority receiving less than an 8.4 per cent uplift. So, I think that it's fair to expect things to be managed within that envelope. And to be fair to local government, I watched their evidence to the local government committee, and the WLGA leaders were clear as well that had the settlement been different, then potentially, a hardship fund would have been something that they would have been calling for, but given the level of the settlement at the moment, they think it's fair to be expecting continued responses to be made through the existing settlement.

I was talking about the directors of social services, who have a different view to local government leaders.

Just finally, we've got increases in salaries coming, increases in wages, and continuing pressure. We've got the teachers' pay award, which is coming through. Are you convinced that the amount of money you've given yourself, as finance Minister, to local government, is sufficient to meet all those demands?

Just to refer to that point about social services, I don't know if the ADSS had provided the evidence before the settlement in terms of social services, but we have provided significant additional funding in respect of what local authorities and the ADSS were telling us that they needed for social services. We were able to provide an uplift that respected what they told us that they needed in terms of social services. So, I'm satisfied that we have been able to meet that particular challenge. And in terms of workforce, that's going to be an ongoing challenge. We talked earlier on in the session today about the profile of the funding that we received from the UK Government. Next year is one story, but years 2 and 3 are going to be more difficult in terms of meeting those pay awards. There's no doubt about that. But, that said, I think that we've done the best that we can for public services within the envelope that we have.

I've been clear with local authorities as well that we would expect them to be managing any pressures, particularly in relation to teachers' pay, within the envelope that they have. It does account for the additional funding required for meeting the real living wage commitment as well. But I think we've gone as far as we reasonably can, recognising that years 2 and 3 will provide some particular challenges if there's no additional funding coming forward from the UK Government. We know they've lifted the pay freeze for public sector workers, but we don't know yet how the UK Government will respond to that. Will they provide uplifts? Will they provide Barnett consequentials as a result? Or do they expect anything to be managed within individual departments? So, as those decisions are made and fed through, we can obviously consider the impacts for us.

I think Andrew wanted to come in on that point.

Thank you. Obviously, one of the key factors in setting budgets is pay. It's a very big chunk of public spending, public sector pay, and growth in pay is driven in part by inflation. I think the current plans don't allow for significant increases in pay in years 2 and 3. The front-loading of the settlement means that we're confident there's sufficient funding in local authority and health settlements, for example, to fund the pay settlements in those sectors. But if growth in inflation continue into years 2 and 3, then I think Governments across the UK are going to have to be looking at what the pay settlements are going to be in those years and what funding levels are required to cover those pay settlements. As the Minister says, if inflation continues to grow several percentage points, then we would expect there to be additional funding for pay settlements in England that we would get consequentials from.

Just on that point—sorry, Mike, to cut across—in particular, is there a risk there might be an in-year ask, especially as inflation seems to be going up and up—that there will be an in-year ask from especially public sector workers of an increase in year? Would that be a risk to your budget and how would you mitigate that?

Most pay deals for the coming period have still not been agreed yet, so if those turn out to be way above what we're currently assuming, then that would be a big challenge, I think, but we would expect to see that happen not just in Wales. If, for example, the health sector, the pay deal there, turns out to be way, way higher than what we're currently assuming, you would expect to see that feed through into additional funding in England for the health service and consequentials then for us.

Okay.

Just finally, then, I wish you were correct that inflation would drive up pay awards, as somebody who was very keen on raising money for uplifting salaries of core workers within local government, but surely the things that drive up awards is scarcity of skills and scarcity of people availability. It's shortages that drive it up, not, 'Inflation is 5 per cent, we'd better give everyone 5 per cent'. If there's scarcity, we cannot recruit people at £9 an hour or £9.65 an hour under the current minimum wage; we need to increase it to the real living wage, which is about £1 more. Isn't that the thing that drives up wages rather than, 'Inflation's going up, let's gives everybody an inflation award'?

Yes, you're absolutely right. Specific labour market issues in specific areas, particular shortages in particular sectors, can have a big impact on pay in those sectors.

We've got time for a couple more questions, if you wanted, Mike, before moving on to Rhianon.

Thank you. I wanted to make sure I got my most important ones in first. I'd like to ask about the Wales infrastructure investment strategy. You've set out that factors relating to climate and nature emergencies must be considered when developing proposals. Who in Welsh Government decides which capital projects go forward?

So, the Wales infrastructure investment strategy, although I led on its development, is very much a document that is owned by all Ministers. I took it to Cabinet to ensure that we had cross-Government buy-in to it. I had individual meetings with those Ministers who are most affected in terms of capital spend to ensure that we were on the same page, if you like, in terms of what we were wanting to achieve and what we felt was achievable. So, as to the strategy itself, of course, I led on it. It has buy-in from all Ministers, but in terms of the detail of the individual investments that will be made, they're set out in the accompanying infrastructure finance plan. And you'll see the investments there set out in what we've called investment area level—so, for example, rail infrastructure, decarbonising Welsh homes and the national forest—and the plan sets out how each of these investment areas will deliver outcomes in the Wales infrastructure investment strategy. So, it's been my responsibility through the budget to ensure that the necessary funding is available to each of those investment areas. But, that said, it's the responsibility then for Cabinet colleagues to ensure that, when they are deploying their own departmental envelopes to fund the specific projects within those investment areas, they can satisfy themselves that the project will deliver on the key objectives of the investment area and, therefore, the strategic outcomes of the strategy. So, I have overall responsibility for the strategy and for funding items within the investment areas, and then individual Ministers are responsible for the particular BEL level schemes within the MEG.

Can I talk about capital and revenue? We've had a lot of people say that there is a shortage of capital, and nobody says they've got too much revenue. Speaking as somebody who used to be a local government leader, I'd have taken everything in revenue. Can you confirm that local government is aware that they can move revenue into capital and they can also use revenue in order to support prudential borrowing? And can you tell me whether health's got the same powers to move revenue into capital as local government has? I know that health can't borrow—that would count against the Welsh Government's borrowing limit, so it would be a bit circular.

I'll ask Andrew to come in on some of this, but in terms of switching revenue to capital for suitable projects, we've used that facility extensively. We've done it in 2020-21 and 2021-22. One of the things I'm always mindful of when we do this is to ensure that we're also thinking about the revenue implications of any capital investment—for example, maintenance and so on. But it is something that we have done in recent years particularly and something I know that local government is aware of. I'll see if Andrew's got any reflections or any examples that we're able to give, perhaps.

Well, on the health side, so, yes, there are cases where we've switched revenue funding to capital on the health side, but we would do that centrally, rather than allowing local health boards to do that themselves. They would come to the health finance team in the Welsh Government and say, 'We would like to use some of our settlement for capital'. That's certainly something that can be done. We have to get Treasury approval for changes in our DEL level spending. So, we have a capital DEL limit and a resource DEL limit, and we can switch from resource to capital, but we need to tell Treasury about that at the appropriate time. So, we need to co-ordinate all of this across the Welsh Government, but there is scope to do that and, as the Minister said, we certainly did a lot of that in the previous financial year and the current financial year.

Can I move on, then, within that? There are items that are definitely capital, like building a new school, and items that are definitely revenue, which is paying teachers. There are, however, things like capital maintenance or revenue maintenance that can be moved between the two, certainly in local government—road maintenance can either be capital or revenue, depending which you've got the most of, and the same with boiler replacements in schools, which can either be capital or revenue, depending again on which you've got the most of. So, what I'm asking is: has health got the same power?

There are the same kind of issues around whether maintenance, certain types of activity, score as capital expenditure or revenue expenditure, and the accountants spend a lot of time considering those kinds of issues—the same on the health service side as on the local government side.

The final question from me is: we had a visit from representatives of business, who said that business rates were a serious problem and that it was something they wanted to be reduced. But we also had experts come to talk to us who told us that the great winners most of the time if you cut rates are the owners of the buildings, who either increase their rents or are able to keep their rent at a higher level. Which one of those do you think is right?

We'll start off with business rates, and the most important thing to remember is that business rates are important in terms of providing £1 billion for the Welsh Government's budget every year. So, we often hear calls to just scrap business rates, but then we'd have to know what we're going to scrap alongside that £1 billion. Also, we provide significant support for businesses to help them with their rates, and that support goes to helping the business become more viable. A lot say that, without the support that the small business rate relief provides, they couldn't continue. So, there are lots of philosophical questions, I guess, behind that, but I think that the important thing is that we have schemes in place that do bring funding into the Welsh Government, which is necessary for public services, but also do so in a way that is coherent with our approach to tax, which is a fair one, to ensure that we're supporting the businesses that need it.

Thank you. I'm a great fan of business rates, because they're very difficult to avoid. Corporation tax is a voluntary contribution made by large businesses at the level at which they decide to pay. But, I was asking who you think is going to benefit. Do you think that the main beneficiaries are going to be the small businesses, as the representatives of business said, or are they going to be the landlords, as was said by one of the academics who came to see us?

I think it depends on—. I can see Andrew's got his hand up, but I was just going to reflect briefly on the arrangements that are in place for the individual businesses. So, one thing that we've seen in the pandemic is that there is a real range of ways in which businesses have relationships with landlords. When we've provided the individual funding related to non-domestic rates relief—so, the grant funding—we found that there were lots of businesses that weren't registered for rates themselves because they were perhaps operating in larger premises, so they weren't eligible for the grant. So, I think that's helped clarify the picture somewhat, having lots of people apply now to be eligible to pay business rates, which has been interesting. I think Andrew's got some more reflections on this.

Yes, you're getting at a hotly debated economic issue about what is the economic incidence of tax. The legal incidence in nice and clear, but, the economic incidence, there are debates about that and whether, in the long run, differences in business rates are basically reflected in property values. So, a reduction in business rates means property values go up and, ultimately, it's the landlord that benefits from that. There are certainly economists who argue that. Some of it depends on the local property market and how constrained supply of property is. It's a really interesting issue and, yes, hotly debated.

Thank you. Has the Welsh Government got an opinion?

I think it's fair to say that different people in the Welsh Government have different opinions on this issue. I know people in my team who would argue strongly that business rates relief largely benefits the property owner, but other people have different views, and there are respectable arguments on both sides.

Have you any evidence of either?

There's evidence of both. There's no easy answer to the question, unfortunately.

Will you publish the evidence you've got?

It's not something that's in our work plan at the moment, but if that's something that the committee thinks the Welsh Government should be looking more closely at, then I'm sure we'd consider it.

I wasn't asking for you to look more closely at it. I was just going back to your earlier point that your people have different views. I was just asking if you'd publish the evidence that has caused those people to have their views.

That's based on their consideration of the economic evidence that's available. There's plenty of published stuff on this.

I'll take that to be a 'no'. Thank you.

Chair, shall I just add at this point that I plan to do a statement in due course on reforming or changes to non-domestic rates—so, an update on our approach to things like appeals, for example—just to put that on the committee's radar?

Okay. Thank you, Chair.

Thank you very much, and we'll come on to Rhianon's questions.

Thank you, Chair. Regarding levels of reserves held by councils within the context of uncertainty and the incorporation into baseline budget of previous COVID spends, what analysis or assessment has been undertaken to understand those levels of reserves held by councils? That's a question that we always, obviously, ask. And a further sub-question to that: in regard to that analysis, what comprehension is there by Welsh Government in terms of disaggregation of what those reserves are compiled of, and I'm thinking in particular of twenty-first century schools funding? Thank you.

Thank you. We do publish information on local authority reserves, and we do that annually. The purpose of that is to support elected Members in understanding the level of reserves their authority has reported in the context of other authorities in Wales. So, I think that's a useful thing that we publish. I do recognise that there is a significant increase in money local authorities have put to their reserves at the end of 2020-21, but also I think it's important to recognise that that's just a snapshot of where reserves are at the year end. Obviously, we're at the end of a very unusual year, so I think that that will also play into part of that as well. Also, authorities have had a really wide range of additional new responsibilities during 2020-21: supporting businesses through the grant schemes, supporting social care, the sick payments, the self-isolation payments, and so on. So, they've undertaken a lot of different work whilst also delivering on their core services as well. So, I think that, as I say, it just reflects a snapshot at the end of a very unusual year, but, yes, we do continue to plan on publishing the information annually.

I presume that's disaggregated, and do you feel that a review of the distribution of funding formula is needed—yes or no?

So, on the review of the funding formula, I've said to the WLGA that if this is something collectively that they would like to do, or for Welsh Government to look at, then I would be open to that. But I haven't had that request from the WLGA; I know it's probably something that they discuss amongst themselves, no doubt. But if that request does come forward, obviously I'd be interested in having some further discussions around it. But, as of yet, that request hasn't materialised.

And you're not minded to do that in terms of that lack of input in this regard from the WLGA. They haven't raised it, so it's not on the agenda. Is that correct?

No, as I say, I'm sure they discuss it amongst themselves, but I haven't had a formal request, so it's not something I would look to initiate without that request. But, that said, we do have lots of opportunities to discuss the formula. We've got the distribution sub-group, which does lots of work, and then the finance sub-group as well. And I don't want to give the impression that individual colleagues don't say that they would like to see the funding formula reviewed, because clearly they do, but I haven't had a collective request for it.

Thank you, Minister. In regard to mitigation of data on free school meals no longer being available as a key indicator into calculating the local government settlement, how will that be mitigated for?

So, further changes to the arrangements for free-school-meal eligibility won't be introduced until after the 2022 pupil level annual school census data, which is published this month. And, as the 2023-24 settlement relies on the data from 2022, there won't be any impact until 2024-25. So, that does give us some time, and I know Welsh Government officials are currently working on a solution on this, and I believe that a piece of work will be included in the work programme of the distribution sub-group, which will then come to the finance sub-group for sign-off, I believe in February.

Thank you, and we'd be very interested in that in this committee.

Moving on, in regard to policies supporting business within the pandemic, what could Welsh Government do further to demonstrate how allocations made in the draft budget align with the strategic plans for growing the Welsh economy? You mentioned a number of documents at the beginning, but it would be useful to understand that fully.

Yes, so through the course of the pandemic, we've provided in excess of £2.5 billion of funding to Welsh businesses, and our package of funding has been designed to complement and build on the support of the UK Government, identifying gaps that exist. And I know that our 100 per cent rate relief for retail hospitality and leisure businesses for the whole financial year has been very welcome and very timely as well in respect of the omicron variant, which we didn't have any concept of at the time of making that decision, but I think it's proved useful. And we know that we've managed to protect in excess of 160,000 Welsh jobs, which might have otherwise been lost, through our interventions, which have been really, really important.

Looking ahead, I think that some of the work that we want to do to try and grow our tax base by maximising the income that individuals are able to achieve by investing in their own individual skills is important. I'm quite excited by the work we're doing through our personal learning accounts programme, which supports individuals to do just that—to move up the ladder or to retrain for different work. And we know, of course, there are particular gaps now within our workforce in terms of skills, so we look at plugging those at the same time, which will be important. So, that's really exciting.

I know you're particularly interested in gender budgeting, and I know we have a chance to talk together on that in due course as well, because the personal learning accounts have been our pilot area, but now we're looking at how we can move gender budgeting out to other areas of Government spend too. So, that's quite an exciting programme of work.

Thank you, and I'll look forward to that, Minister. You've partially gone into this, but how would you respond to the questioning around the draft budget? Because it was obviously published prior to the omicron variant metamorphosis. So, what consideration have you given to providing additional support for different sectors directly or indirectly affected, bearing in mind the publication and then the variation of the virus?

I think most of our response to omicron has had to be undertaken in this financial year, and we've been able to respond very quickly because of the way that we have managed our funding, to ensure that we have ability to deploy additional funding at this point in the year. So, the £120 million announced to support businesses has been really important and I know that's starting to get into businesses' bank accounts now. So, most of our response has been within this financial year rather than reflected in the budget, but, of course, omicron has taught us that there are always surprises in this pandemic and I think that one of the ways in which we can best respond to those surprises is by ensuring that we have really good investment in our public services to put them in a strong position to respond, which is why you'll see such a focus on the NHS, on social care and on local government in our budget, so that those services are robust to meet any future challenges.

That's encouraging to hear, and I totally agree with the last point. Do you think the budget gives sufficient investment, Minister, to ensure that small businesses have the digital infrastructure? It was something that was brought up this week by different witnesses—so, in regard to skills around digital infrastructure and support to develop those and build those digital skills to adapt to a very rapidly changing environment now and in the future?

So, the draft budget does include more than £66 million over three years for Business Wales activity, including supporting businesses with their digital skills needs. That will enable the service overall to engage with over 60,000 businesses, but, in respect of digital plans, although that sits with the Deputy Minister for Climate Change, I know the Minister for Economy has a strong interest too, and this might be one of the areas where, if the Chair is in agreement, I could provide a more detailed note because these do sit in a different part of Government.

I think that would be very welcome, Minister, in respect of—

Yes, I concur.

—pandemic preparedness. Thank you, Chair.

In regard to the Bevan Foundation statement that the Welsh Government support schemes are

'separate, discrete and quite obscure',

in their words, what more can be done to create a more streamlined, accessible system? Again, there was discussion with various witnesses around that this week, Minister.

So, I was going to take the opportunity to discuss this with my colleague the Minister for Social Justice, in whose portfolio lots of our interventions to support individuals and families who need that extra help sit. But I'll explore really what more we could do to try and ensure that there is a joined-up approach. I know that, for example, the DAF, which we talked about earlier on in the session, has been really helpful for individuals and families who need help. We've got the single advice service, which, again, is really important. But I suppose the question is: are people, when they're accessing the single advice service, also being told about support that's available through the DAF or support that's available through council tax reduction? So, it's ensuring that people understand, really, the range of support that is available for them, but I think it's a good challenge and one I'm very keen to take up with colleagues.

And I think it would be really interesting to understand that because, obviously, the single advice centre, in its very name, would purport to be identifying everything around the individual, with all of the things that you've spoken about, and many others as well, so it would be really interesting to find out if that is actually taking place in practice. Thank you.

The Bevan—

If I may, sorry, Rhianon, on that particular point, what would be very interesting in your discussion with the Minister would be whether or not a single type of application might be done as well, so that rather than, as we talked about grants earlier, going through hoops all the time, we make it as simple as possible with a single point of application rather than having to make multiple applications for multiple discrete pots. It would make life so much easier for the most vulnerable in our society. So, maybe you could take that point on board and have that discussion with the Minister.

I'll make a point of any of the concerns or issues that are brought up in committee that aren't directly in my gift to have in the portfolio. I'll take it up with colleagues, definitely.

Thank you. I think the last point is really important and that would be really useful.

Moving on, the Bevan Foundation has advocated adopting a distribution analysis approach—and there was publication of a document, if I recall—and that there is scope to do more with the Welsh Government's strategic integrated impact assessments. What more can be done to improve this, and what role can the budget improvement impact advisory group play in transforming the budget process in Wales?

We're already exploring the use of distributional analysis as part of our budget improvement plan, and we've looked to refine and extend our distributional impact model for analysing public spending in Wales. So far, the analysis has focused on those largest areas of spend, and it has found that our investment is progressive, which I think is reassuring, and it has been useful to have that distributional impact assessment undertaken to allow us to see the budget in a different way. Again, this is the start of a journey, really, in terms of how we provide this kind of analysis, so we'll be learning from what we were able to provide this year to consider what more we can do in future. This builds on the work that we did last year, where we looked particularly at the health MEG and the spending there. So, you will see the document published as part of our budget package, but it's also worth recognising that this type of analysis can't currently identify the outcomes for individuals in receipt of public funding. Instead, it looks at how that funding is distributed, and that's why evaluation of programmes is also so important, so we've got both sides of the coin, really, so that we can understand things better.

I think that the budget improvement group will be really important in terms of identifying ways in which we can improve the process, improve the way in which we present the information that is given. So, it's important that that group has end users on it in terms of organisations that find the documentation and the data important for what they do. So, when we get to finalising the membership and the terms of reference, I would be more than happy to share that with the committee.

I'll look forward to that. Thank you very much, Minister.

Thank you. I'm just going to circle back to one question that I had earlier that I didn't ask. The Wales Governance Centre estimated that, by the end of the budget period, £185 million of increased funding will be due to the improved outlook for devolved revenues. What do you understand the drivers for that would be?

Shall I ask Andrew to start on that? We do recognise those figures.

Yes, sure. All three of the devolved taxes show a positive net position, which basically means that the growth in those taxes is forecast to be bigger than the growth in the relevant taxes in the rest of the UK or in England and Northern Ireland. Obviously, the biggest impact comes from income tax, because it's so big, but it's interesting how big the impact is in relation to land transaction tax, which is a relatively small tax but is driving quite a lot of that £185 million difference, and that's—we touched on this a bit earlier—related to expectations of different price growth in Wales relative to the England and Northern Ireland comparator. So, yes, that's a positive position, and obviously that's a forecast and that will change over time. I can provide a bit more detail on landfill disposals tax, or land transaction tax, or Welsh rates of income tax if the committee would like, but, yes, it's a positive position in terms of the contribution that Welsh taxes are able to make to our ability to spend over the next three years. Cumulatively, across the budget period, we're talking about close to £450 million of additional funding for public services.

Okay, thank you for that. It was just that I had skipped over it earlier, so I just thought I'd ask that one.

We've got a quarter of an hour left to go. Mike, yes. Bear with me a second. There we are.

You unmuted me and I muted me. What I was going to say was that we were told that the freezing of allowances will mean that we will get a greater income tax income in Wales than in England. Have you estimated how much that will be?

I think the estimates of the total increase in Welsh rates of income tax over and above the increase in the UK comparator for that is £30 million next year, £60 million the year after, and £88 million the year after that. That's not only to do with the personal allowance; that's a combination of all the different factors involved. But those are the rough estimates. Those are relatively small percentage terms when you think the Welsh rate of income tax is about £2 billion to £2.5 billion a year. They're slight, marginal increases, but positive nonetheless.

There were those people who thought that actually we were going to diverge the other way, so at least we're moving in the right direction.

I've got a question here on Welsh Government policy with regard to UK-operated schemes. In light of the continuing disagreement regarding whether or not funding still being received from the EU funding programmes is counted by UK Government as providing the same level of pre-Brexit funding, how will you best meet your aim to maximise the overall amount of EU replacement funding coming to Wales?

This is a really serious issue, which is going to have serious impacts for Welsh communities, because far from the rhetoric of levelling up and protecting the union, the loss of EU funding is going to have a big impact. It's partly, or in the main now, due to the methodology that the UK Government is using in terms of netting off existing receipts for EU structural and investment programmes and rural development projects here in Wales. Had we remained in the EU, obviously, we would have had a new and full round of funding. So, it's not feasible for us to replace the lost EU funding, and we estimate now, because of the methodology, that we're set to lose close to £1 billion of funding due to the UK Government's netting off. I've raised this with a procession of Chief Secretaries to the Treasury, but I'm not sure that they've fully understood the issue that we're trying to describe to them. So, I'd warmly welcome the opportunity to have another discussion with the CST on this, and sit down and talk through the issue very clearly, because the impact is going to be absolutely huge.

I think Mike would like to come in, and I think Rhianon would as well. So, Mike first.

Have any of the organisations that are going to be adversely affected contacted you?

We've had lots of discussions in lots of different forums. The group that Huw Irranca-Davies chaired for some time on future regional investment had organisations—including business, farming and the voluntary sector—that all expressed concerns about the level of funding for the future in respect of the promise that we wouldn't be a penny worse off. So, we're having ongoing discussions. I know that obviously Vaughan Gething will be discussing this with colleagues in a business space, and I know that Lesley Griffiths has regular ongoing discussions with the farming unions and so on. So, yes, discussions are very much ongoing. I discuss this obviously in my role with local government colleagues as well.

Can I just say—? We think we're being badly treated, others don't think we're being badly treated—that saves Gareth having to come in. But what I would say is we need organisations that feel that they are losing out to actually tell us publicly that they feel they are losing out. Otherwise, it's just Wales versus Westminster, and we want it to be Wales and the people of Wales versus Westminster.

I couldn't agree with you more. I know that partners in various guises do make representations to the UK Government on this. I met with the Wales TUC earlier this week, and again, they shared concerns about the impact of these decisions on the workers in Wales, and what it will mean for jobs and apprenticeships and so on. So, I think that the parties who have an interest in this are making representations to the UK Government. But the more we can have a joined-up approach on this, the better. So, I couldn't agree more.

I think Rhianon might want to come in as well, so if we could unmute Rhianon. There we are.

Thank you, Chair. For a start, I don't think there's any disagreement: we know that there is not the same level of funding as there should have been, and we are more than a penny worse off. This is a fundamental matter for Wales and a fundamental matter for the Finance Committee, in my view. In regard to the comments that have been made, not just by the Minister today but historically, and the representations that have been made, I would like to seek clarity from the Minister as to how we understand why we are in this position, and why we are effectively—. Well, the initial figure was around £350 million worse off, but with the actual new data that the Minister has just mentioned, I'm even more concerned. I'm equally concerned about the myriad of organisations across Wales that are not where they thought they would be. So, I would like to ask the Minister: what is the clarity from the UK Treasury as to why we're in this position? And if there is no clarity, I would propose that we, as a Finance Committee, write to the UK Treasury to ask for that clarity. How can we assess the finances of Wales, and scrutinise that, if we don't have that clarity? Thank you, Chair.

Thank you. I might ask Andrew to come in in relation to some of the discussions that have been had at official level to try and impress the importance of this on the UK Government. But the reason why we've previously talked about funding in respect of farm funding and what that would mean for losses to Wales there was one thing, and that was incredibly serious for rural Wales, but now we've found out that the UK Government is using the same methodology that they used for farm funding in terms of how they consider the way in which we've profiled previous EU funding. They're using that same methodology for other EU programmes, and this takes the funding that we would lose now right up to the region of £1 billion, which is, obviously, completely unacceptable. I'll invite Andrew in to say a bit more on the detail.

Thanks. I think the UK Treasury position on this is that the UK Government's commitment is—. They have a different interpretation of what the UK Government's commitment on replacing EU funding means in practice, and so what they're focused on is—. So, they ask us, 'What was the average amount of funding that you received from Europe in the previous period? And what we'll do is top up the European funding you're continuing to receive this year, next year and thereafter to the level of your average funding in the previous period.' Our contention is that if we'd have stayed in the EU, we would have had all of that money continuing to flow from the previous period and all the new money on top of that. That's the different interpretation of this. As the Minister said, the Treasury are now applying that to the structural fund programmes, which, obviously, are very significant in Wales. If we had remained in the EU, we would have roughly £375 million a year in the new programmes available to us to spend, plus the continuing flow from the previous programme, which is the amount the Treasury are netting off. That represents quite a substantial loss. But the Treasury's view is that they're meeting the UK Government's commitment by topping up the funding flow that we're continuing to receive from the EU. Does that make sense?

In that regard, in regard to the new mechanism around disputes, is this one of the areas that we will be looking at? Nobody wants, as has been stated previously, to raise such matters through such a mechanism now that we have one, but I would have thought, on the surface of it, this would be an area that could be explored, because there is a definitive difference there in terms of interpretation, and we would hopefully expect there to be an adjudication around that. I don't know what thought process has gone into that, but I think it's absolutely fundamental, if Wales is being short changed, that we understand the dotted i's and crossed t's in how that has come to be.

We've discussed this with the Chief Secretary to the Treasury in a meeting, I think it was last week—the weeks fly by—but it was very recently. And we've requested another meeting to specifically discuss the EU funding and the post-Brexit issue. It'll be another opportunity for us, if the CST agrees to the meeting, to make these points in that forum, which will be important, I think. But as you say, there are now different routes available to us in these areas where we feel that we have been treated unfairly.

Thank you very much. I've just got one final question, and it's a little bit of a different question, I suppose. Over the scrutiny sessions you've been involved with with ourselves and with other committees, what was the most challenging question you were asked and what was the answer?

That's an interesting question. Let me just have a think. This is my third committee scrutiny on the budget so far. Let me see: what would be the most difficult? That's a great question. I suppose some of the more difficult ones are in areas that aren't my direct responsibility, so some of the questions around health or digital, for example. I always think that, perhaps if the health Minister were here, they'd be able to provide a much more in-depth answer because they know their budgets, in terms of those BEL lines of the budget, in great depth, and they'll know the policy behind it in much greater depth than I will. So, I think some of those questions are more difficult if they're not things that I'm directly involved with.

Thank you very much. That was a little bit of a different one to finish off with.

It was an interesting one. I'll be thinking about that all day now, Chair.

If you think of what it was, then I'd be interested particularly in the answer to that, so drop me a line. Thank you so much for your time this morning. Thanks to Members for their diligence in asking questions and thanks for the fullness of your answers. There's a lot, now, to take away, to come up with our report.

Diolch yn fawr iawn, iawn ichi am ddod y bore yma, gan roi o'ch amser yn hael. Felly, diolch yn fawr.

Yn unol â Rheol Sefydlog 17.42, rwy'n cynnig bod y pwyllgor yn gwahardd y cyhoedd o weddill y cyfarfod hwn ac o'r cyfarfod ar 28 Ionawr. Ydy pawb yn gytûn? Ydyn. Dyna ni. Diolch yn fawr. Awn ni i mewn i breifat, felly.