Finance Committee

But it brings us on to our substantive item this morning, which is an evidence session around the Welsh Government's final budget. We're joined by our witnesses and the Cabinet Secretary.

Ydych chi eisiau cyflwyno eich hun ar gyfer y record, a'ch swyddogion, os gwelwch yn dda?

Diolch yn fawr, Cadeirydd. Mark Drakeford, Ysgrifennydd y Cabinet dros Gyllid a’r Gymraeg. Gyda fi y bore yma mae Andrew Jeffreys, pennaeth Trysorlys Cymru, ac Emma Watkins, sy'n arwain ar gyllid i ni.

Gwych. Croeso cynnes.

I'm very pleased that you're with us, because you've responded positively to a recommendation that we made in our draft budget reports. Because there were indications of quite a few changes going to be happening between the draft budget and the final budget, it was good to be able to have this evidence session with you to identify some of those and to understand what's happened between the draft budget and the final budget. I'll give you the opportunity, really, to lay out those changes and to let us know what has happened and how we've got to the final budget being laid.

Thank you, Chair. So, there are a number of significant changes between draft and final, and then there are a larger number of smaller but nevertheless important changes to report as well.

In terms of the large changes, there are three or four things to draw to the committee's attention. The first set are as a result of the agreement between the Welsh Government and Plaid Cymru, which has prioritised investment in health and social care—the largest cash investment—with £180 million additional on the face of the final budget compared to the draft budget. And local government, £112.8 million additional revenue supplied to local government in the final budget compared to the plans at the draft budget stage. There is a third major revenue change, and that is £65 million next year in the first of a two-year transitional relief scheme to take account of the revaluation exercise in non-domestic rates, and there is £120 million in unallocated capital, which is to be carried into next year. So, those are the big changes.

When all of that was done, there was still a sum of money left to allocate. In revenue terms, the first decision that was made was to reflect the Office for Budget Responsibility's updated forecasts for inflation next year. Committee members will remember that the draft budget reflected OBR forecasts published in March. In November, alongside the UK Government's autumn budget, the OBR produced updated forecasts; they marginally changed their forecast for general inflation and they raised their forecast for pay rises in the UK economy from 2.2 per cent to 3.2 per cent. In the budget scrutiny process, many, many questions were asked about the way in which the draft budget approached inflation and whether we would be able to accommodate any changed forecasts from the OBR. Well, I hope it's good news that we've been able to do that. It comes at a cost of about £21.5 million in revenue, but it means that all parts of the Welsh Government now have the funds they need to reflect those forecasts.

There was then a further sum of around £20 million to £25 million [correction: around £30 million] in revenue still to allocate, and that has been used to respond to both the recommendations of committees across the Senedd and the most urgent needs identified by my Cabinet colleagues. The same is true of a residual amount of capital, around £25 million [correction: around £50 million] or so there too of additional capital, to allocate. That has been done in response to things that committees have said and things that my colleagues were keen to draw to my attention.

Thank you very much for that summary. That gives us a bit to unpack this morning and to understand the impacts of some of those decisions. You talked initially about the health budget and that allocation there and the inflationary pressure that's on them. Obviously, we've talked a lot about inflation and different aspects of how you measure it, and you've made that provision, as you say, across budgets for pay. But, from the health and social care final budget, compared to the draft budget and the inflationary costs that we heard about in evidence, does that just keep the NHS and social care standing still, or are you hoping that it will move the dial on waiting times on some of the aspects that we know that are happening in the health budget? As the Cabinet Secretary, what would be your expectation of the health department and the money that's been allocated, and what your colleagues would be able to deliver with the money that you've made available?

Chair, in the budget documentation that we published, the budget report, I think we say explicitly that, despite the additional investment in health and social care, it will be another challenging year for the NHS next year, for all the reasons that you've just set out. Of course, the health service is never standing still. Every year, there will be—. Just to take one example, the All Wales Medicines Strategy Group will be approving new therapies and new forms of treatment, and we are committed always to funding those things. So, at the end of any year, the NHS has never simply stood still.

Not so much reflected in this budget, but for future budgets, the work of the Welsh spending review tries to engage very directly with one of the themes that this committee has been very keen to develop, which is prevention. I think the question, as you framed it to me, was about how does the NHS supply services, but the other side of that equation is the demand for services and how do we deal with demand. The Welsh spending review has a big focus on demand. How can we, in order to make the system affordable and capable of further development—? How do we deal with the fact that—? Again, to take just one example, the enormous rise in type 2 diabetes and the enormous costs. If you look at the proportion of Welsh NHS spending that is devoted just to diabetes, it is very striking, and yet type 2 diabetes is very amenable to preventative action, and action that is not health service action; it's action to do with diet, exercise, lifestyle—all of those things. So, my reflection on this budget and the challenge ahead is that we all have to find the capacity to focus not simply on always finding more money; the NHS takes 55 per cent of all the revenue available for everything that the Welsh Government and the Senedd does. The question can't simply be always, 'How do we find more money?, it's 'How can we more effectively deal with demand for health services?' and 'How does that preventative theme that's been developed help us to make the system become in a more comfortable balance than we see it today?'

I suppose that goes to the question of how you set budgets and how you get departments to work collaboratively with each other. You've talked in this committee before about how you've tried different things. Are any of those things working? Or have you been able to see some gains in departments either sharing budgets or that collaborative approach to get to that end point—well, not the end point, but to progress that preventative spend aspect and say, 'Well, actually, if you give me some of that, I'll save you some of this' type of conversations?

Well, I am quite sure that, as a small Government, it should be possible to do better than we do on some of those things. I think where we have succeeded is in bearing down on a risk that is there always, that a decision is made in one part of an organisation, but unintentionally drives costs or demand into a different part of the system. So, I think we're much more conscious, as we go through the budget every year, of making sure that we look across the budget, that there isn't one part of the system saving money by making decisions that cost another part of the system money. So, I think we're better at that, because we look for it very consciously.

And I think there are good examples of where you can see departments collaborating. In terms of prevention in the health service, we know that decent housing conditions prevent ill health, particularly in Wales, where so much of what the health service deals with is acute exacerbations of chronic conditions to do with respiratory conditions. So, if you can improve the conditions that people live in, you don’t get that, you don't get people arriving in ambulances into A&E in winter time, and so on. And I think we're very conscious of that and there's a lot of discussion that goes on and pooled budgets that, between local government and heath, focus a lot on the way in which action in one part of Government has a positive benefit for actions in others. Is there more that you can do? Absolutely, there is, but I think there are good examples of it happening in practice.

I think you highlighted there that decisions taken by some parts of Government do inevitably have a big impact on local government, as someone that delivers on the coalface and in different parts of the country and in so many different areas. Can you talk a little bit about how you see that the additional funding going to local government will help to alleviate some of that pressure, but also the pitfalls, I suppose, of giving that inflationary rise for pay? But, obviously, some contracts are contracted out to third parties and that money won't cover people who are not in the public sector, even though they are allied to that. So, if you could unpack some of that and some of the challenges, maybe, for local government in delivering services where those decisions have been made at a local level.

I think that the settlement at 4.5 per cent increase in resource available to local government, with no local authority lower than 4 per cent, some local authorities above 6 per cent, is at the best end of what Welsh local government would have genuinely expected. Absolutely rightly, every year, local government makes a bid for everything that it would like to have. There is a gap between the ideal and probably what you expect in reality. I think this year the settlement is at the better end of what local authorities were anticipating, which means that, actually, at 4.5 per cent, that is well above the OBR's assessments, both for general inflation and for pay inflation.

But the point that you make, Chair, is a good one. Just as the Welsh Government makes decisions that have implications for those who depend directly on the budgets that we supply, so it is true that local government makes decisions that have a very direct impact on third sector organisations, on housing associations providing specialist services for people with learning disabilities. That would be a good example, really, wouldn't it, of a nexus where decisions made there have a health component to them, a housing component to them, a social care component to them, and, in very tough times, sometimes, local authorities have not been able to fund those organisations to the extent that they would have wished and those organisations, quite certainly, say that they need. Now, I think, at the level of funding that we've provided for next year, some of those decisions ought to be easier for local authorities to make positively.

Thank you very much. I'll bring in Mike at this point. Diolch, Mike.

Diolch, Cadeirydd. Following on from what the Cabinet Secretary just said, one the things that we talked about was type 2 diabetes. We know that one of the means of reducing the prevalence of type 2 diabetes is weight reduction. So, is some of the money going to health or local government going in there to help with social prescribing and getting people to lose weight, and, as such, not need all the health and social care support that they have for type 2 diabetes?

The level of decision making there would not be for me to take, Chair; that would be for my colleague the health Minister. But, as it happens, I'm aware of the investment that he is making in social prescribing for exactly the reasons that Mike Hedges has suggested. Type 2 diabetes is amenable to actions that individuals can take. Now, the job of the state is to support them in doing that, to create the conditions in which they are able to make decisions that help them to look after their own health. Social prescribing and a number of other things that the budget supports are designed to do that.

Thank you. The last time we were discussing the budget, I was speaking at length about that more money was needed for social care, for health and for local government. And, thankfully, that has now been resolved. But what changes have been made to other revenue allocations in the budget?

Well, Chair, I can give some more detail, if it's helpful, of those, as I said, slightly smaller allocations, but nevertheless important allocations. So, to give you just three or four examples, if I could, there is £5 million that is new in the budget for apprenticeships. That was raised by the Senedd committee with responsibility for oversight of that, and it was a top priority of my colleague Rebecca Evans in the final round of budget bilaterals.

There's £5 million additional for further education. It's a great success story that the number of enrolments in further education in September of last year exceeded expectations. And that's great, isn't it? There are more young people coming back into further education. But that creates a pressure then on resources. There's £5 million in revenue provided to help with that.

There is additional money, £2.6 million, for homelessness prevention programmes. Now, there again, if you look at what the Local Government and Housing Committee here said, they made that one of their top recommendations. It is very much aligned with the preventative theme that has been discussed across Senedd committees, and it was the top priority of the Cabinet Secretary as well.

There are further examples, more money—I think there is £9 million additional in revenue altogether, between the draft and the final budget, for additional learning needs in our schools. So, I could give you more examples across the budget, but it's that sort of level we're talking about, those modest investments, but ones that have significant impact.

Sam, did you want to come in?

Can I—

Sorry, Mike, Sam just wanted to come in with a quick question there, and I'll bring you back in after.

Yes, thanks, Chair. Cabinet Secretary, you mentioned earlier the £21 million being allocated to deal with the OBR's prediction on wage inflation increase from 2.2 per cent to 3.2 per cent, so, essentially, it's suggesting that £21 million is going to support, alleviate, the 1 per cent increase from 2.2 per cent to 3.2 per cent. So, are you suggesting that £21 million represents 1 per cent of the Welsh public sector wage bill? Because that would suggest that the public sector wage bill is £2.1 billion, but of course it's around about—I don't know—£12 billion to £15 billion, probably.

Yes, yes.

So, are you confident that the £21 million is actually going to do the job of alleviating that inflationary pay increase, do you think?

I think Andrew can probably explain the technicalities of it.

Okay, because the number doesn't quite make sense to me.

Andrew.

Yes, so that amount is for those pressures other than local government and health, so there's obviously additional funding going in for health and local government as a result of—

Okay, so the existing allocations to local government and health will be expected to deal with the final OBR prediction on pay increase; it's the other main expenditure groups that this is seeking to support.

Yes.

That's very helpful. Thank you, Chair.

Mike, diolch.

I was going to ask you about the changes made following reports from committees on the draft budget, but you've outlined a number of those. So, am I right in saying you paid attention to what committees have said on the draft budget when you found additional money available to help some of the key areas? And I think that, for most people in the Senedd, if not all, additional learning needs and homelessness would be the top of nearly everybody's priority list.

Well, thanks to Mike Hedges for that observation, Chair. The way that I've tried to handle the budget in the years that I've been a finance Minister has always been to hold some money back for the final stage of the budget, because there always will be recommendations made by committees that you will want to be able to attend to. So, the two powerful voices in that final straight are the things that committees have said and the things that Ministers say. I hold a final round of budget bilaterals after Christmas with everybody, just to check that I've got the very best and final information from them. And actually, in a way that I do not find surprising, there's often quite a coincidence between the things that committees are highlighting and the things that Ministers come to you with as well, but I'm always keen to attend to both. And I've given you some revenue allocations, but there are capital allocations that I could have mentioned that do the same thing.

So, the Welsh language committee is keen to make sure that we invest in informal ways in which young people can improve their language skills. So, you'll see that there's money, new money, new capital money, for the Urdd in the budget to allow them to develop three of their centres so they can be used more weeks of the year and so on. There is additional money for the national library as part of the culture committee's recommendations. But, again, it was a priority of the Minister himself, wanting to take advantage of a new opportunity that's arisen to assist the library with long-term storage, which they need as a deposit library and so on. So, I could have offered you a series of capital allocations alongside the revenue allocations that reflect the point that Mike Hedges has made about listening carefully to what committees say and carefully to what Ministers tell me as well.

Thank you very much, and, on Welsh language informal use, you may remember that I've consistently asked about Twrw Tawe, which is a Welsh-language use club, which meets in Morriston, and how that allows Welsh speakers to use the language socially, so that's really good news.

Can I move on now to non-domestic rates? How do you agree on the amount of funding to make available to mitigate the impact of non-domestic rates revaluation and the level of support for both retail, hospitality and leisure? Did you take into account, when you were looking at pubs, for example, which we talk a lot about, the effect on rents? Because I'm well aware that, for a number of pubs, it's not the rates that cause them serious problems; it's the rents and rent increases often put forward by the pubcos.

Yes. Well, look, Chair, I think there are two slightly separate questions in what I just heard. There is: how did we decide on our transitional relief scheme following revaluation? Essentially, what we've done there is replicate the scheme we used last time there was a revaluation, which I think worked very well—it's administratively straightforward; it's very clear for beneficiaries what they will get. And it means that, by the time the three-year cycle is complete, every business is paying what the revaluation exercise says they need to pay. So, as you know, £65 million in this year means that no business that sees a rise of more than £300 will pay more than a third of any increase. The following year, they will pay two thirds, and, in the third year, they will pay the full amount. Because we've done it before, the mechanism is well-tested. Local authorities are used to running it. We were able to cost it very quickly. That's where the £65 million comes there.

The second part of Mike's question was about the other reliefs that are available for retail and hospitality and leisure. As you know, we have introduced a lower multiplier for high-street retail, bricks-and-mortar retail. And the reason we have started with that is partly because this is the first time we have the ability to set differential multipliers, and I wanted to test the system by doing something specific that we would be able to monitor and evaluate. The finance Minister can come back in a year's time to let you know whether that has been a successful use of that lever. And we chose bricks-and-mortar retail because a quarter of sales that those sorts of outlets would traditionally have made are now made via the internet. And hospitality and leisure are not like that—you know, you can't eat a lasagne online, so, if you're a restaurant—. People have to go to a restaurant; people have to go to a gym. You don't have to go to a bookshop—you can order the book online. So, we made a distinction in that way. And, of course, Mike is absolutely right: non-domestic rates are just one of a whole series of costs that a business has to accommodate.

In terms of pubs specifically, just under half of all the pubs in Wales already benefit from small business rate relief in Wales, and a quarter of pubs pay no business rates at all. And there will be many other things that a business of that sort—. Wage costs, energy costs, rent costs, all of those things go into the calculation that a business makes in order to stay viable.

Yes, I think it's the rent I was talking about, specifically that driven by the pubcos—that you give the non-domestic rate relief, and the pubcos say, 'Oh, look, let's charge higher rent.' Is anybody reviewing that?

Well, look, it's a phenomenon that I think is well known, and we rehearsed it on the floor of the Senedd only last week in relation to land transaction tax. Who is the beneficiary of greater relief in land transaction tax—is it the seller or is it the buyer? And there is plenty of evidence in the past, quite certainly, that extra help in rates leads to landlords putting up rents, because they think, 'Well, now that person has more money in their pocket, so we can put up rents and take our share of the extra help that the Government is providing.'

Okay. Thank you very much. I'm sure we're going to return to that in the next Senedd.

More than likely. I'll bring Rhianon in at this point. Diolch.

Diolch, Chair. I've still got an image of eating lasagne online. [Laughter.] I'm going to move to my questions in terms of the Welsh Government's approach to budget setting this year and potentially around the principles and aims underpinning the budget. You've published an updated Wales infrastructure investment strategy project pipeline along with the final budget. What are the key changes in this project pipeline and what levels of capital funding—you've mentioned £120 million previously—have been retained to allow flexibility for the next Welsh Government?

I thank Rhianon for that, Chair. So, to answer the last part of the question first, as I said, as part of the agreement with Plaid Cymru, there is £120 million in unallocated capital that appears on the face of the final budget for an incoming Government next year. That's what the final budget says; my own view is that there will be a bit more than that, because as you come towards the end of any financial year, it would be a very unusual year if there weren't some capital underspends that begin to be declared in the final three months, because that's the nature of capital expenditure. It does not easily fall into calendar dates. So, I would expect there—

Do you have a sense of how big that's likely to be this year?

I don't have a reliable sense of it at this point, because the monitoring is always at least a month behind. So, the monitoring information I have is probably for November-ish.

We haven't had the supplementary estimates from the UK Government yet.

And as Andrew reminded me, we're yet to have the February supplementary estimates from the UK Government, which will also make an impact on that. But on any previous experience and from what I think I'm seeing already, even in November, I think that there will be a bit more capital squeezed out that will then go into the Wales reserve for use next year. So, there is a relatively generous amount of unallocated capital available to an incoming Government. What I haven't done this year that I have in the last couple of years is to overprogramme capital next year. And in a way, that is a different way of coming to the same end. But there's no capital overprogramming in next year's budget and there was in this year and last year. So, that £120 million is what will be available.

And so in regard to any changes in the project pipeline, is there anything significant there?

The pipeline is a dynamic document, Chair. That's why it's published every year alongside the budget. So, to give a couple of examples, maybe, if you'd looked at the pipeline in any year almost for the last 20 years, you would have seen a phase of the Heads of the Valleys road reflected in it. Well, the Heads of the Valleys road is complete, so for the first time in 20 years, if you look at next year's pipeline, you will not see an allocation for the A465. So, that falls out and, of course, new things come in. So, in the early days of the Heads of the Valleys road, you would not have seen any allocations, for example, for free ports. So, free ports, and particularly the link of free ports with renewable energy, you will now see in the project pipeline that much more directly represented than you would have a couple of years ago. The same will be true of investment zones. It would be true in an example that would certainly be relevant to Islwyn, to Rhianon's constituency, the project pipeline now demonstrates the full £200 million-plus investment we're making in coal tip safety. So, lots of that is new, and therefore it now begins to appear in the pipeline.

Of course, the pipeline also shows continuing investments in things that have been there in the past and will continue to be there in the future. The twenty-first century schools programme is a rolling programme. Some projects that were in the pipeline for this year will fall out because the school is built or refurbished and there will be new projects there too. The same is true of our health service. An announcement, I think a couple of weeks ago, about £60 million for the Royal Alexandra Hospital—that's now in the project pipeline. You will see that money there from 2026 to 2029.

So, the pipeline is a dynamic document. It shows some things being completed, some things new, and it shows a continuation of many projects. And, of course, in a way that I think sometimes doesn't get so much attention, the pipeline also includes capital expenditure by local government, by the utilities, by the UK Government. It's not a Welsh Government-only document. It tries to capture major public and para-public investment over that 10-year horizon.

Can I ask, just before I bring Rhianon back in, in your experience, and you've mentioned that overprogramming of capital, and you've got the method that you've used this year where you've left some in the budget, you've overprogrammed for the last couple, and then the—? We rehearsed this conversation with the previous Cabinet Secretary. In your experience, what's the best way of doing it? Is it better to overprogramme, or is it better to leave the money there and respond?

Well, I think both—

From a management point of view.

Yes. Look, I think both levers are useful for Government to have, and then you have to make a decision in the context of the year as to which one you think is going to be the most useful. Overprogramming I think has helped us to make maximum use of the capital available to us. Now that we're in a position where we have a larger sum of capital available than we did over many years, maybe overprogramming isn't as necessary to drive the spend through the system, because there is just more of it that you can allocate in the more traditional way. So, I'm not sure it's quite as simple as saying, 'Oh, that one is better than that one.' I think it depends on the context in which you're trying to deploy it.

Thanks, that's interesting. Diolch. Rhianon.

Thank you, Chair. Moving to drivers and the impacts of policy choices, including around prevention and productivity, how does the updated strategic impact assessment demonstrate the impact of decisions made in the final budget, 2026-27, and also including how those policy options have been decided upon, please?

Well, Chair, I've tried this morning not to offer you too many self-congratulatory answers, but one of the things that I think I would say is that I think the strategic integrated impact assessment document is a very good read, and does deal directly with the points that Rhianon Passmore has just made.

As you know, we've taken a different approach to the SIIA this year. We published a draft version alongside the draft budget, and a final version alongside the final budget, and we've gone about it in a different way. And I think, if colleagues have a chance to look through it all—we're all overwhelmed by the number of documents we could be looking at—then I think you will see some very direct examples of what Rhianon has just asked me in the case studies that I now deploy.

So, I'm opening it relatively randomly as I have it in front of me, anticipating, maybe, that this will be a matter of interest to the committee as it's a new document. So, I have opened it randomly at the case study of funding on additional learning needs, where I think it does walk through the process that Rhianon has just asked me about. It starts by saying, 'Why is this an issue?' Then it goes on to ask who has been affected by the decision, because it's an impact assessment, isn't it? That's what it's asking: 'How do the decisions made in the budget make an impact in the lives of Welsh citizens?' And it does that in relation to young people with additional learning needs. And then it asks the question: 'How is this spend contributing to the preventative ambitions of the Welsh Government?' And it does that against every one of the case studies that it sets out. So, I've seen many of these documents over the years, and I do think this one does demonstrate the impact of the work that's been done to change the way we do it and to focus it more on the questions that Rhianon was asking me.

Thank you. And in regard to, possibly, your reflections around budget documentation, how is that seeking to improve, collectively, productivity, or not collectively, in both the public and the private sectors?

Well, productivity, Chair, is a shared responsibility across the Welsh Government. It isn't the budget alone that drives a focus on productivity. But in my discussions with my Cabinet colleagues, I was clear, I hope, in saying to them that I would put some additional priority on spending proposals where there was a productivity gain there to be demonstrated. So, again, just to think of some examples I could offer there, I mentioned the Urdd, I think, earlier. So, the case that the Urdd made, I thought, was very much a productivity case. The Urdd has three very successful centres. It has more schools wanting to use the facilities than it is able to accommodate, because there are periods of the year when there simply isn't enough that can be done indoors to make it an offer that you can make. So, by providing some additional capital investment in those centres, the centres will be able to open more weeks of the year. They will be more productive in that sense, won't they? They will have more customers coming through the door doing the things that we want them to do by using their fixed assets more efficiently. And there are a number of other examples in the additional allocations made right at the end of the process, where I think you can see productivity gains as part of the rationale for why those particular choices were made.

Okay, thank you very much. Diolch. And then finally, from me, in regard to—. I don't want to necessarily go off on any tangent away from this budget discussion, but, obviously, prevention is a real matter and also an approach. And indeed, in terms of poverty being a driver around health and social care impacts, it's huge in terms of, for instance, homelessness, and you've mentioned a £2.6 million allocation for homelessness prevention. Have you been able to provide detail or further detail in the budget documentation on how the final budget is seeking to move to a more preventative approach?

Well, I hope we have, Chair. And as I say, in the strategic integrated impact assessment, that question is asked against every one of the case studies that the document explores, asking the question each time: how is this moving investment to have a more preventative impact? And so we continue to wrestle away on this front. We've had many discussions here in this committee about the slightly slippery nature of the word 'prevention', what exactly we mean by it. We use the four-stage typology developed with the well-being of future generations commissioner. We explicitly refer to that in the SIIA, and we're committed, as we were at the stage of the draft budget, to further work, both with the commissioner and with some of the experiments in budgeting that are going on in some parts of Wales, using other sources of expertise to identify where spending is having that preventative impact. But you see it in so many things. I don't think I've mentioned at all the additional money in the draft budget for the rural affairs portfolio. Well, there's extra money there for flood prevention; the word is in the title, isn't it? We have record amounts of capital investment next year on coastal flood prevention and flooding of the sort that we've seen in parts of Valleys communities this winter. I've been able, in the final budget, to find £5 million to continue into next year the work that Natural Resources Wales has started this year on water quality and the prevention of river pollution. Across the board of those extra allocations—in revenue and capital—I think you will find a preventative theme running across quite a lot of them.

Thank you. Diolch.

Diolch yn fawr. Sam.

Thank you, Chair. Cabinet Secretary—I guess we're drawing some of this to a close a little bit—you described the draft budget as a neutral budget; would you describe the final budget as different to that?

I would describe the final budget as a budget that completes the mandate of this Senedd term. This is the final year of this Senedd term, it's the final budget that this Senedd will be asked to pass, and I would characterise it as a budget that discharges the final parts of that mandate. It's why there aren't major new initiatives in the budget, because I don't believe that it would be right for this Senedd to predetermine what a Senedd that is about to be elected should regard as its priorities. This budget discharges the mandate that was given to this Government in 2021 and completes that as far as we are able.

I do think the word 'neutral' still has some value in describing the budget. There are many very well-known techniques that Ministers responsible for finance have used in other places at the end of a term. You'll be familiar with the idea of a 'giveaway' budget that some Governments have used prior to an election, and colleagues will be familiar with the idea of a 'scorched earth' budget in your last budget, in which you attempt to create as many difficulties for your successor as you can. Neither of those things are true of this budget. It is, in that sense, a budget that allows an incoming Government the maximum freedom that I could find for an incoming budget to use the mandate that that Government will secure in an election.

I could have laid a three-year budget; I've got a three-year budget from the UK Government. That would have tied the hands of an incoming Government in complicated ways for quite a long way into the next Senedd term. I don't think that is a democratically advisable way of behaving in the final weeks of a Senedd term. In that sense, I think 'neutral' is—. There's still some value in that term.

Thank you, Chair, and thank you, Cabinet Secretary. Perhaps, if I may, Chair—. I suspect this may be one of your last times in front of this Finance Committee. Particularly thinking about this Senedd term coming to the end of the five years, I was sitting here thinking about when I got elected here in 2021, the different sort of world we were in at the time with COVID, through to where we are today, with a change in the UK Government as well. Just in your reflections, from a finance point of view and from a budgeting point of view, is there anything, perhaps, that you think that you could have done that you wanted to do and that you weren't able to do? Do you have any reflections on, over the five-year Senedd term, from a budgeting point of view, the shift in direction from the Welsh Government from 2021 to where we're heading to this year? Perhaps, if that's okay, Chair, just some—

Yes. Just to note, the Cabinet Secretary will be with us for two more sessions, actually, before—

I'm so sorry. But on a budget point of view—

Not to disappoint you, Sam, and not to frighten the Cabinet Secretary either. But, certainly, I think it's a good question, and I'd be interested in the answer as well.

I suppose my reflection is that a lot of the last five years, to an extent that we would not have anticipated five years before that, has been about recovery. I believe we are in recovery from two or three major events. Sam and I would have a different view on this, perhaps, but I think we are still in recovery from Brexit. Brexit has made the economic position of Wales much more challenging for businesses, and in our ability to invest in those parts of Wales recognised through the European Union as needing that additional investment. In the last five years, a lot of what we've had to do is to try to make up for some of that.

We're very clearly in recovery from COVID still, aren't we? We've had to divert huge amounts of money to deal with the aftermath of COVID, the demand that it's created in public services and so on. And again, I'm not wanting to make party points here, but we are in recovery from a long period in which public expenditure was significantly constrained, and we're making up ground as a result of that. That's particularly true in capital expenditure, in the current year and next year. So, I think we've had to spend more of our time, in the last five years, in trying to deal with the aftermath of crises than would've been typical of a five-year period during devolution, where you would've hoped to have been able to make more progress in new ideas and fresh initiatives. Hopefully, the next five years will look a bit more like that.

Thanks, Chair. Perhaps, in the two further sessions, we may be able to do some more of the reflection. It's always interesting.

Moving to something different, the Finance (No. 2) Bill LCM coming through to the Senedd in the coming weeks—you introduced that in December—relates to devolution of powers for property income tax. Perhaps you could share with the committee what the timescales for acquiring these powers are and what these powers would allow the Welsh Government to be able to do.

Thank you, Sam. I might ask Andrew to explain some of the technicalities here, which are pretty ferocious, if you've read the LCM; it's quite a hard read in many ways. But the timetable one is easier to explain. There's a difference between acquiring the powers and the timetable for using the powers. We will acquire the powers, I think, if the Senedd agrees to the LCM. Then, once the finance Bill completes its parliamentary processes, then the powers will shift to the Senedd.

The timetable for using those powers, however, is that they can be used for the first time in the financial year 2027-28. So, this time next year, the Senedd will be having to make decisions on this new sliver of fiscal devolution. I must say that's how I see it. The ability to set new rates, different rates, for income derived from property is a useful power to have. I think it demonstrates respect for devolution that the UK Government is offering this as a power to Wales, rather than simply instructing us that we are to exercise this power.

Andrew will give you more exact figures now, but from memory, as a percentage of what we currently raise through Welsh rates of income tax, income derived from property in Wales is between 1 per cent and 2 per cent of the total—1.6 per cent. So, it is, as I say, a sort of sliver of new responsibility. But nevertheless, if you were to exercise that by having different rates for the basic, higher and additional rates, you probably would raise a small handful of millions of pounds. We've been talking a lot this morning about handfuls of millions, and the difference that they can make. But in terms of your question about how this actually works, Andrew will give you a better account than I could.

Just to be more precise about how big the sliver is, the most recent year we've got figures for is 2023-24, because these figures come from HMRC outturn data. Property income is declared in self-assessment, so it lags behind PAYE income tax. So, we've got 2023-24 figures. Total property income is around £800 million in Wales in that year. That's [correction: That equates to] about £50 million of Welsh rates of income tax. If you cast forward to 2027-28, which we've started to think a bit about, and if you'd expected property income to grow at broadly the same rate as other income in that period, it might account for maybe £65 million of WRIT by 2027-28. So, 1p on all the rates might raise you £6 million or £7 million. It's small, but not nothing, and it will be useful flexibility, I think, for the Senedd to consider in terms of income tax policy.

There are a few caveats around those numbers, because now the UK Government has introduced this new element into income tax, part of that is that they will be changing the way that property income is treated in the calculation of income tax liability. This is where you start to get a bit more technical, but, in future, it will be taken after other forms of income when applying allowances and other reliefs. Property income will, on average, pay in future probably a higher rate of income tax than other income for that reason, because you will have applied your allowances to your PAYE income first, for example. But also, because the UK Government has now introduced higher tax rates on property income, you might expect that to have a behavioural impact as well. So, these things might pull in slightly different directions. We're just starting, really, to think about this and how it might work in practice, and we'll obviously do more work on that as we go forward.

Mike, did you want to come in on this?

Yes. You say this is a small amount of money, and whilst I support it coming, it's not going to make a huge difference. The one that would make a huge difference is dividend income. Is there any talk about devolving dividend income?

I've had a meeting with the Exchequer Secretary since property income was proposed for devolution, and dividend income was not mentioned by him in that meeting.

Or by you?

Nor by me in that meeting, I'd have to say.

Sam.

Thanks, Chair. I was probably thinking along the same sorts of lines—you expect a number of landlords would set up limited companies to manage their affairs, and then, of course, that wouldn't necessarily come through to the Welsh Treasury.

I guess the other question I have in relation to this, going back to the powers, is what powers would the Welsh Government have as a result of this. One of the headlines from the property income tax has been around the so-called mansion tax—a surcharge, essentially, on properties over a value of £2 million. That may not be massively relevant here in Wales; we expect most of those properties to be in London, and perhaps the south-east. Do you know whether the powers coming through on this would allow the Welsh Government to adjust that £2 million as a threshold for property surcharge or not? Would that power still remain with the UK Government? If you're not clear today—. I know that was sprung on you a little bit.

Thank you. Maybe, just to make sure we get it completely right, we can write a note to the Member on that. I think I know the answer, but I'd rather get it accurately for you.

Understood. Thank you. And then, in terms of administration in Wales, how do you expect it to be administered, and by who?

HMRC will administer it. That is clear from the way the finance Bill approaches it, and we have an assurance from the UK Government that no cost will fall to the Welsh Government in setting up that system. If in the future we were to exercise the power to vary rates and to do it in a way that is different to England, then there may be costs involved there, but, in setting up the system, there are no costs to the Welsh Government, and HMRC will administer.

On that technical side of how it would work here, in the same way as we have a vote on WRIT—and correct me if I'm misinterpreting it—that sliver is now taken off that WRIT bit and added—. So, there will be a resolution in the Senedd to lay that part as well. So, there would be two votes, in essence, rather than one vote.

That's certainly how I would assume it would be, Chair. I suppose if you were doing the identical thing—

You'd just leave it as one motion, I suppose.

You might have one vote because you're leaving—. Say you were leaving everything the same. But if you wanted to do something different on WRIT and property income, then, yes, in future the Senedd will have two votes and two decisions to make.

I think that we need to do some work on that with the Senedd about exactly what form that resolution would take and whether you'd vote on two separate sets of rates.

And I'm assuming there will be a conversation then with the Llywydd on Standing Orders, and that procedural aspect of dealing with this aspect.

Yes, and it's a very important part, isn't it, because the vote on WRIT comes before the vote on the final budget.

You have to have the money before you can spend it.

You do, exactly, for a very good reason.

Generally. [Laughter.]

So, those Standing Order provisions will need to be examined.

There we are. Thanks.

Thanks, Chair, and perhaps finally on this, Cabinet Secretary, we've heard a description of some of the data that is available on this, and sometimes being perhaps older than you'd want it to be. I'm just trying to understand what access you have to data to help you and future Governments make some informed decisions on this, and what you're perceiving as some of the risks of property income tax being devolved.

Well, there is data already available. It's not yet as complete as we will need it to be, but we're not without data, which is the advice I've had. I was able to show some of the scale of the sliver and what would happen if you were to vary the rates. But work will go on to improve data, and I think, Andrew, you've probably already started to do something on that.

Yes. So, we have been starting to talk to HMRC and OBR about this. For example, in the tax ready reckoner next year, we would expect to see a more formal estimate of what changes in Welsh rates of income tax on property income would generate in terms of revenues, or what the reductions would cost. I think OBR are planning on publishing forecasts of property income tax separately for the first time in the UK Government's spring statement, if that's what it's called—the March forecast. So, yes, the evidence base will start to build now.

In terms of risks, yes, I guess you touched on probably the main one, which is that people, if you increase rates, could organise their affairs differently in order to not pay income tax on property income. Those kinds of behavioural effects, we need to think a bit more about the implications of some of those. That's a key thing.

An interesting feature of this—sorry, just if I could have a second—is that it will—. So, if you're a Welsh rate of income tax payer, i.e. you live in Wales but you own property in England, you will still pay the Welsh rate on that property income and vice versa. If you're an English income tax payer who owns property in Wales, you'll pay the English rate. In thinking about the impacts on the rental property market, for example, which is another issue we need to consider, it's not the location of the property necessarily that determines what rate of tax the landlord is paying on that.

Of course, where you're domiciled will be where you pay that tax, not where the property sits, which is another consideration as well, isn't it?

Yes, and we don't know exactly where people are living who own property in Wales, for example. That's not something we've thought about before.

Thanks, Chair.

That gives us a lot of other things to think about. Just before you go on, you mentioned that meeting that you had with the Exchequer after this was announced, then, talking about taxes, and it's something that we enjoy talking about in this committee, but the old chestnut of the vacant land tax, is that something that was talked about in that meeting? And also maybe parity with Scotland around the bands, was that something that was explored, or, again, was that not mentioned at that meeting?

Both of those things were mentioned at the meeting. More time was spent on vacant land tax. One of the slightly frustrating things—it's been true of Governments of different colours—is that when you're dealing with UK Ministers, you don't often meet the same person twice. So, there was a new Exchequer Secretary, therefore new to the whole vacant land tax. I'd already had discussions with his predecessor, who had clearly taken time to get himself prepared for that conversation. The new Exchequer Secretary also had read his brief and so on, but you're sort of starting again. I was mildly encouraged by the conversation, and am still hopeful that we may have some movement on that front before the end of this term. I don't want to be more than hopeful. And I was able to just make sure that the Exchequer Secretary knew about the work that we are doing in relation to the powers that we have over income tax. You know, Chair, my view has long been that the current set of powers are very hard to make use of. They never have been used and I find it difficult to see the circumstances where they would be used. Scotland has a different suite of powers. We've had a research project jointly between Bangor University and the Fraser of Allander Institute in Edinburgh. There will be an output from that research before the end of this term, and I hope that it will allow a more informed debate about whether there is a more usable set of powers that the Senedd might have in this area than the ones we currently have, which have proved, I think, predictably difficult to make use of.

Okay. Thank you very much.

Diolch yn fawr iawn i chi am y bore yma.

There will be a transcript available for you to check for accuracy, and if you could supply that note, that would be very, very interesting for us. Diolch yn fawr iawn.

Diolch yn fawr.

O dan Reol Sefydlog 17.42(ix), fe wnawn ni benderfynu gwahardd y cyhoedd o weddill y cyfarfod yma. Ydy hynny'n iawn? Ydy. Fe awn ni'n breifat. Diolch yn fawr.