Local Government and Housing Committee

Croeso nôl. Welcome back to committee, Cabinet Secretary, with a different set of officials this time. We've reached item 3 on our agenda today, continuing scrutiny of the Welsh Government's draft budget, but this time with regard to the local government aspect of the Cabinet Secretary's responsibilities. Welcome back, then, Cabinet Secretary, and also to your officials: Reg Kilpatrick, director of local government, and Judith Cole, deputy director for local government finance policy and sustainability. Perhaps I might begin with some initial questions, firstly with regard to the programme for government. How does the provisional local government settlement for the forthcoming financial year reflect the Welsh Government's priorities for the sector as set out in that programme for government? And perhaps you could set out whether or not the Welsh Government has considered new ways to address any future funding gaps that have been identified.

Diolch, Cadeirydd, and long time no see to the committee. [Laughter.] Yes, the draft budget does provide a significant investment into local government, although I do recognise the ongoing challenges that local authorities face. I hear and speak directly to local authority leaders, and I've certainly heard about the challenges that they have faced and that they continue to face. The provisional settlement for 2025-26 sets out core funding of £6.1 billion of revenue and non-domestic rates to spend on delivering key services. So, this equates to an increase of an average of 4.3 per cent, or £253 million on a like-for-like basis, compared to the current year. We've, obviously, provided over £134 million in the settlement baseline to cover additional funding provided in-year for teachers' pay, pensions and other pay pressures. So, I think that's important to put on record. As an adjusted comparison, that's an increase to the settlement of an average of 7.2 per cent—so, notably better than the like-for-like increase suggests. But, as I say, that's not to suggest that local authorities will find it easy. I certainly know that they are still having to make some very difficult decisions because of the pressures. Something that has come up consistently with me and, I'm sure, all colleagues here, is the pressures they face particularly around social care and education, specifically around additional learning needs.

So, just to say that, after we've had 14 years of constrained public finance, it can't be turned around in just one year; it is going to take time to recover. Just to say also that, within my budget, there are specific funds to support corporate improvement. There's over £3 million to the Welsh Local Government Association for sector-led improvement in digital services to support councils to improve, and we're working with local government to strengthen the contribution that joint working and regional working can make.

And just in terms of considering new ways to address any future funding gaps, could you expand on that, please?

Yes, I think, as I said, there's the allocation around how local authorities can work together. I mentioned that we've got over £3 million for the WLGA for that sector-led improvement in digital services, and we're working with them in terms of joint and regional working—how that can make a difference. I don't know if there's anything Reg would also like to add.

Thank you, Cabinet Secretary. I think the local government financial regime in Wales is pretty well established and pretty familiar to everyone on the committee—it revolves around the revenue support grant, non-domestic rates and council tax. So, authorities have some ways, already, of raising additional income. They will also have the opportunity to raise income from fees and charges, and the auditor general did some work on that some years ago.

So, I think our concern around the fees and charges is that, while it is an alternative and an additional way of raising income, I think councils are acutely aware of the impact that raising additional income may have on some of those service users, who may not be wealthy enough to pay for them, or will actually constrain some of the ability to access those services. So, I think while there may be an opportunity through fees and charges, that is quite a finely balanced opportunity for councils and, ultimately, that needs to be for them to pick up and to deal with through their own budgeting and approval processes.

Okay. Could I ask you about any assessment you've done, Cabinet Secretary, on the unhypothecated elements of the provisional settlement and to what extent they would help reduce inequalities, particularly given the cost-of-living context that communities face? How confident can we be that, in terms of those unhypothecated elements, they will make a contribution to tackling inequality in Wales?

Yes, diolch, Cadeirydd, and thank you for that important question. As you know, our Welsh Government budget documentation does set out our high-level strategic impact assessment. That reflects the contribution that local government makes to universal services, and also those that are more closely tied to specific inequalities. There are also specific grants to local government, which more closely align to specific services to support specific groups.

In terms of core funding for local government, it's key that local government assess the decisions that they take on the use of unhypothecated funding on a range of factors, including the impact on inequalities through their impact assessments, and this would also include things such as gender, age and other protected characteristics. Local authorities are obviously governed by the Well-being of Future Generations (Wales) Act 2015, and the five ways of working and the well-being goals.

And just to say it's also probably worth noting that the funding formula used to distribute the funding is based on three main areas of need, and those are population, sparsity and deprivation, and the deprivation factors included in that will, obviously, reflect economic inequality factors.

Okay. Thank you for that, Cabinet Secretary. Moving on again, to general themes, really, and assessments that you may have made, in terms of the Welsh language, again, what assessment would have been made of the potential impact of spending allocations on the Welsh language and particularly regarding the requirement on local authorities to comply with Welsh language standards and their duty to promote the language in their own particular areas?

Again, it's for local authorities to assess their decisions as to the impact on the Welsh language. As you say, they are governed by the Welsh language standards that they need to follow. I know that local authorities will work closely with the Welsh Language Commissioner to improve areas where they can share good practice, and learning as well. And local authorities are of course responsible for Welsh language education, and I know that that's something that is developing as well.

Okay. Thanks for that. Finally from me, again sticking with the broader themes, across the Welsh Government there's an aim to tackle the nature emergency, so how does the provisional local government settlement take account of the need to do that—the biodiversity and nature emergency—and how does it reflect the objective for Wales to be net zero by 2050?

Diolch. Absolutely, I think local authorities are both key to and very much committed to these critical policies. I think most, if not all, local authorities have declared nature and climate emergencies, and they all would have action plans if they have done so. The unhypothecated nature of the local government revenue settlement is important because it allows each local authority to consider the issue as part of their ongoing service delivery, not separately, so general increases in revenue and capital are important to support their ability to build in decarbonisation or improved biodiversity into each of the services.

We have worked with local government specifically to support them in this. We've got a programme of delivery through the WLGA, which my budget funds—that's £0.3 million per year that supports the development of sharing expertise and builds capacity, and the partnership council oversees this work, which is driven by working groups led by senior local government officers. It focuses on the four key areas of climate change and adaptation, land use planning, transport procurement, and buildings. We've got some really good examples within local authorities, and perhaps Reg could give more specifics on those. One is the low-carbon heat grant, which provides funding to local authorities to upgrade buildings within their estate from fossil fuel heating to low-carbon heating systems, and we do actively share lessons learnt across all 22 local authorities where there are projects, and I think that Reg could perhaps touch on a couple of examples.

Yes, sure. Thank you, Cabinet Secretary. It might help if I just describe how the Welsh Government tries to work with local government to do exactly what the Cabinet Secretary has just said, and there's a group that is funded by us, but chaired by the WLGA, which brings together chief executives from across local government with the specific remit around decarbonising the local government estate and the local government activities. That covers four main areas, particularly buildings at the moment, but also—. I think Judith might have to remind me of the other three. But, essentially, this is actually a really powerful group that's delivered some very significant projects. Joint procurement of electric vehicles may sound like a fairly straightforward thing, but, actually, across the 14 local authorities who had to be brought together, developing that procurement, developing the contract meant that local authorities in Wales were able to buy vehicles more cheaply, and actually to access those vehicles much more quickly than they would have done if they were making a number of smaller purchases directly from the manufacturer. And again, those vehicles will deliver, I think, a significant saving in carbon dioxide. And that group is now looking at buildings and how to decarbonise the estate, and that will link into the additional £10 million that is included with the capital grants this year that will enable local authorities to bid for and secure funding to, as I say, decarbonise their estate.

I think there might be some examples that we can also share, videos that we might have if the committee's interested, just on good practice.

Okay, thank you very much. Carolyn.

And what about the biodiversity and nature emergencies?

Like I said, I think there's—

By decarbonisation, but—.

Yes, so, absolutely, we said most, if not all local authorities have declared that as an emergency and will all have their plans in place as well. But I think there are some good examples where, like I said, the videos might be useful to share with the committee, but I don't know if the group's touched on that in the same way.

Shall I just come back on the biodiversity question? I think the answer, from our perspective, is that these are really important issues that local authorities have identified for themselves, as the Cabinet Secretary said, by declaring their own nature emergency. We would expect those to be dealt with as part of normal policy development and service delivery, rather than us adding additional funding in for specific grants from this portfolio to do those things. We would, as I say, expect normal policy delivery and consultation with the public to deal with that. There will be other parts of Welsh Government that issue specific grants to local authorities. I'm afraid I can't quote what they are—

Such as the Local Places for Nature—

That's right, yes.

—which will go into local authorities and provide support for direct policy interventions or direct service delivery. But they wouldn't come from us, they would be in addition to the RSG.

It's just, in my experience, local government might talk about decarbonisation, and senior officials, but trying to get them to accept that there's a nature emergency and to incorporate that in all they do, whether it's planning, building and everything else, to support their more junior officers has been a bit of a hard win for me, so I just want to make sure that it's there, embedded in local government, as well as—. I'm on the Climate Change, Environment and Infrastructure Committee, and there is funding for Local Places for Nature through that portfolio that helps. Without that money, though, local authorities would not be able to afford to employ biodiversity officers, and so they made a plea that that money wasn't cut. It's been reduced slightly this year, and so I'm concerned about the viability of having those biodiversity officers. And I just know, like I said, we need to have it higher up as well, that buy-in to the nature emergency, if that's something you could bear in mind.

And I think, just when I'm speaking to—. Perhaps there's a way we can provide you, the committee, with some of the—. All the local authorities have declared—. I haven't seen that myself, so I'd be interested as well. But I think there are also opportunities, in that I meet one to one with local authority leaders, as well as meeting them as a group, and I'm very happy to raise that as well.

Thank you.

I've seen in my own area how important having a biodiversity officer is. It has made a difference to some of the really good examples that have happened. So, I know that those officers do really important work to raise the profile and to support local communities as well, and the local authority, with particular projects around the nature emergency.

I should have declared earlier on that I've been working on a project called It's for Them, working with local authorities regarding managing grass verges and amenity grass for nature, on behalf of Welsh Government, that portfolio. I should have declared that earlier, but I just wanted to raise the importance of buy-in from senior officers as well. Thank you.

Okay, Carolyn. That's on the record now, anyway. Peter.

Yes, just quickly, do the BREEAM standards still apply, or have you updated those for something that fits in to the aspirations for further carbon reduction and meeting the targets? I'm probably out of the loop a little bit on that now.

Judith.

So, that's a nice interesting, technical question. Thank you.

That's why I looked at Judith.

BREEAM standards are still there. If you look at the twenty-first century learning programme, there is a push to make new schools, and indeed major retrofits, net zero by operation and construction—

I see.

—which I don't believe is quite the same language as BREEAM. But you are taking me far outside my comfort zone—

No, no, that's okay. I know that when building twenty-first century schools, BREEAM was a significant driver to reach targets, and I'm conscious that targets have moved on and expectations are greater and perhaps a new set of criteria comes alongside funding requirements and things now, but, yes.

Perhaps we can provide the committee with a note on that, if that would be helpful.

Yes. I think it might be interesting.

Yes, that would be very good.

And from a biodiversity perspective, one way we could have helped was to have had a food Bill and local food plans to cut down the carbon footprint. [Laughter.] But that's a different story.

Yes, but we certainly need to do a lot on local food and food generally. There's a lot of progress that needs to be made, isn't there? Siân Gwenllian.

Thank you very much. In the meeting last week, we heard from council leaders about the problem that is being created because of the announcement about the increase in national insurance contributions. It creates a problem in terms of revenue, but also in terms of the uncertainty about what is going to happen. And, of course, local councils are major employers, aren't they, so one can imagine the size of the problem there. You have mentioned additional funding of £109 million to pay for the increase. Have you now been able to make an assessment in terms of how far that money will go? Have you spoken with the councils to see what the picture is from them? If so, is that money going to go far enough, and how are you going to determine how to allocate that £109 million out to the various county councils?

Diolch, Siân. Really important questions within that. Again, just to say that this is a UK Government decision around national insurance; it's not devolved. The UK Government has confirmed that it will provide funding to public sector employers to cover the increased costs of NI contributions. It's also confirmed to Welsh Government that we will be provided with our share of that funding to support the costs to the devolved public sector, and that funding will be over and above the money that came to Wales from the 30 October UK budget. We expect to receive the additional funding in late spring. We have not yet had confirmation of how much additional funding Wales will receive to support the additional costs to devolved public sector employers. We are continuing to work with the UK Government, Treasury and Treasury officials to clarify the details of that level of support. I don't know if anyone can say a little bit more about the officials' conversations—I'll bring Reg in in a second—but—

So, the figure of £109 million—

Yes.

—it's not confirmed.

So, if I may—

Yes. Sorry, Judith.

That's the estimate that we have of the cost of the NI change. So, it's not money we're providing, it's the estimate of the cost. We need to be clear about that, because that sets the ability of us and local authorities to plan, when you understand the scale.

So, the £109 million is based on figures that you've had back from the councils—

Yes.

Yes.

—showing how much the increase is going to—. So, there's absolutely no talk of UK Government providing that £109 million, which is a little bit of a—. I think the Welsh Local Government Association, we heard, were under the impression that this money was going to come and that it was £109 million. So, you're saying today that that is not the picture.

No, I wouldn't do that; I would never get out of the building alive. [Laughter.] So, as the Cabinet Secretary said, UK Government has said that funding will come to Welsh Government to fund the costs. The discussions are still ongoing about what that actual sum is. Welsh Government and the Cabinet Secretary have said that when we get the money, we will give it out to the public sector bodies.

Okay. What formula are you going to use to allocate that money out to the bodies, if that money does come and if it is sufficient?

Absolutely. I think that's a really important point, as well, how that's distributed, and perhaps Judith will say a bit more about the funding distribution group and the finance group and how that’ll be formulated, because I think it is important that what money we do have is allocated in the fairest way, isn’t it?

It is. It’s a good point. We haven’t made a decision on that yet, we haven’t had the formal consultations through distribution sub-group and the finance sub-group yet. We’ve had informal discussions with local authority finance directors to make sure that we can think about different options. There are clearly options to just use the standard local government funding formula, because that takes account of the different pressures, but equally there might be other aspects that we ought to think about, because some local authorities will have more of their services provided by directly employed staff and others will have more provided by externally employed staff. So, we’re very much aware of that.

In England, they have just announced that they’re going to do it by reference to an individual local authority’s share of the overall revenue expenditure, so it’s just in proportion to how much you spend. That might be an option in Wales as well, but we need to model it through. We haven’t modelled it until we’ve had more clarity on the number, the actual amount we’re getting, but we could. And, as soon as we get perhaps breathing space, we might do it on a range of numbers just so that we and local government can get a sense of the implications.

And I think that’s an important point, those discussions being had with local government and within those forums. It’s important to model and make sure that we get it right.

Thank you for some clarity on that. It'll be spring, you say, before we know for sure how much money will be available. So, in the meantime, can you give an estimate of a minimum assumption to the councils, so that they can at least work it into their budgets as they make their plans at the moment, for them to be able to know what the impact on their revenue will be and what level of cuts they might have to make in order to be able to pay this additional amount of money?

So, the planning assumptions is what I'm after.

Just to say, it's late spring. It's one of these terms isn't it, 'late spring', but I do understand and we are obviously—. You know, this is a decision that’s not within us at the moment, for us to do that. But, as I said, the number that we’re working off in terms of that £109 million is that data from local government. I do understand that local government would be very eager, completely, to understand the position. All I can say is, once we know, we will share that. I don’t know if Reg wants to follow on.

I’ve nothing to add, really. I think we are entirely dependent on the negotiations between the Cabinet Secretary for finance and the UK Treasury, and those negotiations are ongoing.

I would push back and say that you can make assumptions based on the £109 million, and the modelling.

I would say that we have probably a reasonable set of assumptions, which is the £109 million, and that would enable councils to at least begin thinking about what their budgets might look like. The reality of the allocation from Treasury has yet to be determined.

Okay. A further question, of course, exists in terms of—. That £109 million relates to people who are employed directly by local authorities. We're not talking here about the impact on the third sector, for example, and the work that is outsourced, which of course is going to put further pressure on local government budgets. For example, I've spoken with three councils and they vary, of course, in terms of their size, but one council said that this will cost an additional £2 million in terms of internal salaries, but £2.5 million in terms of the work that is commissioned. Another council said £5.4 million for the internal, £2.8 million for the work that is outsourced. Another said £8 million internal, and £3 million for the outsourced work. So, there is a lot of work that is commissioned beyond the local authorities themselves, and there is no mention of any support for local authorities in terms of paying this contribution through the work that they commission. Is that the picture?

Thank you, Siân. This is something that comes up in my conversations with local authorities as well. The UK Government has said it will use the ONS definition of public sector, and we certainly recognise organisations and businesses commissioned by public sector to provide services, and third sector organisations, are understandably concerned about the impact of the changes to employer national insurance contributions. Just as an aside, the UK Government analysis does show that more than half of employers with NI contribution liabilities will either see no change or will gain overall in 2025. But I would say that the third sector in Wales does provide crucial services to communities and people in most need of support. We've committed to a three-year funding agreement for the third sector, but I very much understand the concerns of the third sector.

All right, Siân? Oh, Peter, sorry. Peter.

Thanks. Just on that theme, we heard very clearly from Wrexham, I think, last week, how about 80 per cent of their domiciliary care is purchased from outside, and, ultimately, whilst their costs might be covered, they will end up picking up the cost of the supplier, and it will come back through. So, have we got a case here that, actually, if national insurance isn't fully covered for direct employees and those associated businesses, we're going to end up taking away all of the cash increase that this new budget, this better budget, is going to give to service that one element? That looks like the reality of things unless we see the money coming down the corridor.

Yes, I'd just say that I understand that Wrexham gave that evidence and the concern that they would have in that, but just to say as well that the conversations are ongoing at official level with the Cabinet Secretary for finance here and his Treasury officials. Reg.

I was just going to say, for the assurance of Members, this is an issue that the Cabinet Secretary for finance is extremely aware of, and forms part of those ongoing discussions with Treasury. We do have a clear perspective from the UK Government, but that hasn't prevented the Cabinet Secretary for finance raising very directly some of those additional issues. So, we do know.

And I think, as an example, when Wrexham have raised that with the committee, and when it's raised with me, I'm really keen not to sit on that evidence as well, and to share that with the Cabinet Secretary for finance, because I think that just having some of the examples is helpful in his discussions, I'm sure, with UK Government officials as well. So, I think that would be helpful, and I'm very happy to share that with him as well.

Okay. Carolyn.

Regarding local authority pressures and resilience, the WLGA told the committee that funding pressures are a dynamic and changing situation, that the financial challenges are an accumulation of 14 years of austerity and cuts and inflationary pressures, but also that, despite a better than expected uplift, challenges not only persist but are increasing, particularly in relation to homelessness and children's care. So, could I ask you how do you believe the provisional local government settlement might mitigate the impact of those pressures on local services?

Diolch, Carolyn. I think the WLGA have been really clear and effective in setting out the pressures they're facing. I'd just like to put on record my thanks to them, and to all local authority leaders, for the discussions that we've had through the process as well, and I know that officials have had through the finance sub-group and the regular meetings that we have. I think it's really important that that conversation happens, so I do understand the pressures that they face.

When we look back, we've had increases over the last few years of an average of 9.4 per cent in 2022-23, 7.9 per cent of 2023-24, and 3.3 per cent last year, and obviously in normal circumstances they would be seen as really good settlements, but we've seen significant pressures over the last few years, following on challenges through Brexit, inflationary pressures, COVID—we know there are a lot of pressures that have been faced over the last few years. And as I said, I know the particular pressure points local authorities face over social care and education, but particularly additional learning needs, and, I would say, homelessness as well. We can't do everything in this budget that we would like to. One budget isn't going to change everything. They say one swallow doesn't make a summer, and there certainly is that, but it is a better start. I think the work that local authorities are still doing on transforming services is really important, and we've seen some of that language coming through consultations that local authorities are having, setting their own budgets at the moment. But they are still going to have to make some really difficult decisions whilst they are looking at how they can also transform services in the future. I'd also like to perhaps put on record that the draft settlement package also includes additional funding outside the settlement in the form of an estimated funding of almost £1.1 billion in specific revenue grants and over £1 billion capital grants in 2025-26. So that's in addition to, obviously, our specific RSG.

Have they got an indicative budget of those extra grants? Have they had that, or when will they know when that funding will be coming through?

Judith, on this one.

That's provided in the settlement information that goes out to every local authority at a Wales level. So, most of them will have a pretty good idea of what likely share of most of those grants they will get.

Okay. That just helps with their planning this year.

It does.

Yes, absolutely.

I am concerned that, because of the in-year struggle of funding, a lot have used their reserves up, and when, according to the formula, some get more funding year upon year and some get less, at the lower end, each year, it feels like the resilience isn't there, because each year some might get more and others get less. So, you look at the reserves and it varies quite a lot now. I think one authority's got reserves of £6 million, another £250 million. So, if they need to use funding to borrow for capital projects such as highway maintenance, that pot isn't there for the authority. If they haven't got that capital, those reserves or the funding available to borrow, how can we help them? And are you looking at having a funding floor, because so many are on that level, a really low level now, no reserves left? I know a lot used the reserves last year to help them through, and they were talking about bankruptcy and issuing section 114 notices, so—.

So, yes, there's a lot within that, Carolyn.

I know.

No, absolutely. So, just to say, in terms of the reserves, you are right that we are seeing a decrease in the number of usable reserves. That's a decrease of usable reserves of around £170 million in the previous year. So, the biggest falls are in school reserves and earmarked reserves. I don't know if Judith wants to go into any more about reserves, but obviously some of the reserves are classified as usable and are capital and therefore can't be spent on revenue, but obviously what you've described is revenue, capital releasing revenue. Others are school reserves or housing revenue accounts.

So, just to say there's no link that we've found between those with a higher level of settlement increase and the level of usable reserves, on that point. And in terms of the position that you mentioned on the funding floor, again, this is something that I've heard from local authority leaders across Wales, and there is quite a difference within the formula, isn't there? We say that there's an average of 4.3 per cent. Obviously, there are people above it and people quite a way below that. So, a funding floor is usually considered in any year at the change in allocation, but I think, given the range of increases, the Government is open to considering providing an additional funding floor at the final budget. So, it is something we are considering, something that I'm very mindful of, but, obviously, we're in this situation at the moment where we are looking at that but nothing can be confirmed at the moment.

Carolyn, could I—

Sorry, I haven't answered—

—just bring Peter in in a moment and then perhaps—

I was just going to ask about the shift in the table.

Yes, I was going to—.

So, we've heard there's been a shift in the table of how much they received previously, so that uplift might not be as much as was expected.

So, I think there was a very minor change, wasn't there, and I don't know if Judith wants to just mention how there was a minor—. I think it's quite a minor change.

It is.

It hasn't really changed a huge amount in the table, particularly, but Judith—

Could I just bring Peter in quickly on the back of that point? Peter.

Yes, and thanks for raising it, Carolyn, because one of the—. I'll just touch on that point first before we move on. Whilst we recognise the actual amount of money that is flowing through to authorities may not change through this adjustment, there clearly has been a misinterpretation of the level of increases for authorities. So, we know that the actual figures now demonstrate that, for instance, Monmouthshire, still at the bottom of the 22, has reduced in real terms from 2.8 per cent to 2.6 per cent; 2.6 per cent is the real position, whereas 2.8 per cent was consulted on. So, it actually widens the gap, the real gap, between Newport at 5.6 per cent and Monmouth at 2.6 per cent, which actually strengthens the need to reconsider that floor, because it actually gives the true position. I really do encourage the Cabinet Secretary and the Cabinet Secretary for finance to really consider that, because that's quite a significant difference, which has just altered a little bit. Now, that may be in real terms, in cash terms—. Well, we know that the money's the same, but it actually demonstrates—. It gives a better perspective of the breadth of difference that needs to be adjusted, and I think that can only happen through a floor.

But it also identifies another worrying trend around the funding formula and how—. It would be a question I would have come on to later about, actually: should we be reviewing this? Are some of the things in the formula now slightly out of date? Do they need relooking at regarding sparsity, rurality and things like that, where we can suddenly see a bit more of a levelling up, so that reserves situation doesn't continue where we see some authorities reducing their quality of service and the level of reserves, whilst others manage to maintain quality services and increase reserves? There's something fundamentally wrong with a system that enables that to go on, and a key part of that must be something to do with the funding formula, many of us would suggest.

Another point, and then I'll shut up, about reserves, and I know I've spoken to all of you in the past or past lives about reserves, because I think the Government—. Whilst at the moment the usable reserves probably stand at somewhere near £2 billion across the whole of the local government family, we know that has reduced a little bit; as we said, £100-and-something million could overlap a couple of years. That doesn't disguise the fact that there is a lot of usable reserves there, a lot of reserves that are identified for, quite rightly, specific earmarks, are earmarked. But I know that one thing I've encouraged Cabinet Ministers in the past to do is to make some assessment of earmarked reserves to check that they are being utilised. Otherwise, that money should be mobilised in a different way, and perhaps revenue support grants altered to recognise that some have more fat than others, even it is for a short-term period.

Just before we come back to you and your officials, Cabinet Secretary, Siân Gwenllian.

Could I just add comments relating to that floor to put it on the record that we would also call for setting a floor again this year? I also think that it's time to look at the formula, because there is a trend starting to appear now. If the formula was okay, we wouldn't need a floor, necessarily. What's happening is that there is a tendency that it's the same ones, the same county councils, that are at the bottom of the table, and it's the same ones that are at the top of the table. So, it needs to be looked at. And I think that the attitude that older people are not—. When you have a county council that has a high proportion of older people, and therefore the expenditure is higher, that isn't necessarily, as things are at the moment, reflected sufficiently in the formula. And I think, because that is becoming an increasingly important factor within our society, that it's now time to think about that. I just wanted to put that on the record.

Diolch. Cabinet Secretary.

Diolch. Thank you. Obviously, there's a range of questions here, but they're all touching on the same themes, really, aren't they? Just again to say on record here in committee, given the range of the increases this year in the funding formula and the allocation, I and my Cabinet colleagues are open to considering providing additional floor funding at the final budget. So, I have heard what people have said, and I'm very much aware of that. The other point I wanted to make was in regard to Peter's point: it is really important that we recognise that it's good practice for local authorities to regularly review earmarked reserves, to release any or repurpose any that are no longer required. I think that is something that we need to recognise. It's good practice for local authorities to do that.

I'll bring Reg and Judith back in, because I'm sure both Reg and Judith have probably heard the funding formula discussion more times than I have, and many more times than all of us here have. But I do understand how complex the funding formula is. I know this committee in the past has had sessions around the complexity of the funding formula and presentations. I think the key point is that the funding formula continues to be kept under review, on an annual basis, by the distribution sub-group. It is important that that is remembered. The fundamental principle of the formula is that funding is distributed according to relative need, and the largest drivers of service expenditure are population levels, deprivation levels and sparsity. I will perhaps bring in Judith first on the formula, and then I'll come back to Reg more generally.

Thank you. The Cabinet Secretary is right—we review it each year. But I think it's also important to stress that, with the census 2021 data coming out, and not the concern but the rightful challenge, because we do want to get the formula right, as right as it can be—perfection is probably impossible—. So, we are doing work through the DSG and the finance sub-group to review, in particular, the deprivation and sparsity, and to check the weightings that we use for those things in each formula. The trouble is, we have to do that for each block of the formula separately, and it is not straightforward or quick, not least because you then have to break it down to quite small geographical units in order to be able to assess the sparsity element.

We've done some work. We used the nursery and primary school block as the starting point, because you have that data at a small geographical level being collected anyway, so it's not a burden. We've done that work. On the basis of that, it did shift resources around. What we're conscious of, though, is that, when you apply that to all the other different blocks, they may shift resources around in a different way entirely. So, the finance sub-group agreed that it would be preferable to apply all the changes in one go, and that means we have to do all the work before we can see the whole impact. That work is under way. As I said, it's not as quick to do as you might hope, and it's not as fast, I know, as local government want, and we're trying to accelerate progress on that, including getting some additional statistical expertise in the team, to try and move it on a bit faster.

Are we confident that, if that froze up, it may be needed? Because it looks like there is some tweaking that can be done. Are we confident that the forum would commission that work to go ahead? Because, obviously, it's done in partnership with the Government and leaders, and some leaders—. You know, I've said this many times, turkeys don't vote for Christmas.

I don't know if that's a nasty question to ask.

I think it's important that we do the work with local government, and I think that this is an area that is complex. Even when we're talking about older populations, we've got to recognise there are differences within that as well, because some might need—. In, perhaps, certain areas, in deprived areas, you might have people needing social care at an early age because of health inequalities, but you might find that those people might have a stronger family network around them. Whereas you might find older people moving into some of our very beautiful parts of Wales who perhaps need care at a later age—you know, perhaps more complex, they perhaps have the means to pay, sometimes, but they don't have that support network around them. So, there is some complexity, even when we are talking about things like older age. And there are, within that, in the depths and the weeds of this whole formula, ways to try to consider different factors, to make sure that the care needs of people are met within that formula. But it is complex. I know it's not the first time everybody's spoken about it; I'm sure it won't be the last time. I do very much recognise the way the population is changing within Wales as well, and I think we have to be cognisant of that.

It's good the work is going on.

Yes, absolutely. Judith's very much at the heart of that and goes to many meetings around it.

And if I may, I would note that, actually, local government in this area has been, in the past, very open to making those changes, even when they were to the detriment of individual authorities. Another reason for doing it all in one go is that you can then phase the impact in order to make it manageable, and it will be a different impact in a year with more money than less.

As a past leader of a group and the council, I always struggled with that willingness among certain groups. We couldn't quite get consensus, hence we didn't accelerate this too far.

So, we will see what transpires in due course, Peter.

Could I just bring Reg back in on the more general points? I think you wanted to come in on those.

Thank you, Cabinet Secretary. I would just remind all Members that, of course, the formula just distributes a sum. So, the bigger the sum that we have, the better for everybody, and the higher the increase at the lower end of the scale, as well as the upper end of the scale. So, we are constrained by that as a starting point. I suppose the second issue about the formula is it is relative. So, while the populations, for example, in one authority may be going up, if they are going up faster in another authority, then the formula will be taking into account the additional growth, if you see what I mean. And then the last point is that the formula isn't static. More than 80 per cent of the data that drive that formula are updated every year. We accept that some data aren't updated—and Judith and local government are working on that—but it is a constantly changing and evolving formula. Personally, having seen quite a lot of examples of collaborative working between the Welsh Government and local government, I think this is a really good and sustained piece of activity, although I really do understand that the outcome of that may not be great for everybody.

I remember one year, Reg, when an extra element was put in for sparsity for a couple of years, and it made a dramatic effect and made it a lot fairer, just with that one little tweak around sparsity. So, there are many things that can happen.

Like I say, I'm sure that discussion within the group will continue. Sorry, Chair, Carolyn had a question at the end of that, just around the section 114 notices, and I think perhaps it's important to respond to that. Just to say that local authorities are obviously keeping their budgets under constant review and, as I've said throughout, I do recognise how challenging it has been and continues to be for local authorities. No local authority in Wales has had a section 114 notice and, obviously, that's in stark contrast to the position in England. And no council will be actively planning to issue a section 114 notice. There are very serious implications to that. And just to say that my officials have met with the WLGA and Audit Wales as a group to bring together a protocol on financial resilience that sets out responsibilities and support available. Because, obviously, what we would want to do in Wales is to make sure we're having the conversations very much in advance of any difficulties that local authorities are facing, because we do have that good relationship. But that work on the protocol is under way, and that's continuing. I don't know if you want to mention anything about the protocol or the work you're doing on that, or that it's been—

We have got limited time, I'm afraid, Cabinet Secretary.

Oh, sorry. The work is ongoing, anyway, Cadeirydd.

Perhaps if you want to add anything, including it in a note to the committee would be good.

I'm sure there would be a way to note that when the protocol with local government is complete.

Okay, thanks very much. We haven't got a great deal of time left, Carolyn. Is there anything else you wanted to raise?

It's just a concern regarding workforce as well. They've lost 40 per cent, haven't they, since 2010, so resilience of the workforce was an issue that we wanted to raise with you, going forward.

I completely understand that. Staff costs are a high proportion of the total costs for local authorities. Many authorities are managing vacancies as a way of managing budgets. We have provided £52.3 million in 2024-25 as additional funding to support pressures, especially those driven by the higher than expected pay rise, and this funding then is baselined into the 2025-26 settlement. I think you may have all seen that other table then. So, that's additional funding to meet the higher than expected teacher pay agreement and the impact of the superannuation contributions adjusted for past experience pension costs. Again, as I say, they're both baselined into that 2025-26 settlement, included before the average 4.3 per cent. But we absolutely know that authorities are—. This is something that they raise, and the work around how local authorities work together, I think, is important. There are some really good examples around Wales where local authorities are doing that. And, obviously, there's potential around our corporate joint committees as well.

It's been raised about best practice and working together, but also, do you have conversations regarding health as well? Because there's a battle of budgets all the time, isn't there, regarding transfers to social care. It was raised that even for exercise referral schemes, funding hasn't increased in three years via local authorities, which help keep leisure centres open.

I think there's always a challenge, isn't there, when you're looking at budgets, and how the different pressures affect. As I was able to say in the earlier session today around the increase to adaptations grants, which I think is really important, I've been very keen to put some investment into it, because that really does have a knock-on effect in terms of health, doesn't it? I think it's recognising the impacts of different budgets as well. I very much understand the pressures within local authorities, but I think, where there are opportunities to work together, I'm really keen to help showcase some of those as well.

Okay, thank you.

If we move on to Lee Waters, Cabinet Secretary. I think we have some questions in terms of that joint working and longer and medium-term planning.

We had quite an interesting exchange with the WLGA last week, and one of the striking answers was on, realistically, their ability to plan for the medium to long term. And the response from Councillor Jane Gebbie was, 'We are plucking them out of the air and reading the tea leaves.' I thought that was a commendably frank response. What are your reflections on, given the constraints and the limits to the information that you all have, how the medium to longer term projections and planning you're doing have any real meaning? And what can you do to make some attempt to bring some purpose to them?

Yes, absolutely, and, obviously, we heard the reflections as well, and it’s very stark. You’ll understand that we’ve given as much stability as we can within what we’re able to do, based on the stability that we have as a Government, and I’m very aware of that. I think it’s positive that the UK Government want to move to multi-year settlements, which will be obviously important for us, but the knock-on effect will be that we’ll able to provide that to local authorities as well, because I do recognise that it’s important that we have that longer term certainty. And I know that’s only going to be an extra three years, but I think that it’s a better situation than we have had, and it gives us something to build on.

I think, again, those conversations and that engagement is really important with local authority leaders and Cabinet colleagues as well. And we also have those regional structures that are available as well, such as the corporate joint committees. And I think that’s going to be a way of sharing that capability, and I think it’s really going to be important in the future to look through CJCs and what they can actually achieve.

But all those were known to Jane Gebbie last week, and she still says that they’re reading the tea leaves, so that doesn’t really engage with the question.

Yes, I think, as I said, it’s very difficult to answer—

It is difficult. Well, that’s the premise of the question—it is difficult.

It is, yes.

So, given that it’s difficult, do we just simply say, ‘Well, we can’t do it’, or are there some no-regrets measures we can do with local authorities to have at least some basis for planning?

I think there’s hope that there will be that basis for planning in future years. So, I can say that. And I do recognise the challenge for them. But, again, we’re working with what can we do, and how Welsh Government works within our constraints is the same as local authorities have to do as well. And, as I say, I recognise the challenge that Councillor Gebbie is saying about reading the tea leaves, and that’s been incredibly difficult for local authorities, but we’re only able to offer what we can.

No, I understand that. I wonder if, at official level, there are things that you’re thinking about in this space, given all the limitations the Minister rightly identifies.

I think we are equally as frustrated as local government that we have not had any degree of financial forward-look that we can work with. I think the best answer I can give you is that it is very difficult. We have tried working with the WLGA to sort of look at some scenarios, but, actually, the risk to us, the risk to local government, is to set out or agree on a set of assumptions on which to plan, because you need assumptions on which to plan. And if you’re recruiting staff or retaining staff, or you’re making investments where you’re putting money into reserves, and those assumptions turn out not to be right, decisions by the UK Treasury—and we’ve seen some quite significantly different decisions by the UK Treasury over the last few years—will change our financial envelope, and change that very quickly.

But given most of the pressures that they have described, certainly in terms of overspend coming from social care and education, is there at least work on demographic trends that you can do, in terms of the assumptions of the pressures? I accept, in terms of income, that you’ve got no visibility.

Sorry, I was thinking about financial planning. But I think, in terms of service planning, I’m pretty confident, although—

That is part of financial planning, isn't it? Cost pressures are.

Yes, it is, but our colleagues in the policy departments—so, in social care, and certainly in education—will be working with local government to assess those demand pressures, to think about policies, and how they might be met and managed in the future. I don’t have direct contact with those—I talk to colleagues, obviously—but that work is going on in other parts of Welsh Government with local authorities.

Isn’t part of the problem, in terms of part of the planning being about pooling services, working on prevention, securing economies of scale, and given that you have essentially taken away as much hypothecation as you can to give greater flexibility to local authorities to spend the RSG as they like, that you can’t then have much say on them spending things on specific things like prevention, for example?

Well—

You’ve given away your levers to plan.

Well, I think that, in terms of having that unhypothecated funding, it gives that flexibility to local authorities to respond to the needs of their population. As you say, there will be different pressures, perhaps, or similar pressures but to different extents in different areas, and I think that that is something that local authorities have made clear to us, around how they're able to design services. But there isn't really a clear line between statutory and non-statutory functions, is there? And I think when we're talking about services and what people—

Well, there is. One's statutory and one's non-statutory. There's quite a clear line.

No, but in terms of what people expect. If somebody has a particular care issue, there's a difference between what they can expect. We need to deal with that person's issue. And I think that we just have to be very clear that it is a difficult balance to strike. But this is something that local authorities have asked. We are working—

Sure. I understand that, but the point I'm trying to make is that you have, therefore—in that trade-off, you have given up the levers you have to ensure any strategic thinking. [Interruption.] Peter Fox is saying that that's subsidiarity, yes, it is, but if we're looking at longer term planning—. So, for example, the WLGA have said to us that they can only fund work on prevention if there's specific funding for prevention, but any specific funding for prevention would have come within the settlement, which you've now given up because you've said that there's not going to be hypothecation. So, you can't have it both ways. So, that's the problem. As you described at the beginning, you have very little visibility about the income coming in, you've just said that your ability to plan demographic trends isn't joined up because you said you weren't talking to your colleagues about it, and in terms of those pots that you had to get collaboration, or get long-term planning or get prevention work, you've surrendered quite a lot of them in the name of flexibility. So, I understand the trade-off, but you have surrendered quite a bit in your ability to have some resilience in the sector, haven't you?

We still give out £1.1 billion in hypothecated grants. So, that's a sixth of the money that we provide to local government. So, there are still quite a lot of those policy levers, those financial levers that are present in each of the policy areas. I think that the discussion that you raise about hypothecating or not is a constant discussion that we've been having with local government, and we continue to have it because we have a piece of work about reducing the administrative burden, which is focused on finding the right balance between ministerial grants and local government flexibility. And I think that we are in a position at the moment where local government, including the WLGA—principally the WLGA—is making a very powerful case for increasing the amount of unhypothecated money that we give out to local government. Their argument is that they can actually plan better for that money, they can combine that money, and they can use it more flexibly over a number of things, and I would argue including prevention, which is an integral part of service delivery, rather than a separate identifiable thing.

Except that their evidence to us is that, without targeted resources earmarked for prevention, they're unlikely to achieve the radical step-change required. So, they're saying—they're facing both ways here, aren't they? So, it's a genuine dilemma, I understand the trade-off, my question is—. The reality is that they are facing short-term pressures and they're in an impossible bind. You, not least under the Well-being of Future Generations (Wales) Act 2015, have a responsibility to think beyond the short term, and given that you have surrendered quite a lot of levers, I'm wondering what is left for you. What is left in that toolkit for you to ensure that there is a more strategic approach for the medium to longer term? I've not heard an answer to that.

I think Reg has said about the grants that go out in addition to that, and I think that that does give us that lever as well. We're also in conversations with local government. They tell us some of the pressures. We've got something here from the WLGA, but it's about how we can work together, isn't it, through these difficult times in terms of the financial challenges that we've had over a number of years now. You know, I think—

I understand that, but it doesn't answer the question.

No, but I'm not quite sure what you want from that question, then, in terms of what you could suggest that would improve that, apart from taking—

Well, I think my suggestion is, if we are serious about preventative work and collaboration, there do need to be dedicated streams of work for that and the NHS needs to be both carrot and stick to encourage local authorities to do that. My question is: what are those?

Well, like I say, I think there's nothing really much to add now onto that, because we do understand that—we hear from local authorities what they think works best for them, and how they can respond to those needs of their population. Those discussions go on, and absolutely they have responsibilities under the well-being of future generations Act as well, and that goes back into impact assessments as well.

If it would help, I'm fairly confident that there are pieces of work going on across other parts of Welsh Government that are doing exactly what you would say: engaging with local government, trying to map service demand, trying to develop policy solutions and trying to work out the costs of implementing those. And we can provide the committee with some examples of them. I think your point about how is all of that brought together in a single vision for the public sector or for local government as a whole is a good one, and that is something we probably need to focus on a bit more. And actually, I'm very optimistic that a three-year settlement, for the first time in many years, will provide us with the opportunity to do that.

Okay. Thank you.

Okay, thank you very much. And finally, Peter, although we may have covered some—

Yes, I think we've covered an awful lot in an earlier session, but perhaps just to explore on capital, if we may, and our ability for borrowing and the like. I just wonder, Cabinet Secretary, if you could expand on the allocation of the £200 million in general capital funding and whether the increase is sufficient, bearing in mind that the core capital funding has not kept up with inflation. And we were only talking in an earlier session about the cost of housing and different things, and that applies to, obviously, local government infrastructures as well, so I don't know if you have any views on that.

Thank you, Peter. Yes, general capital funding is increasing by £20 million to £200 million to support the inflationary cost pressures and to give more flexibility to authorities in financing smaller capital projects, refurbishment schemes and schemes such as the important disabled facilities grants. I know we've had to decrease capital funding a few years ago, but we have reinstated and increased that level of unhypothecated grant over the past few years just to try to give that bit of extra flexibility and to respond to those inflationary cost pressures as well.

The general capital grant is just one element of the capital funding that local authorities have to fund capital projects. Alongside the provisional settlement, we announced, as I said, £1 billion of specific grants. Authorities are also able to borrow within their prudential limits, and they will be balancing their investment needs with the revenue implications of borrowing.

Also, we're able to increase the funding to enable authorities to respond to our joint prioritisation of decarbonisation through the low-carbon heat grant—£30 million. And, again, we've had some really excellent examples where this funding could be used as stand-alone projects or as part of wider capital programmes, and perhaps that is something else we can share with the committee—some of those examples.

Yes, thanks for that. If we go back to that stark reality between those who have got and those who haven't got, obviously revenue to service prudential borrowing is going to be difficult. And I don't know what your assessment is on the current levels. Is that going to enable a postcode lottery of improvement in capital infrastructure—roads and things? Now, I know that the Cabinet Secretary for finance has talked about underwriting £5 million-worth of revenue to service borrowing, which is about £60 million borrowing, I suppose, a year. I don't know if that's for 25 years—I'm assuming it probably is. And that's a good thing, but then there are questions around that: how will that be allocated? Will that be allocated on a needs base, like Powys, which has got an awful lot more roads and pavements than perhaps somewhere else, and do they get a fair crack of the whip, or is it going to be allocated or distributed on a formula-type basis? So, yes, some thoughts on the resilience for councils to actually use their borrowing power, which is a massive tool for them, and how are we going to allocate that £5 million.

Yes, just to say, I think this is something that has been welcomed by local authorities and I think it'll help them to finance around £60 million of capital funding, particularly on highways management and fixing our roads. Reg or Judith will tell you about how that will be distributed.

So, I fear I will not tell you, because we haven't decided yet, and this is currently being regarded as a transport portfolio issue. But when we've done it in the past, we have done it through the local government capital formula, and as you say, that therefore takes account of the fact that Powys has a very different set of metrics than Rhondda Cynon Taf or Torfaen.

So, it's that mix of all councils have got a fair crack at the whip of addressing their relative need. That's quite important.

And perhaps that's something we can follow up with the Cabinet Secretary about how that will be distributed, just to confirm with you as well.

One last point, Chair, if I could, and that was just—. We've heard that some councils are talking about retaining NDR rates, or a bigger portion of NDR rates, and especially those around city and growth deal areas. I wonder what your perspective might be on that, recognising the consequential effect on those poorer councils that might not be able to generate NDR.

So, rates retention is currently only applicable to the Swansea bay growth deal, as no other city or growth deals requested rates retention as part of their economic growth plan—just to make sure that's clear. So, the rates retention arrangement agreed with Swansea bay growth deal only applies to a small number of defined projects. Reg, do you want to—.

Yes. Retaining NDR is quite a new thing for Wales. I think it's much more common in England. Our current approach does restrict the ability to retain NDR to a particular set of circumstances; that would be the growth deals, and I think there are some issues for investment zones and maybe free ports as well.

The conditions about retaining those rates are that they have to be new and they have to be the direct result of the investment in the projects, so the agreed projects between the growth deal or the investment zone and Welsh Government. We have an income to local government of well over £1 billion of non-domestic rates every year, so it's a very significant amount of income. So far, the Swansea deal, which the Cabinet Secretary has talked about, involves retaining about £286,000. So, at the current stage, and I think for the foreseeable future, for the immediate term, the cash amounts that will be retained by these deals or these arrangements are likely to be very small in comparison to the overall budget, and as a consequence, the impact on those authorities that aren't able to generate their own non-domestic rates, which therefore benefit from the pooling arrangement, is likely to be marginal, if they notice it at all.

Yes, and it's not that Swansea bay is indicating a wider shift to adopt this more often. If an authority or an investment area or an authority had a great idea for expansion, you're not looking to roll this out. This is—

Well, it is a facility that would be available to the growth deals, the investment zones and, I think, free ports, but only in a specific set of circumstances, and as a result of an agreed set of projects that will generate new—particularly, yes—new non-domestic rates.

They have to be outcomes and outputs that trade off.

Yes, it would all be part of a wider process.

Thank you.

Siân.

Yes, this is a development that we need to keep an eye on, I think, because okay, the figure isn't high at the moment, and we're talking about one specific area, but the principle is an important one, I think, and it's one that perhaps we would ask the Cabinet Secretary to consider, in terms of this principle, therefore. Is this something that we would like to see developing in the future or is it not?

I have a specific opinion on this. I wouldn't think that it is a principle that we would want to see spreading across Wales, because it emanates in the first instance from a way of doing economic development that is not a way that is compatible, perhaps, with what we would like to do in Wales. It is an economic development plan that has been imposed upon us to a great extent by the previous UK Government, and the entire way that this economic development takes place is incompatible, I think, with our aspirations as a nation.

Then if, within that project, we also allow those areas that are seeing that growth to retain that money, we are therefore adding to the problem of polarisation between the poorest areas in Wales and those areas where there is more prosperity. So, just in terms of establishing a principle here, I think it is important that that should be considered.

Is this facility, is this ability a devolved power, therefore, is it?

Yes.

Yes, and I think, as I say, this is something we do need to—. You've put the arguments there around that as well, and just how we can be aware of this for the future. We'll keep a very close eye on it.

Okay, diolch yn fawr, Cabinet Secretary. Diolch yn fawr to your officials as well. Thank you all very much for coming in to give evidence to committee this morning. It is still just about this morning, and thanks for remaining with us beyond the allotted time. You will be sent a transcript again, obviously, to check for factual accuracy.

Diolch, Cadeirydd, and nice to see you all. Thank you very much.

Diolch yn fawr.

Our next item is item 4, papers to note. We have a letter from Cymorth Cymru, a letter from Llamau and a letter from the Chair of the Climate Change, Environment and Infrastructure Committee, all relating to the Welsh Government's draft budget for the forthcoming financial year. And also a response from Welsh Government to our report on social housing supply. Is committee content to note those papers? Thank you very much.

Item 5 is a motion under Standing Order 17.42 to resolve to exclude the public from the remainder of the meeting and for the meetings on 30 January and 5 February. Is committee content so to do? I see that you are and we will move to private session. Thank you very much.