Finance Committee

And we'll move now on to our third item this morning, which is our second evidence session on the draft budget. We've got representatives here from the Office for Budget Responsibility. I'd like to start by asking the three of you to introduce yourselves. Please, if we could start with Richard.

Good morning. I'm Richard Hughes, chair of the OBR.

Thank you very much.

Good morning. Tom Josephs, I'm a member of the budget responsibility committee. I lead on the fiscal analysis that we produce.

Fantastic. And we've got Professor David online. If you could introduce yourself as well, please.

I'm Professor David Miles and I take the lead on economic analysis at the OBR. Apologies for not being able to be there this morning; I'm in New South Wales, as opposed to old south Wales. [Laughter.]

We were debating this earlier and saying you might be one of the furthest evidence sessions that we've ever had, so you're holding the record at the moment, especially in this committee. So, welcome, and hopefully the jet lag won't be too bad.

Thank you very much for making the time to come and see us this morning. We'd like to start by examining the impact of national insurance contribution increases, the increases in Welsh rates of income tax forecasts, the risks associated with the forecast that you've made, and the financial risk that climate change has for the budget as well. So, can you explain to us to start with—I think with NI contributions being so high in people's thoughts with this budget—how the increase in the national insurance employer contributions announced in the UK Government's 2024 autumn budget impacts on the forecasts for the economy and wage growth in the UK, and how that's factored into your forecasts when it comes to WRIT?

Yes. David, do you want to start on the economy and then maybe Tom on this?

Okay. Well, although the extra national insurance is paid by employers, that doesn't mean that that's the end of the story, and we think it's very likely that, in fact, they'll respond to the higher tax by adjusting—over time anyway—the wage increases that will go on to the workforce, and it may also affect employment levels. In fact, the evidence seems to be that if you think about the ultimate burden of the higher national insurance contribution, we think it's very likely that maybe as much as 75 per cent of it actually gets passed back on to workers in the form of lower wage increases than they otherwise would have got. So, that's going to affect their taxable income and therefore it affects income tax revenue, which has implications, obviously, for the revenue you raise via the Welsh income tax.

The risk is that—. That's the sort of judgment that we made, that 75 per cent of the effect actually flows back on to workers, and, over time, wage settlements are lower. There’s a bit of science in that, but there’s a lot of uncertainty about whether it really is that high a proportion of the effect that gets passed on to workers, and therefore ends up influencing income tax. It could be that firms have to take more of the burden themselves. That’s not necessarily costless, though, in terms of income tax paid by workers, because companies may then find that their profits are lower and they’ll just employ fewer people.

So, one way or another, it seems very likely that a large part of the impact of this tax will flow through back onto the labour market, back onto workers, and reduce income tax, relative to what it would have been had there been no change in the national insurance rate.

I think Mike Hedges just wanted to come in on that.

I’ll make two points. Surely, a lot of the problems with wages rising or not is due to a shortage of skills, and I think, in areas where there’s a skills shortage, won’t it have no effect whatsoever because there’ll still be a battle over getting people with those skills?

And the other thing is that we’ve got a lot of companies who make huge profits, and I don’t need to tell you about the two curves that exist. And surely—and I’m going to talk about it later—we never talk about bringing in productivity. It's about the same people, doing the same things, the same way, and being less productive continually than the rest of Europe.

I don't know if you want to—

If I may, briefly.

Yes, of course.

I think you’re right that in certain areas there clearly are skills shortages. And that’s one factor, perhaps, behind the relatively strong wage growth that we’ve seen over the last year or so. And the overall unemployment rate is pretty low. So, you could see this as quite a tight labour market. But our judgment was that if you just ask the question, ‘What does the national insurance increase do?’, relative to a world in which there wasn’t one, we think wage settlements would be a little bit lower than they would have been.

And that’s not to say that we’re talking about wage cuts here. What we’re factoring in is, instead of wage increases perhaps being granted at a rate, on average, of 3 or 4 per cent, that might come down to 2.5 per cent or so, so that, over a few years, wages are a couple of per cent lower than they would have been in companies that passed on most of the impact back to workers.

I suspect it will be different in different sectors. And perhaps in those sectors where there’s a lot of relatively low-paid people—in hospitality, in the care sector—it might impact small companies that employ a lot of people in those sectors particularly hard, and I suspect that it really will be passed back on to the workers there.

It’s not something we can be absolutely sure about, but our assessment is that, probably 60 per cent, 75 per cent even, of the effect will flow back to lower wages than they otherwise would have been. As I say, that doesn’t mean that wages are going to be absolutely cut; it’s just that wage increases will be less than they would have been.

You're talking about a number of sectors there where people are being paid the minimum wage. Are you suggesting the company is going to pay less than the minimum wage?

No, you’re quite right. What I was talking about was overall average levels of wage settlements. It differs across sectors. And where there are a lot of people on the minimum wage, as you rightly say, a company that’s complying with the rules simply can’t cut wages. So, it could be in those sectors that you see more of an impact on levels of employment rather than wages.

Sam, did you want to come in?

Yes, just to quickly supplement the comment there in terms of the relative impact on lower pay sectors. You described the care sector or the hospitality sector, for example, and Wales would have a disproportionately larger number of people in those lower pay sectors. So, is it fair then to say that the impact of the national insurance increase is going to be felt harder here in Wales than in other parts of the UK?

It might be felt somewhat harder in terms of employment levels, because the adjustment through wages can’t happen, or at least can’t happen legally, if a large number of people are being paid the minimum wage. So, it may be that, in other parts of the UK where those sectors are less significant, there are fewer people in minimum wage jobs, more of the impact comes through lower wage settlements and somewhat less through slightly lower employment. But I think, one way or another, this tax—. It's very difficult for any tax to be increased without there being some negative effects on people's incentive to save or to work or to employ people, and this tax is going to be paid by somebody.

Thanks.

So, with that then, how does that then relate into your forecasts for WRIT, and how have you used that in your assumptions?

For the UK as a whole, we reckon that employment will be lower by about 50,000. It's not a dramatically large number in an employment level for the UK of 32 million, 33 million, or so, but it's not trivial either. Perhaps slightly more significant is the impact, we think, on wages, which I've been talking about, and wage settlements being a bit lower for the next few years than they otherwise would have been, which is the way in which a significant part of the tax is paid. On top of that, there is some erosion in corporate profits, so we don't believe that all of this gets passed back to the workforce. That diminishes somewhat the incentives to invest because corporate rates of return are slightly lower than they would have been.

Tom, did you want to come in on that?

Yes, briefly. In terms of how that then feeds into our forecasts for Welsh income tax, so, as you know, the way in which we produce the Welsh income tax forecast is we forecast UK-wide income tax—the relevant parts of income tax—and then we calculate the Welsh share of that. So, the effects that David was talking about in terms of lower wage growth, lower employment, will feed through at the UK-wide level, and therefore also in terms of Welsh income tax, to slightly lower overall income tax—roughly, at the UK-wide level, around £5 billion lower income tax as a result of our estimate of the impact on employment and wage growth.

Looking at the budget package as a whole, the policy package as a whole, there are other elements of the policy package that lead to higher income tax at the UK level, and therefore also at the Welsh level. So, the overall impact of the budget policy package was one that was increasing spending by more than tax, increasing borrowing, and therefore, in the short term, we assume that acts to stimulate demand in the economy in the short term and tails off in the medium term. But that delivers a boost to tax receipts, including income tax receipts—

So, what sorts of policy aspects—

—in the short term. But that's looking at the overall impact of the budget—

The budget—

—policy as a whole, where spending was increased by quite significantly more than spending, and, therefore, borrowing was increased, and that—

Is it public sector spending? Or what's having the biggest effect there to mitigate, I suppose, what we've just been talking about?

So, the Government announced a significant increase in overall public spending. Roughly half of that was paid by tax increases, mainly the NICs increase, but also a range of other tax increases. But half of that increase in spending was essentially funded by additional borrowing. Therefore, in the short term, we assume that additional borrowing acts to stimulate demand in the economy, have slightly higher growth in the short term than we otherwise would have done, and that therefore acts as a boost to income tax receipts. And that does tail off. That's a sort of temporary effect that tails off over the medium term, because we assume the economy adjusts to that additional demand.

And that medium term is 2028-29, or—?

Five years, yes.

Okay.

There are also a couple of other specific measures that the Government announced that acted to increase income tax receipts. So, they announced quite significant additional funding for His Majesty's Revenue and Customs' compliance activities, which we estimate brings in quite significant additional income tax. And some of the other measures they announced on the capital tax side also act to increase income tax receipts. So, the overall impact of the budget policy package as a whole led us to actually increase our forecast for income tax. That is only partially offset by the impact of the NICs increase.

What impact does the freezing of thresholds to 2029 have on that? Because obviously that increases the receipts, but then has more of a negative effect on people in lower income sectors, similar to what Sam was talking about earlier.

Yes, so that effect was—. I mean, previously—. That’s in our baseline forecast because it was announced by the previous Government, and in this budget there was not a change to that policy, so it’s in the baseline forecast. It is one of the big factors driving quite strong growth in income tax receipts over the medium term. In fact, quite a lot of that has kind of already happened or is happening this year and next year, because those freezes are particularly strong drivers of receipts when you have high inflation and high earnings, as we’ve seen over the last couple of years. I think overall, over the forecast period as a whole, it’s increasing income tax receipts by around £50 billion, so a very significant part of the reason why tax receipts as a whole are increasing over the medium term.

In terms of the impacts on Wales specifically, this is something we have looked at in some of our previous analysis, and we’re actually hoping to do some more analysis on this over the coming year. In particular, going to the point that was made earlier, the freezing of the personal allowance we think is likely to have a relatively more important impact in Wales because of the relative distribution of earnings in Wales compared to the rest of the UK, meaning more workers are likely to be affected by that freeze, i.e. more employers will be pulled into the tax system due to the freezes in personal allowance compared to the rest of the UK. And as I say, being able to get a really good analysis of that requires having quite granular data on the more precise distribution of earnings around the personal allowance. So, as I say, that’s something we’re hoping to do some more work on this year.

And is that data freely available to you? Are you able to—? Do you have that granularity?

Yes, I think we can—. I think we are able to get that data, it's just a question of being able to do the necessary analysis, which will take a bit of time and resource.

And is that analysis work that you've decided to do yourselves, or is that something that's been commissioned by either Government or somebody else?

It's not been commissioned, I think it's analysis that we are interested in doing because it will help us improve our Welsh income tax forecast in the future, but we've discussed it with colleagues at Welsh Government who are also very interested in doing this—

I think it'll be of great interest to this committee as well, going forward. Thank you. I'll move on now to Mike Hedges. Mike, I'll bring you in.

Diolch, Cadeirydd. How sensitive is your modelling to your productivity growth rate forecasts and how could this impact WRIT forecasts? Don’t you see the increase in national insurance being an incentive for people to increase productivity, and don’t you see artificial intelligence being used to increase productivity?

David, do you want to have a go at that?

Yes, of course. The simple answer is that our forecasts are very, very sensitive to the assumptions you make about productivity. Outcomes in the UK will vary very greatly if productivity growth is 0.5 per cent or 1 per cent higher consistently than if it’s as low as it has been in recent years. To give you an idea about that, the rate of productivity growth in the UK before the financial crisis used to be about 2 per cent or 2.5 per cent a year. So, over a five-year period, people would see a maybe 12 per cent or 13 per cent increase on average in their real earnings. Since the financial crisis, it hasn’t grown at 2 per cent or 2.5 per cent, it’s grown by barely 0.5 per cent. So, we’ve had—well, what is it now, 15 years of productivity growth in the UK being almost 2 per cent lower a year than we got used to in the previous 30-40 years, so that the level of gross domestic product now, after 15 years of losing 2 per cent a year, is probably 30 per cent lower than it otherwise would have been. So, it's been an absolutely enormous impact—the very low productivity growth we've seen for really a sustained period of about 15 years.

Our assumption for the next five years is that things are a bit better than the dismal last 15 years, but not as good as the much better 30 or 40 years that led up to the financial crisis. Productivity growth in the 1960s, 1970s, 1980s and 1990s was, as I say, 2 per cent to 2.5 per cent or so. So, we don't think it's going to go back to that level. We think it's going to be about 1 per cent growth a year, as opposed to the barely 0.5 per cent of the last 15 years.

Maybe we're being too optimistic, maybe we are too pessimistic. It makes a big difference how things play out. If we're wrong by 0.5 per cent, so instead of growing at 1 per cent a year, it grows either at 1.5 per cent or, the other way, it grows at 0.5 per cent, it probably affects the level of borrowing the Government will have to do each year, ultimately, by as much as £40 billion. So, it builds up over time if we're more or less optimistic than things play out to be a really big story.

Now, we've been on the optimistic side of the OBR on productivity growth for a few years now, and it's partly on the back of something Mr Hedges has mentioned, which is, 'Might we see some of the new technologies that have come along in recent years—stunning increases in artificial intelligence and computer power—might that feed through to productivity?' We think it will. And that's one reason for thinking that the last 15 years are more dismal than what's likely to happen over the next few years. Others are more pessimistic than we are. I think, also, it's an interesting point that Mr Hedges raises, because one of the things that the national insurance rise does is it does increase the cost of labour relative to capital or machines. That gives a bit of an incentive to try and boost productivity, maybe by switching production techniques to slightly more capital intensive ones, and there's a bit of a silver lining there to the national insurance increase. But the bottom line is it makes a huge difference what happens to productivity as you look a few years down the road.

Okay, thank you very much. The Office for National Statistics reported that reduced responses to many surveys, such as the labour force survey, has increased variability of outputs. You also mentioned the time lag associated with the survey of personal incomes data you use to inform your forecasts. Does this or other survey data you use suffer from falling response rates and reduced reliability of data at UK or Wales level?

David, do you want to take that?

Just very brief, and I'm sure Tom and Richard will all say—. It's been a really big issue, this, that the response rates, being the source of information that the Office for National Statistics provides on what's happening in the labour market—the response rates have fallen catastrophically, really, in the last four or five years. Therefore, the reliability of that data on employment levels, on wage settlements, but particularly on employment levels—the reliability of that data has been significantly eroded, and it's going to be maybe even a couple of years before we're likely to see major improvements in that. That's a big problem for people who rely on those statistics. That's us at the OBR, the Treasury, and the Bank of England in forecasting what's happening in the labour market. So, it's a real issue.

If I can add—one of the things that we find ourselves having to do, which we've also noticed that the Welsh Government does in its own economic and fiscal analysis, is to just look at a wider range of data sources than just what the ONS can provide through the labour force survey. So, we increasingly rely on, to understand the labour market, looking at administrative data from the benefits system to give us clues as to what's happing with inactivity rates, as well as pay-as-you-earn records and employment records from His Majesty's Revenue and Customs to give us a sense of what's happening with employment. So, we're relying more on administrative data. The danger there is that you're getting a biased sample of what's actually happening in the wider labour market, which only a really good statistical survey can deliver. But as David highlighted, when response rates drop as much as they have, you then start to worry about the representativeness of even those kinds of random samples of the population.

Mike.

Thank you. Your Welsh taxes outlook provides an initial assessment of successive forecast differences for the Welsh rates of income tax for 2022-23. What have you learnt from this exercise and how will it inform your forecasts in the future?

Tom.

Thanks. So, this is an initial analysis that we've produced, and we'll actually be producing a more detailed version in the update we do in a couple of months' time. It looked specifically at 2022-23. So, what we found is, perhaps, unsurprising. The first forecast we did of 2022-23, which was produced in 2021, significantly underestimated revenues, and that is essentially because of the subsequent shock to inflation coming out of COVID and due to the invasion of Ukraine and the energy price crisis, and the impact that that had on inflation is something that we've subsequently done a lot of work on in terms of learning lessons and looking to improve the way in which we forecast inflation.

The subsequent forecasts after that, not surprisingly, were much more accurate. We, I think, are reassured that there doesn't seem to be a particular bias one way or another in the forecast areas, suggesting that those forecasts are central, which is what we're very much aiming for. There seems to be a small but consistent underestimate of the Welsh share for that particular year, 2022-23, in those forecasts. So, if that is sustained, that is something we will want to do some further analysis on to try to understand it better. And I think it goes back to the point I was making earlier, potentially around the impact of the personal allowance freezes and whether that is having a disproportionate impact on Welsh income tax relative to UK-wide income tax. So, that's part of the reason that we want to do that additional work, to look in more detail at that issue that I was mentioning earlier.

Just thinking back to the NIC contributions and that make-up of the Welsh economy, with a significant part in the public sector, then you've got a real chunk of the economy where you've got the third sector heavily involved, and that impact of national insurance contributions increase on that particular part of the economy. Does that have any bearing on what we've just been talking about? Have you done any analysis on the impact on segments of the economy, similar to what Sam was talking about earlier there, the lower—you know, the tourist economy, or that aspect? Does that factor into your models, or—?

So, when we did our estimate of the impact of the national insurance rise and the split between the impact on real wages and employment, one of the things that we did do was to look at a more disaggregated view of employers, because it was clear when we were looking at the measure that it was going to disproportionately affect lower-wage industries, which were, as David was saying, going to struggle to reduce wages further because of the national living wage. And that meant, in particular, hospitality, also social care and some industries that are overweighted in the Welsh economy compared to the rest of the UK. And so, in that sense, one of the reasons why we did think there was going to be a bigger employment effect was because there were those industries that were closer to a lower bound on what they could do with real wages, given the rise in the national living wage. And so, in that sense, we have looked at it in a disaggregated sense: sector by sector, the impact it has across different categories of employer.

I think in the case of Wales one thing to bear in mind is that there were a number of moving parts in this last October budget. There was the national insurance rise, which does put an additional burden on employers, but there is also some compensation being provided to some public servants for that extra cost, as well as a lot of extra resources being provided for public services in the budget, which, as Tom was saying, more than compensates in fiscal terms for the cost of the national insurance rise in the Welsh budget. So, taking all of that in the round, you're still probably looking at a net benefit to the public sector fiscally in Wales from all that, because the rise in departmental spending far outweighs the additional cost being put on public employers from the national insurance rise.

But then would that assume that those rises were passed on to the third sector providing those services, through into local government and then onto those contracts, rather than it going into, potentially, those departments and being used in different ways?

It will depend on what the Welsh Government and also what English public services do with the money. The direct compensation for the NICs rise was only for was what is defined as public sector workers in the national accounts, so that doesn't necessarily include people who are being contracted—

In social care, for example.

Social care is an example, but also people working in the third sector who are contracting in to public services in England or in Wales would not get direct compensation for that. However, there is a big increase in spending on public services in this October budget, which Wales benefits from through Barnett consequentials.

Okay, thank you. Sam.

Thank you, Chair. It comes on the back of Mike Hedges's questions around your forecasting tools and abilities. With Government creating fiscal rules and then seemingly changing them or ignoring them, I wonder what that does to your forecasting ability and what sort of assurances that creates for you. Is it helpful or unhelpful at times, do you think?

In terms of fiscal rules, we assess whatever fiscal rules the Government of the day happens to set itself, and you're right that we've gone through quite a few different fiscal rules in the UK in the recent past. A recent study of international fiscal rules around the world showed that we change fiscal rules in the UK more frequently than almost any other OECD country. Every country has been changing its fiscal rules recently, because everyone has just seen big shocks from COVID, as well as the Ukraine war and the big increase in inflation. And then, more recently, the rise in interest rates has just put public finances under lots of pressure and forced Governments to recalibrate their fiscal settings. So, I think, to some extent, it is understandable that when the world changes you have to change your objectives and change your response. We do just take the Government's fiscal targets as stated and we assess whether Governments are on track to meet them.

The new Government changed its fiscal rules yet again in this autumn budget, and, based on our forecast back in October, they were on track to meet them. I think one issue that has been a consistent challenge for Chancellors is that whatever rules they have, they set themselves very small margins against them from one fiscal event to the next. In the autumn budget, this Chancellor left herself just under £10 billion-worth of room for manoeuvre against her headline fiscal rule of balancing the current budget in five years' time. You just heard from David that just 0.5 per cent lower productivity growth in the next five years would cost £40 billion in terms of risk, and that is only one source of risk to the fiscal outlook. The margins that Chancellors tend to set themselves against their fiscal rules are tiny fractions of the universe of risks that they face, be it from lower growth, be it from higher interest rates, be it from a different outlook for things like inactivity. All these things pose risks to our forecast, against which Chancellors hold very little margin for manoeuvre. That's one of the things that's driven rules having to change and deadlines having to be pushed back—these kinds of risks can materialise and force a reappraisal of when rules can actually be met.

I think there are a few things that the Government has done in the last few months that do improve the predictability of the fiscal policy-making process. I think the commitment to going back to a regular programme of spending reviews and doing multi-year reviews and setting out three to five-year prospects for public spending certainly makes it easier to assess the credibility of the Government's spending plans and ensure that those fiscal rules are supported by a more detailed bottom-up plan for public services. The fiscal lock that the Government introduced that requires it to get a forecast from us before it makes major fiscal policy changes also ensures that the Government is not making big fiscal decisions outside of the normal routine of forecasting and budget making. So, I think those are improvements, but, to some extent, the chopping and changing you've seen in fiscal plans and fiscal rules has reflected the fact that any Government is operating in a very volatile macroeconomic environment these days.

Thank you very much. Mike Hedges. There we are, thank you.

I unmuted myself and the host unmuted me and I ended up being muted again. Apologies for that. Just one comment. I know that hospitality and care are talking about difficulty in recruitment. Have you looked at that, or do you want to make a comment on that? But the main question I've got is this: while your fiscal risk reports are at a UK level, your recent analysis of the mitigation and physical damage costs related to climate change is quite considerable. Have you done anything on how you think it's going to affect economic growth in Wales, and also, are you seeing Wales being disproportionately affected, either positively or negatively?

Let me cover the second part of your question, and then David or Tom might have some thoughts on hospitality and the state of the labour market there.

On fiscal risks, you are right that we did, as part of a wider programme of work that we've tried to do into the fiscal and economic risks posed by climate change back in 2021, look at the fiscal costs of getting to net zero. We've tried to add a further piece of the puzzle by looking at the economic and fiscal damage that unmitigated climate change might do to the UK economy and public finances. We did this very much at the UK level, rather than trying to break it down by regions, because it's hard enough to try and do this for an economy as a whole before you get down to the granular effects that it might have on the different nations and regions of the UK.

What we did find in that work, and drawing very much on modelling developed by the Bank of England and other central banks in concert with a consortium of academics, was that for a country like the UK, looking 50 years ahead—. We looked at two different scenarios. One was for a 2 degrees centigrade rise in temperatures, another was for a 3 degrees C rise in temperatures. Between those two scenarios, you could see, over 50 years, a loss of UK GDP of anywhere between 3 per cent and 5 per cent from the kind of damage that you'd get to an economy like the UK from climate change, where the main channels through which higher temperatures affect an economy like the UK, given the climate that we have, are more frequent heatwaves and then coastal and riverine flooding.

We haven't yet, but we'd be happy to work with our colleagues in the Welsh Government to look at what that might mean for Wales in particular, although you would expect for a country like Wales, you've got a lot of rivers, you've got a long coastline and so that is clearly a route through which climate change can cause some significant economic damage, which then has fiscal consequences, in terms of the damage it does to the economy, but also the cost that might fall to the public sector to remediate that damage if it's uninsurable or uninsured.

We do think that the potential fiscal costs associated with the economic damage done, but also the need for compensation from the public sector, are considerable associated with climate change, anywhere between 20 and 30 percentage points on the level of GDP over 50 years to deal with those kinds of economic and fiscal costs falling to the public sector as a whole. But, as I said, we did this first exercise just last year to try and look at the UK-wide costs. Obviously, you can learn even more by looking more granularly at what it means for different nations and regions of the country.

Okay, thank you.

I'll bring Sam in now. Thank you.

Thank you, Chair. I'm going to move on to some more specific tax policies from the Welsh Government—first of all, the land transaction tax, and then I'll also ask questions on the landfill disposals tax as well. In your forecast, you have outlined expected increases in the residential land transaction tax. Could you just outline your reasons for that, please?

Essentially, we have been surprised this year by the strength of the residential property market. Again, looking first UK-wide, we've seen a stronger rebound in transactions and prices after a dip last year than we were expecting, and we've also seen that in the outturn data in terms of receipts from those taxes this year, both UK-wide and in Wales. Essentially, that is what is driving the increase in the forecast, that short-term strength in transactions prices and the receipts data that we've had so far this year.

We do assume in the forecast that some of that is a temporary strength, or a bringing forward of strength that we were expecting to see play out over the medium term. So, we've slightly reduced our forecast for transactions and prices over the medium term. That's why the strength in the forecast is mainly in the short term and then it tails off over the medium term.

Thank you. Do you think the slower-than-expected reduction in base rates is going to significantly change your forecast that you've put forward here?

For the forecast that we produced in October, which this is based on, we used the market expectations of interest rates at that point, which assumed a decline in interest rates. We will revisit that assumption in our next forecast on the basis of market expectations of interest rates at that point.

I guess it hasn't happened at the same pace as, perhaps, October would've expected. Do you think that's fair?

We had assumed that there was a shallower pace than even back in October, but as Tom said, we'll take another snapshot of it when we do our March one.

Thank you. The Welsh Government tax policy report states that additional land transaction tax forecast revenues are included as a result of additional resources being invested in the Welsh Revenue Authority and their work. Could you outline how you have changed your methodology to take that into account?

That measure was one where the Welsh Revenue Authority was given additional resource to employ additional staff to undertake compliance checks on land transaction tax. We have a fairly well-established methodology for assessing the likely revenue from those types of measures, which we used in this case and we use frequently for similar UK-wide measures. We look at historical evidence on the yield that an individual staff member generates undertaking that kind of activity, and typically we have quite good data on that. We use that as the baseline for assessing how much yield additional staff are likely to deliver. We adjust that for various factors, such as the time it will take a new staff member to get up to the productivity of an existing staff member. We also adjust it for the fact that, over time, it's likely to be the case that compliance activity will change and will evolve and therefore the yield over the medium term is likely to reduce. And also, just the fact that additional resource is likely to be able to tackle, if you like, the easier-to-get compliance revenue earlier on and leave the more difficult stuff until later. So, you tend to have a diminishing returns-type profile for those kinds of measures.

I guess there's a sweet spot, isn't there, where the investment makes sense, and a point where it no longer makes sense to continue that. On the commercial side of land transaction tax, you're forecasting a reduction in the revenue from that particular tax. I think you've outlined that that's due to behavioural changes in commercial property use. Can you speak to that point and perhaps explain why there'll be lower than initially forecasted revenue on the commercial land transaction tax?

The commercial property transaction tax revenue tends to be very volatile, because it is affected, often, by some very large one-off transactions. That's essentially what's happened this year. We've seen a very big one-off transaction that's boosted receipts this year. We assume that that's not repeated in the future, which is why the forecast then has slightly lower revenue in subsequent years.

With that aspect, I'm just interested in how you would go about—. How good is your data gathering, I suppose, in knowing these events, because they're quite significant purchasing events? How is your data gathering able to inform your forecast, or is it just, 'Oh, look it's happened'? I don't know. Is there a method that you've used to try and foresee when some of these transactions might come into the forecast?

So, the Welsh Revenue Authority has very, very good, detailed data on transactions that have taken place in the past, and they do look at forward indicators of transactions. We don't typically try and forecast specific transactions—

Because it's predicting one event sometime in the future.

—because it's just very difficult to do that, and the forecast is not done at that granular a level of individual transactions. But if there is good intelligence on likely very large transactions that may come up in the future, then we will try and take that into account.

Right. So, otherwise, you try and smooth out the curve, and, if they happen, they're nearly a bonus, in effect, in income, rather than trying to forecast that volatility.

Yes, exactly.

Okay. Thank you.

Thanks, Chair. Just one more point on the LTT: one of the significant differences in policy between England and Wales is relief for first-time buyers; in England, available on land transaction tax. Have you done any work to understand the impact of a policy like that being introduced by Welsh Government here in Wales to support a greater flow of purchasing for first-time buyers at all?

So, we haven't done any analysis of that. We're actually not allowed, under our legislation, to look at policies that have not been announced by the Government. So, I'm afraid we've not done that.

All right. That's for Government to do, I suppose. All right. Thank you.

And then moving on to the landfill disposals tax, we've, of course, had our first divergence of policy from England and Wales on the landfill disposals tax, so I'm wondering what's been the impact on your assumptions of the divergence in the LDT lower rates between Wales and England, how that's affected your forecast of that tax revenue?

So, the standard rate was aligned at this event, and then a divergence was introduced in the lower rate. We had previously assumed that, because of the divergence in the standard rate, there would be some impact on flows from England to Wales—a relatively small amount—but the fact that the Welsh Government has now aligned that standard rate means we've now assumed that that flow would not actually happen.

On the lower rate, it's actually a very small component of overall landfill, and we assume that it is also the type of material that is less likely to be transported. So, essentially, we have assumed that it will not lead to any change in cross-border flows. There is some risk around that, but it is a very small component of the overall revenue, so any impact is actually likely to be very small.

Sorry, do you do much analysis or forecasting around that behavioural aspect of taxation—so, cross-border behaviour, maybe? Because it's something that we as a committee are interested in, especially with Welsh rates of income tax, compared to maybe Scotland, where they've got a different system across border there. So, do you do any of that analysis, and what does it actually tell you? This was one where there might have been some behavioural change, but, from what I'm hearing—and correct me if I'm wrong—it didn't have any significant impact in behavioural change.

Yes. In this case, we're assuming it won't have any material impact, partly because obviously there are quite big transport costs involved with transporting waste material, particularly waste material that qualifies for the lower rate, and the differential is not a huge one. But we do look at this question more generally in other areas of taxation, and you mentioned Scotland. Scotland has obviously changed its income tax regime compared to the rest of the UK and part of the assessment that has been made of those changes is whether or not it would have an impact on, essentially, migration to or from Wales from the rest of the UK. The analysis—. So, HMRC did some analysis of that, which concluded that there was not strong evidence of a large effect. But, again, it's something that they are continuing to do some analysis on.

Has any analysis been done on the border with Northern Ireland and the Republic of Ireland? Because, obviously, there are two different tax regimes there as well. Just out of interest.

I'm not aware of anything. There may have been some done.

There may have been. Okay. Sorry, you were about to say something, Richard.

Certainly, trade policy changes have had very big effects on people's decisions, on companies’ decisions, about where they choose to locate activity. That's not so much a tax system behavioural effect, but it is an effect of Government policy on location decisions of companies. Obviously, Ireland has its own tax model for corporations, and those kinds of changes do have very big effects on the decisions of internationally mobile corporations about where they site activity.

When it comes to people and personal tax decisions, I think it's probably fair to say that what we tend to find is that behavioural assumptions that involve people's decisions about how many hours they work or whether they enter work in a given place tend to swamp their decisions about where they place themselves, and so the much more important behavioural effects for UK individuals seem to be about how much labour they choose to supply in response to different incentives wherever they're sitting, compared to whether they decide to sit in Scotland or sit in England or sit in Northern Ireland or sit in Wales.

Thanks for that diversion. Sorry, it was just interesting to query that. Back to Sam.

Landfill disposals tax is much more interesting, isn't it? [Laughter.] So, just finally, perhaps, a couple of points on this just to close this point off. Non-compliance has been raised as an issue over recent years. I wonder if you're expecting to see improvements in compliance given additional activity by the Welsh Revenue Authority. Then, also, there are new recycling regulations coming through in Wales. I wonder if you've modelled the impact of those business recycling regulations with any of your assumptions with this particular tax at all.

So, on the additional recycling regulation and capacity, it underpins our medium-term forecast, which is one where we have, essentially, a kind of broadly flat assumption in terms of the volume of waste going to landfill, because we assume that sort of increased generation of waste is absorbed by additional recycling or incineration rather than going to landfill.

On compliance, we have been—. Well, I think the question is around whether we have sufficient information on that subject.

The question was about Welsh Government are investing in improved measures to improve compliance, so has that assumption been put into the forecast for—

So, again—. Sorry. So, not a specific kind of assumption on the precise impact that would have on the forecast, but it's something that we do consider when we're producing a forecast. In future, if we think that's going to have a material impact, then we would take that into account.

Thank you, Chair.

Thank you very much, and thank you so much for your attendance this morning. It's always interesting to have you here and to go through your analysis. Thank you very much to Professor David Miles from the other side of the world as well this morning. Thank you very much for this evening, there, I suppose, is it? I’m not sure what time it is.

It's night. It's pretty late here. [Laughter.]

We'll let you get off to bed. There we are.

It's also 30 degrees.

Wow, okay. [Laughter.] Thank you so much. There will be a transcript available for you to check for accuracy, but thanks again for your time. And we'll take a short break now to reset the room. Thank you.

Welcome back to this session. This is our second session this morning on the draft budget. We have our witnesses here this morning. We'll start online.

Can we start online with—? If you could introduce yourself and where you've come from. Diolch. David.

Bore da. My name's David Phillips. I'm an associate director of the Institute for Fiscal Studies in London, and I lead on work on devolved and local government finance.

Excellent.

And then—.

Good morning. I'm Guto Ifan. I'm a lecturer in Cardiff University and part of the Wales Governance Centre, and part of the Wales Fiscal Analysis team.

I'm Ed Poole, and I'm also a part of the Wales Fiscal Analysis team in Cardiff University, and a reader also in the university.

Fantastic, thank you very much. A warm welcome to you all this morning.

We'll dive into questions. We always find your sessions very interesting, so we'll try and keep things as tight as we can. We've got you for an hour and we've got a lot of ground to cover. But we'll start with understanding the economic context around the Welsh Government's draft budget for 2025-26. What approach would you have liked to have seen the Welsh Government take in terms of presenting how the proposed allocations have changed since 2024-25, those that have been shown in the draft budget? I know Guto's done quite a bit of work on this, so maybe we'll start with Guto.

Yes. I guess the point to make is that it's difficult this year to get a proper sense of how total spending is changing and how portfolios are changing from this year to next year, not that the Welsh Government has done anything different from usual. They do usually compare draft budgets for the next year with what was in the final budget plans for the current financial year, and usually that doesn't matter too much in practice, but this financial year is going to be quite exceptional. Both Conservative and Labour Chancellors this year have increased massively the amount of day-to-day spending in the budget for 2024-25.

We think, on top of those consequentials, block grant adjustment changes, devolved taxes, day-to-day spending increases by about £1.2 billion on top of those final budget plans for this year, and that means that—. Well, the Welsh Government have acknowledged that and they've made some adjustments to that baseline. They've specifically included how much they're going to spend in addition on pension contributions and on pay deals. However, that comes to about £652 million, which does leaves you with £0.5 billion not accounted for in that baseline year. If we add that back into the baseline, the actual change from this year to next year in real terms is actually quite negligible. I think it would have been nice or preferable to have some recognition of that in the narrative of the budget, in some of the tables maybe, as well as a recognition that some of that unallocated funding that's not in the baseline has already been allocated in the first supplementary budget and in subsequent announcements that have been made for the Welsh Government's priorities for this year.

So, I guess, overall, it makes it more difficult, essentially, to analyse the budget this year. What it does tell us is just how front-loaded the UK Government's additional funding is. Much of the increase in spending that was announced at the October budget, for the Welsh Government, most of it happens this year, so, from last year to this year, and then not such a big increase in real-terms spending next year in terms of day-to-day spending, and a more difficult outlook beyond that as well.

So, what challenges does that have for scrutiny? I'll bring David in after that, if I can.

It makes it more difficult to look at—. For example, you've got three figures, essentially, for how much the Welsh Government is going to spend. If you ask how much the Welsh Government is going to spend on the NHS this year, you've got the original final budget plans, you've got revised first supplementary budget plans, you've got the revised baseline for this year, and, on top of that, you've got £70 million from press releases and announcements that the Welsh Government have made. So, it makes it very difficult to know how much the Welsh Government is going to spend on the NHS this year. And then you compare that to what they've outlined in the draft budget, it makes it quite difficult to analyse what's going to come, what's the increase and what's the change, how it's going to feel for people setting budgets in the Welsh NHS.

David, maybe you could comment on that and maybe—. You've been commenting a bit about the Scottish Government experience as well, so maybe if you could draw that into it as well.

Yes. So, I think I would echo lot of what Guto was saying there. I mean, traditionally, the Welsh Government's approach of comparing the draft budget for the coming year to the draft budget for the year we're in I think made sense, because the Welsh Government used to hold back some funding to allocate in supplementary budgets. So, if you're comparing the supplementary budget for this year to the draft budget for next year, you'd be getting a misleading picture, because next year, you'd still have held some money back, which this year you've now reallocated. So, at that point, I think it made sense to say, 'Let's compare draft to draft.'

Now, however, the Welsh Government doesn't hold money back in this way, at least to anywhere near the same extent. And in that case, I think it makes much more sense to compare the draft budget for next year to the latest position for this year, because that gives you a much clearer picture about what the plans on the table now mean for different service areas. Now, yes, next year you might then, later in the year, get top-ups to the budgets because of improved devolved tax performance, or extra money from the UK Government, but that hasn't happened yet, and until you do make those allocations, the kind of relevant comparison is to say, 'Well, what are you planning to spend next year compared to what we now think we're going to spend this year?' That tells you what the pressures are. So, I think, as Guto was saying, it was helpful that the Welsh Government included some of the changes that it's made this year on pay and pensions costs, but it could have gone further. And, actually, to work out which changes had been included, you needed to look at a notes table on an appendix in a spreadsheet. So, I don't think it was as transparent as it could have been there.

Another issue that I think Guto also picked up in his analysis, which I think is really important, is that there are also some accounting adjustments being implemented at the moment—so-called, international financial reporting standards 16—and those adjustments, they haven't been made to the 2024-25 figures that are included in the comparison, but they have been made to the 2025-26 figures in the comparison. The IFRS 16 adjustments reduce slightly the resource spending and they increase quite substantially the capital spending. So, the figures reported in the budget documentation, all else equal, substantially overstate the increase in capital spending next year. That makes it particularly hard—and we'll come on to this, I think, later—to talk about how capital spending has changed, because we're not sure, really, because of these adjustments, and they're not specified out separately by portfolio and separately by type of investment.

So, I'd probably be a little bit more critical of the Welsh Government's approach than Guto has been, because, whilst I think you can perhaps say, 'Well, look, they have made a step in the right direction by including some of the adjustments that have been made to budgets in-year', I don't really see a strong rationale for presenting one set of figures using one set of accounting rules and another using a different set of accounting rules. The Welsh Government have told me it's because, 'Well, actually, the accounting rules, the impacts on different years differ, so the impact on 2024-25 is not necessarily the same as in 2025-26, and we felt it was better not to make these adjustments.' I can see some point to that, but I still think you would have a much clearer picture if you presented the same figures under the same accounting rules for the two years.

Thank you very much for that. Coming back to the—. And that's particularly interesting when it comes to scrutinising the budget, and we had quite a lengthy discussion with the Cabinet Secretary when he was giving evidence to us around presentation, and we've been following that up. So, it's interesting to see what you're saying there.

With the assessment of the changes in the Welsh Government's budget between 2023-24 and 2025-26 in real terms, so, stripping all of that back and the presentation and the analysis that, David, you've done and that Guto, in particular, has done on this, what is it actually telling us? So, Guto, or Ed, do you want to go with what it's actually—? You know, when you get back to apples and apples, what's it actually telling us?

Well, yes, just a quick caveat, as you just said, it's beneficial to have these two-year comparisons over the two years and also it's quite detailed and the interpretations are quite tricky, because you have to go through the line items to have a look at how items of the budget are moving between different ministerial portfolios.

Having said that, if you take the major components of the budget—NHS, local government and the residual everything else in the budget—over those two years, from 2023-24 to 2025-26, I think the NHS will be growing by about 3.7 per cent per year on average. That’s about in line with NHS England since Chancellor Reeves's budget and that’s before the additional moneys that will come from the immigration health surcharge that’s added each year to the Welsh budget from visa charges that come on top of the health budget. For local government, over the two-year period, that’s about a real-terms increase of 3.1 per cent per year, and that’s a significant increase relative to previous years since 2010 for local government.

Everything else—the residual—is where it’s still a much, much tighter outlook. So, that’s going to see a much smaller increase in cash terms, and it’s actually going to be falling in real terms, the residual area of the budget, over the two years. Why is that? Partly it’s because of the continuing impact of inflation over that time. And that, of course, is going to be compounded by the pay settlement. So, we’d expect other areas of the kind of residual areas of the budget to be likely to be falling because of the impact of pay and inflation.

Thank you. And, Guto, anything to add to that, or David, any thoughts? No. That's great. Thank you very much.

So, looking at—. We’ve talked about presentation, but what about timing? On the timing of the publication of the Welsh budget, we were talking just before we went live that it wasn’t right up to Christmas this year, but it was still pretty late on. What impact does that have?

Yes, clearly there’s some element of being dependent on when the UK Government makes its own autumn statement or budget. There’s no doubt that the Welsh Government is constrained by the announcement on that. Scotland was able to publish their budget a week earlier, but that’s relatively little difference in terms of the grand scheme of the timeline.

I think, going forward, now that the UK Government is committed to going back to multi-year spending reviews—we’re expecting a spending review some time in the middle of this current calendar year—that should mean that the Welsh Government has more time to do its work in the current calendar year. That’s going to be really important because, of course, that’s going to be going then into the plans for the election, in terms of what plans does the Government have for the Welsh Government budget as it goes into the election period.

So, while, I think, in this current year, we understand why it’s so constrained on time right before Christmas, I think, next year, there’s going to be much more ability for the Welsh Government to be able to put documentation out earlier.

And that will help, I'm assuming, the stakeholders and everybody—yourselves, but also everybody who’s affected by this, the third sector and all the rest. Guto.

Yes, I imagine the sort of ideal would be—. A few years ago, I think from 2016 to 2018, the budgets were coming out in October, which provided you with a good period before Christmas and a good period after Christmas to fully scrutinise the plans. I guess that would be the ideal scenario.

David.

If I might come in, I think I agree to an extent, but I think there might be a trade-off, because even with a multi-year spending review, the tradition has been that there have been subsequent changes in autumn budgets, to some extent. So, I think there is still something of a trade-off between the timing of when the Welsh budget is made and the extent to which that can account for any changes that have taken place in a UK autumn budget. I’m not best placed to say this, but I think the committee should take a view on whether it would prefer an earlier draft budget, which could then be amended during the course of the budget scrutiny and parliamentary process, or whether it would prefer to have a more final draft budget, if you like.

But I think there is that sort of trade-off. So, yes, I think that more time for scrutiny is good, but there’s a question about the extent to which that then means there are more subsequent changes after the initial budget is published.

And then it adds into the conversation around whether or not it should be a legislative process that allows amendments to the budget through the process, rather than, as you say, a more final draft and scrutiny of that draft. So, yes, there are quite a few different moving parts there.

Coming back to something you mentioned earlier around capital budgets—and we’ve seen some large real-terms increases this year following a period of real-terms falls—the Cabinet Secretary told us that additional capital allocations were

'aligned with creating the conditions that will allow the Welsh economy to grow alongside the UK economy',

and they have tried to use the capital in this budget

'to crowd in private investment'.

Are you able to give a view on whether that’s the case, David? You mentioned capital earlier.

Yes. So, the first thing I’ll say is that ascertaining the true changes in the capital spending plan next year is pretty difficult, given the fact that the budget compares plans for next year after the so-called IFRS 16 accounting changes with the figures for this year before those changes. As I said, I don’t think that’s the best way to do it, despite the fact that, yes, these adjustments have different amounts of money each year.

Now, for capital spending as a whole, that means that, rather than increasing by the 21 per cent in cash terms that's reported in the budget documentation, if you do compare both sets of figures after the IFRS adjustments, I think it's more like an 8 per cent increase in capital budgets next year. So, quite a big difference there.

Now, those adjustments will differ somewhat across the main expenditure groups, although at least, unlike in Scotland, I've not been able to find detailed information on what those adjustments are by main expenditure group. Maybe Guto has seen those. But when I looked in the supplementary budget for 2024-25, which has information on these IFRS adjustments, I could only see the overall figures, not figures broken up by main expenditure group. So, I've actually found it quite hard to say, well, actually, when you adjust and try to do things on a similar accounting basis, what are the changes for the different portfolios. So, it's quite hard to see where the Welsh Government is prioritising capital spending on a more like-for-like basis.

Now—

Hang on. Can I ask Guto: do you just want to comment on that particular bit?

Yes. So, I think they have published a breakdown by main expenditure group—not line-by-line detail—in terms of where those adjustments are.

Okay.

And just to specify, in terms of IFRS changes, from what I understand, it's to do with how leases are treated, and, essentially, they're moving onto the balance sheet of the Government. So, that requires the majority of leases now to be treated as comparable to owned assets in the public sector. And in terms of looking at that detail line by line, or by portfolio, I don't think it should require you to look at two separate PDF documents to try and get a clearer picture. I've done the comparison for the health and social care budget, given the prominence that the Welsh Government gave to that in the narrative of the budget. So, they made a big point about spending an additional £175 million of capital funding, bringing that capital investment in the draft budget to £614 million. It was repeated yesterday in the First Minister's speech that they were spending an additional £175 million on modernising the NHS. But that wasn't accounting for the fact that the baseline changed by £80 million. So, it's more like £95 million. So, the real-terms increase in the NHS capital budget is not 36 per cent or 37 per cent in real terms, it's more like 16 per cent an increase in real terms. Now, that's still a huge increase and a significant increase and a big step change in the capital budget, but I don't think it's useful, in terms of scrutinising the plans, that you had to go back to a PDF document that was published in October to get a true picture of how much additional spending there's going to be on capital in the NHS next year.

Thanks, Guto. David, sorry, I cut across there—you were in mid flow.

That's okay. Thanks for clarifying that, Guto. I've obviously not seen that document, which obviously goes to show that it's quite difficult to find, because I did do quite a bit of ferreting around.

Now, the second part of your question, Chair, was about whether this will help crowd in private sector investment. I think that is possible. I would certainly hope that increased public sector investment helps boost productivity, through better public services or better infrastructure in future, which should encourage more private sector investment, or at least boost private sector productivity as well. But in the short term sometimes it can actually crowd out private sector investment, if there are shortages of skilled workers or appropriate equipment needed for that investment or if the public sector borrowing absorbs available savings, leading to higher interest rates. And, indeed, the OBR thought that the increase in public sector investment would slightly depress private sector investment overall through such crowding-out effects.

And that's one reason why, at the IFS, we suggested that it might have been better to more slowly ramp up capital spending UK-wide rather than front-load the increases as Ms Reeves did. You might get more bang for your buck, if you like, and less crowding out, if you take more time to plan and avoid rapidly creating inflationary pressures in the construction sector, or shortages in skilled labour or certain types of equipment. The flip side, of course, is that, if you think capital investment now can rapidly improve public sector performance and efficiency, investing now might help public services cope better with what Guto said looks like a tighter funding environment in the period from 2026 onwards, and that probably means that it's things like investment in technology and software, for example, to speed up medical diagnoses and treatment, rather than new buildings and infrastructure, that are where you want to be front-loading that investment. Those are the things that will get you more productivity increases in the public sector, that will get you probably less crowding out, less inflationary pressure. So, looking actually in detail at the Cabinet spending plans, is it things like technology, software, new scanners, new beds, or is it new hospitals, new roads? I say actually we should be doing more on the technology and equipment in the short term if that’s what we want to do, to have the biggest impact on improving the outlook of the public finances and public services.

Diolch yn fawr. Thank you. At that point, I'll bring Mike Hedges in. So, if we can—. There we are. Mike.

Is there a clear view from the budget documentation and the allocations made of how the Welsh Government has prioritised revenue spending and what it's seeking to achieve with these changes?

So, I think, to be fair to the Welsh Government, when it publishes a draft budget, it publishes far greater detail than what the UK Government does. It provides detailed line-by-line budget expenditure lines in an Excel document. You don’t get that granular level of detail when the UK Government publishes a budget, for instance. Those come later, at main estimates by UK Government departments.

However, I think the line that I used in the bargain analysis of the budget is that it tells us where we’re going, but not how we get there next year, in terms of, as we’ve already covered, we can’t really ascertain what the increase will be in spending from this year to next year properly in the spending plans. And again I think, going back to Ed’s point, it would have been beneficial to have two years’ worth of analysis, at least for the main expenditure groups, at least at the high level of how spending’s going to change from last year, which what we already know, to how spending is going to change from last year to next year, so over a two-year period in cash terms and in real terms. I think that would have been useful, to get a proper sense of what the budget was trying to achieve.

Mike.

Can I add—?

David, sorry, yes. Sorry.

So, I would agree with what Guto says. The Welsh Government does publish a lot more detail than the UK Government does on the spending plans. Also, alongside the budget—. The budget document itself has some information, groups the kinds of changes in spending, the narrative around the key themes of the Government, and there’s a separate sort of strategic impact assessment document as well, which provides some information. So, there is, I think, a bit of a link between, if you like, the budget spending allocations and, if you like, the big picture of what the Welsh Government’s trying to achieve, but it’s a bit tenuous.

It’s difficult to do, I should say. It’s difficult to actually do, if you like, mission-based budgeting, to steal a term there, because actually trying to link up individual items to your bigger missions is quite difficult, and often individual items link to many missions. But I think perhaps one thing that could be done to improve the ability to see what the Welsh Government is prioritising is, actually, to, in the budget document itself, avoid just a list of amounts being spent on particular programmes or areas of spending, avoid quoting numbers that are continued spending and genuinely additional spending in ways that are a little bit difficult to work out which is which, avoid using terms like ‘investment’ when you actually mean ‘resource spending’.

So, I think that, whilst I agree with Guto that there’s a lot more detail that the Welsh Government provides than the UK Government, and it does actually provide a link between its spending items and its broad level objectives, I think it can be clearer on what is a genuine improvement—sorry, a genuine increase—in spending and also what is investment versus what is resource and day-to-day spending. So, again, good, but room for still, I think, significant improvement.

Do you think the budget takes the opportunity to invest in initiatives that are preventative or transformational?

I think, over many years now, the Welsh Government has been looking at ways to more clearly specify the areas of preventative spend in the budget. We’ve been multiple years in the committee that has been looking at having those areas of spend more clearly identified. I think these areas in particular are those that are longer term in their spending outlook. I think, for those particular areas, it's really important, given the future constraints over the next few years, that the Welsh Government has greater flexibilities in the use of its funds going forward. So, because we've talked multiple times that this current year and the next year, to some extent, are going to be much less tight than we thought they would have been at the time of the UK general election, that's not the case in the current plans for the future years going out. Therefore, we'd want to see Welsh Government's ability to carry forward funds to offset the current likelihood that future years are going to be much tighter. So, we'd like to see a larger Welsh reserve, a more flexible Welsh reserve, allowing those funds to be carried forward. That can only be determined by the UK Government, and I understand, from public statements, that there is a negotiation over that. But I think, when we're looking at prevention, at that longer term spend, having the flexibility to carry forward funds is really important.

If I add a little bit there as well, I'm not sure that the budget document itself is where we'd want to see the detail on service delivery and transformation. But I would want to see it perhaps a little bit more to existing or planned documents setting our such plans. And I think, a little more generally, I'm not sure I detect the necessary sense of the urgency, really, to tackle the issues around public sector performance and productivity in Welsh public services that I would like to see. NHS productivity is still well down on pre-COVID levels. I'm being a bit controversial here, but I think, to me at least, it's clear that the Welsh NHS is performing worse on several key metrics than England, for example, which, of course, already is performing pretty poorly. Welsh educational performance shows some worrying trends in things like Programme for International Student Assessment scores to university admissions.

I think the first part in actually reforming services and tackling problems is to admit you have a problem, and I think in Wales, sometimes, we haven't had, if you like, that really radical honesty that I think perhaps we're starting to see a little bit of in Scotland, under significant pressure in terms of the amount of scrutiny that Scottish Government’s now facing on public services. But I think that the budget isn't where we'd want to see then all the detail on how you're going to transform services and how you're measuring performance. But I would like to see, I think, more of a focus, more of a sense of urgency on the necessity of reforming and improving productivity in public services and then improving outcomes delivered for people in Wales.

Productivity within hospitals reduced dramatically from 2002 to 2014-15. They stopped producing the figures after that, but I've no reason to believe it's not continued to reduce. But productivity is something we don't talk about enough, and the expectation to just provide more money and everything will be all right has always proved to be incorrect. Perhaps that's a comment that I'm sure David might want to agree with.

How is demand for public services changing following the cost-of-living crisis? And does the draft budget enable service providers to focus on meeting these demands? And could local government, for example, for those who pay council tax by direct debit—couldn't they send them their council tax demand by e-mail rather than printing it out and posting it to them?

Guto.

The first part of the question, in terms of the cost-of-living crisis, I guess the main impact on the cost pressures facing public services is on public sector pay—it's having to pay larger levels of public sector pay deals than you would have expected in the absence of the increase in inflation and the cost-of-living crisis. As I think we mentioned earlier, the baseline for 2024-25 is increased by, we think, about £450 million to account for additional pay deals this year. So, that's broadly in line with what we were expecting in terms of the additional announced pay deals, compared to the 2 per cent to 3 per cent that they were expecting when budgets were originally set.

And then looking forward, then, next year, in terms of next year's budget, the Office for Budget Responsibility now makes an explicit estimate or forecast on the size of the public sector pay bill at a UK level, which they say, I think, is going to increase by about 5.6 per cent in real terms. At a Welsh devolved level, there's some uncertainty around the exact size of the public sector pay bill on a devolved level, but we think that a similar increase in Wales at a Welsh level would amount to about £600 million to £700 million. So, in the context of additional revenue allocations on top of the revised baseline last year of about £900 million, the majority or the lion's share of that will be going towards meeting pay pressures, which I guess the Welsh Government would have had to have had at the forefront of their minds when setting the budget for next year. The majority of it will be going towards the public sector pay part of the budget. And given what we talked about before about the additional spending this year, that suggests that for everything else in the budget, there's not much of an increase at all in cash or in real terms, in terms of non-pay budgets for next year. So, I guess that, in terms of the additional pressures from the cost of living, that's the main cost pressure. And, of course, as was mentioned, there are other considerations, of course, in terms of budgets to deal with the cost-of-living crisis.

David.

If I may come in briefly. Yes, I very much agree with Guto there that the cost-of-living crisis, if you like, is not really for the Government. It's mostly a demand pressure, it's mostly a cost pressure. On the demand side, I think that the bigger pressures are those that we've known about for a number of years, with the ageing population, but also a greater number of children and working-age adults with special educational needs and learning disabilities that are increasing the costs of special educational needs provision, adult social care. I'm not sure of the figures in Wales, but in England at least, more of the increase in social care costs has been for working-age adults than it has been for older adults. So, I think those underlying pressures are the main demand pressures. The cost-of-living crisis will have increased demand on certain areas, like temporary financial assistance provided by councils; it may have exacerbated health and housing issues, increasing some of these costs. But I think that, when it comes to the demand drivers, other factors are probably more important. The cost-of-living crisis is really, if you like, a cost-of-provision crisis for the Government, rather than any sort of demand crisis for the Government.

I must say, on the last part of the question about e-mailing council tax demands, I'm not sure whether that would be possible or whether there is legislation that requires them to be sent out by letter. That might be something to ask the Cabinet Secretary for Housing and Local Government.

Diolch. Diolch, Mike. I'll bring Sam in now.

Thank you, Chair. That's a lovely segue to talking about local government. I'm going to ask you a couple of questions around local government finance, and then I want to ask a couple of questions on national insurance contributions as well. So, just, perhaps, as a kick-off, perhaps to Guto or Ed initially, how does the provisional local government settlement affect the funding gap for local authorities? Your view on that. Thanks.

So, the Welsh Local Government Association had estimated a funding gap of about £500 million for local government pressures. When we look at the budget, there's about £253 million of additional core funding for local authorities, and that's on top of an increase in 2024-25 of about £131 million. There's also another £15 million in the health and social care budget for social care. And then if we assume that council tax is going to increase by about 5 per cent, which is another above-inflation increase, that results in an additional about £110 million as well. So, if we add all of those elements up, that pretty much reconciles, more or less, the funding pressures that were estimated initially for the year. So, in this current year, as we've mentioned multiple times, and in the year to come, the pressure is much less than we thought it might have been at the time of the two major parties' manifestos at the general election. So, in this current year, the talk about things like council bankruptcies and so on, that is off the agenda in terms of the current fiscal year and the following fiscal year. I think in future, we don't know; it depends on how tight the budget is. But in the current year and in 2025-26, certainly the pressure is far less than it could have been six months ago.

Just to pick up on that point, Chair, you say that the risk of council bankruptcies is off the agenda. Do you think that's real? I'm just looking at a letter that we've received at committee today from Flintshire County Council, and they’ve responded to consultation on the budget and they’ve said:

'The Council has a major challenge to balance its budget for the 2025/26 financial year. Escalating service demand'—

and it lists those service demands, including the impact of inflation, pay awards, national insurance. And they go on to say that it

'leaves the Council with an estimated additional budget requirement of around £47m.'

So, I accept your analysis of the overall picture across Wales, that £500 million level. Do you think, though, it’s not taking into account individual local authorities and the risk of them falling over at an individual level?

It’s not something that we specifically look at in great detail in terms of looking at it at an individual local authority level; it’s not something we’ve done much work on, looking across at a Wales level, and especially as Ed said, compared to what we were expecting. I think those budget crises would have been across local authorities, which would have been much greater before the announcements in October. And as I said, we haven’t really looked at it at a granular individual local authority level. Of course, it will vary across local authorities.

Yes, and the letter goes on to outline from Flintshire council, for example, that they have the third-lowest level of usable reserves, which I guess is one of the mitigating factors that local authorities can rely on. So, do you therefore then think that the provisional local government settlement is able to take into account individual local authority circumstances? So, for example, there seems to be no flaw in these provisional settlements this time round—is it too much of a blanket approach from Welsh Government, do you think, the settlement this year?

As Guto mentioned, we haven’t looked at the circumstances of individual local authorities. I mean, in general, the 3.1 per cent annual increases are robust compared with previous years, so when we look at the picture across Wales, then this is a settlement that is much better than could have been expected six months ago. Now, all of the pressures that you’ve mentioned in that letter there are true pressures, and so individual councils will be dealing with this in different ways. As a sector as a whole, this is a comparatively generous settlement compared with previous years. That’s all I think we can say on an individual basis.

I suppose it’s the variation in the formula that’s an average rather than a top and a bottom.

Absolutely.

And obviously that’s a concern to local government, and I understand that you haven’t done any analysis on that, but anything that you might do in the future would be of interest to this committee. David, did you want to come in on that?

Yes, so I’ve not looked in detail at the situation for Welsh local government. I’ve done a lot of work on English local government as part of my role here at IFS. One thing I’d say about Welsh local government is that there still is, if you like, a functioning system of allocating funding to local government that tries to account for differences in how the need factors are changing, like demographics and differences in how the tax base is changing for local authorities. That doesn’t exist in England at the moment; the UK Government is undertaking a review to bring a system back in. The last Government had planned to do that but it sort of kicked the can down the road somewhat.

Now, of course, there will be a debate, a legitimate debate, about what the system should look like, how it should rate different factors, and maybe they're the kind of issues that are being alluded to by Flintshire council—they feel that the system in place in Wales isn’t properly reflecting what the real cost pressures are, what the real ability of different councils to raise taxes is. So, I think you should always, even if you have a system in place, keep it open for review.

The other point I would quickly make as well is that the local government finance settlement can only to an extent take account of individual council circumstances. To the extent that different needs factors are different for individual councils and they’re being picked up by the spending needs assessments, it can do that, but to the extent to which different councils have more or less reserves, or have seen bigger or smaller increases in their spending, you don’t want to actually account for individual councils' individual financial situations, because it could potentially undermine, if you like, the financial incentives for councils to constrain spending, control spending, and manage their finances prudently. So, there is a kind of difficult balancing act there about the extent to which you want to account for individual circumstances that affect the need for spending and the amount you can legitimately raise through council tax, but without actually taking account of the actual spending and the actual financial position, which can then undermine, if you like, the financial controls and financial incentives of local government.

Thanks, Chair, and thanks, David, for that further comment, and it's a fair point. I guess the further point, though, is that the individual circumstances of local authorities can give an indication as to the quality of the settlement formula and the way in which it plays out. So, I guess it does need to be understood and taken into account to ensure that the formula is as fair as possible is the point—

I would agree with that, yes, and that is certainly an argument that the UK Government has been making when looking at the finance system in England, looking at the differences in terms of the same reserves for more or less deprived councils, saying, 'Look, we're not going to then cap your individual reserve levels when we give funding, because that then distorts your incentives, but this pattern is indicative of the fact that the existing allocation system is perhaps not reflecting the true difference in needs.' So, I would agree with what you say there, yes.

Thanks, David. So, just moving on a bit further on the local government settlement, I wonder if there's been any analysis or understanding of the impact of the budget for statutory and non-statutory services. We've heard a lot about the impact on preventative services and the potential for more expensive services to have to be provided if preventative funding isn't in place. So, I don't know if there's any analysis that either of the organisations have done to understand the impact on those statutory or non-statutory services that local authorities provide as a result of this budget. No? No. Anything from David at all?

No. I think the only thing I would say is that one thing that's particularly true for Scotland and Wales for local government is that the number of school pupils is now falling, and in some areas it's falling reasonably rapidly. To some extent, that might actually then help free up funding that can be used for other council services, but that would require difficult decisions around school numbers and teacher numbers. I think that's one of the tricky decisions that councils and perhaps the Welsh Government as a whole will be facing over the next five years.

Yes, that's fair, David, thank you. Moving on to the national insurance impact, then, from this budget, I wonder if you have a view of the impact of the increase in national insurance employers contribution, in particular taking into account the larger proportion of public sector workers in Wales, the larger proportion of businesses that would either be in the hospitality or care sector and that would traditionally be lower wage jobs. I was just wondering what impact that may have for us here in Wales.

Yes, in terms of—. Sorry, David—

David, you go first and then Guto.

No, you go, Guto.

Just to say that it's very difficult to model in terms of the budgetary impact of it, and it will be, given the available data on the wage structure in the public sector in Wales. We are expecting further—there's a pot of funding in reserve by the UK Government that will be allocated. It would have been beneficial to have that allocated sooner, and we'd know then how much funding the Welsh Government had to spend on the pressures on public services. The key question, I guess, then, is how that funding is allocated, whether it's just the Barnett share with the needs-based factor of 105 per cent. Is it 105 per cent of whatever is spent in England on this and whether then there is a differential between the Welsh share of the public sector pay bill, compared with what the funding that's going to come down the line is? I can't imagine that it's going to be—this was a particular issue in Scotland that David might know more about. I can't imagine it being too great, that difference between the amount of funding coming down through the Barnett share of it, but it will be a factor in comparing and scrutinising the eventual figure that the Welsh Government receives. The other unknown, I guess, is how much it's going to cost private providers of public contracted services, third sector organisations that provide services as well.

Before David comes in, and perhaps he wants to expand on my next point as well, because there is real concern, isn't there—? We call them public service delivery bodies, whether that's the third sector, the private sector or public sector, they still provide a public service. As you've pointed out, it seems at the moment that any additional money to support national insurance increases is directed towards public sector bodies only. I just wonder what you think the impact on the broader public service delivery will be if those service delivery partners are not supported.

We've got a letter today from Tenovus Cancer Care that's come through to our committee, and they've outlined that, for just one organisation alone here in Wales, it's going to cost them a minimum of £0.25 million a year, the national insurance impact. Of course, that's going to impact the people they support and make it more difficult for them to support all the people we'd like them to. And that's been replicated all across Wales with all sorts of organisations. So, I'm just wondering what your view is more broadly on the impact on public service delivery of the national insurance employer contributions. I'm not sure if David wants to come in first and then we'll go from there.

On that particular point, as you say, yes, the UK Government will provide additional funding—probably via the Barnett formula, or at least that's what the rumours are in Scotland—to pay the cost of higher employer national insurance for public sector employees that are employed directly, but not those working for third or private sector organisations funded by the Government. That includes private sector or third sector social care providers or childcare providers, and it also includes universities. The Welsh Government could choose, if it wished to, to provide funding from its general funding to provide compensation for those organisations, but, of course, that would mean less funding elsewhere.

I think, also, it's important to distinguish between short-run and long-run impacts of the increase in employer national insurance contributions on employers and on workers. In the short run, it probably is employers who bear the burden of the higher bills. In the long run, though, research suggests that most payroll taxes, like national insurance, get shifted into workers' wages in the form of lower wages. Indeed, the OBR estimates that over 60 per cent of the increase in employer national insurance will, after two to three years, be reflected in lower pay settlements, with around 20 per cent shifted on to consumers via higher prices and just 20 per cent being borne still by employers.

What this means, I think, in the short term is that public sector employers will see their employment costs rise in line with employer national insurance bills and the funding provided to the Welsh Government will therefore be needed to compensate for that. But in the longer term, as a larger part of the burden of employer national insurance, first in the private sector but then also in the public sector, is shifted on to workers in the form of lower wages, given that the public and private sectors are recruiting in, often, quite similar labour markets, I think that will then reduce the pressure resulting from the national insurance bill increase on employers' labour costs, of course shifting that pressure on to households' post-tax income.

What I'm saying here is that, in the short term, this money might be needed to compensate public sector employers for the costs. In the longer term, actually, if some of that gets shifted to wages, some of that money then might be more available to spend on other things, for example including compensating the third sector and private sector providers of public services for the residual part of the cost pressures that they're still facing. I'm not trying to downplay this issue, but what I'm saying is that we need to distinguish between the short and longer terms, when, actually, the burden is going to be less on the employers in the longer term, probably more on their workers.

I want to move on to some questions about tax policy. We've got about five minutes left. I'll come on to some questions from Mike Hedges on tax policy.

Diolch, Cadeirydd. Do you have any views on which areas the OBR should focus on to improve Welsh tax forecasts?

In terms of the outturn and comparing to forecast, I think the OBR has a pretty good record, and it lays that out in its documentation. The comments that we've made in previous sessions with the Finance Committee have been around the presentation, the narrative and the depth of analysis that they provide in the documents, and I think that has improved. I think there's a greater focus on what's happening, underlying the Welsh forecast.

I think it's worth reiterating what we said last year in terms of the importance of the forecast of comparable UK Government revenues, which is just as important for the Welsh budget. It's the difference between Welsh taxes and revenues and what happens to the block grant adjustments, which are linked to English and Northern Irish revenues. So, I think it might be a place just to delve in to.

The big story of the forecast is how beneficial it's been for the Welsh Government budget. Currently, next year, it's about £317 million net benefit from tax devolution. That isn't insignificant. It's about 1.4 per cent of day-to-day spending allocations. It's about equal to what the Welsh Government would receive if they increased a penny on income tax. That's a big change in the size of the Welsh budget resulting from these tax changes. So, I think understanding what's happening to the relative performance of the Welsh economy should be the focus of the OBRs presentation of the forecasts. That said, the forecasts themselves, I think, have quite a strong record in that regard.

Maybe just one more point. The Welsh Government publishes tables in the annex of the draft budget, which are especially useful for anybody interested in this area. I think it would be equally useful if the Treasury published another version of their block grant transparency data, which they haven't published since, I think, July 2023. That's 18 months, almost, where we don't know what's happening to the underlying block grant. And they provide additional information in terms of the block grant adjustments as well, which I think would be useful for the Finance Committee.

David, did you want to come in on that? I'm just conscious of time, that's all.

All I would say is that I would very much echo what Guto says there. I think there could be some scope to move towards, in the longer term, a bottom-up approach for the Welsh forecast: rather than take UK forecasts and apply Welsh shares to them, actually a more bottom-up approach for the forecast, like the Scottish Fiscal Commission does. But that would probably be quite a significant investment that would require the Welsh Government to contribute more funding to the OBR to help them do that. But, as Guto said, I think the key thing to improve in the short term is to actually focus more on the net position, which is what ultimately matters for the Welsh budget, rather than just the actual forecasts themselves.

Wales has benefitted from the freezing of tax bands, hasn't it? If tax bands had gone up, then Wales would have been disadvantaged. Keeping the previous tax bands has put more people into each of the tax bands, which has benefitted Wales compared to the rest of the United Kingdom.

In terms of income tax receipts, yes.

I imagine that's a lot of what's driving the improved performance. It would be nice to have some sense of that. Maybe the Welsh Government might not want to delve too deeply into that. They might take the bonus from tax devolution and not want to look into the granular detail. But in terms of the OBR forecast, it would be nice to get some sense of what different components of the forecast are driving the better performance of Welsh taxes.

One factor also—and HMRC put out an analysis of this—is that, since about 2018 or so, there's been an increase in the net migration of the tax base into Wales, and also into Scotland. It seems that, effectively, starting just before COVID, but then accelerating during the COVID period, there has been an increase in migration on a net basis into Wales, and a large part of that has been relatively higher paid individuals. So, part of it is also a shift in tax base to Wales that wasn't taking place earlier in the 2010s, for example.

And finally from me, the Welsh Government published their fourth tax policy report this year. What is your overall view of how ambitious and effective the Welsh Government has been using existing powers?

Briefly, the main story here is the postponement of the council tax revaluation and the more general reforms until 2028. In terms of the tax powers that the Welsh Government has—income tax, council tax, business rates—the decision to postpone council tax reform is the main driver here. We have, in many sessions and in many reports, argued about the relative progressiveness of council tax relative to income tax. We're still seeing double digit increases over the multiple year period in council tax, which will have a significant impact, particularly on people on lower incomes, compared with income tax, which is a more progressive tax.

The other one is on business rate reliefs. We've got now the 40 per cent rate relief, which has been matched by the UK Government, so there's less difference with England than there was. The risk on that is that 40 per cent relief is capitalised into rents, so over the longer term—and we're now talking about the fifth, sixth year in which this relief has been in place—the risk is that there's a transfer of public sector resource into private sector landlords as that 40 per cent reduction is capitalised into the rent. I think those are the two main areas on policy.

You say income tax is progressive, but we know it isn't, don't we? Income tax is so easy to avoid. People don't get paid by income, they get paid by dividend. They've got so many means of reducing their income tax. The advantage of council tax is you can't up your house and move it, and you can't do anything to reduce its value apart from reducing the size of the building.

If I come in on that one initially, I think it's right what you say there, that there is an ability to avoid and evade income tax in a way that there isn't for council tax, at least to the same extent. It's still the case that income tax is much more progressive than council tax, even bearing that in mind. But because of the reduced abilities to avoid and evade council tax, because, if you like, property wealth is also an indicator of people's ability to pay, not just their income, it might be a more efficient way to redistribute a little bit less via income tax and a little bit more via council tax by having a revised, up-to-date and then slightly less regressive, or perhaps even proportional or progressive, council tax.

I would echo what Ed was saying in the fact that it's disappointing that the Welsh Government did postpone the revaluation and wider reforms of council tax until 2028, although it is good that it is now legislated for to be valued at that point and every five years, in primary legislation. Much work had already been done. It would have been possible to do it in April 2025 and start to move towards that system.

I'd also agree with Ed on business rates. I'd say, actually, another tax the Welsh Government should be making changes to is land transactions tax. I'd be arguing that the further increases in the taxes charged on the purchase of second homes, including rental properties, is actually a step in the wrong direction. It further exacerbates the damaging bias against the private rental sector in our tax system, and by reducing the supply of rental properties, will increase the cost of housing for those unable to afford to save for a deposit to buy a home themselves, because rents will be higher. And given the role the rental sector plays in the mobility of particularly young people, it will also make it harder for people to move for educational or job opportunities.

Given the Welsh Government has control over the three major property taxes—business rates, council tax and land transactions tax—I would like to see a more joined-up strategy for those property taxes: a revalued and reformed council tax, business rates transformed into a commercial land value tax, and significantly reduced—or ideally abolished—land transactions tax. I think you do all of that and then, as Mr Hedges was saying, think about how you use property taxes versus income tax in terms of redistribution, and I think you'd have a fairer but also a more efficient tax system in Wales.

Thank you very much, everybody, for that. That brings us way over time, but as always, very interesting.

Thank you very much for your time. It's great to see you here giving your opinion on the budget. There will be a transcript for you to check for any inaccuracies—let us know. We'll take a short break now to reset the room. Thank you.

Welcome back. We've reset the room and are pleased to see our witnesses here for the fourth evidence session.

Welcome, good morning. Would you introduce yourselves for the record, please, and we'll start with yourself?

Bore da. My name is Natalie Zhivkova. I'm a policy and insights manager at Wales Council for Voluntary Action, WCVA.

Fantastic, croeso.

Bore da. I'm Victoria Vasey, director of the Women’s Equality Network Wales.

Fantastic, croeso.

And good morning, bore da. I'm Simon Hatch. I'm the director for Citizens Advice Cymru.

Fantastic, croeso. Welcome to you this morning. We've got an hour or so with you and appreciate you making yourselves available, and there will be a transcript for you afterwards as well, just to check for accuracy. I'd like to—. Obviously, we're talking about the draft budget and I'd like to start with looking at how it's impacted on, or how the cost-of-living crisis is reflected in the draft budget, and the Welsh Government's progress in implementing some of our committee's recommendations. As a general to you all, what do you think of the Welsh Government's funding allocations for 2024-25 and the pressures it did and did not alleviate, or what impact did that have on supporting people with the increasing cost of living? Maybe we'll start with Natalie.

I think we can all agree that last year's budget was quite difficult for everybody. I think, for the voluntary sector, we have seen the impact of the across-the-board cuts. We like to refer to this as 'death by 1,000 cuts', because when there are cuts across all the portfolios, naturally that means there are going to be cuts for the voluntary sector as well. So, we did a recent survey of the voluntary sector in Wales, and from them we got that around 40 per cent that said they've received less public funding in the past 12 months, and also around 50 per cent said they've received no uplift to any grants or contracts. And, of course, with inflation, that's a big problem for them.

I think it was particularly tricky for our sector because we were already in a difficult financial position when last year's budget came. So, the loss of European Union funding, which I would have to say that the UK shared prosperity fund didn't replenish completely, plus really high service demands. We're still seeing the impacts of COVID. We have issues with recruiting and retaining staff because we're not able to offer competitive wages, again because of low public contract sums, and also the fact that they're usually annual and not multi-year. So, it's very precarious employment; obviously, it's not attractive. Also, the difficulty in recruiting and retaining volunteers was an issue, and the cost-of-living crisis impacts organisations as well as individuals. So, operationally, it was quite tough. So, last year's budget was really quite difficult for us. I can't really say it alleviated any of the pressures; I think it just added to the plethora of pressures we already had as a sector.

Looking on to the budget this year then, and I'll probably ask the same to others, have you seen any lessons learnt in what you've seen from the draft budget for this next one, anything that's giving you a little bit of hope?

Well, we were expecting a bit more from it, I will be honest, because we knew that the settlement was much bigger, so we were hoping to see almost a change in the narrative as well. If you read the budget narratives for last year and this year, I think prevention is not mentioned nearly as many times, for example, as two years ago. So, we are not seeing that long-term thinking, a future generations-informed approach to long-term solutions and prevention. It's more about addressing the challenges right now—you know, putting injections into the NHS to make sure we lower the waiting times. But when there isn't central guidance to invest in prevention and because there is such little detail in the budget—the voluntary sector is not covered in it, really—we can just hope that, say, local authorities, regional partnership boards and others will be spending some of the money they get on prevention, but there is no direction to do so. So, it's early to say, but so far our priorities are not really represented in what we've seen in the budget.

Victoria, you probably agree with a fair bit that you've heard, so in the interests of time, if you don't necessarily repeat, but if there's any extra or anything else that you've seen within the budget, if you'd care to comment.

Yes, of course. So, I think we would endorse all that Natalie says. I think in terms of the third sector more generally, I absolutely support her comments. I think in the women's sector it's been particularly difficult. As I'm sure you're all aware, Chwarae Teg closed towards the end of the year before, which has left a huge gap in the women's sector that simply hasn't been filled. The funding that went to them has not been reallocated within the sector to any extent that I'm aware of.

In terms of women's vulnerabilities to the cost-of-living crisis, that's something that has been front and centre of all that we're doing. We know that women are far less likely to be economically active than men. We know than they're two and a half times more likely to be in part-time work. They're three and a half times more likely to be out of work in order to deal with caring responsibilities. When women are in work, they tend to be in work in lower paid sectors.

So, all of the hardship measures that we saw in last year's budget were very, very welcome. So, we're looking at the discretionary assistance fund, we're looking at the council tax reduction scheme, the Warm Homes programme. They're very welcome, absolutely essential lifelines, but they're sticking plasters, short-term measures that are not looking at the structural problems, and I think that probably picks up a little bit on what Natalie was saying. I think, if we're looking at lessons learnt on that point, again, we see the DAF increases—we welcome that, obviously—but we're still worried that that's short termism.

In terms of, I think, investment in public services, last year was difficult. It was difficult, and that was difficult for women. Women rely on and work in the NHS, in social care, in local authorities, and funding was low. There are improvements this year, but we'll wait to see how that comes out. I think in all of this the devil will be in the detail.

Childcare was probably the big issue that we focused on last year in the budget. You'll be well aware that there was a huge cut to childcare financing by £11.2 million, I believe. That was a huge loss. We do have investment this year, which is to be welcomed, but it's against cuts in the previous two years, and it feels a little bit like an exercise in smoke and mirrors insofar as we're perhaps not getting the investment into childcare this year that we would expect in a budget where—. This is the money budget, right, and we feel that perhaps we have learnt lessons—this has learnt lessons—but we're not looking at structural issues within childcare, and we're not doing much more than mitigating the cuts that have come in the last year or two.

And, Simon, from your point of view then, anything you'd like to add?

Yes. I think, firstly, just to highlight that it's important to restate the essential nature of independent impartial advice, and much of our comments are based on the research we've done with our clients and communities, but, of course, also the 19 local Citizens Advice independent offices around Wales.

So, I would also echo what both Victoria and Natalie have said about the sector more widely. There are a couple of elements of balance that I would highlight to that. Does the overall approach need to be more preventative? Yes. Are there examples where some of that is included? So, yes, partially. And thinking about the delivery of the single advice fund funding and additional funding around the discretionary assistance fund, there is an element within the mechanism for the single advice fund to potentially extend now over six years, which is an important example of some of that medium to long-term thinking that we've been discussing, and I think that's a really important element for local Citizens Advice in Wales.

At the same time, we warmly welcome the increase in the discretionary assistance fund, and that is absolutely needed. So, there is a crisis right now—we understand where that situation is, that the cost-of-living issue has not gone away—but there is a need to build into that elements of more medium and long-term and preventative thinking, not least thinking about how that could be integrated into some of the work of the discretionary assistance fund itself. There are real impacts that are being had on the partner deliverers for DAF, in terms of pressures because of the increase in demand and the complexity of the cases. So, we think that reviewing and thinking about that by Welsh Government going forward would be important—to have conversations with us and others.

So, yes, I think it's a balance. There is a real cost-of-living crisis still carrying on. The needs in terms of advice providers are absolutely outstripping the support that we’ll be able to access. While there have been some steps, absolutely, in the right direction, that really needs looking at in terms of the next few months and the final budget.

With the announcement on the winter fuel allowance by UK Government, have you seen that—? What’s been your experience in advice centres? Have you seen more people coming to you on that aspect, or what’s that experience been, because as an organisation, you’ve talked about it?

Yes, no, absolutely. I mean, yes, we have seen more people coming to us and we’ve done a lot, genuinely in partnership with Welsh Government as well, around access to pension credit. Over the last few months particularly, we’ve seen, I think, just under 3,000—2,500 to 3,000—extra people supported around that particular issue in the last few months. So, it’s too early to say exactly what will happen, I think, as an impact from that decision, but we know, in terms of the people who are coming to see us, that there is a lot of concern around that threshold just outside winter fuel payment access, and people are concerned and worried about that and that has driven an increase in people trying to access Citizens Advice.

And as a gateway into other forms of help, that's a real issue as well. Speaking to older people who are marginally over—£1, £2, £3 even—the threshold, it's a hard cut-off. Are you seeing that sort of thing in your call centres?

Yes, absolutely. And I think it ties back to the wider point about pressure. Because of that cost-of-living crisis, the number of people coming to see Citizens Advice is increasing continually. There are more people coming to see us about crisis at risk of homelessness than there were last year. There are more people coming to us in debt, who we are referring to a foodbank, than last year. So, the complexity of and the numbers of the cases that are coming to us are going up and up all the time, which is why, when you highlight the point around the winter fuel payment and the overall impact of the budget, despite the positive moves around the single advice fund and DAF, those are simply not keeping up with the level of demand, which is just sky-rocketing, and the issues for people are increasingly real and damaging. Also, it’s important for me to just finish by saying that that’s having an impact on our advisers as well, because that pressure is going up and up and up, and it’s having an impact on their mental health and on the capacity we’ve got to support them—all of those issues are as much of a priority for us at the moment.

The Welsh benefits charter was published back in January last year. I wonder what your thoughts are on that. Has the charter done what it committed to do or not? And I don't know if I want to start with Simon or go to Victoria or Natalie. I'd be interested in all your comments on it.

Very quickly, I think it's trying to do what it intended to do. I don't think it's there yet; it's in progress. I mean, in principle, we would say a couple of things: one, that there is absolutely a clear need behind it. There's a complex nature and confusing nature for so many of our clients when they're coming to us to think about approaching and applying for benefits, whether they're locally administered or not. So, it's absolutely the right thing to be doing. We would also always in principle like to see those things, not just on a voluntary basis, but to have a firmer footing to them, so that there's a commitment to absolutely always have to turn up and make it happen. So, yes, it's the right thing and it's in progress, but it's really important that it continues to make progress and continues to engage with the charitable sector, where a lot of the impact of this is being felt.

Victoria, we were talking a bit about winter fuel allowance issues, especially for older women in particular, but also the benefits charter. Do you have any thoughts, or anything that’s coming through your network or the budget group?

Broadly speaking, we’re supportive of the charter. The ideas behind it are good. How it actually works in practice, in the end, I think, remains to be seen. One of the things that we’ve focused on is the council tax reduction scheme. It’s incredibly important to get that done, and get that done quickly, given that we’ve seen—I think it’s until 2028—that the review has been pushed back.

From a gendered perspective, one of the important things to incorporate in any of the work of the charter is thinking about household-level payments. They impact women in particular, insofar as they often impede women’s ability to be financially independent. Any household-level payments may exacerbate abusive relationships and situations, and keep women within those relationships. So, I think, part of what we’d like to see with the charter is that thinking going into its implementation. Other than that, I don’t think we have much more to add.

Do you have anything to add, Natalie?

Nothing in addition, really. I would say that there is no impact assessment on the charter yet. So, because we don’t work with clients, individuals, directly, it will take some time for us to see. But I think the intention behind it is excellent; it’s just to see now how the execution goes.

With the winter fuel allowance cuts, are you seeing that coming through in any of the conversations you’re having with your members?

I think it would come across from organisations such as Citizens Advice. But it would be part of a plethora of many issues, so we don’t go so granular in the details of individual polices like that.

Thank you. Before I go to Sam, just looking at your stakeholders and the people that you’re here representing today, what’s your overall view of the draft budget, and does it address some of your priorities? Which ones does it address, and which ones does it not address? Maybe we’ll start with Natalie.

We asked our stakeholders what their two priorities for the budget were before publication, and they were multi-year core funding for the sector, which is a long-standing priority, and the other one was public contract grant increases, or another specific mitigating measure for the increase of national insurance contributions for employers and the national living wage.

The budget doesn’t mention any of those things, so it guarantees neither as it stands. Because we also don’t have the portfolio-level specifics of the budget, we can’t really comment on it right now. The only elements that we can potentially judge upon is that there is a £10 million modest increase of the social justice budget. But, of course, that’s the smallest budget of all of them, and that’s not the only budget where we’re hoping to get some funding through. It’s about a 7 per cent increase, which is nothing much to comment on really. I think part of the problem is that, at the stages where we are able to input into the budget, we don’t have the details necessary to be able to assess what the impact’s going to be, and that’s been another long-standing issue.

There are already existing instruments that could have been, for example, pointed to within the narrative. One of them is the code of practice for funding the third sector. This is an existing Welsh Government document that’s been recently refreshed. It refers to multi-year funding, core funding, and it provides that guidance. That could have been included. There could have been more uptake from public bodies of that. And, similarly, of course, we were hoping to see a specific measure for the national insurance contributions.

Victoria, is that similar to your experience?

Yes. I think, probably, the thing to underline, which I started with, is childcare, and understanding the extra £20 million and how that’s going to be spent. I think we have a good sense of that, that it’s going to uplift the hourly rate for service providers, which is great, but it’s still not uplifting it to the level at which service providers say that they need to be at in order to be able to provide sustainable childcare. Childcare is incredibly important for our members, insofar as it's a sector, it's an industry, that has predominantly a female workforce, and, obviously, its users, insofar as families, are predominantly women, in that they are the main, primary or sole carers for children. So, we really welcome £20 million—it's not to be sniffed at—but we are concerned that it's not looking at structural issues that we see around the provision of childcare. It's not clear that the roll-out of Flying Start, which is supposed to be happening, is funded at all. So, we feel that there's a lot of structural work to be done. We feel that a focus on Flying Start would be incredibly important—it's a flagship, wonderful scheme, but it's very limited in its accessibility. And, again, I think we would like to see more medium to long-term thinking throughout. The increased spending on violence against women and girls we very much welcome, but, again, the devil will be in the detail, and we don't have the detail, so it's difficult to comment. And then, finally, overarchingly, data is difficult. Sometimes, finding a gendered perspective, understanding the gendered perspective, of many policies is difficult, insofar as the data isn't available. So, across all of this—

Is that from a collection point of view, or is that in terms of presentation? So, is it collected and not—

It's unclear. When it's for Government or public sector to do that collection and publication, it's unclear—it's not reaching us. So, whether it's collected and then stored somewhere, or it's not collected, I'm not sure. But across the board, we would really encourage more data collection, and particularly disaggregated data collection.

Okay. Thank you. Simon.

In terms of stakeholders, there are two or three points to make. Does it address the overall demands that I referred to earlier in terms of advice need? No. There's absolutely more that needs to be done there. But there are some positive steps, which I highlighted earlier, and won't repeat. There is an important balance between that preventative element that's needed and the crisis right now. I echo the points that were made around national insurance contributions—and maybe we'll get on to those further. But also, there are some practical elements, just in terms of the nature of that crisis, just to really reinforce the evidence that we are seeing. There are potential practical changes; I'll just highlight one example. You could potentially move from three payments in a year under the discretionary assistance fund back to the five that was brought in temporarily during the pandemic because of the level of crisis and the pressure on people. If anything, that's not gone away—that's got worse, because of the cost-of-living crisis more generally and the overall impact and pressures on people's finances and the barriers that they're facing. That's just one specific example that we would call for within a wider review of DAF, to try and move forward in a way that really addresses the challenges that our clients are seeing.

Thank you. Sam.

Thanks, Chair. Good morning, everybody—I appreciate you being here with us today. I just want to come on to the points you started to mention on the employer national insurance contribution pressures. Natalie, from the WCVA side, in your response, you said that

'The simultaneous cuts in preventative spending across multiple portfolios left many organisations in a very vulnerable financial position.'

And on top of that, of course, are the national insurance contribution pressures as well. I'll perhaps start with you, Natalie. Would you be able to just expand on the impact that organisations in the third sector are feeling as a result of the increase in national insurance contributions?

Yes, of course. They haven't come in yet, so all the impact is, of course, speculative. It's quite difficult to calculate the actual impact. I know a lot of times we're asked for figures, but if you want to hear some, the National Council for Voluntary Organisations estimated it as £1.4 billion UK-wide for the voluntary sector. I know that the Conservative group within the Senedd likes to use another OBR calculation for the Wales portion of the sector, which is about £100 million. I think the WCVA want to focus more on how varied the impact actually is, and it can really disproportionately affect certain organisations, especially if they have a lot of sessional, seasonal part-time staff. It really quickly adds up.

To give an example of some organisations that would be household names you’ll be aware of, Tenovus—I believe the committee has received a letter from them—are looking at about £250,000 a year. As a result of the increase, similarly, the Welsh branch of Marie Curie, for example, is looking at £256,000. Those will be larger charities. When we talk about medium sized we’re getting figures in the range of between £13,000 to £16,000, which may not sound much when we’re talking about distribution of millions here, but for a small organisation that is a part-time staff member, that is the opening hours for a service being reduced.

I think the issue is that, unlike businesses, who, granted, would also struggle with this, our sector can’t really increase the prices of our services to end users. Most of the things are done for free or at a very discounted rate. Equally, if they’re already paying uncompetitive wages, there is very little wiggle room for making those wages even more uncompetitive. Despite all that, we have surveyed the sector, and a lot of them said one of the measures they would take is not offering pay increases, reducing staff, reducing referrals that they receive. We know that 84 per cent of organisations told us they are quite concerned about their ability to respond to this increase, and they are considering all possible measures to mitigate it. But, ideally, we’d like to see some Government support for this, because it’s not an issue that’s going to go away.

Perhaps before others respond as well, just on the important point you raised there, that the sector broadly, generally, can’t necessarily increase the cost of its services to people, it would be more difficult, perhaps, for them to do that, I guess lots of the funding that comes through is either through grants, fundraising, or through specific contracts, in particular with local authorities. Are you getting any confidence that that is being recognised in terms of the funding that may flow through from local authorities in particular? Do you want to respond to that?

Nothing yet. We know that there’s been no official guidance, at least not to our knowledge, unless it was private, to local authorities, regional partnership boards and so on, to pass on some of that extra funding they’ve received. Also I feel like there’s not really been an acknowledgement by the Welsh Government of the issue. I believe that the Cabinet Secretary for finance did say to this committee that they don’t believe they should be introducing any mitigating actions in regard to that. And also, at UK Government level—I think there is actually a session happening in the Commons today—there is no intention of doing so.

That's very helpful. Does anybody else want to respond to my initial question? Perhaps Victoria.

Again, to endorse Natalie's comments, I think maybe also it might be helpful to stress that this is the third successive financial hit to charities. We had loss of EU funding, then we had the cost-of-living crisis, and now we have the NICs increase. It just seems to keep on coming. There seems to be little respite.

Although this obviously doesn’t pertain to NICs, given that this happened before and the impact hasn’t been seen yet, the closure and the shrinking of the third sector, which is only going to be exacerbated unless the national insurance rises is mitigated, is really seeing a huge loss of expertise within the sector. A lot of time, effort and money goes towards training people to become experts in our fields in very small, very vulnerable organisations. And once that expertise and those people are lost out of the third sector, it’s incredibly difficult to get them back.

That’s a general comment, I appreciate, but I think as the national insurance rises do hit, that will be exacerbated. And it’s exacerbated in smaller organisations, particularly 'by and for' organisations. In the women’s sector, we’re looking at migrant women, we’re looking at survivors of violence, and black and minority ethnic women organisations being particularly hit, and that’s a double and triple whammy, I think.

Just before I come to Simon, one of the things that the Cabinet Secretary did say when he was in front of us just before Christmas was that he was anticipating hearing something in April/May/June time around the NI contributions flowing back. Maybe, from a specific organisational point of view, as you're talking about this, what planning assumptions can you make based on—? There's a risk that that money will not come to you. How does that work when you're working through your budgets for your own organisations and possibly stakeholders that you're working with? So, just maybe a comment on that would be of interest to this committee. I don't know if Victoria wants to go first, or—.

Sure. It just makes it very difficult. It makes it more complex and uncertain, and it makes it less likely that there can be effective planning. There is some certainty around the advice sector with the extension of the single advice fund, which is really important. It's important to put that on record, and that's really, really valuable. It doesn't exist in the same way in England, and it's something that is incredibly valuable about the way we work and recognise independent, impartial advice in Wales. But the immense pressure that we're already feeling, in terms of local Citizens Advice, from a financial perspective, makes that really, really difficult, Chair. Bluntly, it means that you have to go into reserves, if you've got enough of them, or lose colleagues.

One of the things that he said during the evidence session was, because we were talking about money coming to the NHS and the way that Welsh Government budgeted back then was to take a risk-based approach to budgeting. Now, as trustees of charities, and that sort of thing, how comfortable would you be in taking a risk-based approach to your budget?

Well, I won't speak on behalf of, obviously, all 19 local Citizens Advice, but that will hugely depend on the size and scale of those organisations themselves and the level of—. It's incredibly difficult, as I said earlier, to meet demand now, and so this is just going to add another level of pressure and risk, and that will be factored into the trustees’ plans between now and the spring, no doubt. But they're going to probably have to make some really difficult decisions that are going to impact people in Wales.

Can I just pick up on that?

Yes, carry on now. Sorry, Sam. I just wanted to come in on that.

Thanks, Chair. So, you just started to touch on it there, Simon, I think. So, I think you've really well described the organisational impact of this national insurance pressure. So, you talked about possible redundancies, possible pay cuts, possibly dipping into reserves. And then Victoria outlined the risk of people just leaving the sector. I was wondering if you could really briefly—I'm conscious of time—just then describe what you think the biggest risks are to the people that you're serving on a day-to-day basis as a result of those organisational impacts and because of what may be down the track.

That they can't access the support they need at the time that they need it.

Okay. Anybody else want to say anything?

I think it's as simple as that. For our members, it's as simple as that. For those of us working more on a policy level, less work will be done. And I hope the work is valuable, and I think, already, in our sub-sector in particular, the loss of Chwarae Teg has left a huge gap, and that gap will widen at a time when it needs to be closing.

Anything you want to add, Natalie, at all?

I would say that, for us, we know that 69 per cent of organisations are already using charity reserves, and when we asked them if nothing about the financial situation changes, would they have to start considering major steps such as closure, about 38 per cent said that they would have to start considering that in six months to a year, which is really concerning. It basically means that if those organisations close, all the service users are going to be left with nowhere to go, because most people go to the charity sector because the public sector is not offering what they need. So, there is no fourth option after those organisations close, and I think that is the biggest risk that we've identified.

Thank you. Okay, we'll move away from the national insurance impact for a moment and I just want to touch on the housing support grant. I think, Simon, earlier on you mentioned that, from a Citizens Advice perspective, homelessness is one of the biggest areas of support and advice that the organisation provides in Wales. The draft budget reflects an increase of £21 million for the housing support grant, which means that there will be around £204 million-worth of HSG money. I guess you welcome that, of course, but I'm wondering whether you feel that that is going to be enough. Is it a big enough allocation of funding and recognised priority to deal with the issues that are either at Citizen Advice's front door or other organisations' front door?

We certainly welcome it. Yes, absolutely. Is it going to be enough? I think in the—. Well, there are probably specialist housing-related charities that will inform you in more specific detail, but it's clearly still going to be challenging. It's very important that it's there, but the environment out there, as has been described already today, is incredibly challenging. So, I imagine that that's going to be difficult anyway.

So, the ability, from a Citizens Advice perspective, for the Government to think really boldly about areas like the Warm Homes programme and how energy efficiency can be driven forward in terms of the housing stock in Wales, and access to social and private rented accommodation, are the key factors as far as we're concerned, and we're seeing those pressures given the poor, or relatively poor, level of energy efficiency of homes in Wales. That's a really key element that I would stress there as well.

And just, yes, to go back to the fact that we are seeing year-on-year increases in the number of people both in debt and coming to us for general advice, who we are having to talk to homelessness charities about, referring to foodbanks, that continues to increase. And it's particularly impacting the most vulnerable. So, the people who are numerically at the top of those access-to-support lists for us are the disabled, single parents, parents with young children and private renters. So, all of those are in a particularly challenging financial position vis-à-vis their homes. So, yes, it's absolutely welcome, but all of that context is really important.

Yes. Thank you. I'm not sure if anybody else wants to contribute, Chair.

Yes, if you want to address that, or I'll move on to Mike Hedges otherwise. No. That's fine. Mike, I'll bring you in. There we are.

Diolch, Cadeirydd. To Victoria, your response to the draft budget said that the draft budget was

'a regrettable missed opportunity to address the fundamental issues with childcare in Wales'.

Can you expand on this? What could the Welsh Government have done to reduce the impact of a lack of affordable childcare on women with the resources available? And if you want to spend money on that, where would you like to take it from?

I'm not sure I can answer the last of those questions. I think it's a missed opportunity insofar as it doesn't look at the structural difficulties that we have in childcare provision. We've got an incredibly complicated system whereby Flying Start, as I mentioned earlier, is an absolutely wonderful programme, but the coverage is very patchy. It's only available to the youngest of children. You then move on to the childcare offer, which is only available to three and four-year-olds, but is not available to the most low-income families. It's available in different settings. Families are moving around, changing settings for their children during the day, having to drive miles to get their children into childcare. It strikes us that money would be well spent in this budget looking at those fundamental underlying structural difficulties and finding solutions to them, and there doesn’t seem to be money to do that. That would take a relatively modest amount of money to look to solve these problems. The cuts in the budget for childcare last year were due to lack of uptake. The lack of uptake is not because families—and by 'families' we mean predominantly mothers—it’s not because they don’t want or need that provision, it’s because it’s too difficult and sometimes impossible to access. So, trying to look at those problems and fix them would be an opportunity not missed, I think, and probably something that could be done with a relatively modest amount of money in this budget.

The roll-out of phase 3 of Flying Start appears not to be funded. If it’s hidden somewhere within the budget, that would be good to know, but that appears not to be funded. It’s a programme that has its limitations and its difficulties. It provides two and a half hours of childcare per day, which is great for children, which we support enormously, but less good for parents and families insofar as two and half hours of childcare a day doesn’t really provide the time to be able to access employment. You’d need a very particular kind of a job and a very understanding employer to be able to work around that. But we do think that the roll-out of phase 3, with those issues in mind, should be done and should be funded, and it’s unclear why there isn’t funding for that within this budget.

Something else that could have been done, an opportunity that’s missed within this budget, would be to explore the possibilities of having a single application mechanism, which is, again, something that I think could be done with relatively modest funding, and something that would look to the future in order to make childcare provision easier to navigate and more effective. I think that additional funding to ensure that the hourly rate goes not from £4, £5, to £6, but from £5 to £7.50 or there or thereabouts, which I think is the number that childcare providers are aiming at, would be important. I think there’s a possibility of looking at some sort of capital funding or ring-fencing of it for premises. That’s something that could be done within this budget that would have long-term effects.

Thank you very much. This is to everybody: how can the Welsh Government do more with the resources it has to extend eligibility for free school meals? Would the reintroduction of free school meals in holidays have a significant enough impact to reduce financial inequalities in disadvantaged families?

Who would like to take that? Do you want to take that, Simon?

Yes, absolutely. More can be done. I think from our point of view, the principle is applied that the access to that is straightforward and the information around that is made more straightforward. So, I suppose my answer's really tying it back to the information, access and advice points that I've made earlier, really, in terms of sustainable and independent, impartial advice will support people to be able to access that. It's an important element of support for families, but, as with so many other elements, access and awareness of that needs to be provided as clearly and as straightforwardly as possible.

Mike.

Okay, thanks. I wondered if anyone else was coming in. The Bevan Foundation said in its response to the committee consultation about the draft budget for 2025-26 that many Welsh benefits, including educational maintenance allowance, have not increased with inflation and families have to be poorer than ever to access them. Do you agree with them? What impact have you seen on Welsh households, and, if you do agree and you want it to be rectified, where would you take the money from?

Probably back to you, Simon.

Yes, sure. Yes, we agree with them. We would expect the Government to make decisions about where the money was coming from. We absolutely agree in principle and call for the uprating of appropriate inflation-related benefits and entitlements. The impact that that is having in flat budgets on the sector has already been described and articulated today. It's having a very real impact, and so 'yes' is the short answer, Chair. In terms of whether that's prioritised effectively so far, we haven't seen it in this budget, and there needs to be a response to the level of demand and the level of crisis that we're seeing, combined with an appropriate level of investment in the forward-thinking, preventative approach that can make changes.

I'll give an example, actually, and I can't remember if I highlighted this before, but thinking about DAF, the discretionary assistance fund, thinking about the increase and then combining that with a review to find out the best ways of connecting and supporting third sector and charity sector providers that are supporting the referrals within the mechanism to deliver support for people within the discretionary assistance fund. That's providing increasing pressures and will continue to do, even with the uplift that's been announced, which we absolutely welcome. So, that's an example of where, in response to that question, some funding could be put in to support the sector to manage that process of referrals and receive more support to be able to address the number of clients that are coming to them, because the demand is absolutely outstripping supply and because the complexity of each individual case within that is significant. That's one practical example where that sort of increase could be applied.

To everyone, what productivity improvements do you expect to achieve this year?

It depends on the context, but I think productivity within the third sector is already ridiculously high. Our colleagues that are funded, whether centrally or through local authorities or other partnerships, for example, with the NHS, are at the absolute sharp end of the delivery. The levels of immense pressure that the sector and certainly local Citizens Advice are feeling, I would challenge anybody to suggest that there is—. There are always reviews, and, without going into organisational detail that you don't need here, I'm very confident in the level of constant review that local Citizens Advice deliver to ensure that they're as efficient and effective as possible in meeting client need. What they are telling us, what our advisers are telling us, what the management are telling us, is that the level of demand is going up and up and up—those have been demonstrated in some of the figures that I've described to you—and the impact that that is having is putting huge pressure on the existing workforce. So, that could be an issue around recruitment and retention, for example, in the sector, which is hugely challenging. So, all of these issues tie together; I think this question and the last question, in terms of potential uprating with inflation, are absolutely linked. I think the efficiency levels and the productivity levels are absolutely of the highest level, certainly from our organisation. I won't speak for other parts of the sector, but, having spent much of the last 20 years in the sector, from what I see, that's absolutely the case as well.

What improvements have there been with the strategic integrated impact assessments and how are they important?

Would you like me to take this one?

Yes, please.

Yes, no problem. I would say that we are part of the budget improvement and impact advisory group that's been working on the strategic impact assessment improvement. They have improved somewhat. I would have to say, for the voluntary sector, they don't really cover it in any way, so, if you read through the strategic integrated impact assessment, it lists a number of things that have been considered, but it doesn't tell you, for example, 'Because we considered this, we changed our minds on such and such decision.' So, it's quite unhelpful for us as a sector, as a document, even though it has been improved. I think, really, it's not the document we're asking for; for us, ideally, we'd like to have portfolio-level guidance on what the spending is going to be at the same time as the budget, so that we can scrutinise that, and that's going to be immensely more helpful to us than the strategic integrated impact assessment, no matter how good that gets, if it doesn't cover our sectors directly.

Could I perhaps add, Chair?

Yes.

So, both the Wales Women’s Budget Group and WEN Wales have been involved in the review process as well, and we feel as though the SIAs are much more robust in their present iteration. There is a stronger gender perspective, which we are particularly happy to see. There is a better view of intersectionality as well, which, again, we're happy to see. But what we would note is that they can only be as good as the information that's fed into them, and sometimes that could be better. And this gets back to my point on data collection and information and the disaggregation of data. If the information being fed in is better, is sharper, is disaggregated, then they would be more useful.

Thank you. This is back to you, Victoria, I'm afraid. In your response to the draft budget, you said that there was still much further to go in regard to gender budgeting. Other than waiting for the publication and assessment of the remaining two gender budgeting pilots, what else would you like to see from the Welsh Government?

Sorry, I didn't hear the second part of that. Apologies. Could you repeat?

I'll start with: other than waiting for the publication and assessment of the remaining two gender budgeting pilots, what else would you like to see from the Welsh Government?

Well, you ask your question very carefully, because, really, the next steps, without seeing the results of those pilots, are really difficult to set out. Seeing the results of those pilots, evaluating them, is really the key to ensuring that gender budgeting can be rolled out further. So, without them, it's going to be very difficult to do an awful lot. We would very much like to see, though, some gender budget questions within portfolio-level equality assessments. We believe that that would be helpful. But, really, the key is to see those evaluations and then to make next steps; without them, it's going to be very, very difficult.

Okay, thank you. And finally from me, the socioeconomic duty was introduced in 2021 to deliver better outcomes for those who experience socioeconomic disadvantage. What impact do you think the duty is having? Is there sufficient evidence that Welsh Ministers are taking the duty into consideration when making budgetary decisions?

Natalie, do you want to have a go at that?

Yes. I think, actually, the socioeconomic duty is something that we can see some tangible good results from. One of them would be, actually, the Welsh Government's support for the real living wage for social care workers, but as with, probably, the benefits charter, the intention is great; I think the implementation perhaps leaves a bit to be desired. Because if we take, as an example—. We were talking about homelessness grants earlier. One of the measures that Government had introduced was the revenue support grant, which was going to local authorities. However, that is going unhypothecated, which means that they don't have to abide by the real living wage for social care workers when they commission the voluntary sector and social care workers there as part of their own commissioning process. So, in this instance, the socioeconomic duty actually is very useful in that Welsh Government, under that duty, decided to support the real living wage, but then it is not asking local authorities to do the same, by giving them funding without ring-fencing it specifically to be used under that duty as well. So, while we do welcome it, I think more can be done to implement it more universally and better.

Great. Just finally then, as we wrap up, other than saying, 'Please can we have more money', what would you like—? What would be your priority, or what should the Welsh Government prioritise? What would be your key ask, if you were talking directly to the finance Secretary now? Other than saying, 'Please give me more money', or, 'Give my sector more money', what would make a tangible difference to your sector, to your members and to your stakeholders?

Shall I begin?

Go for it.

I think, for us, it's not necessarily always about more money, it's about how the money is being spent. It's about transparency. It's about multi-year core funding, instead of funding year by year on a project basis, because there are so many organisations that are being funded for five then six years, and they have to reapply year on year for the same type of funding. It really limits our ability as a sector to diversify our sources, to think long term, to make bigger plans, because you never know when your funding's going to end. So, it really limits our ability to become better and to be more sustainable and self-reliant, and I think that is something that could be changed without necessarily giving more money. It's about changing how the money is being distributed.

Okay. Victoria. Sorry, it's an interesting question, I think.

In terms of the third sector, our part of the third sector, I completely agree with Natalie's views. I think, in terms of gender equality more broadly, there is so much to be done, there are so many areas in which improvements are being made, and really tangible differences are being seen. But, particularly with this budget, I think a focus on childcare, which I've already spoken at probably too much length on, would be the right thing to do, for there to be more money, recognising the cuts in recent years, but also for that money to be spent in a strategic way that allows for us to develop a smarter, better, more accessible, more effective overarching system.

And the final word to Simon.

Two very practical things: one is about money—so, some support on the impact of the national insurance contribution issue is absolutely fundamental—and secondly, more structurally, the review of the discretionary assistance fund, to see how prevention in the sector can be engaged with the process, which allows that to develop in a more preventative way, while managing the crisis pressures specifically.

Thank you very much.

Thank you very much for your time this morning.

Thank you very much for your time and your expertise and for coming in to speak to us. It's very important. And thank you very much for your written evidence as well. It is valuable and it is appreciated. There will be a transcript for you to be able to check.

Therefore, I will ask, under Standing Order 17.42(ix), to resolve to exclude the public from the remainder of this meeting. Is everyone in agreement? Yes. Thank you; we'll go into private. Thank you.