Finance Committee

Symudwn ymlaen at y gwaith rydyn ni'n mynd i fod yn ei wneud heddiw, a'r gwaith ydy edrych ar gyllideb ddrafft y Llywodraeth. Mae gyda ni, i gychwyn y bore yma, tri thyst.

We've got the three witnesses with us. Are you able to introduce yourselves, your roles and in what capacity you're here? Shall we start with David online?

Thank you. Good morning. I'm David Phillips. I'm an associate director at the Institute for Fiscal Studies, and I lead our work on devolved and local government finance.

Thank you, David. Guto.

I'm Guto Ifan. I'm a lecturer at the Wales Governance Centre at Cardiff University, and I'm part of the Wales Fiscal Analysis team as well.

And Ed.

I'm Dr Ed Poole. I'm a senior lecturer at the Wales Governance Centre at Cardiff University, and also part of the Wales Fiscal Analysis team.

Gwych. Diolch yn fawr iawn. Croeso cynnes a diolch ichi am roi eich amser y bore yma.

Thank you very much. We'll crack on. We've got you hopefully for an hour or so, so we'll try and keep our questions succinct and the answers as succinct as possible, just to cover as much of the work as possible.

I'd like to start. I'd like to understand the economic context surrounding the Welsh Government's draft budget. Could you give your view on the economic outlook? Obviously, it's worsened considerably since last year in terms of inflation, growth, household incomes and, as we've heard now, the budget available to the Welsh Government will fall in real terms over the coming years. How will this new economic context impact on the Welsh Government's ability to deliver its priorities with the funding available? Shall we start with the governance centre?

As you said, the main change is the increase in inflation in terms of the budgetary impact of that. It's quite difficult to properly assess, or accurately assess, how much the cost pressures have increased for public services. What we usually use, the gross domestic product deflator measure of inflation, probably doesn't fully capture the extent of cost pressures facing public services, and the increase in cost pressures compared to what we were expecting.

In our analysis before Christmas, before the budget, we produced an estimate of a halfway point between the GDP deflator of the domestic economy measure of inflation and the consumer price index inflation, and that suggested that, next year, even after the additional funding from the UK Government, the Welsh budget was, in terms of day-to-day spending, around £800 million less than what would have been expected when original plans for 2023-24 were set last year.

Okay. David, what is your take?

I would echo the point that the usual measure of inflation, the GDP deflator, which is what's used by the UK Government, and usually the Welsh Government, to adjust figures over time, probably understates inflationary pressures at the moment. As Guto said, it's very hard to put a precise number on it, but it does mean that the changes after adjusting for inflation would be less generous than the usual calculations would suggest. I'd also say that high inflation and the fall of household income will also affect some of the demands placed on the Welsh Government. There may be pressure to offer support to households. There may also be greater demand for certain public services, higher demand for the council tax reduction scheme as a result of increases in unemployment, and so on. So it may not just be costs going up, but also some knock-on effects on demand as well. In the slightly longer term—so, looking a bit further ahead—the slowdown of the economy and the rise of unemployment might ease the pressure on prices and ease the upward pressure on wages. But that will probably be seen more in 2024 and then 2025 rather than in the coming year.

With regard to that GDP deflator, is it because it's an aggregate over a lot that makes it a bit more tricky? An average doesn't fully—

If I can come in there, I think one of the main factors with the GDP deflator is it's a measure of domestic—. It's a measure of the cost of goods produced in the UK, gross domestic product. But a lot of the stuff that's going up most in price, like energy, is imported, and that's not captured in the GDP deflator, whereas it is in the consumer price index. Of course, energy and food are much bigger shares of household budgets than they are of the Government budget, but they're still a share of the Government budget, and that's why we think the GDP deflator probably understates inflation and the CPI inflation probably overstates it for the public sector.

Mike.

David, just on what you said there, would an increase in unemployment actually affect the amount of income tax that the Welsh Government take? Also, is it possible it would have a knock-on effect on house prices, which has an effect on the money we get from other taxes?

There would probably be impacts on Welsh tax revenues from a fall in the economy. You'd expect, for example, higher unemployment to lead to lower income tax revenues; you'd expect, for example, lower house prices, and especially lower transactions, to lead to lower revenues from land transaction tax. But of course, because of the way the Welsh fiscal framework works, where the block grant adjustments are linked to what happens to revenues in England and Northern Ireland, incomes would fall there, and house prices and transactions would fall there too. So what would matter is are these falls bigger or smaller in Wales than they are in England and Northern Ireland. At the moment, at least, the forecasts from the Office for Budget Responsibility don't suggest that would be the case. If anything, they suggest there'll be an improvement, a small improvement, in the net tax position over the next couple of years.

Thank you. Ed.

Briefly, on the income tax point. I think David's right on land transaction tax—we might see a bigger effect. On income tax there's more of a trade-off, because we've got large increases in some pay packets because of inflation, and because we've got frozen thresholds. This does mean an increase in the income tax take as a result of those two factors. So, there is an economic effect, but on income tax I should think it'll be more of a trade-off.

Thank you. What's your understanding of pay assumptions in this Welsh Government budget, and what would be the impact of different public sector pay awards in 2022-23 and 2023-24 on the Welsh Government? Do you have any thoughts on that? Guto.

As far as I'm aware there are no clear pay assumptions set out in the budget. There was acknowledgement that the pay squeeze was more acute in the public sector than the private sector, but there wasn't any indication of whether the Welsh Government could or would go above current pay offers. We've got our assumptions of what the Welsh Government would have been assuming when budgets were originally set to 2024-25. At the time, we think that the UK Government was planning for pay increases of about 2 to 3 per cent. I think 2.7 per cent per year would have matched, on average, what was then expected for a consumer price index inflation, which is, of course, now much higher. So, the 5 per cent, on average, for the public sector this year is higher than what would have originally been budgeted for. In terms of next year, then, if you match the Office for Budget Responsibility's forecast for average earnings across the UK, and across both the public and private sectors, that was 3.5 per cent, which I guess is perhaps an indication of what the Welsh Government might be planning for next year.

So, if you combine that with the 5 per cent this year, which is higher than what was originally budgeted for and 3.5 per cent next year, which, again, would be higher than what would have originally been budgeted for, we think that could add about £288 million to the total devolved public sector pay bill across all Welsh Government and local government services in Wales—£288 million more than what would have originally been budgeted for. And I think that's probably feasible considering that the Welsh Government has increased day-to-day spending by around £487 million in its draft budget for next year. So, that probably accommodates a large share—a large share of that is accommodating the increased pay awards.

But, of course, on the other hand, the other side of that is that those pay increases—the 5 per cent this year and the 3.5 per cent next year—that, over two years, would be almost a 7 per cent real-terms pay cut for public sector employees, and public sector pay will fall further behind the growth in the private sector, again after a decade of that happening. So, obviously, there are big, big trade-offs of increasing the costs on public services against the recruitment and retention issues and the general quality of public services that you can deliver if there are real-terms pay cuts.

Okay. David, did you want to add anything to that?

The one thing I would add is that, of course, because increases in the national living wage have been substantially higher than the increase in average wages, the Welsh Government's pay policies will have to reflect that as well. I was at the Local Government Association conference yesterday where they were talking about what might need to happen to pay scales in local government in England, given that the minimum wage is going up by almost £1 an hour in April. And, of course, during a cost-of-living crisis that is impacting lower income workers, not only do you need to do this for meeting the national living wage, but you might think, well, this is also what's needed to support workers through the cost-of-living crisis.

But the flip side is that if you're getting bigger increase towards the bottom of the pay distribution, that means smaller increases further up the distribution. And, in some instances, that follows on from a pattern seen over the last decade or so, where the real-terms falls in wages have been bigger for more senior medics, more senior teachers, more senior local government workers and so on, and that can then mean there's a trade-off between, on the one hand, supporting lower-income workers and meeting the national living wage, and then risking the retention and recruitment further up the distribution of public sector pay.

Thank you very much. Rhianon has joined us—welcome, Rhianon. I hope your journey wasn't too bad in.

It was interesting.

Interesting. There we are. Welcome, anyway. Moving on, as we are expecting falls in real wages to continue over the next year, coupled with a recession, what do you think are the key pressures facing households, and how are these likely to manifest themselves in 2023-24? And how can the Welsh Government support lower income households particularly affected by these issues? To what extent does the draft budget try and address that? I don't know if Ed wants to come in on that, and David as well.

Sure. Obviously, there are a number of impacts here. I think the two largest are energy costs, which we know about, and consumer inflation. So, energy prices, there's been some better news on that in the past few months in terms of the wholesale price coming down somewhat, but we're still expecting an increase in the energy price cap, potentially not as far as the £3,000 cap that's coming in in April—perhaps down to about £2,800 in the second half of this year, again due to those falling wholesale costs. But that's still three times as much that the average household will be paying for energy than they did just three years ago. So, even though there's better news on that front on wholesale costs, this is still an enormous impact on a household's budget.

On inflation, this is part of the issue when we're talking about GDP deflator and CPI inflator, there are quite different levels of inflation in different sectors of the economy. In food and non-alcoholic beverages, prices are continuing at extremely high levels of inflation; it was 16.5 per cent in the 12 months to November 2022, and that was slightly up from October. And this food and non-alcoholic beverage inflation has risen by 16 consecutive months now. Even before the pandemic, when we didn't see these inflationary pressures, the poorest income group of households were spending more than twice as much on food and non-alcoholic beverages as a proportion of their income than households in the top earning levels of income. So, we're seeing a disproportionate hit relative to income on households in the lower levels of income.

So, with the combination of energy and consumer inflation, the outlook for households is quite bleak. And we think that, by 2027, real disposable incomes in Wales will be about £10,000 lower than had the pre-financial crisis trend been sustained. And this is quite unique in the Organisation for Economic Co-operation and Development comparator countries; it's not the case that this is just an international problem—of course that feeds into it, but there are certainly UK and Wales-specific impacts here.

On the flip side, what can the Welsh Government or the UK Government do about this? We've already seen the energy price guarantee, which has obviously helped somewhat to reduce some of these extreme cost increases in energy. The £200 payment to households using alternative fuels, much less generous, and particularly in areas like rural Wales, where this is more commonly used as the fuel source. But there was a good take-up of the winter fuel support scheme. We estimate—. Officials in the—. There's a recent letter from the Minister for Social Justice, implying that the total number of eligible households was 220,000; the take-up was about 166,000. So that's a take-up rate of 76 per cent—that's quite a good sign in terms of the take-up of that winter fuel support scheme. But of course, in the context of these big, big pressures on inflation and energy, that's not going to cover the full impact of those cost increases.

David, is this budget going far enough, then, to be able to help? And obviously, any other comments that you've got.

So, if I first come to my other comments—I was going to say, I'd agree with Ed about some of the factors underlying the pressures facing households. Looking at how this might impact across households across the income distribution, it's not clear to me actually that it will be the lowest income households, over the next year at least, that will see the biggest percentage hit to their incomes. To some extent, that is because, whilst they will be hit harder by inflation, there are increases in benefits linked to CPI inflation, and also, as I said, the national living wage is going up by quite a lot more than average wages. If anything, I expect the hits to incomes to be a bit higher towards the middle of the distribution, where wages will go up by less, and, for example, the income tax threshold freezes will have more of an impact. Now, of course, the hit might be bigger for those on middle incomes, but they might be able to more easily absorb the hit than those on the lowest incomes. So it's not as simple as saying that the hit is smaller for the lowest incomes so it's less of an issue for them.

In terms of the options facing the Welsh Government, or available to the Welsh Government, I think it's worth saying that the options are more limited than in the Scottish case, given the devolution settlement for Wales. It would be possible to provide some flat-rate support across households. So, an example that was used in Northern Ireland, in the recovery from the COVID pandemic, was a high street voucher. Now, of course, it's flat rate, it's not especially targeted at low-income households, but a flat-rate amount is much bigger as a share of their income and spending for low-income households. Another option would be to consider a version of the council tax rebate, for example, perhaps targeted at those who get council tax support.

Now, in terms of, 'Is the Welsh Government doing enough?', I think the notable thing so far is that, whilst there are standard increases in means-tested benefits and the energy-linked means-tested benefit one-off payments across the UK as a whole, there have been fewer announced for 2023 than 2022 by the UK Government, despite the further fall in income. So, I think, what one might see—not guaranteed to see—is one could see further action in the upcoming March budget that might then provide some additional funding to the Welsh Government to do further measures itself.

I'd like to move on to the impact of inflation—we've touched on it earlier in other questions, and I know that Mike's got some questions to follow as well, and I suppose it goes on to a little bit of the supplementary I asked about GDP in different areas. What impact does the inflation have in different areas of Welsh Government's portfolio? For example, are there areas in the portfolio where there's a particularly stark impact of inflation on the budget? So, I wonder if Guto or Ed want to go first on that.

I think what we know is that borrowing costs have increased from those historic lows that we saw for a number of years before the pandemic. The one-year interest rate from a loan from the Public Works Loan Board is now at 4.2 per cent, and that's up from 1 per cent as recently as June 2021. That's obviously going to have an impact on the financing of new capital projects, and there are particularly some sectors in which capital cost inflation is running extremely high—school construction, areas like that. There's quite a large variation across the board in terms of the extent to which capital cost inflation and construction inflation is increasing. But the borrowing cost is going to be faced by local authorities in all of these cases, so that's going to obviously increase the hit on the capital budget.

Peter, did you want to—?

Just to put some figures around that, the cost of a public body borrowing £1 million now, how much does it cost to service £1 million over a 25-year period? It used to be about £50,000, £60,000, so now we're talking probably a couple of hundred thousand to service £1 million over—. And that's quite an important figure when local politicians are deciding what they borrow to do things.

That's right. Certainly. The way that debt can be structured can be changed, but, yes, there's certainly an immediate hit on borrowing costs. Over time, you'll be paying off debt that's still 1 per cent, so the portfolio of your debt will not be immediately hit, but that way, you'll still be paying off loans that were borrowed at 1 per cent. However, the longer time period that local authorities are borrowing at these higher rates will affect the overall debt portfolio.

Do you think that there's a consequence, then, that people will put the brakes on capital investment and that will slow down infrastructure and actually have a detrimental effect on growth in the economy?

Well, certainly there'll be more pressures on the capital budget. If the cost of borrowing increases, that is going to make the money available to local authorities less available, I suppose.

Absolutely.

Great. I don't know if David had anything to add, otherwise I'll move on to Mike.

The only thing I would add is that, whilst there was some top-up to the resource budgets in the short term to partly address higher inflation in the autumn statement, there wasn't that on the capital side, so the increase in inflation and, as Ed was saying, in borrowing costs, will have an effect on capital that's not being offset at all. And then, in the longer run, there were cuts, obviously, to the resource spending plans for 2025 onwards, but the cuts to the capital spending plans were even greater, proportionately speaking. Although, it is worth saying that, despite those cuts, capital spending as a share of GDP is still forecast to be higher than any year before the COVID crisis since the 1980s, apart from 2008 and 2009. So, whilst there are cuts, they are still relatively high capital budgets compared to most of the period since the 1980s.

Mike.

I'll carry on talking about capital for the next few moments and the effect of inflation and increased costs on social housing plans in housing associations, in councils, which are starting to build houses again. How do you see that being affected? Of course, they used to borrow, over 60 years, for council housing. In fact, they're now paying back 1962 borrowing. But, also, councils had a lot of 30-year borrowing, didn't they, and now we're paying back 1992, when—I was checking on my phone—we had particularly high interest rates.

It links, doesn't it, in terms of the overall borrowing cost. Whomever is borrowing at these much higher levels, it's going to have this immediate impact, and it's huge—it's one of the things, when we look back on over this period in which we had a historic number of years of very low interest rates, where we could have done a lot more in terms of borrowing for purposes such as social housing and other public infrastructure. But, it wasn't to be, and I think that any increase at levels that we're seeing at the moment is going to make it more expensive for councils and housing associations to do this.

Thank you. Moving on to the budget, you've seen the budget documentation. Are you able to easily identify areas that are being deprioritised or delayed?

If I can come in on that first—

Yes, certainly, David.

I think it's worth saying that there's a remarkably detailed set of spreadsheets highlighting the capital investment plans alongside the budget, right down to small schemes at the local authority level. So, it does provide a lot of detail on what is being planned. However, there's little information in this on what's being delayed, scaled back or shelved by the Welsh Government compared to previous plans, which you'd expect there has to be, given that the budget documentation highlights an 8 per cent fall, partly as a result of higher inflation. The only areas where I can see mention of delays and so on in this documentation is on some of the smaller local authority schemes, and that delay is often linked to the COVID pandemic. So, I'd say there is a lot of information, more than we actually get published in England on capital investment plans and the timings and so on, but there isn't that information on, 'Well, given the impact of higher inflation reducing the real value of this, what's been scaled back? What's been delayed? What's been shelved entirely?' At least, I couldn't see that in the documentation.

Funny you should say that—I couldn't either. [Laughter.]

Nor us. [Laughter.]

A couple more questions: do you think the budget shows sufficient evidence of how policy is evidence driven and how outcomes will be evaluated, or is it what I seem to see it as, which is just a continuation of what we had last year with a little bit more than inflation and a little bit less than inflation?

Yes, the Welsh Government budget is not an output or results-based budget, a performance budget. I think there are good reasons for that, particularly when you've got a budget that is being driven by massive inflation, economic shocks, and there are areas other than simple performance metrics that should be informing how you're going to design the budget. So, policy evaluation isn't really our area of expertise in Wales Fiscal Analysis—I know there are other pre-eminent institutions within Cardiff University that engage in policy evaluation—but, as a budget itself, it's not a performance budget; it's not really linked around outputs or outcomes data. But, I think that there are—. Given the circumstances that we're in at the moment, I think there's very good reason that that wouldn't necessarily be the priority.

Just on that, maybe, David or Ed, have you seen in other budgets, and not necessarily Welsh Government budgets, good practice of showing that that we could look at to compare how to do it rather than—?

Yes, some performance budgeting and results-based budgeting is used by some governments. I do think that, particularly for larger organisations, it can be quite difficult to do this very well because you have, in economic terminology, this principal-agent problem that we don't really know—. The budgets setters in the Senedd or in the Welsh Treasury will be so far detached from the actual on-the-ground delivery of a certain service that they are reliant on the knowledge from the delivery team on what an output should be costing and what outcomes should be possible. There's quite a long chain of principal-agent issues along there. So, it's not particularly used by very large governments because, sometimes, the output information, the outcomes data can be a little bit divorced from the budget. What that doesn't excuse is that you can still do performance evaluation; it just doesn't have to take place in the budget process, particularly for very large organisations and particularly at the moment when we have the impact of inflation, of pay awards, of energy-cost inflation—these things are going to massively change the inputs that we need to provide to get to the output, regardless of the performance data. So, I think there are, obviously, good reasons to do performance evaluation, but there's also a good reason for doing that separately from the budget process.

I think Rhianon wants to comment.

Yes. That sounds sensible, so when would—? And you've referred to, perhaps, smaller governments or legislatures. I'd be interested to know which ones. But, on the performance evaluation aspect of that, in those cases of what we seem to deem to be the holy grail, when would that take place?

So, if you imagine something like evaluating the foundation phase, that is such a major intervention, but one that takes decades to come to fruition. So, it wouldn't be possible to do a policy evaluation on something as important and as long term as that in the annual budget cycle. So, there would be an opportunity in that for a randomised control trial or another type of performance-management intervention to look at the outcomes from a policy intervention, and then consider that, not necessarily in the budget process—

Yes, I understand that. So, it does depend—sorry, Chair—specifically on what we're looking at in terms of a bespoke evaluation.

Absolutely. So, this is why it tends—. With smaller authorities, with smaller municipalities or what have you, there's more of a scope to do this at the scale within the budget process.

Okay.

Okay. Thank you. David, did you just—? Yes.

If I might come in for a second there, please. So, I would agree with and echo much of what Ed said there. I actually looked through the budget document—I think it was chapter 4 and the strategic impact assessment—and I thought, 'Actually, it does, intuitively, link well the evidence and what it says its priorities and the priorities linked to those are.' Of course, an intuitive link does not necessarily mean that the policies and funding that have been identified will address the problems identified. Intuition can sometimes be wrong.

But I wouldn't be overly harsh on the Welsh Government in this regard. In many cases, the quantitative and even qualitative estimates of potential impacts of past policies or similar policies elsewhere that could inform this are just unavailable, and that's because, as Ed was saying, for many public policies, it's just fundamentally incredibly difficult to evaluate them in a robust way that economists would like to do. You haven't got a control area where the policy wasn't implemented, or it takes a very long time, or there are lots of other policies going on at the same time and so you're not sure how to identify the impacts. So, I think that this move towards an outcome-based approach is always going to be very difficult, incremental, and you can start by looking at particular policies, as Ed was saying. And I think it was good to see, published alongside the budget, some information on where the Welsh Government is doing impact evaluations on particular policies. But I would say that there clearly still is a work in progress here, but we shouldn't underestimate the challenges in moving towards outcome-based budgeting or even just evidence-based budgeting, given the fundamental difficulty in producing this evidence both for new policies in Wales and, actually, past policies that can feed into that evidence-taking process.

Thank you. Mike.

Moving on, the funding outlook doesn't look good, though, as we also know there's going to be a general election next year, I think that the likelihood is that all those numbers we've had for our five-year programme will disappear next year. They might come back worse after next year after the general election, but, before that, they'll probably be stretched out. That's my view, and people are nodding, so there's some agreement on that.

But, do you think the Welsh Government should be looking at policies that are not working, or where they could cap expenditure? I've thrown out these ideas, which have had no support from the Welsh Government whatsoever: capping basic farm payments, so some people don't get £300,000; enterprise zones, certainly ones that generate virtually no jobs; inward investment, where we give large sums of money to companies from outside the area to bring branches in—well, I'd call them 'branch factories'—that last five, 10 years, the grant funding runs out and they follow; and things like giving additional rate relief to large supermarkets and others who, I would argue, don't actually need it.

Guto.

Yes, I guess we haven't really looked at the specific policies that you've mentioned. I think you're right in saying that the outlook after this spending review period is particularly gloomy at the moment, given the pencilled-in plans of the UK Government, even though we don't have a proper breakdown of the UK Government's spending plans, and we don't know what the impact will be on the block grant, et cetera. But, I think the Welsh Government will have to look at if those—. As you said, there are uncertainties around whether those spending plans will come to fruition, but, if the Welsh Government wanted, then, to pass on consequentials for the NHS, which is the big part of the Welsh Government budget, then it will have to find cuts—real-terms cuts—in other areas of the budget. So, it will have to start—. It's going back to, potentially, the position of five, six years ago of finding funding, finding savings from particular programmes outside of the main health budget.

Peter.

It would be—. Oh, sorry.

If I can just bring Peter in briefly, and then I'll come to you, David.

It would be fair to say we're in extremely unusual circumstances, which we hope don't last for ever. So, it's quite legitimate for a government to put perhaps the brakes on investment in certain areas to prioritise other areas, so that not everything—. We do that in business all the time; you cut your cloth accordingly for the circumstance you're in. So, it would be quite legitimate, in a difficult time, for a government to say, 'Well, we're not investing any more in this for two years because we're going to divert that and mobilise that money to another area.' Do you think that's fair?

Yes.

Yes.

David.

Yes, thank you. On that last point, I do agree that you do need to reprioritise in difficult circumstances. I think one of the risks, then, is that if part of this is postponing action for plans, if the financial situation down the line is equally challenging, you face the same question again. So, whilst it can help with the short-term situation, it could then just push the can down the road a little bit. But, sometimes, you need to do that.

One thing I was going to note was, as well as considering which areas could be cut back, I think it's really important to really consider are there areas that could be delivered more efficiently. And I think that's particularly true of big-ticket items such as health spending. Now, one thing that the Nuffield Trust, who looked a lot at relative performance and relative efficiency in different parts of the health service across the UK, one thing they noted in an analysis last year is that the average stay in hospitals is substantially longer in Wales than in England—so, around seven days as opposed to 4.3 days in England in 2020. And that means that, despite having more hospital beds in Wales—quite a lot more hospital beds per person—the actual capacity isn't that much higher despite an older population and a sicker population. They highlight that this longer stay might be partly because of different patient characteristics, and, in a few instances, there may be some benefits from keeping people in for longer, although there's limited evidence on both of these. But they do conclude that there are, I quote,

'serious questions to ask here',

and that the NHS appears to take longer to treat and safely discharge patients in Wales than in England. So, I'm not sure there's an easy solution to this, and there may be good reasons, but it might be worth looking at this area, whether it's in this committee or in the health committee, because that's an over 50 per cent longer hospital stay in Wales compared to England, which clearly will impact on the potential to get patients through the system and the cost of the system.

Also on the health system, I think a focus on preventative or early intervention might also be beneficial across the health system and a range of areas. It could include public health and access to primary care, including out-of-hours care, in order to reduce the pressure on emergency and other secondary care, which is often a lot more expensive to deliver. So, I think, for example, further investment in NHS 111 and other urgent care access would make sense in the Welsh context. So, for example, in the six months between April and October 2022, just under 40 per cent of NHS 111 calls in Wales were answered within a minute, compared to just over 50 per cent in England, and 17 per cent of callers in Wales hung up before being answered, compared to 14 per cent in England. I think this is particularly important in the Welsh context, given you can only access out-of-hours GP services through 111, whereas in England you can still walk into NHS walk-in centres.

Very briefly, can you send us a link for the Nuffield report?

The second point is that the danger of telling the Welsh Government to make something more efficient is that they'll just create bigger and bigger organisations that eventually perform worse and worse than the smaller organisations they had before.

The third point is that a lot of the health problems in Wales are due to poverty, due to poor housing, due to poor diet. Until we start addressing those, you're still going to continue to have that pressure.

We'll move on to Peter, otherwise this committee will move into health committee, and other Chairs will be shouting at me, but fascinating and thank you for your insight there.

I'm conscious a little bit of time. If we do run out of time, we might have one or two supplementary questions that we'll send through to you, if that's okay with you, to get a written answer. I know we've had submissions from you before. If we do run out of time, then if we've got your permission, then we'll write to you.

Yes, Peter. Thanks.

Yes, thank you, Chair. I quite enjoyed that last bit, actually. But I want to focus a little bit more now on tax policy within the draft budget and proposals for future change and looking first at forecasts. As you'll probably be aware, we'll be talking with the Office for Budget Responsibility later on today. I just wonder: do you have any views on the areas that the OBR should focus on in terms of improving their forecast, such as reducing reliance on UK-wide data?

In terms of the forecasts themselves, the assumptions and the approach, I think, are reasonable and clear, and probably the best available given the data available. They've looked at the real-time information from HMRC, so there's new data that is Wales-specific data. I guess, less in terms of the quality of the forecasts themselves, I think there could be a different focus in the narrative in the document that the OBR present.

I think it's really comprehensive and there's interesting analysis about the Welsh tax base in that, but the most important thing that comes out of the OBR forecast is the relative performance of the Welsh tax revenues relative to comparable UK Government revenues. There is some focus on the Welsh share of total UK income tax liabilities, but that doesn't tell you exactly what the impact of change in the forecast is on the Welsh budget. So, I think first of all, there are comparable UK Government revenue forecasts in the annex; I think that should be moved into the narrative discussion of what's happening to revenues compared to comparable revenues.

I think the OBR should be making calculations of the block grant adjustment as well, so that you can clearly see from the document and the narrative that, 'Oh, this is having a £30 million impact on the Welsh Government's budget.' Because it takes a while, actually, to plug in and you have to basically create an Excel file yourself to plug in numbers from the OBR report to apply it to the comparability percentages published in the block grant transparency data from the Treasury. So, it takes hours to get to the actual impact of the changes in the OBR onto the Welsh budget, so in terms of the narrative and then understanding what's changing between forecasts.

So, there was a big change in the net effect of tax devolution based on the last iteration of the OBR's forecast from March last year. At the time, we thought that, by 2024-25, there would be a £375 million net benefit from tax devolution to the Welsh budget, including a reconciliation for previous forecast errors. That's now dropped to £137 million. So, that's over £200 million of funding not available to the Welsh Government. Luckily that wasn't actually budgeted for, because the budget was based on previous iterations of the forecast, but there are large swings in the forecasts and the narrative doesn't really explain them. I think they're totally, probably, legitimate, but it's very hard to gauge what's driving that differentiation in relative performance.

That's very helpful. I don't know if anybody else—. I'm not sure if David wants to reflect on that.

I completely agree with what Guto said there. The only one thing I would add is that the OBR in its latest forecast says it plans to publish a working paper on income tax trends in Wales relative to England, and that could inform some improvements in the forecast methodology. So, for example, as Guto says, historically, they make use of Welsh rapid data from real-time information. But, looking forward, for example, it doesn't look like there's any accounting for the differential economic structure of Wales. So, for example, the different sectoral make-up with a bigger public sector, a bigger manufacturing sector, and so on. So, perhaps this working paper could inform some improvements to make the forecasts a bit better. But, as Guto said, the main thing that's a real missed opportunity here is that, because the OBR is forecasting both Welsh revenues and the UK revenues that determine the block grant adjustment, it could do more to explain the net impact of that and why that's changing. And if that requires a bit more investment from the Welsh Government to enable the OBR to do that, I think that would be worthwhile in terms of enabling more scrutiny and understanding by, for example, this committee.

That's really, really helpful. I'll just push on another area slightly. With so much uncertainty in the global and UK economy, do you have a view on the reasons for differences between future economic forecasts from the OBR, the Bank of England and the Scottish Fiscal Commission?

If I can come in on that first, in terms of the difference between the OBR and the Bank of England, I think there are two main factors there. The first is that the OBR effectively assumes that, in the short term, people will cut back their spending by less than in a usual recession. Usually in a recession people cut back spending by more than their income falls. It's called 'precautionary saving', and that has a negative knock-on effect on the economy. The OBR thinks that this time around, because of the savings people built up during the pandemic, and also perhaps because of the nature of the increases in prices, people won't cut back spending as much, hence the economy won't have that double-whammy, if you like, of spending falling by more than the incomes. Then in the longer term, the Bank of England basically assumes that productivity growth will remain at very, very disappointing levels, whereas the OBR thinks there'll be some pick-up in productivity growth—not back to the levels before 2008, but somewhere between the levels we've been seeing recently and the levels before 2008. So, there are two factors that explain that. One is a short-term factor about how people respond to the recession, and the other one is productivity.

The Scottish Fiscal Commission obviously produces forecasts only for Scotland. For the economy, they're a little bit less pessimistic than the OBR. Unemployment and earnings is a bigger difference, and their report suggests that they think that some of that could be due to the differential impact of the energy crisis on Scotland versus the rest of UK. Scotland has, obviously, a big offshore oil and gas industry. The direct effects of that aren't captured in there. That had knock-on effects for the onshore economy around Aberdeenshire and so on, so the SFC is a bit more optimistic about employment and earnings, because it thinks there'll be a bit of a positive impact from the oil and gas sector offsetting the sort of more general negative impacts from the economic slowdown and recession.

Thanks for that. If I can just push on into—. Wales Fiscal Analysis has suggested that the overall net effect of tax devolution is still consistently positive across the spending review period, by an average of £168 million year. Can you provide further detail on the scale and impact of this on the Welsh Government's budget, particularly for this coming year?

So, I think the net position, so compared to a situation that had tax devolution not occurred and we were still reliant purely on a block grant system, the revenues are about £174 million more than the block grant adjustment that's been taken off next year in 2023-24. That's about just less than 1 per cent of day-to-day spending, so it's not totally negligible, the impact in terms of the Welsh Government's spending power. It's equivalent to almost a penny on the basic rate of income tax; it's not far off a penny on the rate of income tax being added to the Welsh budget and day-to-day spending without having to change tax policy that much. So, it's mainly driven by income tax and some reconciliations next year, and the land transaction tax revenues growing faster as well, and that's set to grow. So, the net benefit across the forecast period, we think, will reach about £232 million by 2027-28 as well. Of course, those are just forecasts and they are liable to change, but it's certainly a good news story in terms of tax devolution for the Welsh Government.

That's really helpful, really interesting. Thank you. If I can move, then, on into income tax. How do you think the changes to UK income tax policy in the autumn statement impact on the WRIT tax base now and in the future, relative to the UK, and how will this feed through the devolved funding process?

Briefly, there were several important ones. We had the freezing of the personal allowance threshold and the higher rate threshold. That will result in this fiscal drag effect, so we'll have more taxpayers being pulled up into the next threshold. Over time, that'll increase the number of higher rate taxpayers, potentially make the income tax powers a little bit more usable; we've got more of a spread of taxpayers across the three bands. The dropping of the additional rate threshold from £150,000 to just slightly over £125,000, that approximately doubles the number of taxpayers in Wales who are paying the 45p rate of tax; that's quite a significant impact.

Perhaps the biggest one is the one that was reversed, in the fact that we didn't see the proposal by the then Prime Minister and Chancellor—Truss and Kwarteng—to abolish the 45p rate of income tax. That would have been much more than a spillover effect on the Welsh tax base; that would have potentially eliminated one of Wales's three tax bands without any consultation with the Welsh Government or with the Senedd. It also would have had an impact on the block grant adjustment by applying a different rate of deduction to the block grant in the BGA at the additional rate, which is a technical issue, but would have had a material impact on the budget. And again, there was no consultation about that move. So, I think the biggest one is the one that actually got reversed at that budget.

Yes. No. That was a—

I think David might have—. I don't know if you've got anything further to add to that, or—

Just very quickly. I'd agree with everything that Ed said there. I think, again, coming back to the importance of thinking about the net effect on the Welsh budget, these things will also affect the tax base in England and Northern Ireland as well, so I'd expect the overall impact on the Welsh budget from these changes to be relatively modest. Although, as Ed said, if they had abolished the 45p rate, that could have had a knock-on effect on how the block grant adjustment was calculated.

The one thing I will say, though, is I think that the freeze in the personal allowance and the higher rate threshold might be one of the factors underlying why Welsh income tax revenues are forecast to increase a bit quicker than the block grant adjustments. The freezes in the thresholds tend to raise relatively more from the bottom of each tax band, and more Welsh payers are towards the bottom of the basic rate band, and towards the bottom of the higher rate band, compared to England. So, that could be one of the factors underlying the slightly faster growth in tax revenues in Wales, relative to the block grant adjustment.

Thank you. The finance Minister told us that decisions regarding the Welsh rates of income tax are not taken in isolation from the tax people pay to Westminster and, due to economic circumstances, it didn't feel like the right time to be taxing people more. What do you view as the key arguments for either increasing or reducing the Welsh rates of income tax at the moment?

Briefly, the argument is if there is a need to raise revenue, under devolved control revenues, in the system to meet pay pressures or to meet the demands for additional capital or current spending. The question is: where is it fairest to draw those revenues from? So, our argument is that the Welsh rates of income tax are a more progressive way to raise revenue than council tax. Council tax is, effectively, a devolved tax because of its interaction with the local government settlement. The majority of people in Wales don't pay income tax, whereas, of course, most households do pay council tax. Council tax tends to be regressive relative to income, it also has effects geographically. Where you've got authorities like Blaenau Gwent and Merthyr Tydfil relying on lower banded properties compared with Monmouthshire, for example, you're going to have a territorial impact and a regressive impact relative to income. Householders in lower value houses will pay a higher rate of their income than is true of people in very large, higher banded houses. So, it's a well-rehearsed argument; it's about the trade-off between drawing income from income tax and council tax.

That would have to come with some strong regulation around it, though, wouldn't it? Because if you want the one, you've got to make sure you reduce the other.

Sure, absolutely.

And that would be the fundamental determinant.

Can I add, in terms of income tax and not using income tax powers this time around because they've mentioned the increase to UK-wide taxes and the economic outlook for household incomes? I guess one of the differences—. It's important to look at the differences between Wales and Scotland. So, when the Scottish Government decided to raise their income taxes in Scotland, they, because they've got powers over the thresholds, were able to introduce a starter rate and an intermediate rate, which protected lower earners from any income tax rise. The Welsh Government could raise the basic rate of income tax, and that would be progressive, but there would be an income tax increase for people on lower incomes over the personal allowance. What the Welsh Government could have done is use the higher rate and additional rate, and that's something that the Scottish Government have done. So, now, the additional rate and the higher rate in Scotland are 2 per cent more—2p in the pound more—than the equivalent in England and Wales and Northern Ireland. The Welsh Government's hands were tied, but they could have done something. Unfortunately, if you want to raise material levels of funding to change the outlook for the Welsh budget, you're going to have to change the basic rate of income tax.

So, just following on from that and what Ed was saying, in Scotland, they've got that increased tax take, which is good. Have they reduced the impact of council tax on their residents as a quid pro quo?

I don't know. David might know more about it, but, since 2010, there's been a longstanding policy in Scotland, I think, to freeze council tax, so the longer term trend is definitely that they've lowered council tax relative to the rest of the UK.

I see. That's interesting.

So, previously, 2007 to 2017, council tax was frozen in Scotland, and the band D rates in Scotland, I think, are about £500 or so lower than they are in England and Wales, which doesn't quite offset the—. For a long time, it offset or even more than offset the higher income tax rates in Scotland. It doesn't now, but it offsets part of the extra that's paid through income tax.

Thank you. I'm very conscious of time and we haven't really heard from Rhianon. I think, Rhianon, questions 14 and 15 are probably what I'd be most interested in here, in what they are, but it's up to you. We're probably okay to go on a little bit. Our next session is meant to start in about 10 minutes. We'll need to change over, so if we could get brief answers that would be great.

I'll try and make the questions more brief. In regard to, though, the amount of higher rate/additional rate taxpayers in Wales, they are very, very small, aren't they, in terms of the additionality that would actually bring forth. So, in regard—. This is a question for David: in regard to the Scottish budget, you gave a view previously that the property transaction taxes in a sense prevent, from what you've said, mutually beneficial transactions, reduce geographic mobility and can also penalise the rental sector. So, does that view also apply to the Welsh land transaction tax?

The very short answer is 'yes'. It applies to stamp duty as well. I could say maybe a little bit more about how Welsh policies are affecting this, but I'll do it very quickly. So, the fact that there's a higher threshold for land transaction tax in Wales means that lower to middle-value properties actually aren't distorted to the same extent, at least owner-occupied ones, but the higher rates towards the top of the distribution mean, for high-value properties, the distortion, the reduction in trades, reduced geographical mobility for higher income people and so on, is bigger than England towards the top of the distribution. And of course the higher rate, the 4 per cent as opposed to the 3 per cent rate, on additional properties, means there's a bigger penalty to the rental sector in Wales relative to England.

I was just looking briefly at profits for companies such as Costa and Tesco. So, this question is: how will the non-domestic support announced in this budget benefit businesses and landlords in the short to medium term? Secondarily, can those policies be better directed to benefit Welsh businesses, bearing in mind how I started that question, and how does support compare to that offered in other areas of the UK? Quite a lot in there. I don't know who wants to take that.

If I can take the last part, and maybe hand over to Ed and Guto for the first part, if that's okay. So, how it compares to support in the rest of the UK—well, it's, I think, very similar to the support in England, with the retail, hospitality relief and the cap in place on the amount per business. Scotland actually didn't have any particular relief announced for next year for retail, hospitality and leisure sectors. That follows on from the fact that its reliefs ended in, I think it was, June last year. Surprisingly, there was a lot less push-back on that than I thought there would have been. Because, in the short term, we do think the main beneficiaries would be the occupiers as opposed to the businesses. But, yes, they didn't have this relief in Scotland and, whilst there was some comment, there was a lot less than we might have expected.

Guto.

Just to reiterate, we often say that the Welsh Government's hands are tied in terms of tax policy, in terms of changing the overall size of its budget, but that decision not to replicate the reliefs given to leisure and hospitality businesses, which costs about £140 million next year, I think, added—. If they copied what the Scottish Government have done and removed those reliefs, that adds more funding for public services. So, you know, it's a political decision to benefit the non-domestic rate sector.

We've probably got time for one more question, Rhianon.

I think, if we can, I'm going to go to the final question: the risks and benefits, then, in regard to devolving social security benefits to Wales.

It's something we looked at in a paper a few years ago in 2019, looking at some of the trends in the social security payments in Wales. If it was devolved on similar lines to Scotland, we found that it wouldn't be financially unsustainable, because of relative trends, but it depends on negotiations between both Governments, when they are devolved, how exactly you'd adjust the block grant to fund the powers. The Scottish Government are spending more on social security than they are getting from the block grant adjustment and funding from the UK Government, but that's mainly driven by the enhanced generosity of the devolved benefits that they've introduced, the Scottish child payment, for instance. So, I guess, that's a political choice, to prioritise welfare spending over other day-to-day public services.

If I can just drill down on that, very briefly, what you're saying, then, is they're not getting it in their block grant adjustment, but they have chosen to actually enhance their offer, a little bit like our council tax reduction scheme, et cetera. I'd be more interested in following that up, perhaps in a different session as well, Chair. Has anybody got anything else to add to that discussion point?

The only thing I would add is that the Scottish experience, especially when introducing new benefits, where you're not sure what the eligibility will look like, like with the disability benefits, the changed disability benefits, that adds quite a lot of additional risk into the budget process. Because, when you set the forecasts, which then determine how much you can then spend on the rest of your budget, on public services—. But, when you're introducing new benefits, you're not sure what the take-up will be, what the eligibility will be, those could change quite a lot, and that is something that will impact the volatility of the fiscal framework, and that might require additional borrowing powers, alongside those that are needed to smooth on the tax side. So, I think you need to think about how it fits in with the wider fiscal framework because of the risks, both in terms of volatility and in terms of if there's any risk of divergence over time.

As Rhianon says, I think it's a discussion that we probably need to take further at another time, as always. It shows that—. We tend to go over time, because it's so fascinating to listen to your analysis. Thank you so much for your time this morning. There will be a transcript available, so please check it for accuracy. Diolch yn fawr. We'll pop into private just for a few minutes to reset, but we'll be back shortly.

Thank you very much.

Grêt. Dyna ni. Rydyn ni nôl yn fyw, a chroeso nôl i bawb sy'n gwrando o adref.

Welcome back. We're moving on to our second scrutiny session today. We've got with us the Future Generations Commissioner for Wales and others. I just wonder if you'd be able to introduce yourselves and who you're representing here today. If we start with Sophie.

Bore da, pawb. I'm Sophie Howe. I'm the Future Generations Commissioner for Wales—well, at least for the next two weeks. [Laughter.]

Welcome. Rhiannon.

Bore da, Gadeirydd. I'm Rhiannon Hardiman, and I'm change maker with the office of the future generations commissioner.

And, Alex.

Hi, good morning, everyone. I'm Alex Chapman. I'm a senior researcher at the New Economics Foundation, providing a bit of technical support to the office of the future generations commissioner.

Gwych. Diolch yn fawr. Croeso cynnes i chi.

As you'll be aware, this is being broadcast, and there will be a transcript available for you to check afterwards, but welcome to the committee, and thanks for your time this morning.

I'm going to kick off with some questions. I'd like to start by looking at the funding available to the Welsh Government and the impact of inflation. You've contributed to the scrutiny of the Welsh Government's budget regularly, and in all likelihood, as you say, it will be your last time to appear as the future generations commissioner in front of us today. In your time as the future generations commissioner, what improvements have you seen and what areas still need to be addressed in terms of the Welsh Government's budget setting process?

Diolch, Chair. In terms of improvements, there is a budget improvement plan, so commitments to improve the process in line with the Well-being of Future Generations (Wales) Act 2015. There's a definition of 'preventative spend', which has been agreed, and certainly we've seen some really substantial shifts towards spending on decarbonisation and how the Act has influenced major spending proposals. The M4 relief road is an example, but also the Wales infrastructure investment plan, going back to a zero-based review on capital spending there, and aligning that infrastructure investment plant with the well-being of future generations Act. However, there are still—. Sorry, the other thing I would say is, I think, over the period of time, we have seen a better reflection or link between the budget process, the budget narrative, and the well-being objectives that the Government has set. However, there is still further work to be done for the Government to really show their workings on how they are applying those five ways of working in the legislation, and how they're doing that really in-depth analysis across the well-being objectives that they've set.

Whilst there is a definition of 'preventative spend' in place, the committee might be aware that I recently used my section 20 powers to undertake a review of the Welsh Government and this was really looking at the machinery of Government and how well embedded the future generations Act was in the machinery of Government. And what we found there was that there were very high levels of awareness and commitment to the principles of the future generations Act, but less detailed understanding of the real kinds of technical applications of the Act. And in terms of the definition of 'prevention', we have certainly seen that not enough progress has been made in actually showing how it is being applied comprehensively across all of the spending decisions.

We're still not necessarily seeing an assessed impact of budget decisions. So, yes, there is a kind of strategic impact assessment that looks at a whole range of different data sources and so on, and that has improved over the course of the last seven years in terms of impacting some of the key data sources linked to the well-being of future generations Act, but we're still not necessarily seeing that translate into a really good analysis of, 'Okay, so what is the actual cumulative impact?'

The final thing that I would say is that—and again, it's an issue that we found in the section 20 review—it's a real challenge for Government where we're talking about a Government narrative, for example, on 'greener, stronger, fairer', which is sort of easy, because it's three words and people remember it. That does sometimes cause confusion between that as a kind of, let's say, political narrative, or a Government's narrative, versus the actual legal requirements of setting objectives that deliver or maximise their contribution to seven well-being goals and then taking all reasonable steps to deliver those well-being objectives. So, what we see in the budget is that there is this sort of focus on, 'Are these proposals delivering fairer, greener, stronger?' And that's fine to a degree, but that doesn't necessarily always show a very clear line of sight into, 'Well, actually, these are the Government's legally set well-being objectives and how we are actually delivering those.' That is a challenge, Chair, that we have seen not just in terms of the budgeting process, but in terms of that shift from commitment and enthusiasm and some very good steps towards embedding the future generations Act and then this real technical application.

What would be the one thing that would make the biggest difference if they were to adopt it and bring it in to the next budget round? What would be the one thing that you would suggest that they should prioritise?

Well, I think that there needs to be a clear assessment of, 'These are the well-being objectives that we've set and these are how our budget decisions are helping to deliver those well-being objectives.' We're seeing that in some areas, but I'd also like to see an analysis of, 'Well, why that spend, and why not another spend, and what's the analysis that we've done, and what is the thing that we can do, or the set of things that we can do, that could make the biggest contribution to the well-being goals?'

The second thing, really, is really showing how they've applied those five ways of working, and again, we can see some quite interesting sort of narrative around prevention, for example, in the budget, but we really need to see—. I would like to see, over a period of time, how we are shifting our resources from primarily spending on acute spend to tertiary prevention, secondary prevention, primary prevention, which is what the definition of 'preventable spend' covers.

In your evidence, you say that while most commitments in the draft budget seem to remain in line with what was set out last year, some have been weakened due to rapid inflation. What risks do you see to those budgets from inflation and how might this impact the outcomes the Welsh Government aims to deliver?

Yes. So, I mean, I suppose the top line, which I'm sure you've heard from many people you've taken evidence from, is that no increase in capital from the UK Government means a real-terms reduction in capital budgets of 8 per cent due to inflation, and the infrastructure finance plan is already over-programmed in this three-year spending review period, and it basically means that the Government is likely to be able to do less. We don't know exactly where that is going to impact, but if it were to impact, for example, in terms of falling behind on infrastructure plans, say, on public transport and active travel investment, say, on renewable energy, that could have, obviously, a direct impact in terms of decarbonisation plans. Because I think one of the best examples of budgeting decisions aligned with the Act, or budgeting approaches aligned with the Act, is the Wales infrastructure investment plan, where we see that real-terms 8 per cent cut, that has the potential to have an impact on how the Government are able to deliver their own well-being objectives.

We're also seeing real-term reductions in funding for biodiversity, for example. So, the around 15 per cent reduction in funding there is a real concern and, of course, I think this week, the Minister made a statement in the Senedd about legally binding biodiversity targets. So, there is a risk to Welsh Government there in terms of meeting its own targets and its own well-being objectives, but there are also risks to other organisations. There have been some substantial cuts, for example, to Natural Resources Wales, which is likely—we haven't, obviously, been able to assess in the time available what the detailed impact of that is likely to be. But it does raise questions over how that will impact their approach to meeting, particularly, that goal of a resilient Wales.

And then, of course, we have seen the cultural sector cut, so national cultural bodies like Amgueddfa Cymru and the National Library of Wales, and, sadly, in these very challenging financial times, it is often those cultural bodies and services that get cut. Don't get me wrong, I've got a huge amount of sympathy for the position that the Government are in now and the need to protect front-line public services. However, I think there is something about a more imaginative consideration of those cultural services as being a key part of front-line public service delivery, and they have particular preventative interventions. So, again, it's back to the definition of 'prevention' and thinking about things in an integrated way, I think we'd like to see a better assessment of that when looking at cuts to what are the bodies that probably have always taken the brunt of any financial challenges.

A final question from me, for the time being: the Welsh Government, again, decided not to change the Welsh rates of income tax, something you've noted in your evidence. What are your views on this, given the level of funding available to the Welsh Government?

It's my clear view as commissioner that those with the broadest shoulders should take more of the burden and, therefore, there are opportunities for the Welsh Government to raise particularly the higher rates of income tax, which, in 2023-24, would raise £33 million and £3 million respectively in terms of those higher rates of income tax. That is relatively small fry in terms of the scale of the challenges that we face and, of course, the bigger tax take would be from raising the basic rate of income tax, and I understand the Government's position there in terms of that real difficult balance between people really feeling this cost-of-living crisis and, therefore, struggling to make ends meet, and raising the basic rate of income tax would potentially make that even worse. But, actually, in terms of those top two tiers, raising £36 million—not the same level as raising the basic rate, but also not to be sniffed at.

So, some of the things that I just referenced there, for example, the cuts to Natural Resources Wales, those are things that could be reversed if those higher rates of income tax were raised. It's interesting to note that Scotland have raised their higher rates by 2p. I think that perhaps that's something that the Welsh Government should look to do in the future, even if it's just to protect some of the really challenging priority areas, like climate, like biodiversity, in terms of weathering the storm.

Thank you very much. Rhianon.

Thank you, Chair. Obviously, your paper mentions that COVID has impacted the poorest the most, and there's a recognition that the funding settlement is not enough to meet the collective pressures, obviously, from what you've just said. So, does this budget, then, adequately address the immediate issues facing Wales? Obviously, you've put an emphasis in terms of biodiversity.

Well, there are things in the budget that aim to alleviate some of the immediate pressures being experienced by people in this cost-of-living crisis—so, £18.8 million allocated to the discretionary assistance fund. The biggest intervention, I suppose, in this sense is the Government's approach to trying to protect as best they can front-line public services. Obviously, that is critically important to the delivery, really, of a whole number of their well-being goals and staving off potential significant problems emerging. That's not to say that, even with the financial settlement for front-line public services, it's still not going to be incredibly challenging for them, but, if the Government didn't take that approach, it could be an awful lot worse. So, I kind of feel that the Government are in between a rock and a hard place here.

There are a few other positive things. In particular, we've actually seen that the—. It's very difficult, because the Government are still not doing a comprehensive analysis of the carbon impact of their spend, but committee may recall from previous years that we've used a methodology, which Alex can explain in more detail, to look at that ourselves, and, actually, it looks like decarbonisation spend, primary decarbonisation spend, has actually gone up, which I think the Government is to be congratulated on in these difficult times.

However, you will also be aware that I put forward a series of proposals that I feel could both deal with the cost-of-living crisis and help us to meet those wider targets. So, just to reference those in particular, investing in public transport and active travel, which the Government are continuing to do, is important. I am increasingly hearing from a whole range of different sources, from young people I'm engaging with, people who work with young people, even so far as the CBI, who are saying that their members are saying some of the challenges they have in attracting young people into apprenticeships and so on is the cost of public transport. So, I think that there's a real case for the Government to be looking at how they could potentially resource free public transport or additional reductions in the cost of public transport for young people, and of course that would have a direct impact in putting money back in their pockets as well.

I am pleased to see that the Government are continuing to provide funding of £2.2 million for the basic income pilot. Again, I think that's a brave decision—well, a brave and necessary decision, I'll say—in the current climate. So, that is good news. There's ongoing support for training and apprenticeships and it's really positive to see the reference to contributing to skills in the foundational economy, net-zero sectors and health and social care. Investment in social housing is good—£10 million to meet housing pressures from homelessness.

Okay. Okay, thank you. That’s very comprehensive and I’m just conscious of the time, and the Chair is looking at me with his eagle eyes. Just very briefly, there were three main policy areas that you've mentioned, and there was obviously the low-carbon technologies loan as well, which you've highlighted.

Just very briefly, your overall view has been made, clearly, to this committee, but those policies themselves, if we go in the middle, are around £250 million. You have mentioned, progressively, in terms of income tax raising, but, obviously, we don’t have that taper and threshold ability at the moment. So, any idea where that money would come from?

Well, I suppose if you—. You know, you wouldn’t be able to do them all. I think this is a long-term plan, around how the Government might be able to look to do some of these things in a future year. But 1p on the top two rates of income tax generates £36 million. Multiply that by—double it or treble it, if you were looking at 2p or 3p, for example. Then, you're getting closer to doing things like funding free public transport. So, those are political choices. As I said, I don’t underestimate the pressures that the Government are under, but there could be some progressive interventions like that, I believe.

Briefly, do you feel that Welsh Government is engaging with those who are suffering the most from this so-called cost-of-living crisis?

The Government have a range of engagement mechanisms, and this is, from my assessment of interactions with the Government, absolutely at the top of their list of priorities. But we have to be honest that they are hamstrung, really, in terms of the resources that are available to them. Particularly on housing retrofit, for example, if the UK Government had worked in partnership with the Welsh Government with the successor programmes to EU funds and so on, then we might be able to see more intervention and more progress in those areas.

Mike.

You've previously outlined the importance of investing in skills and training—I very much welcome that—and you've welcomed some specific commitments in the budget. What about high-level skills? That's one of the areas that Wales is very weak in, and, if you want to increase our economy, having more high-level skills is certainly going to get more people paying the higher rate.

Yes, I think that's a fair point. The Well-being of Future Generations (Wales) Act 2015 wants everyone to have decent work, and one of the best ways of achieving decent work is having a higher level of skills. We are disappointed not yet to see the net zero skills plan, and that has—. We think that there is a range of opportunities there for the development of these kinds of high-level skills to go into good quality, decent jobs, but we haven't yet seen that plan coming out, and it does seem to have been delayed for quite some time.

You talked about biodiversity earlier. I'm very keen on biodiversity. If you ever listen to any of the debates, I normally talk about equilibrium in terms of the environment and the importance of the high-end predators, which stop the rats and seagulls growing in such large numbers to the detriment of almost everything else. You say about the money being moved into decarbonisation, but is it not true—tell me if I'm wrong—that a lot of the work needing to be done in biodiversity doesn't need large sums of money, it needs large-scale commitment?

I think that, certainly, you've got a point there. One of the really positive things that we're seeing in this budget—and we hope to see ongoing commitment, going forward—is investment in a national nature service. In theory, you could throw all the money in the world at a particular issue, but, if you haven't got a skills base to be able to actually deliver what needs to be delivered, then you are not going to get very far. So, in that regard, it’s actually more commitment and policy intervention, and maybe a little bit of funding, to develop something like a national nature service, work with the range of different organisations who are working in nature and biodiversity and have that really direct commitment, as the Minister was outlining in her statements this week, that actually are the things that could make the real difference. But, as I said earlier, we’re still seeing cuts to Natural Resources Wales, and I can’t tell you exactly how those cuts are going to play out in terms of the impact on meeting those biodiversity targets that might result from them.

I'm sure that biodiversity would improve because of cuts in local government expenditure: where they don’t cut grass verges down to an eighth of an inch above the earth, where they don’t cut the grass on the roundabouts to an eighth of an inch above the earth, it actually allows the growth of biodiversity and animals to recolonise. You see that also—. I live in Swansea, and you’ve got areas that are mountainous—‘hilly’, I think, is probably the correct term to anybody outside Wales—where, if they’re left alone, the biodiversity is really good. It’s when people start interfering and spending money and doing things that it gets worse.

Mike, I couldn’t agree with you more there, and in fact one of the early pieces of advice that I gave to local authorities in Wales in a series of simple changes to meet the well-being goals that I published was, basically, 'Don’t cut the grass; allow nature to thrive, and also save yourself some money in the process of not having to mow the lawns.' I am really pleased to say that you will see across Wales now that that is happening, not everywhere all the time, but I certainly have seen an increase in that over the last seven years. And just the final thing to say on that is also the Government should be commended for the sustainable urban drainage regulations, which, again, aren’t necessarily a financial requirement as such, but a policy intervention that is requiring that greening of communities for the benefits of sustainable drainage is also having those benefits in terms of nature.

If my colleague Joyce Watson was here, she’d tell you that she thinks that we ought to have legislation to stop people tarmacking over all their gardens, which is causing problems with biodiversity and problems with drainage. Would you agree with that?

Well, yes. I haven’t looked into that specific issue, but, on the face of it, yes, that would make a lot of sense, and would probably add to some of the things the Government are already doing, like giving people trees to plant in the garden and so on.

And finally, last year you suggested it wasn’t clear what Net Zero Wales commitments were being funded as part of the budget. Do you see it in this year’s budget?

So, we haven’t fully mapped against the Net Zero Wales plan, because, obviously, of the amount of time we’ve had since the budget has been published. And I suppose one thing that I would say is that that is made more difficult because the Welsh Government itself doesn’t map or reference particularly extensively in the budget narrative the links back to the Net Zero Wales plan. However, we can see some clear areas of progress—so, this clear shift in the budget towards actions to support climate change and decarbonisation. I mentioned our own methodology this year—we think that there’s a 4.4 per cent increase in funding specifically for primary decarbonisation activity, and that’s set against a backdrop of an overall budget increase of 1.8 per cent, so you can see there how there is a greater focus on decarb. We’ve seen £20 million-worth of capital grants to help local authorities decarbonise. We’re seeing very clear progress on transport. We’re also seeing progress in terms of social housing with the Welsh housing quality standard and so on. However, there are still a number of concerns that exist. Like I said, the budget doesn’t reference which parts of Net Zero Wales will be addressed. It’s not easy to map it out. The concerns about how the public sector across the board is going to meet the aspirations of net zero by 2030 have been raised by Audit Wales, and some of my own analysis echoes those concerns. We mentioned earlier things like the skills gap. So, there is still a range of areas where we think there are still some challenges. But if you would, I suppose, pick one area that shows that the Government is committed in this area but probably still not doing enough, it's that comparison of the increase of 4.8 per cent against a backdrop of 1.8 per cent elsewhere.

Before I come to Peter, are you satisfied then that the Government's approach to addressing carbon impact is in this budget, or is it that you are having to do that work yourselves because it's not there, and you'd like to see the Government actually publishing that alongside the budget?

The Government absolutely must publish that alongside the budget. I've been saying that for at least the last four, if not many more, years. We're still not seeing that full assessment. Likewise, it's a similar thing, Chair, to what I was mentioning in terms of that assessment of preventative spend. I think the Government recognises that it needs to do it, but it's constantly in a kind of crisis mode where they don't have the capacity, time or resources, quite frankly, to be able to do some of the work that is absolutely necessary, and that's a problem.

And that has an impact on the long-term planning rather than the short-term dealing with crisis after crisis.

Exactly that.

Thank you. Peter.

Thank you, Chair. Good morning, Sophie. I just want to probe your views on how well you think the Government are using the well-being of future generations Act in setting its budget. You identified in your section 20 review earlier this year that there were some challenges going forward. Indeed, in your written evidence you made it clear that links between funding and well-being goals and objectives aren't made clear in the budget. I just wondered how well you think that this budget uses your Act to frame decisions, and how might the Welsh Government address the challenges you've identified.

Thanks, Peter. I've probably covered a fair bit of that. I can map, 'The Government said they would do this in their well-being objectives, here are the actions that they're now funding in this budget', and so on. But it's a bit similar to the answer that I just gave to the Chair in that the Government themselves should be making that clearer and doing that real analysis, which would enable them to also see where are the gaps, and what is it that we're not actually funding or progressing in our budget commitments.

I think that the issues in terms of the five ways of working—. Over the course of the last seven years, we've definitely seen some really significant long-term spending interventions aligned with well-being objectives, for example in transport and universal basic income. But, we need to see that analysis across every aspect of the Government's spend. So, I suppose my report card would be essentially what I said in the section 20 report, which is, 'Good, a fair amount of progress being made, but we're still not doing exactly what we need to do'.

It's been some years now, hasn't it, so I can see that must be frustrating. The Government have referred to the budget as one of the most difficult since devolution. Do you think the narrative does an adequate job of analysing the negative impacts of the Welsh Government's decisions, and how do you think that might be improved? I'm sorry if we've covered some of these things already.

It attempts to do that, but I don't think—. In relation, for example, to the impact assessment, it identifies a range of factors that should be considered, but doesn't necessarily then go on to say, 'And therefore the impact is this'. So, what is really needed is a comprehensive analysis of how do we choose, using our resources, to do the things that are going to make the biggest contribution to all of our well-being objectives and how do we understand the cumulative effect of the budget. We can see impact assessments, for example, in relation to particular programmes and so on, but what the strategic impact assessment needs to do is really look at that in a cumulative way to say, 'Overall, is this helping or hindering us in getting towards our well-being objectives?' and, 'Should there be different things that we do and prioritise?'

I think you've answered some of my next question, actually. I know you were tasked with considering the learning and best practice that could be relevant to a strategic integrated impact assessment. I just wondered if you could share with the committee at the moment any of your findings so far in that regard.

I think there's still a fair bit of work to do on the strategic impact assessments. They use a range of macro evidence sources that they've considered. There is an improvement in the presentation of trends on each of the sections, and each section presents key funding allocations linked to trends. So, that is some progress compared to where we were previously. They keep repeating the word 'impact', saying the key strategic impacts alongside wider considerations have underpinned a range of the allocations, but the key strategic impacts are just the trends in the stats; they're not actually the impact. So, that is what we need to see.

Having worked with the budget team and a range of Government departments across the years, what I can say is that I think the No. 1 challenge here is the resources that are available within those teams—the human resources there—to actually do this work, and the fact that they're just constantly responding to crises. This is where my section 20 review and the improvement plan that the Government are developing in collaboration with my office are critically important, because at some point, someone needs to say, 'We actually have to carve out some resources to do this work.' We must stop just saying, 'It needs to be done but we haven't got round to doing it'. We do actually need to carve those resources out. That needs to be prioritised, because if we don't start doing that now, the things that we're not considering well enough for the long term and prevention now will be the problems that the next Government or the next Senedd term or the term after that and the people of Wales will have to deal with.

And on the improvement plan, we know that prevention has been pushed back; there's not enough progress on prevention. I think I know what you're going to answer on this, but how effective is the draft budget on focusing on prevention? Should there be more? We can't always say, 'There's not enough money; we can't do it'. It's how you prioritise money.

Yes. Again, we can see some good preventative interventions in the budget. What we see in the budget really speaks to, overall, what I've found in this section 20 review. Like I said, there's this enthusiasm and commitment, and new things are happening. People are saying, 'Prevention: that would be universal basic income; it would be investment in homelessness; we're needing to prevent the climate emergency, so we're investing more in that.' That's the kind of general approach and application rather than really technically making sure that everyone understands the definitions of the different forms of prevention and is really analysing all of their budget lines against those definitions of prevention. I think that that really needs to be the next iteration for Government in terms of the budget improvement plan. And, of course, that links to the improvement plan that they are setting out in response to my section 20 review.

Obviously, we're seven years in, I've been quite upfront saying the first three years were incredibly difficult. There wasn't a political prioritisation of this. There was some significant progress then made in the year prior to COVID, then COVID hits and everyone goes into a kind of crisis, so perhaps some of the progress made and the capacity in the system takes a step back. Progress has been made, but there is much more work to be done. I think it will be a real, or it should be—. Far be it from me to say what the next commissioner should do, but if I was sticking around for another seven years, I would be absolutely terrier-like in monitoring the budget improvement plan and the overall improvement plan from the section 20 review.

Thank you, Chair.

That pre-empted a little bit of my final question. What piece of advice would you give your successor with regard to the budget? You've answered that one. Is there anything else that you, in the short term, with your successor coming in now, in the next 12 months, in line for the next budget round—? What would be the one thing that you would say to them to say, 'Please focus on this, because this will make a real difference to people'?

I think I'd probably come back—. I mean, all of the five ways of working need to be explained through the budget narrative and linked back to the well-being objectives. I recently met with the First Minister just before the publication of my section 20 review, and it was actually with the First Minister when he was finance Minister that we did this work on preventative spend, and he was even raising the points of, 'Why hasn't this been properly embedded?' and so on. So, I think that there should be a real focus on that in doing some quite in-depth work with officials in the civil service to get them to understand what that definition is and help them to map their thinking and their spending proposals across those definitions, starting, obviously, with Treasury officials, who also need to scrutinise that in terms of spending proposals from different departments.

Does that mean advocating for more civil servants?

Yes. Well, I'm always of the view that it doesn't necessarily have to be civil servants, and that, actually, some of the best things to do—. I'll embarrass him here, but if I was the civil service, I'd bring in someone like Alex to help them do this sort of analysis, not necessarily in a consultancy way, but in kind of bringing in that outside expertise to actually hold the hands of people doing this, roll out training, and develop awareness and understanding. Because sometimes I think the system needs to have that external challenge and expertise to move itself forward.

Thank you so much for your time this morning, and also thank you very much for your service as the commissioner for the last few years. I know, as you said yourself, that it was tough for the first few years. It's a shame that you're just getting into your stride and your time comes to an end. But thank you so much for that time and thank you for all the evidence you've given to this committee over the years as well. Obviously, there will be a transcript available after this for you to check for factual accuracy, and just make sure that that is correct. I wish you well in the future. We'll take a short break now and we'll be back at 11:35 for our next session. Diolch yn fawr iawn iti, Sophie.

Wel, croeso nôl i'r sesiwn yma, ac yn y sesiwn yma, dŷn ni'n mynd i eto fynd dros y gyllideb ddrafft.

So, we're looking at another scrutiny session about the evidence on the draft budget. And, I think, Mike, you want to say something.

Can I declare an interest? My office is a member of the Bevan Foundation.

Thank you very much, Mike. That's fine, no problem at all. Now, we've got Victoria online, and we've got Natasha and Luke here, but would you be able to just introduce yourselves, and say in what capacity you're here today? Maybe we'll start with Victoria on screen. [Interruption.] Oh, hold on. There we are.

Thank you very much. I'm Victoria Winckler, I'm director of the Bevan Foundation. And my apologies, I can't be with you in person; the trains were defeated by the weather.

No problem, thank you very much. I think that's been a recurring theme for other people today. But, thank you for joining us—the wonders of modern technology and that. But, if we go to Natasha next.

Yes, I'm Natasha Davies, I'm the policy and research lead at Chwarae Teg.

Lovely, diolch. And Luke.

Hi, I'm Luke Young, I'm the assistant director of Citizens Advice Cymru.

Gwych, diolch yn fawr. Wel, croeso cynnes i chi i gyd.

A warm welcome to you here. We've got a fair bit to get through, as you can imagine. But, it's being broadcast, and there will be a transcript available for you afterwards to check.

I'd like to start with exploring whether the draft budget allocations reflect the Welsh Government's priorities, and how they support people with the cost-of-living crisis, and what Welsh Government are doing to progress in implementing the committee's recommendations. So, to all of you to start with: the Welsh Government says it has reprioritised its funding based on the three priorities, one of which is to continue to provide help to those most affected by the crisis that we face. Is this clear from the draft budget allocations, and how do they reflect this priority? I don't know who wants to go first, but, maybe, if we go to Victoria first, and then we'll come into the room afterwards. Thanks. Victoria.

Thank you very much. I think the Welsh Government is quite right to focus on, amongst other things, addressing the needs of people most affected by the cost-of-living crisis. I mean, we're all squeezed, but it's the people who have the most limited room for manoeuvre. So, I think that that's quite right, and, I think, its prioritisation of the additional funds for the discretionary assistance fund, for the pupil deprivation grant—sorry, the pupil development grant—and free school meals for primary pupils is also very welcome. There's less emphasis on fuel poverty, but there is also some provision in the budget for addressing fuel poverty. Whether that is enough, and goes far enough to justify the claims in the budget narrative, I'm less sure. I think there clearly were many other areas where people need help where the Welsh Government could have intervened and has not done so. And I think we also shouldn't forget that people who are under pressure from the cost of living also use other public services. So, they also rely on the health service, they also use public transport and use the education system. So, I think, probably, the link between claims and allocations is clearer than in the past. I think that's what I'd sum it up as.

Okay. Lovely. Shall we go to Luke next and then to Natasha?

I think, and the position we have as Citizens Advice is that people in Wales have been better supported because of the decisions of the Welsh Government around the cost of living. That's in the current budget. In the budget that we're looking at, I think the narrative speaks to lots of ambitions, but I don't think those ambitions are fully met within the new budget. I say that while recognising that the additional money going into the discretionary assistance fund is really, really useful and helpful for lots of people, and I'm sure we'll come back to that point, and there are additional items that Victoria has mentioned, which are supported by this budget. But if this is a budget that is dealing with a cost-of-living crisis and the symptoms of that crisis, then it feels slightly outside of that narrative to talk about the removal of the Wales fuel support scheme and to almost not talk about it, really.235

The Wales fuel support scheme was a big-ticket item in the last budget, and it's not in this one, and I'm sure that we'll get into the depth on that. But this budget as it currently stands and all of the allocations feel as if the Government is saying, 'We are going to do our best to deal with the symptoms of the cost-of-living crisis,' and there's a lot of value in that, but one of the biggest problems that people in Wales currently have is the ability to pay their bills, and their energy bills in particular. You can remove the scheme next winter, but the need is going to be there and the gap is going to grow wider, so I think that that is something that we will certainly have to come back to and discuss in the session.

Okay, thank you. Natasha.

Yes. So, I would say, from our perspective, they're incredibly difficult circumstances in which to be setting a budget. We'd probably agree and welcome the decision to focus on supporting front-line public services. We know that women are more likely to use public services. They're also more likely to be employed in public services, so that's welcome. The continued commitment around the real living wage for social care workers obviously has a positive gender impact, given that women dominate that workforce as well.

From our perspective, there are a couple of gaps that are a bit worrying. There's no discussion of childcare; that's a huge financial pressure on households, particularly on women's incomes. And the budget narrative does make reference to the risk of rising unemployment, but the only real discussion about employability support in there is apprenticeships, and I think expecting apprenticeships to do the heavy lifting in that space is probably a little optimistic, and if we look at the detailed budget expenditure lines, there's actually a drop in the funding against employability under the budget reprioritisation, so that's a bit of a concern for us as well.

There are areas where budgets are flat, which we know, with inflationary pressures, ultimately is a real-terms funding cut. For example, against advice services, it's not really clear what might be being lost from there. And we very much welcome the fact that there is a small uplift in the amount of money against violence against women, domestic abuse and sexual violence, but it is quite a modest uplift, and given the immense pressure that those specialist services are under at the moment, I'm not convinced that it's necessarily going to go far enough.

Okay, thank you very much. I've got a couple of questions that probably focus more on some of the evidence that we've had from the Bevan Foundation, but if you've got any short things that you wanted to say on that, just indicate and we can add to that, but I'll predominantly be going to Victoria with the next couple. In your response to the draft budget, you said,

'Short-term measures to ease cost of living pressures are not a substitute for action to reduce poverty'.

What actions could the Welsh Government have taken in this budget, with the resources available, to reduce poverty?

Can I explain a little bit about the thinking behind why we said that? At the moment, everybody, or virtually everybody, is being squeezed by inflation, but people were already living on a very low income before inflation started to take off. What's happened for them is that they've been pushed deeper into financial difficulty, and more people who were just hovering around about the poverty threshold have been pulled in. So, we've got a short-term crisis. But if and when the cost-of-living crisis eases, when inflation goes down, perhaps even we have deflation—who knows—the problem of poverty won't go away. In fact, I suspect that it will be even bigger than it was before. The solutions are not dramatically different from the things that the Bevan Foundation and others have been advocating for some time, and that's around boosting people's incomes. There are steps in the budget to boost incomes, particularly around the living wage and social care, but could more be done? There is cutting costs, and yes, there is help for people in severe crisis, but we'd like to see more done, for example, to insulate homes and to increase the rate of the building of social housing to help people to manage their costs and to manage childcare costs as well. And then, there is really longer term stuff around improving prospects, both for individuals and households, but also the prospects that are there depending on where you live. So, improving places as well. And I think we seem to have lost a lot of that broad-brush approach to reducing poverty and, for understandable reasons but I don't think they're right, we've got quite a short-term focus.

Do either of you have anything to add to that? No. That's fine. So, you said that you've got concerns about the reach and take-up of some of the schemes funded for the 2022-23 budget to offset the impact of the pandemic and cost-of-living crisis. Can you expand on this and what are the issues and what actions could address them?

Okay. Even before the pandemic, we had identified the huge number of different and extremely important devolved grants and allowances that are administered by Welsh Government and local authorities, or third parties on the Welsh Government's behalf, and their value was overlooked, I think. They've really come to the fore as a result of the pandemic, and while there has been very widespread acceptance of the need to join them up and to streamline them, I think the progress in actually making it happen has been much slower than we would like to see. And that's all the more important now we've had lots more new schemes come into play as a result of responses to the cost of living.

So, the Welsh Government is working on producing a charter, and we're a part of that group. But, I think we would like to see that go much further. There's some real heavy lifting to be done to deal with the nuts and bolts of getting the different schemes to join up, whether that's IT, whether it's administrative and to do with data sharing, or whether it's around tweaking eligibility so that people can be moved through that system. We have actually commissioned some work on that ourselves. We were grateful to the WLGA, the Wales TUC and a whole range of partners who contributed to the cost of doing that. And we're doing that because we want to see progress, and if it takes somebody understanding how software package A speaks to software package B, well, if no-one else is going to do it, we will do that. So, really, that technical stuff needs to be resolved, and I think it also needs a bit more of a drive.

The Welsh Government administers some of these schemes itself, so we want to see them making progress, and we want to see them putting more pressure, I suppose, or more encouragement on local authorities. And, while a charter is helpful, my own experience is that charters have a fairly short shelf-life and, in particular, don't drive the reluctant to change.

We've heard in the past in this committee and elsewhere about that 'no wrong door' approach, so that if—. Somebody, especially somebody who is in need, doesn't want to be repeating themselves over and over and over—I can see Luke wants to come in—and it's how do you get systems that talk to each other so that that person is passed to the best place possible to be helped, and by multiple agencies. Luke, did you want to mention something?

Just on one of the points that Victoria was making, particularly around a single point of access for Welsh benefits, lots of our clients come up against all of the different systems, and that can be a struggle at the best of times, and even more of a struggle, obviously, when you're going through some tough times. But, I think there's a real opportunity to make some big changes in Wales and do some exploration as to how you streamline and get money directly to people. We know that, for people in crisis, direct payments are the biggest and easiest intervention that you can make to make their lives a bit easier. Now, in response to the cost-of-living crisis, those of us in advice have spent quite a lot of time in media and with people trying to explain what advice is on offer, and it gets very difficult when you say, 'Well, you get some of these direct payments over here, but you need to apply for the £200 via the Welsh Government over here, and by the way, you need to speak to local government to see if there are any extra pots around it'. It's confusing enough for those who work in it day in and day out, and I think, if we can learn anything from the cost-of-living crisis, it's that simplicity is our best friend.

Yes. Natasha, yes.

Just adding to that from our perspective, I suppose, just to highlight the impact, the risk of these systems not working as well as they should be for the people who need the support, often, people who are looking for this kind of financial support, they are time-poor as well; they haven't got the time to navigate needlessly complex systems in order to work out what support they need. And what we see with women, in particular, in low-income households is that they are more likely to be managing the household budget, they're much more likely to go without in order to make sure that the kids are fed, they're much more likely to be turning to high-cost credit and other avenues of financial support in order to cover the cost of essentials. So, the risk, the impact of not fixing that, I would say largely needless complexity, is not insignificant in the day-to-day to lives of women in particular.

And there's the added—. My own personal experience of talking to people is that, if you get a 'no' from one, you think it's going to be 'no' everywhere—because there are so many applications, you lose heart. Mike.

One mistake on one form that throws you out means that you don't think anybody's going to give you anything. I just want to ask—I'm not sure who, it might be to Luke—has anybody done any work on the correlation between the length of the forms that people have to fill in and the percentage of people who start the forms who actually complete them?

I imagine there's an entire academic study that could be done on that and funded and it would take a few years, I'm sure, to wade through. The point is absolutely right, isn't it—it is that multiple forms discourage people. One of the reasons that individuals come to Citizens Advice is because they want to cut through that and have someone to help them with it. So, I agree with you on the ambition; I'm not sure of the specifics though.

Could I just say as well, if I could, just about people's risk there as well that, if that stumbling block for you is something like universal credit, which is the thing that opens the door for all of the other support that you're entitled to, I think what my concern is, and I can't point to any sort of robust, statistical evidence around that—it is based on anecdotal evidence—but people perhaps who look at the length of the application they need to go through for something like universal credit and might only get a very small amount through universal credit, but as a result of them not going through, they're not getting all of the other support that's on offer at the moment, which, again, increases that risk of falling into debt or relying on other sources of financial support.

And having spoken to the older people's commissioner and pension credit being another one of those—you're going to miss out by £2 or £3, but it doesn't open the door to anything else. So, we've got to get better at doing this, and I think that's come through very clearly. Is there anything further that the Government needs to do to make that work or is it—? Victoria.

From our point of view, the advantage of joining schemes into a Welsh benefits system is not just about integrating and streamlining the admin; we would have also urged, as part of moving forward, that there is a fresh look at the value of some of those schemes and a look at some of the eligibility. There are some people who, as you said, for whatever reason, either don't apply for universal credit or aren't eligible for it. The best example is people who work part-time on a self-employed basis and on a very low income. The universal credit assessment assumes that they work 40 hours a week at the minimum wage and that's their income, and yet, they might be working for fewer hours because they have care responsibilities or disabilities—all kinds of reasons—and we would not want to see the door completely locked and bolted shut for people on the margins. So, it's not just, while I can understand the appeal, arguably because it's slightly easier, of looking at the admin and getting the streamlining, it is also, if we are to have an effective system, about it being fair in its eligibility and it also having an appropriate value in terms of the help that people get.

So, nearly a graduated entry rather than a cut-off in certain circumstances—

Possibly.

Some of those types of elements, anyway. Thank you very much for that. Peter.

Thank you. I'd like to just explore a little more your views on the allocations around the draft budget, and I've got a flavour of some of your feeling around some of the things so far from the earlier questions from the Chair. But to you all, really: in the draft budget, the Welsh Government allocates an additional £18.8 million for discretionary assistance fund, is this sufficient to meet the pressures faced by Welsh households, and if not, what more could have been done to address some of these concerns?

I'm happy to start.

Luke.

We welcome the £18 million additional to the discretionary assistance fund. I think that it's important, in order to keep the fund doing what it's currently doing, and it is support for those in an emergency and crisis support. And I suspect that, what we will see is actually rising numbers yet again this year that need to do it. I think the Minister said earlier on in the week that 200,000 people have been supported by the fund, and you can see where the need will expand and therefore the need for that £18 million will very much, very quickly be swallowed up by rising costs and keeping the scheme going and then distributing the funds.

Some of the additional flexibilities that have been built into the discretionary assistance fund—more payments and regular periods that were brought in through the pandemic—I think should be continued in the discretionary assistance fund. But the core issue I have with the budget allocations and also with the narrative is that discretionary assistance is there as an emergency; it is there for those in crisis. What we do not see enough of in the budget is the support to keep people out of crisis, which is why I go back to the Wales fuel support scheme in the essence of that extra £200 this winter has helped keep people out of crisis. There will be some who will have gone to discretionary assistance as well, but our modelling shows that actually, it has made an impact this winter, and without that next winter, the gap is even wider. So, I think that, when we talk about discretionary assistance fund, I think the Government have done entirely the right thing in prioritising it and wanting more money in it, but I do worry that, because of the nature of inflation and other things, it will get swallowed up. And we should remember that this is crisis support, and we need to go further down the line and stop people falling into crisis.

That's really helpful.

Do either of you want to add a comment to that? Okay, we'll move on, then, Peter.

Thank you for that, and my next question—I've had a flavour of what you feel on that as well. The Welsh Government said that it can't afford to continue to fund the winter fuel support scheme provided to help people during the cost-of-living crisis, and you've just talked to that. How successful do you think that scheme has been, and what are your thoughts on it ending?

We'll continue with Luke, because you started talking about it, but obviously, we welcome comments from the others.

The scheme in itself is there as an emergency fund, and the Welsh Government made a bold decision in saying, 'We're going to prioritise that and try to keep people out of crisis'. It is what they could do. Now, there are imperfections with the support scheme. If we were choosing something from scratch, would we choose that model? We've already talked about the issues where people have to apply for a fund versus a direct payment that they could get from UK Government, and the systems that sit around that.

I think my point is that you can remove the fund, but the need will still be there, and the need will be greater next winter. So, you're still going to have those households falling into crisis, and they're going to need to be picked up somewhere. I know that £90 million is quite a lot in this budget, and also, I've sat down with the budget pretty much and gone line by line, and I've gone, 'Thinking about it, if I were in Cabinet, taking it line by line, what would I do? What choices would I make? What would I cut?' Because that's the challenge that the Minister has given us, and it is difficult. I've done things, looking at it and going—and none of these will thank me for this—but 'What if, all the Welsh commissioners, we took a few million off there?' and 'What if, Senedd reform, we push that back a bit?' And none of those are without consequence, of course, and are big political decisions in themselves, but the size of it is huge, so I do recognise that. The £90 million is equivalent to the Welsh Government's headline youth guarantee. So, what I say is that I recognise that it's a big number; I don't have the answer on where you can magic it out of the air, but the need is still going to be there, and I think our challenge back to the Minister and to Government is that you are still going to have Welsh citizens struggling in this area; you know that it's coming, but this budget also doesn't invest in a big way in energy efficiency. So, one way that you can cancel out the Wales fuel support scheme for lots of people is if you make their homes more energy efficient. But, actually, we're nowhere near that ambition either.

I'm getting a flavour through that that, actually, it is a big—. It's a hell of a challenge, we know that it is, but prevention and investment into prevention so that we don't get to these places—. Some of this can be a bit knee-jerk to deal with the initial situation. Where's the planning around prevention?

Just one thing, and then I'll pass over, this is a budget that is about the cost-of-living crisis, and it is about dealing with the symptoms of it. What we fail to see is what the plan is from the Welsh Government and the UK Government, because it has to be, I think, ultimately, a joint plan, to get us out of crisis mode and into a mode that is going to make people's lives better. We need to break this cycle of, every winter, needing to give people emergency payments or an emergency stopgap. We're not there yet. I see the ambition in the budget narrative, but I don't see how we get there in this budget.

Thank you.

Victoria.

Thank you. I very much echo what Luke has said that, while it was a very welcome scheme, it had its flaws around take-up and it was also a very blunt instrument—so, people got the same amount, no matter if they were a single person in a bedsit or a family of five in a much bigger home. It wasn't perfect, but it was extremely helpful, and I think it has helped to avoid some of the crises that we might otherwise have seen. What is quite concerning is that we are a year on from a consultation on the next iteration of the Warm Homes programme and Nest, and, here we are, we've got a matter of months to go before the new financial year, and we don't yet know what's going to happen. Although there is an increase in the budget, I think it's a real-terms 11 per cent uplift in the allocation for fuel poverty, what's that going on? Is that enough? I suspect that it isn't, and I'm surprised that there hasn't been more of a focus on the need to really upscale and take the home insulation programme forward at significant pace.

I think you could say the same about some of the other areas that would actually help to reduce the need for something like the winter fuel support scheme in the long term. Because, at the end of the day, while that scheme is going to help households pay for their energy use, it's all just going back to the energy companies, and it seems to me a very bizarre circulation of cash around the system, and we somehow need to go upstream and stop that and focus on prevention.

Thank you for that. That was really insightful and sensible. The draft budget commits £10 million to the homelessness prevention budget. Are you clear how this will be used and what it will achieve?

Again, to start, no—no, we're not. I think this is one of the challenges with the way that the budget information is presented, to be honest. We can see how much more money's gone in, but we don't know what it's going to be spent on. If you deep dive into the depths of the budget expenditure line tables, you can see where money is being taken away, but, again, you don't necessarily understand what is going to be lost as a result of that. As an external stakeholder, you are basically waiting for the ministerial scrutiny sessions and the evidence papers that get published, and then, when we're here speaking to you guys, we're, like, 'We don't know.'

What I would say from a Chwarae Teg perspective around the homelessness prevention allocation in particular is just, I suppose, what we would want to see is a recognition of the gender issues related to homelessness, which, perhaps, don't always get spoken about. We tend to immediately think of rough sleepers when we think of homelessness. Women are less likely to be sleeping rough, but they're not necessarily less likely to be at risk of homelessness. If you look at the figures around those who are assessed as being threatened with homelessness, the last couple of sets of data showed that women were around 60 per cent of that group, and the risks as to what can lead to women being homeless are often different: relationship breakdown is a major factor, fleeing domestic abuse can be a significant factor. So, when we get the detail on what that additional allocation might be supporting, we'll be wanting to make sure that those schemes, initiatives and interventions are ones that look at the different needs of different groups who might find themselves at risk of homelessness, particularly in the face of rising cost of rent. Renters are in particular difficulty at the moment.

Yes. And often with women, there'll be children more involved as well, so a bigger dilemma.

Yes.

And then the investment in those front-line people. If it's not clear on where that money—. It's all well and good spending on schemes, but schemes need people to run them, and it's the investment in those people—especially in some of the schemes in some of the areas where you're covering, Natasha—who are dealing with people who are extremely vulnerable, listening to extremely difficult conversations, and them, potentially, having to take a second job, because they can't afford to stay in that job, and not having the time to decompress in the evening before they go back to work because they've got another job to keep food on the table for their own kids. All those elements, £10 million probably doesn't touch the sides.

No. And I would say, across front-line services, often being delivered by a lot of third sector organisations, massive recruitment and retention challenges at the moment because the funding that's available just simply is not keeping pace with what they need to earn, and those are staff then who are turning to foodbanks or are leaving the service all together, as is that specialist expertise, and then there's under-resourcing in services, when, at the moment, the demand on those services is increasing.

And going back with homelessness, then, if you don't have the intervention before they're made homeless, it then means people become homeless, which then puts an added pressure on all the local services, and it just keeps going round and round. Whereas that preventative measure, and making sure that those front-line and third sector employees are looked after properly and funded properly, so that—. It's not necessarily commissioning more services; it's funding the services that we've already got. It would make them more—. Sorry.

That's all right. The final question from me is really to you, Victoria. In your response to the draft budget, you noted concerns about the process, allocations and details in the budget. Can you expand on this? Is the Welsh Government's decision-making process for this draft budget sufficiently clear?

That's a bit of a leading question, because the answer is 'no'. I would say that I think there's more clarity this time around than in previous budgets, but there's a disconnect between the narrative and the detail that's in the tables. And, as Natasha's already referred to, it's very hard to track what's going to be done with money, and it's also hard to assess the scale. Is this enough against the scale of likely demand? So, I would say 'no', really.

Thank you. That's all from me, Chair.

Excellent. Thank you. Right, we'll move on to Mike.

Natasha, you have talked about childcare earlier, and you talked about—. 'Disappointment' was one of the words you used—I wrote it down. It's incredibly expensive, but it also has an effect on the broader family when grandparents tend to fulfil caring roles so that their children can work, which reduces their family income. Any comments on that?

Generally speaking, childcare is an issue that Chwarae Teg has been talking about since we were first set up, which was 30 years ago. It has not stopped being an issue. What our challenge to decision makers is is that we have to see a mindset shift where we actually recognise that the provision of childcare is vital for the functioning of our economy and our society. Without it, many parents—and it is overwhelmingly women—simply cannot work. We know the cost of childcare in the UK is prohibitively expensive for a lot of families. If we look at the figures in Wales, the average cost of full-time childcare is £246 per week. Women's average weekly pay is around £424 per week. So, the cost of childcare is nearly 60 per cent of women's average pay, before we've even got off the starting point.

While we are pleased to see the provision of free childcare in some ways in Wales—the 30 hours is definitely a welcome investment—I'm a little worried that the budget looks to be flat for that this year, and if providers are under inflationary pressures, are they then going to have to pass costs on to other parents, who perhaps aren't accessing the offer, or through other ways? The expansion of provision to parents of two-year-olds through Flying Start, yes, it's welcome, but I think that it's an incredibly modest expansion of free provision: it's fewer than 20 hours a week. That's often spread across days of the week. That's not necessarily the most helpful model of childcare provision for people who are trying to balance work and caring responsibilities. So, in the face of the cost-of-living crisis, where everything is going up, where we know that women's incomes aren't enough to keep pace with that, our concern would be that by not accelerating the roll-out of some kind of free or subsidised provision this coming year, in this budget, we are going to be facing a risk where women might be having to make the decision whether it's actually affordable to go out to work. And I just don't think that's a situation we should be in in 2023.

Thank you. To Victoria: you reported the freeze on the education maintenance allowance and its eligibility thresholds. I spent many years campaigning for EMA to continue after they did away with it in England, and we were much more interested in actually keeping it, rather than its value. Are you now saying that perhaps we ought to be looking to index it?

Absolutely, yes. I think the fact that we still have it in Wales is welcome, but its value has been eroded by the amount—£30 a week—being unchanged since the mid-2000s, and the eligibility threshold hasn't changed since about, I think, 2012. I could be wrong on that. And, as a result of that, it's worth less and less to young learners. At a time when many people have urged the UK Government to uplift social security benefits by the rate of inflation—and they did for most of them—I think we have a strong expectation that the Welsh Government should similarly ensure its own grants and allowances keep the same rate. So, absolutely, yes, it should be indexed, and if it can't be done, at least this financial year, make a one-off payment: give all EMA current students £50.

I should have said that before I came here in 2011, I taught at a further education college, and the number of students who would not have been there without EMA, albeit not being sufficient, was fairly substantial. I think that we need to perhaps realise just how important EMA is to people who are poor. I think that the problem we have in the Senedd is we talk amongst a group of relatively well-off people, most of whom come from a very well-off background, who don't understand how poor people live.

There was an evaluation done of EMA about seven years ago, and the focus in that evaluation was entirely on whether EMA retained students, which is an important factor, but we would argue that making sure that those students have enough money for a meal, or enough money to get the bus to college, and enough money for essential equipment is an important part of ensuring their retention. And when we talked to young people before the pandemic, they were already telling us about learners who were quitting because they couldn't afford to carry on on £30 a week; they were getting jobs and helping their parents that way. We're now hearing stories about learners who are handing over the cash to their families to help pay the gas and electricity bills, and are going without meals or going without equipment. So, it's a really important tool in the Welsh Government's toolkit, and I don't understand why a young primary school pupil can get a free school meal, but the Welsh Government is not giving any help to our poorest children who are staying on in school or in further education.

I think Luke wants to say something.

Oh, yes.

Thank you, Chair. I agree with everything that has been said on EMA. Of course, one of the benefits of EMA is it's an element of some financial independence for people at a young age, and that has a learning and a teaching effect, which is really important. I had EMA back in the day, and I think it was still at the same level that it's at now, and that was a long time ago.

But I did want to flag to the committee, moving on from FE into HE very quickly, that it's worth noting that, within the budget, there is very little that is said, or support-wise, that looks at the cost-of-living pressures on undergraduate and postgraduate students. Many students won't have access to universal credit. They won't be able to access some of the money that is there. In terms of Citizens Advice, actually, that is very much a group that often deal directly with their institution rather than with services generally. So, I just wanted to point out that blind spot while we are talking about students. Thank you, Chair.

Can I talk about free school meals? Anybody who has followed me in the Senedd—which is probably nobody outside my office—will know that I was asking questions on free school meals two years ago, and expanding free school meals, and I was getting a lot of very negative responses from people who are now very much in favour of it.

But, the point is: it's not a simple thing. There's a job of capacity. There's a job of capacity within the schools. There's a job of capacity within the kitchens. What I'm asking is: do you think that more needs to be done with the resources available to extend eligibility? And do you think that the capital side of it appears to have not been given the level of detail that it needs?

Who would like to go first?

Shall I go first?

Victoria, yes.

Okay. Deliverability was always quoted as a problem when we were looking at free school meals a few years ago. We got together various school meal providers from a range of different local authorities and we asked them about it. What became clear was that there is huge variation. There are some schools that could provide a meal for all children relatively easily. They might need an extra dishwasher, they might need some extra storage space, but it was doable for them, and it could be done in a matter of weeks. There were other schools that were in a very different position. So, we didn’t have a—. It was clear that it wasn’t one size fits all.

It was also clear that, for the majority of schools, it could be done. It just needed different interventions, and it wasn’t perhaps as eye-wateringly expensive as some people had claimed. And it was partly for that reason that we urged the Welsh Government to go at the speed of the quickest, not to go at the speed of the slowest—not to hold back. If a school was ready and able to go, then it should be doing free school meals as soon as it could. I can’t answer your question on the capital, because I don’t know where we are in terms of expenditure and in terms of the scale of demand. That’s probably something that the Welsh Local Government Association would be better placed to answer.

In terms of extending eligibility, I think that there is still a very strong case for increasing the number of children in secondary school who are able to get a free meal to all of those who get universal credit. The levels of universal credit are barely above destitution levels, and yet simply getting universal credit is not enough for a schoolchild in secondary to get a free school meal. I understand that universal secondary meals would be very expensive, and I can understand that the Welsh Government might have other priorities. But I think that it’s a very sharp cliff-edge, going from leaving primary and having a free meal, to virtually no pupils in secondary getting one, and I would really like to see eligibility extended as soon as possible for secondary pupils.

Thank you. That's one of the things that I was banging on about two years ago, when I was making limited progress. I will keep on banging on about it and, hopefully, I will make more progress. I will quote you as being a supporter as well, Victoria.

The final question from me is: we know that people with disabilities are far more likely to be poor. They are far less likely to be in employment. If they are in employment, they are far less likely to be in well-paid employment. They are more likely to be on the minimum wage. Or, as some companies work out, you can pay less than the minimum wage per hour if you have hours in the system that you don't pay for. You may tell me that that's illegal, but it's not unknown, in that they have hours that they work that are not counted as working hours, even though they have worked during those. Has the Welsh Government provided sufficient support in this draft budget to prevent more disabled people falling into poverty as a result of increasing costs? Disabled people’s energy costs, depending on their disability, can be substantially higher than those of others, and many disabled people need to be kept warm.

I can give the context of what we see, in that over half of all of our clients report having a disability or long-term health condition. That has been a pretty steady trend for Citizens Advice over the years, but even allowing for that, we’re seeing households and people reporting a disability or long-term health condition making up a higher proportion of those who seek essential debt, food and fuel crisis support. So, our evidence certainly backs up the point that you’re making, which is that this is a group, in particular, that is struggling. As to whether there’s enough within the budget, I would say I think that needs deeper exploration. The need is certainly there. Others might have things where they could go deeper.

If I could just come in, I’ll probably make a slightly broader point about the cost of inequality, which I think is probably not necessarily talked about in enough detail in what we’ve seen around the budget. Obviously, Chwarae Teg looks through a gender lens, and we talk about the disproportionate impact of the cost-of-living crisis on women; it’s the same for a lot of other protected characteristic groups. That’s not an inevitability—that’s a direct result of the fact that we have inequality in existence. For the situation around women, it’s because women are paid less. Women in Wales do not earn enough in a year on average to meet the minimum income standard that is set by the Joseph Rowntree Foundation, and that will be more acute for women who are disabled, women who are from ethnic minority backgrounds, LGBTQ+ women, women who live in low-income households. What we see in crisis after crisis after crisis is that it’s the same groups that are left more vulnerable, most vulnerable, to the negative impacts. It happened in the pandemic, it happened after the 2008 financial crash, and I’m not sure if, at the moment, in terms of our cost-of-living response, at a Welsh level or at a UK level, enough recognition is there around the different ways that inequality is shaping people’s needs and experiences. What I worry about is, because we’re in a crisis, we start seeing interventions to tackle inequality as a nice-to-have, as a luxury, when actually they’re essential, because otherwise in the next crisis, the likes of me will be here saying the same thing again, and the crisis after that, and the crisis after that. We don’t seem to be learning any of those lessons about the need to really get those gaps closed so that we’re not leaving people more vulnerable when a crisis does hit, particularly economic shocks.

I don’t know if you’ve got anything to add to that, Victoria.

I’d just echo what Luke and Natasha said. In any crisis, the burden always falls on the people with the least, and the people who experience that inequality. It often amplifies the differences in inequalities between different groups of people rather than bringing people together. I would also say that all the surveys that the Bevan Foundation has done on the impact of poverty and cost of living show that disabled people bear a disproportionate burden, and they report that financial pressure not only affects their mental health, but also affects their physical health. We’re running a survey at the moment with YouGov to try to unpick why that is, but what discussions with stakeholders have told us is that there are a whole raft of issues around, for example, not being able to keep a home as warm as it should be for their health condition, not being able to afford special diets, not being able to run specialist equipment, forgoing social contact that might have additional costs because of additional transport and so on. Not only is that really worrying in itself—that in a crisis that was nobody’s fault, the people who can bear it the least are actually carrying the biggest burden—but I think we’re storing up problems for ourselves in the future, because people who are cold get health conditions, and people already with health conditions get worse. That’s not a lifestyle choice, not to have the heating on—it’s because you can’t afford to do it. And I think, as this crisis goes on, we will start seeing even more people—. I'm sure this is not good news to the health Minister, but we will start seeing the cost of this playing out into other areas of public service. It's back to the point we made earlier about needing to think about prevention.

Thank you, Mike. Rhianon.

Thank you. Some very interesting comments from everyone. Pre COVID, pre Brexit, we didn't have enough to meet the collective needs of Wales, and that's exactly where Welsh Government is now—we don't have enough to meet the collective needs. I can't list all of the things that we want to spend on from this conversation that need spending on in terms of the inequality gap. So, in terms of the consistently evidenced impact of poverty—and in particular going back to the gender lens, and obviously then the protected characteristics around disability, et cetera—what is the cognisance in terms of the impact of the budget integrated improvement group in terms of that budget lens in regard to its influence and impact? Because at the very heart of our conversation, we need to drill down strategically, don't we, in terms of how we can impact our budget allocations. Do you see—any one of you as witnesses—any impact in regard to that group on this budget?

I'm happy to start. We are a member of the budget improvement and impact assessment group, as it is now called. Yes, I would say that I have seen an impact, perhaps more on what can seem a bit processy, but actually is an important part of the decision-making process. What I would say is that the strategic integrated impact assessment that's produced alongside the budget I think is better this year. I can see the feedback that we have been able to provide, as a group of external stakeholders, reflected in that, which I think is hopefully an indication of a really constructive relationship between the stakeholders on that group and the officials that we're engaged with day to day. I think the impact assessment does a better job of being an impact assessment in that it actually discusses the potential impacts of the decisions that are highlighted in the budget narrative. In the last two years, it did not do that—it was an evidence summary, which was pointless, quite frankly. So, I can see some improvements. There's a way to go, absolutely.

I think what I would like to see going forward is, I suppose, more of an indication or evidence that analysis and assessment of impact is informing decision making at all parts of Government, because the strategic integrated impact assessment document is the evidence of ways of working, of ways of thinking. We can see some thinking around the strategic priorities that are set out in the narrative. What I can't see this year is some of that within MEG decision making. If we're losing money from employability, what are the likely impacts? If we're adding money into homelessness prevention, what is that going on? That's where I would like to start seeing some change in practice, and then change in the information that's produced publicly. I'm hoping that we can continue to enjoy a constructive relationship with officials going into next year, and start, hopefully, seeing some of those changes made as well.

In regard to the missing middle, as I put it, in terms of inequality, you've mentioned childcare and the transformational impact that real investment would have in childcare in terms of tackling all of the things that we were talking about earlier. That's going to be extremely expensive, so I would hope, looking to the future, that that will be much more of a headline in terms of where we're moving. And, of course, we know the initiatives that are occurring at the moment.

I'm going to move on to my last-but-one question, and it is linked. We've got the three gender budget pilots, and obviously that's measurable. Is that enough?

I would say that having the pilots is a good starting point. I don't have a problem per se with pilots as a starting point. It's a little frustrating that we haven't got the full evaluation of the initial one around personal learning accounts publicly available as yet, but I did welcome the fact that it was expressed in the budget improvement plan that the lessons are informing the new pilots, and it was good to see a couple of key areas highlighted there as issues to address—training and support, and data and evidence. I'm hoping that the equality data units that have been set up in Government will help with the latter. What I'd like to know going forward is what's going to be done around that training and support piece. It's something that we did talk about in the gender equality review back in 2019, and that's not just around budgeting; that's around mainstreaming in the round.

I was pleased to see in the budget improvement plan that there was talk about moving out of pilot phase, which we haven't necessarily seen talked about publicly before, and the detail that's there around the two pilots that are ongoing around the young person's guarantee and the e-bike scheme. It seems that their starting point—. Reading between the lines, it looks like they've been doing some gender beneficiary assessment-type work, essentially—who is benefiting from these schemes. The next phase needs to be seeing how tools like a gender policy appraisal, something like that, actually inform delivery. Because it is important to reflect on how investment is impacting and benefiting different groups, but where we need to get to is where that analysis is then informing the decision making and the design of things going forward. I wouldn't necessarily want to see us moving into yet another phase of pilots; I would want to see us saying, 'Right, how is this going to be implemented now across Government'—Welsh Government as a starting point, and then, ideally, out into the wider public sector as well.

Thank you. Citizens Advice: in regard, then, to the crisis support—. You've almost answered this already, with double the amount of clients coming forward. It's almost a daft question: are you seeing a difference in the groups of people accessing? Do you have enough money and capacity to do the work? I almost don't want to ask you that question, but I need to, and it's one that I've picked out. And in that regard, bearing in mind the whole multitudinal asks, demands and needs on Government, moving from one crisis to another crisis, when we need systemic transformational change of policy, which needs absolutely the budget to go with it, which we don't have, what is your advice to Government in regard to what you do as an advice agency for people in need?

There are a few things in there; I'll try to move through them fairly promptly. In terms of the groups that are coming to us for advice in the cost-of-living crisis, we're seeing more single adults come to us. A big chunk of those are single parents, and I think around 80 per cent of those single parents are women, going back to the points Natasha said earlier. There is a larger number, even within our client profile, as I mentioned, of those with a disability or long-term health condition. In the last few weeks, actually, in much bigger numbers, people are reporting that they have no money left to pay their prepayment meters and are being forced to disconnect. In fact, a really worrying stat is that last year we saw more people who were unable to top up their prepayment meters than we have in the last 10 years combined. That shows the scale of the problem, and it's something that we're certainly alive to.

In terms of our budgets in Citizens Advice, our budget next year, within this budget, is pretty much level, it's flat, so we will not be immune to all of the issues every other organisation is having. We're not receiving a large increase, we're standing steady, really, so that will mean some difficult decisions. And also, for members of staff who are particularly pressed, having gone through multiple crises, it will be another tough year. I think that, actually, broader than that, it would be worth the committee getting to the detail on the advice budget line as to where those cuts are being made, because they don't necessarily fall within Citizens Advice's purview, but actually, that money is being reduced somewhere, and that's not particularly clear, going back to Natasha's other point.

And then, on your final point as to advice to Government, I think it's repeating slightly what I said earlier, which is I know it's difficult. To find £90 million to give to low-income households to keep them out of crisis last year was a huge investment by the Welsh Government, and people in Wales will have been better off because of it. But, removing that fund in this budget doesn't remove the need. All indications and all modelling says that, actually, prices are going to rise. If you just take out that £200 that those 400,000 households are eligible for in Wales, you very quickly get into large numbers needing crisis support. That extra £18 million that has gone into the discretionary assistance fund disappears very, very quickly. And so, what I worry about is that this is a budget that deals with the symptoms of the crisis, but we'll be coming back in-year and saying, 'Look at this mounting crisis; you now need to take emergency action'. I'd rather not get there; I'd rather be preventative and say, 'Can we invest in areas that stop people falling into crisis now?'—like energy efficiency, for example. That would be my—

I don't disagree with any of that at all. Practicably, if you've got a fire raging in the corner and one behind you and one behind you, where do you find the transformational money needed to transform systems, wholesale? I mean, that's what I never get to the bottom of, because we have to put those fires out and we don't have enough water to put those fires out now.

I agree with that. There are multiple fires. If you are looking at everything that's on the Government's plate today, from the NHS to public services, I understand how it can almost seem indulgent to be talking about next winter when we're not even through this winter, but the reason we're sounding the alarm now is that, last year, all of our data said that people were going to have a tough winter, and it took quite a long time for some in the Welsh and UK Governments—. Welsh Government has been responsive, and UK Government has been responsive, to that need, but, actually, we were raising the alarm long before that. So, yes, there are multiple fires; I don't envy Ministers having to make those decisions. But, when you can see a spark that's about to go off in a few months and create another fire, you kind of want to put it out before it rages.

I won't pursue it. Victoria, have you got anything to say about the more general comments that I've made?

I'd like to stress to the committee that I think the external challenges faced by the Welsh Government and our other public bodies are probably at least as great, if not greater, than they faced with COVID. I think, when the chips are down, there are clearly difficult decisions to make, but I think the absolute priority should be people's well-being, and that's health, housing and warmth, food, care and their ability to learn. As Luke hinted at earlier, when he said he'd gone through the budget line, I think, when we're in tough times like that, tough decisions need to be made, and I think there probably are parts of the Welsh Government budget that can be pruned because, at the end of the day, we have people in the most dire circumstances, whether that's their health or their warmth or their lack of food, and I would urge the Welsh Government to look very closely at whether its budget fully meets all those needs.

Thank you very much.

Diolch yn fawr iawn i chi am eich amser y bore yma—mae wedi mynd i mewn i'r prynhawn yma.

So, thank you so much for your time. As I said at the beginning, there will be a transcript for you to check for accuracy. There might be one or two questions that we didn't quite cover off. If we feel that we could really do with your input on that, hopefully, in an e-mail across to you, or a letter over, you might be able to respond to that if we need to. But I think we've covered an awful lot of ground today, and thank you so much for your time again to come into this committee.

Under Standing Order 17.42, I propose that this committee resolves to exclude the public from items 7, 9, 10, 11 and 12. Is everybody happy with that? Great. We'll be therefore going into private now, and we'll be back for our next public session at 13:15. Diolch yn fawr iawn.

Wel, croeso cynnes i chi yn ôl i'r sesiwn nesaf o'r Pwyllgor Cyllid, a dŷn ni'n dal i wneud y sgrwtini o'r gyllideb ddrafft. Mae gennym ni sesiwn yma rŵan.

We're here with members of the Office for Budget Responsibility. I'd like to start off with welcoming you here, and if you could state your names and roles for the record, please. Richard.

Yes. Thank you. I'm Richard Hughes, chair of the Office for Budget Responsibility.

And then Andy.

Andy King. I lead on fiscal issues on the committee at the OBR.

And David.

I'm David Miles. I take the lead on economic judgments on the budget responsibility committee. And apologies for not being there in person; I couldn't get out of London, unfortunately, this morning.

That's fine. Thank you very much. And, yes, modern technology allows us to do this, and, with some of the heavy rain we've had, I think other witnesses have had to come in online as well, so it's been quite handy to be able to do this hybrid.

We've got a few questions, and thank you very much for your analysis that we've had already. I'd like to start by looking at your forecasts and the tax forecasts. How have the announcements in the UK Government's autumn budget to extend the freeze in the personal allowances and the higher rate threshold by a further two years to the end of 2027-28, and a lowering of the additional rate threshold, impacted on the rate forecasts?

So, maybe I can say a few things initially and Andy will no doubt want to say more about the detail of the forecast. But, broadly speaking, they bring a lot more taxpayers into tax, both new taxpayers—people paying income tax at all, those whose income now falls above the basic rate threshold—and then it also brings in more people into additional rates. It brings several million new taxpayers into the basic rate, and, I think, creates about 1 million more higher rate taxpayers. It's also, basically, the main tax-raising component of the autumn statement, and it offsets what, in the end, was a revenue loss compared to our previous forecast and the fact that the Government didn't go ahead with the health and social care levy. So, that lost them about £20 billion. That helped to offset that £20 billion, and then have a net revenue yield for the overall tax system of about £10 billion overall. So, it was plugging a tax gap left by the fact that the Government didn't go ahead with the health and social care levy, and raised a bit more additional tax to fund what was a more challenging fiscal position for the Government, driven by the fact that the economic outlook had deteriorated. Is there any more to say about what it means for Welsh revenue?

Certainly. So, in terms of the Welsh rates, the pre-existing freezes to income tax allowances are raising more than we initially thought because inflation is considerably higher. Now, that's not to say that they are raising more money, that income tax is being raised in absolute terms; it's that the income tax that would have been lost due to thresholds being raised with very high rates of inflation is not being lost because the thresholds are frozen. So, what matters at the moment is purely wage growth for growth in income taxes. And because wage growth, very weak and falling in real terms, is historically at a relatively strong rate in cash terms, that's feeding through to the income taxes.

Because we think inflation is going to be very low in three or four years' time, the extension of the freeze doesn't raise huge amounts of money. Indeed, in the first year of the freeze, our forecast would have said that raising them with inflation is essentially freezing them. So, it raises small amounts in the medium term. The bigger revenue raiser, or raisers, was, firstly, the decision not to cut the basic rate from 20 per cent to 19 per cent, which affects the reserved part of income tax, and reducing the threshold at which the additional rate, the 45p rate, applies, which is proportionally a larger revenue raiser UK-wide than it is in Wales, because of the shape of the income distribution, but is still a revenue raiser nonetheless.

Excellent, thank you. The OBR's UK growth forecast has a more positive outlook than the Bank of England's. Can you explain the key differences in the methodologies to account for this, and how does this impact on Welsh tax forecasts?

Sure. Maybe, David, do you want to talk about the differences between the Bank of England's and—

Yes. I think the—. You're absolutely right. Our forecast is a good deal more optimistic about growth in the UK, and more optimistic about employment and unemployment than the Bank of England forecast. I think there are a few things at work there.

Probably the most important is that we think consumption will hold up quite a bit better than the bank does, and that's because we have a much lower forecast for household savings. We think that households—. Those that can may borrow a bit more to get through the real squeeze on disposable income that we're seeing already and will see for much of this year, 2023, and those who have been saving might save a little bit less to keep consumption up in the face of a really big hit to disposable income. The Bank of England doesn't think that will happen on the same scale, so they've got weaker consumer spending, and that makes the recession a bit deeper and last a bit longer. That's probably the key factor.

We also factor in where we think oil and gas prices will go, which, at the time of the November forecast, was that they would start falling back quite substantially, significantly, a year or so down the road. I think the bank may not use the market forecast that that will happen for quite as long in their forecasting procedure, but I think that's kind of second order. The big factor, I think, is we think households in the UK will save substantially less than they have in recent years, and that will keep consumption and demand a bit stronger.

Mike, did you want to—?

Talking about consumption, are you talking about consumption in cash terms or volume terms? With 10 per cent inflation, if people spend 5 per cent more, it's a 5 per cent reduction in volume. And haven't gas and oil prices been volatile for a very long time?

They've been volatile, really, since the back end of 2021—

Sorry, I was talking back to about 1990.

Well, I think gas prices, actually—. Before we get towards the end of 2021, gas prices have been relatively flat—from memory, something around 50p a therm. They start rising quite strongly at the back end of 2021. They become extraordinarily volatile and move to much higher levels, of course, after the Russian invasion of Ukraine. More recently, they have actually fallen back a meaningful amount, and the forecasts of where they will be a year or so down the road have also fallen back, but they've only fallen back to a level a few years down the road, which would still be three times as high as they were in the years leading up to getting towards the end of 2021. So, very volatile, but, even though they've fallen back recently, very, very substantially higher than they were in the years up to the middle and end of 2021.

On your other question, I think you're right. Even though we are more optimistic than the Bank of England on what you might call money spending on consumption, because consumer price inflation is already very high and will stay high for much of this year, in real terms that's much more muted. But we're nonetheless more optimistic than the bank on that.

Rhianon.

I was going to include it in my line of questioning, but I'm just interested in this premise around inflation being much, much lower very shortly. Combined with all of the other assumptions that you've made, how solid do you think your modelling is, compared to not just the Bank of England, but Scotland as well? I'm concerned.

Yes. I think there are lots of risks around it, and it's been pretty difficult forecasting the UK economy over the last few years—first COVID, then the huge price increases in the wake of the Russian invasion. So, the errors that one has made over the last couple of years are very, very large, and one can't be tremendously confident about being close to our central forecast. And that's all it is; it's just our best guess as to what the outcome might be.

What could go wrong? Well, unfortunately, rather a lot of things. We have factored in, as I said, what the financial markets are predicting will happen to oil and gas prices, which, overall, actually is relatively favourable relative to where we are right now, that they fall back over the next couple of years, and fairly substantially in the case of gas. That is probably the single biggest factor behind the prediction that the rate of inflation is going to drop back down really quite substantially by the end of this year and during the course of 2024, and we think to a very low level of virtually no inflation as you move through 2024. Now, that could be, as a forecast, way out of line if—who knows what's going to happen to gas and oil prices, but if they were to spike back up again from where they are right now and stay there, that prediction that inflation falls back quite sharply, particularly during the course of next year, would turn out to be wrong. So, it's very sensitive to that.

It's also affected a bit by what we assume about wages and wage settlements, which, for the economy as a whole, will continue to be under the inflation rate, and to that extent, actually bringing the inflation rate down a bit over the next few years. But, it is a tight labour market, and it may turn out that wage settlements, instead of running at about 5 or 5.5 per cent for the whole economy, move up sharply—that will depend, to some extent, perhaps, on what happens in the public sector, and it's unclear quite how that's going to play out. But, that's another sensitive factor to the inflation forecast.

Thank you very much—[Interruption.] Yes, certainly.

Just one point on the composition of our inflation forecast and which bits of it we can have more confidence about and which bits we can't, in the document, we provide a breakdown of what's driving inflation up and, as David was saying, a big proportion of that is the higher gas price, which is being driven by geopolitical factors as well as by the weather in Europe and gas consumption. That's going to continue to be very volatile and depend on the course of the war in Ukraine as well as the course of the weather over this winter and next.

Other elements of it are also what's happening to goods prices, and there has actually been some good news in recent months about falling logistics costs. You'll remember, before the Russian invasion of Ukraine, we were worried about supply chain bottlenecks and difficulties, and shipping costs going up very dramatically in the wake of the pandemic. Those costs have actually now started to come down and we're seeing that in the data. So, there are a number of indications that would suggest that goods prices are starting to fall and will continue to fall over the course of our forecast period. As I said, gas prices have come down a bit, even since we did our forecast for November. And, so far, when you look at the other component of that, which is service prices, wage settlements are coming in more or less in line with what we expected in our earnings forecast, which was also another big driver of inflation and gets you up to that 10 per cent figure that you saw for the year as a whole. What we've seen so far, at least on two of those, has been positive, and then we'll have to see what happens on domestic rates.

Thank you. You published your Welsh tax forecast to coincide with the Welsh Government's draft budget, three weeks after the UK autumn budget. Were there any challenges in adhering to those timescales and, if so, what were they?

There were challenges throughout the autumn, I'd say, on the overall forecast process for us in that we had a number of different deadlines for producing the forecast for the autumn statement that ultimately ended up being on 17 November. At various points, we were ready in late October and then ready in late November and ended up doing it in the middle of November. So, I think that, to the extent that we faced timetable challenges, they were created by the political situation in Westminster, rather than anything that was happening here in Cardiff. But, beyond that, Andy, is there anything to say about how we interacted with the Welsh budget process?

No, I don't think the gap between the autumn statement and the draft budget here causes us any problems. The extent of that window—if it's longer, then we can include more information about, particularly, the fully devolved taxes; if it's shorter, then, the shorter the window is, the less information we can incorporate. So, potentially, if it was a very, very short window, then we would have nothing to add beyond what we have prepared alongside the UK-wide forecast, but other than writing a Welsh-specific document, there are no timetabling challenges.

One of the things that we heard from Wales Fiscal Analysis this morning was that they would find it useful if the things that you've got in the annex were moved into the main body of the report with regard to the impact on the block grant and tracking that through. So, it might be something that may come as a recommendation from this committee—that might be something to look at for future reports, just to see, so that we can track what the impact is on the block grant and that sort of element. So, would that be something that would be fairly straightforward for you to—seeing as you've got all the data, would that be fairly straightforward to be able to do?

I won't overpromise here—

No, of course not.

I think it's something on which we would need to have more interaction with the Treasury during the process, because although our numbers are used, we don't set any part of the block grant. So, let me take that away and make sure that we can do that.

It's just something that might come down the line from evidence we heard earlier, so, I haven't spoken to colleagues yet about it, but it was just something that came up in evidence this morning. So, it might be something that will come down the line. I'll pass over to Rhianon now.

Thank you, Chair. So, in using the Welsh rates of income tax outturn data, modelling your forecast, how does it enable you to refine your model?

So, as you know, one of the many important differences between the Welsh rates and the way the income tax numbers are used, relative to the income tax forecast we produce at the UK level, is that the whole system is based on liabilities—so, when the income was actually earned and the tax liability was generated. Whereas for our UK forecasts, we're looking at the way that these things are recorded by the Office for National Statistics in the national accounts, where PAYE, which we know about in almost real time, is recorded as such in the accounts. But self-assessment payments are recorded in cash terms, so, as the cash is arriving this month in respect of 2021-22 liabilities, for our UK forecast, those receipts are recorded now; for the Welsh forecast, this is the first time that we learn about the actual tax paid on 2021-22 liabilities.

So, when we're forecasting the Welsh rates, and the same in Scotland, we have to forecast an enormous amount of the past, because we don't have full information, which makes the outturn statistics that are published once a year with a long lag hugely important because they tell us where things were a year ago, or two years ago, and all of our forecast models work on the basis of taking the most recent outturn and forecasting how it will grow. We don't forecast the level of anything; we forecast growth from a starting point.

So, therefore, the revenue downturn, in a sense, which has been affected here, is an average £55 million less. So, how do you, after that explanation, clarify why that was the case?

The aligning it to the latest outturn? Yes—

You revise that revenue.

So, the things that we knew about before the outturn number was available were that we had all the PAYE information and that is, say, 90 per cent of non-saving, non-dividend income tax liabilities. We knew the total self-assessment payment UK-wide, but not all the details of what was from Wales and what was related to savings, dividends or NSND. And so, the biggest surprise, I believe, was at the UK level, that the share of the total income tax, which we knew about from the cash payments, the share that was non-savings, non-dividend was a lot lower than we expected, and so, the outturn alignment that you see there affecting the Welsh rates was proportionately the same as affected a UK-wide non-saving, non-dividend versus the total. And the problem there is that, on the savings income and dividend income, the tax system is basically the only place you get the information. There are savings income and dividend income numbers in the ONS national accounts, but they are ONS forecasts until the tax data can be plugged in, so that's the one piece of the jigsaw where we just don't have another way of getting at the number until we get to the outturn, so that was where the surprise was.

Okay, thank you. I touched upon this earlier, but can you summarise, then, the potential or the risk involved with modelling your Welsh rates of income tax forecasts? What impact, then, does that already-discussed uncertainty—especially around growth and productivity and earnings—have with your forecast? Because I'm still struggling in terms of your misalignment with other modelling.

So, you mean the difference between the kind of risks that David was talking about on the state of the economy, versus the—

Yes. Well, how are you basing your assumptions, in terms of what you decide is going to be the basis and the premise of your forecasting?

So, the forecast process starts with views about the UK economy, which is where David leads.

And where do those views come from, substantively?

They come from a number of different sources. The three of us ultimately make the judgments about what goes into it. At the moment, the big drivers of—what's driving the fact that we look to be in recession and one that's going to get worse is the higher gas price. We don't make our own independent judgment of that; we rely on the futures markets, because they have, so far, been the best predictor of where the gas price is going to go. But they've proven to be very volatile, because the future has been very uncertain. So, that's been a big driver of what's driving inflation and therefore driving the erosion of real incomes.

A second big input and a second big driver of what's bearing down the economy over the next few years is higher interest rates, where we take gilt rates, forward gilt rates, for UK Government borrowing and market expectations for what's going to happen to bank rates. So, that's where we get the interest rate assumptions that go into our forecast.

And then, in terms of disposable income and households, we've got a judgment about what happens to the evolution of nominal earnings, which we think is going to be around 5 or 6 per cent growth this year, and then declining to a lower level over the medium term, and it's the gap between higher inflation and also higher interest rates and what people have got in their pay packets that is driving the big squeeze on household incomes. All of those are judgments. They're ones where we get some new information as we go from forecast to forecast, we see what the markets make of gas prices and interest rates and we see what wage settlements are actually being done in the economy and update those.

So, just for information, because this is not an area of my expertise, you're updating them how regularly, and how often, then, are you updating your modelling? Because we've already talked about the mass volatility; we've not even mentioned issues around Brexit or supply issues in that way. How does that happen?

So, twice a year, we do a new set of medium-term forecasts, and then once a year, we do a long-term forecast that goes out 50 years. So, those are two opportunities to review our medium-term assumptions, and then one opportunity to review our kind of longer term assumptions about what drives UK economic prospects going out to the 2070s. So, those are the main points at which we have an opportunity to take a different view.

Okay, thank you. And then, finally from me: can you explain how you are currently modelling the differences between Welsh and UK tax bases in your forecasts for Welsh rates of income tax?

Yes. We can track these things in outturn. The way we put the forecast together is to put the UK forecast together and then forecast the share of UK-wide revenues that will be from Welsh taxpayers and then perform the more mechanical calculation for which bit is Welsh rates and which bit is reserved. So, in a sense, we are forecasting relative performance; that's our core focus.

Over the past, you can see that there is a trend downwards in the share of UK-wide revenues from Wales. Part of that is explained by population growth being slower here than UK wide, and part of it has, I think, been explained by the interaction between how the tax system has been changing and the income distribution here. So, raising the personal allowance very sharply through the 2010s was relatively more costly here, because it affected a larger proportion of the income distribution. That then goes into reverse in the forecast, because of the frozen threshold. Other factors are really small, relative to those main drivers.

In the forecast, we capture the population trends directly, because the ONS population projections that we use UK wide are obviously available broken down by country, so we do that. We also capture at a high level the demographic effects of different rates of population ageing, which is a much smaller effect, but one that we now capture by looking at income tax per head above and below the state pension age and the proportions of the population there. From the PAYE system, in that bit of the past that we're forecasting to get from the latest outturn to where we are today in cash revenues, because Welsh taxpayers are tagged in the real-time information system, we can see how the share is evolving in employee incomes, so we can factor that in.

And then, for the year ahead, if there is something that we can see that we think should be part of the forecast, we will adjust the share again. So, an example of that last year was that we could see that bonus growth in the financial and professional services sectors was extraordinarily high, and we know that that's more concentrated in London than everywhere else, so that was going to dampen the share in Wales and Scotland. So, we put that in, and that's basically where we've got to so far in terms of thinking about relativities.

Okay. And then, finally from me, if I may, Chair, in regard to your assumptions at the beginning of the session, which has predicated your positioning around this, do you come up with a range of high-end, 'This is what we think the top probability is', and, 'This is the worst case scenario'? Because, obviously, I don't understand whether that's what I'm being presented with at the moment, or whether this is just your singular model.

It's certainly not a singular model. I probably should defer to David, but this is our central forecast within a range of possibilities. This is what we think—. Specifically because of the way the UK fiscal framework is put together, we are trying to forecast something where there is a 50:50 chance of it being either side of the line, but the probability of it being bang on the line is, essentially, zero, because we're talking about forecasting what everyone in the country is going to do and what that means for the tax they pay—

And, obviously, then, if inflation doesn't radically drop, you've got that other balance. Okay, thank you, Chair.

Peter.

Good afternoon. Thanks for coming in to talk to us. I know, previously, you were talking about presenting a detailed investigation of the effects that differences between the Welsh and UK tax bases might have on your forecast for 2022. I just wondered if there was any update as to where you've got with that and if there's anything you could perhaps share, or when it might be published.

Unfortunately, the constant forecasting that we've been doing over recent months means that we've not got to the point where we have shareable material yet. What I was just talking about, in how we've added a demographic element to the income tax share forecasting, that's an early win from the work we've been doing on that—that detailed piece of analysis. We're hoping that events will not get in the way this year. Essentially, we've moved everything back, so that we will be trying to share material after the UK budget in March and be able to publish later in the year. But I think the discussions over the draft analysis are what we would really value, because the expertise here and in Scotland is things that we want to tap with provisional conclusions and analysis.

Thank you for that. I know it's been a bit of challenging period, to say the least. How effective do you think the current data sources available for forecasting Welsh devolved taxes are, and what consideration have you given to utilising more Wales-specific data to improve the robustness of your WRIT forecast?

It's more challenging for the WRIT forecast than it is for the two fully devolved taxes that we forecast. So, for landfill, the data is incredibly rich, and the forecast is almost forecasting each landfill site. For the property tax, now that it's been up and running for a few years, again we have a richness of data that allows us to use up a microsimulation model of the distribution of property transaction prices. The real challenges there are forecasting house prices and the number of transactions, which is nothing to do with having regional data or not, it's just that this is a notoriously difficult thing to forecast.

With the Welsh rates, as I was talking about earlier, the problem we have is that it's on a liabilities basis, so the cash data relating to those liabilities is very lagged in the self-assessment system. It's non-saving, non-dividend, which for PAYE is fine, because all of that is non-saving, non-dividend, but for self-assessment it's not. Particularly, dividend income can be extraordinarily volatile from year to year, because it's the one form of income that people can decide when and how much to take out of their company, and so it's very sensitive to tax policy changes, and we just do not know the answer to that until the self-assessment returns are in and HMRC go through them one by one and work out.

We use as much Wales-specific data as we can. The paper that you're talking about, one of the things we've been doing is looking at whether using the labour force survey brings something beyond what we can see in the tax data. Because the PAYE system's real-time data is so granular, to my mind, it is more useful than the labour force survey, because, essentially, it's a census, rather than a survey. In the labour force survey, when you start looking at the Welsh data, there's a lot of volatility, which I'm sure is just because the sample is small, rather than Wales is more volatile than the rest of the country, and the way to confirm that is that it's not there in RTI.

So, essentially, the tax system gives us really, really good Wales-specific data for employees and for the fully devolved taxes, and then there is just a gap, and I'm not sure I can think of ways of getting better Wales-specific data on savings income and dividend income, which we need to subtract, from what we can see, from the total cash revenues.

Thank you for that. You did mention land transaction tax, and I know that it's difficult to assess those sorts of things with the volatility of house prices and things, but you've significantly downgraded residential land transaction tax forecasts for both main and additional rates. What assumptions have you made in modelling those forecasts?

Shall I maybe ask David to talk about our UK-wide forecast first?

Well, I think the main factor—and this is very much common across England and Wales, because it's such a unified mortgage market, with essentially the same products being used right throughout England and Wales—and the big driver of the somewhat pessimistic outlook we've got for the housing market, both for house prices and for transactions, is a reflection of the pretty sharp increases in mortgage rates that most people are going to experience. New buyers, who've just bought in the last month or so, have already seen this happen. Relative to where mortgage rates were back in July or August, there's been a very substantial increase in the typical product bought. The two-year or five-year fixed rate mortgage, which might have been available at 2 and a bit per cent six months ago, is now 5.5 or 6 per cent. That hasn't yet had an enormous impact on the much larger group of people who already have a mortgage, but they're going to be rolling off what are usually fixed rates for two, three, four, five years, over the course of the next few years, so their mortgage rates are going to go up. It's hard to see that not having a substantial impact on house prices—I think it already is—and what typically happens when house prices fall, transactions and sales tend to come down with them. So, we've kind of used that relationship to drive both transactions and the level of house prices, and, of course, they both have an effect in the same direction on transaction taxes, which is to make them weaker than they otherwise would have been. And it's a pretty big effect. I think we've got something like—for the UK as a whole—a 9 per cent fall in house prices from where they were a couple of months back to where they'll get to a couple of years down the road, as these higher mortgage rates flow through in their effect.

Yes. Thanks for that. Have the various policy changes that the Welsh Government have made around land transaction tax since COVID hindered you or made it difficult for you to forecast further?

They have affected the way we forecast. I think, relative to the impact of lockdowns and release, and the big surprise or the unexpected strength that came from both the race for space, and, quite possibly, some of the COVID support measures flowing into the housing market, and the enormous forced savings amongst the higher income households, who couldn't spend during lockdown and put it where the British people put it, in their property, the policy measures are probably second order. The holiday had a less dramatic effect here, because it was less generous than the UK stamp duty land tax holiday, which caused some enormous forestalling spikes. Well, to be honest, when we do this forecast, the starting point is trying to look for a clean year of data that can form the base for the model, and that's a challenge. [Laughter.]

A bit difficult.

I've got a very small question, Chair, if I may.

Very quickly—

Very quickly.

—because I think we're nearly at time, but I know that Mike has got a few questions as well. So, we'll—

Mine will be very brief.

This is very brief, if I can do it, and that is, basically, you've mentioned mortgage rises, and obviously the rent rises that go with that, so I'm just still struggling with why you think people are going to consume more, in terms of where you're starting from, or is it that you're relying on the über-rich, of which we have quite a few more, to do all of that consuming?

Sorry. I think I was perhaps a little bit unclear in saying that we have a very low saving trigger and that supports consumption. That's true, but it doesn't stop total consumption spending in our forecast actually falling. So, household consumption, which normally is rising in the UK over time, we think in 2023 is going to be something about 2 per cent lower than it is in the year just ended, 2022. So, we absolutely do have falling consumption. That's largely a reflection of household disposable income being hit, because inflation has been higher than typical wage settlements that are coming in, which, to a large extent, is a result of oil and gas prices and other commodity prices and food, much of which we import.

It's not an optimistic forecast in the sense that it's saying, 'Everything is going to be fine, and total spending by households is going to keep on rising.' Absolutely not. It falls meaningfully this year, 2023. The housing stuff is a contributory factor, though I don't think that it's the main one to that, on the back of slightly lower house prices and fewer transactions in the housing market. Consumption tends to be boosted by transactions in the housing market. We think that transactions are going to be lower.

Okay. Thanks.

Mike.

Before this tax got devolved, when we had stamp duty, what I saw was—and you can tell me if I have got this wrong—that it was volatile and cyclical, and when we had the problem with the financial crash, in Wales, the amount of stamp duty being collected reduced by about 50 per cent.

The other thing that I think that I know is that, because we have got a number of very large commercial areas, the sale of one or two of those could massively distort the amount of money coming in from land transaction tax—the commercial side of it. We'd only need to see two of the very large ones sold, and all of a sudden, you are talking about increasing the amount that you are predicting by 50 per cent. I have got a lot of nodding for these. Can I take it that people are agreeing with me?

Yes. I think that we are agreeing that these are very volatile taxes. The land transaction tax is still, despite the reforms, quite a volatile source of revenue. It's falling by 25 per cent, I think, in peak to trough in the forecast that we have presented here. And that is just because it depends on values, but also in terms of the volume of transactions that generate the revenue.

And volume depends on value. Why would you sell a house that is worth 10 per cent less than what you paid for it, rather than waiting for inflation and other factors to catch up and take it back, at which stage you might want to sell it? I think that that's what we saw in the late 2000s, wasn't it?

The final question from me is on something that raises very little money, but everybody is very good at doing, and that is landfill disposals tax. The first year that we had it, it got more money than we expected, but it's more a tax for the environment than a tax for the amount of money that it brings in. You would probably abolish it for the amount of money that it brings in and the cost that it takes to raise, but the fact that it has a huge effect on the environment is incredibly important. You assume that £6 million a year will persist across the LDT forecast, which is reflected as a modelling change to assume higher volumes of waste being sent to landfill. Are you confident that higher volumes will be sent? Everything that all Governments are doing—and I don't just mean the Welsh Government—is to try and reduce the volume going to landfill.

That's an assumption that higher volumes than we had previously assumed will be sent to landfill. The forecast still assumes that landfill volumes decline over time. The pandemic caused a very sharp drop in revenues, and the key forecast judgment for the previous few forecasts has been how fast and how far it will recover, and it seems to have bounced back further than we expected. For a while, we thought that there was maybe some kind of temporary catch-up that would tail off. We think that that tailing off will be smaller than previously.

I saw a map, and it might have been from you, where it showed how close landfill sites in the north-west of England and the south-west of England are to Wales. So, aren't we very dependent on landfill tax in England, and if England dropped theirs by 25 per cent, our landfill tax, and the amount of landfill, would reduce dramatically?

There's certainly evidence that landfill revenues in Wales include a good chunk of English waste. The Scottish landfill tax rate is also identical to the rest of the UK, so we haven't been able to test the elasticity of people's willingness to drive their landfill. The big test that is coming is when, in Scotland, there is a municipal waste ban on what can be landfilled. Our forecasts for Scotland, and the England and Northern Ireland landfill tax, assume that almost all of that crosses the border, rather than finding different ways to be disposed of. So, we will be able to test that, but that's not for a few years yet.

But that test is not relevant to Wales, is it? Because you've got places like Connah's Quay, which are not far different from the Welsh side to the English side, whereas with the Scotland-England border, the big population centres are back up in the central belt, which is a reasonable drive. And they put roads along there that are not dissimilar to some of the ones we've got in Wales—it might say '30 miles' but that does not mean 30 minutes.

I think that's why we've only got that map in the Wales version.

Thank you very much.

Thank you very much. There's one question from this section that we haven't quite been able to get to, but I think it's an important one. You've included a house price inflation uplift for Wales for 2021-22; how effective was this in delivering more robust forecasts, and have you needed to refine the process for determining the uplift for 2022-23?

The uplift is informed by outturn house price inflation through the year, so I think of it as a momentum judgment—you can witness momentum in the outturn data, it's not going to go away straight away. And so while in the medium term we assume house prices move together, between now and that kind of medium term, or a year or so ahead, we just assume that that momentum persists. It has helped us to forecast short-term growth in the tax base more effectively, so it's definitely something that we will keep doing. For this forecast, because the mortgage rate shock to households is uniform across the country, we've essentially assumed that the hit to house prices in Wales will happen at the same pace as it happens UK-wide. It's something that we thought about because there are certainly previous examples where downturns ripple out from London, but I think those are more downturns where house prices have got overvalued, whereas this is essentially a shock from outside that's hitting everyone at the same time.

That's interesting. You mentioned earlier that you effectively model the UK and then mechanically, effectively, take out a percentage for Wales, rather than modelling the Welsh economy in isolation. If you saw—I don't know if you do see—any divergence from that model in Wales compared to England, how do you compensate for that? Or do you refine a Welsh-based model, then, compared to the UK model? Are there things within your forecast that are Welsh-specific that you're able to effectively tweak to make sure that you're following the Welsh trajectory rather than following the UK trajectory?

Yes, precisely. So, that's what this uplift does. The fundamental drivers of house prices are to do with incomes and interest rates, and so on, and those are common to Wales and UK-wide. But the cycle can clearly be different, and there is data on Welsh-specific house prices and we can see the transactions as well, because they come from the tax system—

And I suppose you see there are older people, so they're less likely to move, and there's all the demographic information that society in Wales is different from parts of the UK as a whole. So that would have a bearing on how often houses are sold and that sort of element.

Exactly. That kind of thing will affect what we term the turnover—so, the number of transactions per house, or the number of houses per transaction. That is in the starting point for the forecast, and growth thereafter—. If we apply the same growth rate to the UK-wide forecast as we do to Wales, then that lower structural rate of turnover will be embedded in the Welsh forecast. If we thought for some reason that they were going to converge, then we'd need a faster growth rate in our Wales model than in our UK-wide model. If we thought it was going to diverge further, the opposite. And we have the freedom to do that.

We've looked a lot at whether it's sensible to assume in the medium term that house prices, in particular, grow in line across the UK, and we think they do. They can be on different cycles, although typically not very different, so we focus our effort on trying to get the short-term dynamics, which are different, to capture those via uplifts. We also had to do a lot with the transactions forecast when lockdowns were at slightly different times, and the pace at which reopening happened was at different times, and, of course, with the holidays having slightly different generosity and end dates. So, we try to capture all these Wales-specific short-term factors. We haven't done anything in the medium term yet, because we haven't seen evidence that tells us that we should. If we did, we would.

And is that the same then for income tax? Is it the same sort of thought process that goes into the forecasting and modelling of income tax—all of your forecasts, effectively?

Yes. What we're trying to do, to the best of our ability, is, with the information available, to capture anything relevant and Welsh specific. So, where there's data, we use it. Where it's based on discussion with yourselves and with the other experts here, then we will use it.

Just for information, if there was absolute incongruence and divergence, and you thought, 'Oh right', and you've got your opportunity for your mid-term forecast, do you ever bring out an emergency forecast or an interim—?

We have. One example was during the pandemic. Under my predecessor, we'd done a forecast just before the pandemic hit the UK in March 2020, and then very shortly thereafter in April, the OBR put out an updated scenario, which was an initial best guess of what COVID was going to do to the economy, and then we did another forecast in July. So, I think where circumstances dramatically change, we do update our forecast, especially because policy needs to change, like when we had things like the furlough scheme and all the support that was provided for the UK and here in Wales. So, we do, where needed, produce outside-of-cycle forecasts.

Am I right in saying that that is at the request of the Government, rather—? You wouldn't independently publish that.

Under legislation, the Government has to request our forecasts, but they also have to request at least two a year, and there's never been a case where they haven't asked for two a year. So, the question hasn't arisen whether we'd do one on our own.

Okay. Thank you so much.

You nearly did. [Laughter.]

You could get into difficult territory there.

No comment. [Laughter.]

Thank you very much for that. I'm sorry for going a little bit over time. It's always fascinating to have you in and to have your insight into the way that these things work. It does help with our deliberations on the budget and to understand the macroeconomic effects that are happening. As I said earlier, this has been broadcast and there is a transcript available for you, if you can check through that for us. Thank you.

Diolch yn fawr iawn ichi am eich amser.

As mentioned earlier, we will now go into private for the rest of the afternoon. Thank you very much. Diolch yn fawr.