Finance Committee

Am y tro, felly, yn unol â Rheol Sefydlog 17.42, dwi'n cynnig bod y pwyllgor yn penderfynu gwahardd y cyhoedd o eitemau 4, 5, 7, 8, 9 a 10. Ydy pawb yn fodlon? Ydy, dwi'n gweld bod pawb yn fodlon, felly awn ni'n breifat tan chwarter wedi 10.

Croeso nôl.

Welcome back to the Finance Committee. We've just come out of private session with the chief economist and it was very fascinating. Our thanks to him for giving us some insight, and we might go into some of that information with the Finance Minister. And welcome, Finance Minister, happy new year, and all the rest of it—a new term and a new Senedd year. So, croeso. Can you introduce yourself and your officials, please?

Yes. I'm Rebecca Evans, Minister for Finance and Local Government, and I'll ask my officials to introduce themselves.

Bore da. I'm Emma Watkins, deputy director for budget and Government business in the Welsh Treasury.

Bore da. I'm Gawain Evans. I'm the finance director for the Welsh Government.

Wonderful. As I say—

Croeso cynnes.

Welcome. This is the pre-budget scrutiny, which we had last year and again this year. It's great to have you with us and to start linking through some of the stuff that we did from the priorities debate and all the way through and to look at the next few months ahead and to see where you're at. You took away my first question, because we had your letter this morning around the date of the budget, and I was going to ask whether or not anything has changed. Obviously, from your letter, that I think Members have had a copy of—. Could you talk us through that letter and say what your thinking is, what's happened and where we're at with the budget timetable?

Yes, of course. Just last week, we heard that the UK Government intends to have an autumn statement on 22 November. You'll remember that we'd previously notified both Finance Committee and Business Committee that it was our intention to publish our budget on 12 December, but, unfortunately, that would have just left us with, I think, two weeks and four days [correction: four working days] in which to produce a budget, which just wasn't feasible. I know that's going to be really disappointing to all of you on the committee and equally disappointing to us as well.

We think that three weeks and four days really is the absolute bare minimum time that we would need to produce the budget, for Ministers to consider what their spending plans are, to carefully cost what those are, for those figures to be tested through Government, for the impact to be defined and so on, and then, obviously, we talk a lot about that wide suite of documentation that sits alongside the budget, so that all needs to be prepared and translated and so on. So, I think three weeks, four days is really the absolute bare minimum time that we would need to produce a budget, and I think especially so in such difficult times as well, because the choices that we make are going to be difficult. We're not in a space now of doing lots of new things. It's very much about identifying the absolute priorities and probably making some really difficult decisions, and I don't think that we should or can, really, rush that kind of thing.

Thank you for that. It is disappointing that the autumn fiscal event is going to be later, so it means it puts pressure on you, it puts an awful lot of pressure on this committee's scrutiny, and the other committees, obviously, trying to do that. In your letter, you talk about how we'll have six weeks and four days, I think, to do the scrutiny. Three of those will be in recess, so it looks as though we're going to be spending Christmas together again, because that's what's been happening over the last few years, and, obviously, it's been five years on the bounce now that we haven't been able to stick to the two-stage process and that sort of thing. So, what are your thoughts around—? We've been talking about budget protocol, and we've had meetings, and we've also had letters backwards and forwards. Are we getting to a point where we need to look at that again, starting again, or do you think that there's enough in the budget protocol for us to be able to actually use it to go forward?

I should have said, just to round off my earlier answer, I don't think I actually said that it's the intention now to publish the draft budget on 19 December. So, just in case—

Okay. Sorry. Did I miss—

I'm just aware that there may be people watching who are still not clear. So, just to round off that.

In terms of the budget protocol, I think that we've been doing really good work. So, your officials and Welsh Government officials identifying things that we can agree that we can change. So, for example, this pre-budget scrutiny session we've been undertaking for the last couple of years has actually proved really useful to us, and I hope it's useful to committee as well, and the opportunity to hear directly from the chief economist I hope is useful as well. I think that those kinds of innovations are really important, but the areas where we've struggled yet to come to an agreement have been around the timing of the budget and what that means for scrutiny. That is because the UK Government now does seem to have moved to this autumn statement, and, when we set the protocol, of course, it was in the context of a spring statement. Had we had our budget in spring, obviously, we would be looking to provide much more information earlier on, but, unfortunately, that's not possible.

Do you think, realistically, that anything will change in the next couple of years?

It's hard to say. I think this current Government is obviously set in this routine now, so it's hard to see that changing immediately. What an incoming or different Government might do in future is hard to say.

Peter.

So, this situation is, obviously, altering the way you have to consider things. We know this is likely to happen, so is there a lot more forward planning, or running alternative budgets? You create perhaps two or three budget models at the same time ready to tweak the one which is best fitting? I'm sure that's what I used to do when I was setting budgets when I was waiting for our settlement and things. So, has it altered the way you're doing things? So, I'm just wondering—. I accept that we've got a longer time frame, but you will be doing a lot of preparation work. Will you be getting signals from the Chief Secretary and that of what you could be expecting and what you might need to start planning for? I just would have thought that those conversations are ones that I would have expected to be having.

So, we normally start our budget preparations around June for the following financial year, so we do start very early, and that's really about having internal discussions with all colleagues to identify the pressures that they're facing within their portfolios, explore the delivery of the programme for government, and how funding is required to do that.

This year has been different in the sense that we're undertaking an exercise looking at how we can meet that £900 million gap that is in our budget at the moment. So, that's taking precedence, and we have to do that first, and I'm glad that we have grappled with it relatively early in the financial year, because some of those decisions then might feed through into the next financial year, so it might be a reduction to a budget that becomes permanent, or it might be a reduction to a budget that we have to do for more than one year, or an increase elsewhere. So, I think that getting this in-year exercise over with in the first instance is a priority, but we're doing it very much mindfully of what that knock-on impact would be for the next year. Emma.

Just to follow-up from the Minister, then, in terms of where we go after that between now and 19 December, the 22 November date is really crucial for us, because we can work with colleagues and say to them, 'If there is more money—and that's a very big "if"—where might you want us to put that money? If there isn't money, where may you have to reduce things?' So, we do have to work on a number of different scenarios—or modelling assumptions, if you like—but then it's after the twenty-second when we get that certainty; that's the sort of crunch point, then, at which we maybe start to deploy one of those scenarios, but things firm up. And the challenge is, if we did things earlier than that, we could be going out to our public sector partners with incorrect information. I think what they need is the clarity and certainty, and you will both know that from your time in local government. But we'll be doing some of that; we are working through those sorts of assumptions and modelling at the moment with colleagues.

And on the point about the discussions with the CST, we have our regular Finance: Interministerial Standing Committee meetings. Our next one is on the twentieth of this month, and I'll be really keen to press for some greater clarity in respect of what to expect in November. But absolutely genuinely, we do not have advance notice of what's coming. So, we're like everybody else, in a sense, of keeping an eye on the press for early announcements and trying to gauge what those things might mean. So, the level of information shared with us is next to nothing.

So, I do have a call usually with the CST on the morning of any fiscal event, where they'll talk through the numbers of what that means for Wales, and then I have the opportunity to ask some specific questions that are important to us, but there's no real engagement before that, so we are planning on a range of potential scenarios.

You talked earlier about that £900 million, and that's a figure that's been around since, probably, about March time—that you've been saying, in real terms, the budget is £900 million less than it was in 2021 when we had the settlement. We were talking to the chief economist and others earlier, and they were talking a little bit about how that figure has been come up with. Are you able to talk us through that, just from your point of view? What drives that figure? Is it CPI, is it based on revenue and capital, or is it just one or the other? Is there a mix of different indices there or is it just the one index that you use?

So, those figures were based on the OBR's inflation forecast from March of this year. But actually what we do know has happened since March is that prices have been increasing at a faster rate than was expected back in March, so, actually, that gap could be even larger than the £900 million. We’ll have to wait and see how things pan out in the next set of figures from the OBR. So, that obviously is a concern to us. Obviously, we expect the same to be in place probably next year as well in terms of the impact on our budgets. So, it does affect all aspects of our spending plans really.

Yes, it was interesting because we hear that inflation is coming down, but will inflation coming down have a bearing on that figure? Will it improve the deficit there—the £900 million deficit? Is it baked in now or will it, over time, get better?

It, I think, depends on what our settlement is, what the forecasts are and so on. So, certainly for next year and the foreseeable future, we expect things to be remaining difficult, at least for a few years yet.

And is there an element where you'd look at, say, the capital budget rather than the revenue? Would a fairer inflationary figure be something like the construction element because of building? Would you ever blend those indices or go into more analysis of that so that you've got a more accurate figure, or is it just an indicator rather than anything else?

So, we're just trying to discuss who's the best person to answer. Maybe we should get the chief economist back. [Laughter.] But, I think that you see the impacts right across Government. So, I suppose it's probably easier in some ways to deal with on the capital side of things, because you can adapt your plans, you can slow down programmes, you can build fewer of x, y, z than you were originally intending. So, it's easier to manage on a capital side, whereas on the revenue side, particularly with pay, that's a real pressure for us, because we've seen pay awards that were beyond those that we had expected—absolutely necessary because it's important that we pay public sector workers properly, but, at the same time, the budget hasn't increased to accommodate that. So, that has been one of the most challenging areas for us to manage, I think.

So, looking at—. Sorry, Gawain.

I was just going to say that, in terms of the Welsh Government budget, the capital budget is a far smaller element, so, as the Minister was saying, when we talk about the revenue budget, which is predominantly most of our money, we're all subject to very similar pressures around the running costs, around pay, utilities, all those types of things. There is a lot of commonality between the different, various sectors.

Thank you. So, when we were looking at—. You were talking about sectors there. Are there some sectors within the economy that have been less impacted by some of this, or fewer sectors that we're involved in been less impacted in terms of inflation by both the costs of delivering outcomes and increasing demand? So, are you seeing it equally across Government or are some performing better than others, basically?

No, we are seeing severe pressures right across Government. I think that they're particularly acute within the health service at the moment. That's partly in relation to pay; it's partly due to the high energy costs within the health estate. So, it's particularly challenging in health.

And then, there is also another challenge in terms of public transport—rail, for example. People haven't been returning to rail in the numbers that perhaps we'd anticipated during the pandemic—it has still not recovered to the same extent. And yet, there are a lot of fixed costs related to rail that need to be met. So, that's another area of particular pressure. So, if I had to name the two big areas, I think they would be health and transport, particularly rail.

Final question from me for now: looking at the budget for 2024-25 and your current year as well, what are the changes in the forecast for inflation and economic growth and tax revenue, including the block grant adjustment? What impact is that having in real terms now? It's been widely—. We heard from the First Minister at the beginning of August and from other Ministers that you've been looking at in-year adjustments and things you've been looking at. Where are you at with that and when will we hear anything further, because I think the programme for government—not the programme for government, the business for the next three or four weeks—is silent on any announcement, and we would have thought that we would have heard something by now.

Just to reassure you and all colleagues, I will definitely be making a statement when I'm able to. At the moment, we're still completing that work, looking at the pressure that we have within the budget and how we manage that. So, you've heard the FM saying that we've been working right across the summer. So, Cabinet have been having a large number of meetings. I've met with all colleagues, and we've been looking at every budget, really, to see what can be released in order to meet some of those pressures. We're still working on that at the moment. We need to take this decision as a Cabinet collectively. Everybody needs to be—I'm not sure 'comfortable' is even the right word, but—accepting of the choices that we need to make, and we need to have those debates amongst Cabinet so that we are all in the space of accepting, really, what needs to be done. And then I'm more than happy to talk through the detail then with colleagues.

Will the block grant adjustment give us any chinks of light that there's some positivity coming back, or—?

So, revenues from the Welsh rate of income tax and the associated block grant adjustment are fixed for this financial year. So, there won't be any help in that sense, because that was fixed using the Office for Budget Responsibility's forecast from last autumn when we were setting the budget for this year. There might be changes in future, however, with reconciliations and so on, but it's too early to say or to give any kind of idea of the net effect on budgets for next year. But, for this year, there's no help coming in that sense.

Okay. I'll go over to Mike.

Thank you, Chair. On the 2023-24 budget, and I understand the difficulties you're having with that, you will have reported it before we get next year's budget being reported to us in December.

Yes.

I think that you also have to look at this year's budget. There are things happening all over the place, aren't there? The increase in wages helps income tax income; the unexpected problem with reinforced autoclaved aerated concrete, that will obviously affect capital but will have a limited effect on revenue, if any. And the third one is: aren't farm-gate prices now, which are increasing, giving you a good reason to reduce farm subsidies?

Thank you for those questions. In relation to RAAC, in the first instance, we don't envisage there being large costs within this financial year in relation to RAAC, partly because of the limited amount that we've found on the public estate here in Wales in any case. You'll be aware of the two cases in schools, which are already being actively managed, and then obviously the health Minister has been clear on where RAAC has been found on the health estate. But we do know that, although the Chancellor did say immediately that funding was not going to be an issue in terms of addressing RAAC, there was a statement shortly after then from the Treasury correcting that and saying that there would be no new money, that RAAC had to be managed from within existing resources. So, that's our starting point, really.

We are fortunate, though, because we've had such an intensive period where we've been investing in the school estate. We've spent over £2.35 billion on the school estate in terms of both improving schools and building new schools, and we can see that right across Wales. So, I think that's been an important investment. And we're still committed to our school investment programme as well. So, that's really positive.

The FM has agreed or announced on 29 August that there would be £12.8 million linked to the RAAC at Withybush hospital. That funding is to fast track visual inspections, continue survey works and undertake mitigation works in areas impacted by RAAC. And the funding also includes the provision of temporary catering facilities in the hospital to maintain services there. I understand that's from the existing health capital programme, but I'll—. If I need to correct myself, I'll write to committee.

Just wages going up increases the income tax take—

Sorry, Mike, just on RAAC as well, I know a lot of the local governments have come out and checked the schools, but to what extent have we got to the point where all buildings owned by local government have been checked, and are there any budgetary issues that local government will need to find money—? I'm just thinking of one—not in my region, obviously—in Cardiff; St David's Hall is one of the ones that springs to mind that I think is owned by Cardiff Council and would potentially be a big bill for them. Are there any other instances that you're aware of or you've been having conversations with local government as to the impact for them, basically?

So, all local authorities are providing information, in the first instance, on their school estates, and we've got the majority of those through now and we're getting more all the time. It's our intention to both update the special RAAC page on the Welsh Government's website with the information, but then also to issue frequent statements, probably written statements if we need to do them very frequently, just to keep colleagues updated on that. Local government is also then looking at its wider estate in terms of leisure facilities, entertainment venues and so on, just in order to satisfy themselves that they are fully aware of where RAAC is and the status of that, and that will be, I think, in by the end of this month. So, schools, I think, by the fifteenth, and then further work that officials will need to do to look at the wider picture across local authorities. But Ystadau Cymru has been working really hard to provide the whole of the public sector with information and advice, and obviously it's the guidance from the Institution of Structural Engineers that those authorities will be looking at.

Thank you for that.

I just want to come back to the increased income to the Welsh Government following wage increases. Of course, the Westminster Government left the amount of money where you're going to go up different tax bands as it was, and that means people are moving up tax bands as well. Have you estimated how much extra money you expect to take this year, following wage increases?

We're always looking at the different tax elements and we're looking at the figures that come out from Treasury, but I think it's fair to say that total UK income tax revenues have been higher than expected, but they might not translate into higher revenue forecasts. So, we will know, I think, around the time of the autumn statement, what our income tax take will be at that point, and that's fixed in terms of our own budget. So, we could do some modelling and we can certainly get you some more information on that, if needed, but we won't know for definite until November.

I don’t think I need it; I think that you need it, because, if you're going to have more money coming in during the year, due to wage increases, then that would mean the amount of money you would have to take out of the system would reduce, wouldn't it?

But it won't come in during the year, because Welsh rates of income tax and the associated block grant adjustment is fixed.

Twenty per cent is on Welsh rates of income tax, isn't it? If I am earning £50,000 a year, and I then go up to £60,000 a year, then there's a £10,000 a year increase, and that means that the 20 per cent Welsh rate will go up. I'd pay £2,000 more into the Welsh rate, wouldn't I?

But we wouldn't see any change in our budget in this year, anyway. It would be an adjustment that we would receive in the next financial year, then.

One of us is confused, and it may be me, but you've set an estimate of how much income tax you expect to take during the year. During the year, wages have increased; in some places, quite substantially. Therefore, the estimate of how much money you expect to take during the year will also increase. That has nothing to do with block grant adjustments; that's all to do with the Welsh rate of income tax, the amount of money you expected from the Welsh rate of income tax, and then the amount of money that comes in from the Welsh rate of income tax.

The reconciliation then takes place after the end of the financial year.

So—

I was just going to say, as the Minister said—sorry to interrupt—it's fixed at this point, based on the OBR forecast. There will be a reconciliation, but that would be at the end of the year, so it won't impact this year; it'll impact later on. So, there could well be adjustments there.

So, the 20 per cent is a nominal 20 per cent, and it gets adjusted at the end of the year; it doesn't come in on a monthly or annual basis.

Yes, it's adjusted. There's a reconciliation at the end of the year, along with all the other adjustments that we could have to our budget.

So, if you've got more—. If your tax take is higher than you're expecting it to be, you can't use that extra until it's adjusted at the end of the year. I know I'm simplifying it massively, but is that correct?

We base our budget on the forecasts provided by the OBR for the financial year of the budget that we're talking about. And then, if the actual figures then are higher than the forecasts, there's an adjustment, which means that we will have additional funding, or should have additional funding, which we can then spend in the next financial year.

Sorry, this bit is fascinating me, because I thought the 20 per cent rate was a 20 per cent rate in Wales that we'd split at the Welsh rate of income tax: we set the Welsh rate of income tax and we had the income tax from that Welsh rate coming in into Wales. What you're now telling me, I think, is that, although it's set there, we don't actually get it in, positive or negative, until the next year.

So, we only have power over 10p of each of the bands, and the decisions that we take in respect of that, within the context of the OBR forecasts, is what we have for that year, and the adjustments are for the next year. Now, if the UK Government overall is taking more tax, and decides to provide more money for public services, then, if it's devolved, then we will get our Barnett share of that. Maybe we should do a technical briefing, Chair.

I think we need to, because I was just talking about that: somebody paying 20 per cent tax, that 10p that is being collected in Wales and allocated to Wales is not collected and allocated to Wales during the year, and that that is then constrained or protected, depending on assumptions made, and we don't get the money until the following year.

Rather than get bogged down into this now, maybe you could write us a short briefing note on this issue and see if we can get that bit, as I think things like self-employment will come into it, and that can affect stuff as well. So, there's a lot of elements there, but I think the crux of it is, 'Is the money raised by the WRIT, collected by the Welsh Revenue Authority and brought in—when does that really get realised into budgets?' But I think we'll let—. If it's okay with you, then we'll get a briefing note, or even a separate session, a technical session, just to bottom out this, because I'm conscious of time, and I think we're—

I think it is something that is incredibly important in terms of the amount of money you have to spend.

The only other thing I was going to raise was we had a long discussion in a Plenary, when the committee came along and led a debate on the budget and expenditure. Has that influenced your planning for the draft budget?

Yes. I really enjoy those debates, because every year—. I think we've done them a couple of years now, or three years now, I think, and they are different. And I did notice the difference in this year's debate, because I did feel that everybody was really grappling with the difficult context we're in. There was very much a sense of realism about the fact that this budget really is going to be about what do we keep doing, what are our absolute priorities. It wasn't, as it would be easy to fall into, a long, long shopping list of additional things that people are passionate about, people want to see, for perfectly good reasons, but was more, I think, engaged with, 'This is really, really tough: what do we really need to keep doing, which people do we really need to protect, how can we understand the cumulative impact of choices on the most vulnerable people?' And I thought that was really helpful.

And there are always important challenges in terms of the budget, so the documentation that we provide and so on. So, I think that we take that really seriously when colleagues in the Senedd say that they need to know more about x, y and z or they don't feel that information is being provided in a way that is accessible on such and such an issue. So, we always try and respond to those as well. And I know that's something that we've exchanged correspondence on when you've written on behalf of all of the committees as well.

I think, from this committee's point of view, we get a lot out of that because, obviously, it helps frame our questioning and our thoughts in coming through in budget scrutiny. So, I think it's an excellent element and, obviously, the engagement that we do with stakeholders beforehand as well helps us form our thought process around that. But thank you for engaging in that debate, and long may it continue. I think it's becoming a staple of our budget scrutiny. I'll go over to Peter.

We've covered a lot of things in the earlier conversations. Ministers will be facing big challenges trying to understand where they might need to cut, especially in the face of the cost-of-living crisis. I just wondered how you are identifying the efficiencies within the departments to minimise impacts on outcomes. We know, in the UK Government, they're going to be following a productivity review. Are you considering something similar here, so that you make the right cuts in the right places, if you have to?

I think it's interesting, looking at the UK Government's productivity review, and then also looking at what Scotland did last year in terms of an emergency budget and, of course, the fact that, in Northern Ireland, they breached the departmental expenditure limit last year, and it's having an impact on their budget this year. I think what that demonstrates is that all Governments are addressing a really big issue here, but doing it in slightly different ways, and I think it is important that we look and explore what other countries have been doing to manage the situation.

I think in England, the approach there, as you've described, really, is about asking individual departments to make reductions in spend through efficiencies. What we're doing is taking a step back and doing it as a cross-Government piece of work, because it might be that there are particular areas where we want, as a Government, to move money from one main expenditure group into another to address the problems in that MEG. So, it's a slightly different approach in the sense that the UK Government is department specific, asking them to manage the issues within the department. We're trying to manage it across Government, and then, potentially, move money from one part of Government to another. So, it's grappling with the same problem in a different way. And, as I say, in Scotland last year, they undertook quite a significant exercise of repurposing funding from some parts towards health in the large part and, in Northern Ireland, they're grappling now with the impact of breaching the DEL.

Obviously, the First Minister made quite a powerful statement about the pressures that are going to happen. That's sort of laying the ground for, usually, difficult decisions. Are there areas of efficiencies—? Looking at that holistic approach you've taken as a Cabinet, are there areas where you are expecting to see significant deprioritisation? I've got an example here, perhaps a more flippant one, but young people were asking should we disinvest in the Welsh language, perhaps, for a period, to divert that money into other more important areas for the current time. That's not to say that should remain a long-term issue. But are those the sorts of things you're saying—that actually, we might need to change our views on how we wanted to do something, perhaps put those things on hold, and divert that money to emergency pressures now?

Every single portfolio will be making a contribution towards the challenge of meeting the pressures in the budget. So, there won't be a single area of Government that isn't making a contribution. I have protected the revenue support grant, so there's no in-year cut to the RSG, and that's been important to give local authorities the certainty for the rest of the financial year in respect of their budgets there. But, beyond that, we're having discussions right across Government, and we're just not quite at the point yet where we've concluded those; we need to meet as a Cabinet and, as I was describing earlier, ensure that we're all content with the way forward. But as soon as we have more detail, I'll be very keen to share it.

Thanks. I was going to ask a question to you, but it's already been covered, really, about how you're considering the impacts of divergence of income tax and things. I think we've covered that with the WRIT. I see that, yes, that money is reconciled, and we might get a positive in the 2024-25 budget as a result. But I don't know if there's anything further you wanted to add on your update and the work you're taking to understand the potential impacts of divergence of income tax.

There's not much more I can add in terms of the exercise with regard to the £900 million at this point, but I am keen to share with colleagues, so that colleagues have an understanding of the work that's gone on. I'll perhaps ask Emma to say a bit more about the principles that have underpinned the exercise, because it's been really important to us that we've been mindful of the impacts on people who are vulnerable, and cumulative impacts and so on.

I think it'd be interesting for the committee to understand. The figure of £900 million is nearly £1 billion; is that the quantum of the cuts that you're looking at, or are they cuts towards that figure? So, are you looking for the £900 million or are you looking to alleviate some of those pressures, rather than all of the—? It's nearly 5 per cent of the budget, isn't it?

There are various considerations, one of which is the indication that we should have some additional funding in respect of the NHS pay awards in England, so we have to make an assumption there. I'm hoping to get more detail from the Chief Secretary at the meeting on the twentieth. It's still not acceptable that that announcement was made so long ago and they still haven't been able to tell us what, if any, consequential funding is coming. You know, that plays into it. And then, obviously, a lot of the pressure is within the health service, so there's going to be work to manage down that pressure within health, and that's an important part of the picture as well. So, there's that. We're not looking for £900 million of cuts from budget lines; there's a range of things we're doing, but it's still going to be a significant piece of work.

And just briefly in terms of some of the principles and priorities for this exercise. The committee will recall that the priorities for the spending review for 2022-25 were very much protection of front-line services and addressing the climate and nature emergencies. That evolved into last year, where we added in support for the most vulnerable parts of society, as a result of the cost of living. And Cabinet have had many discussions about the importance of sticking with some of those principles, as they make some of these difficult decisions. I think you'll probably be aware that one of the challenges with dealing with the short-term issue is you ignore the long term, and, actually, that's where you have longer term negative impact. We're very focused, and Cabinet are very focused, on the impacts, cumulatively, across different sectors of society and different parts of Wales, and that's something that Ministers are working on and we as officials are working on.

But there's still an emphasis—and the Minister talked about protection for the RSG—on protecting core front-line public services, as we go through this exercise, and, indeed, that's likely to be the case as we go into next year's draft budget as well. And also, continuing to provide support to those households who are most hit by some of the cost-of-living challenges that they're facing at the moment. And also, continuing to work with our public service partners and third sector partners in terms of delivering this as well. So, there's a slight evolution and perhaps a tightening of the principles that we adopted for the spending review and that are the principles of this Government. That's not to say there aren't difficult choices. I think one of the challenges, when you set principles and priorities, is they can be interpreted in different ways by different people, and I think that's part of the challenge that the Ministers face at the moment.

Thank you very much. I'll bring Rhianon in next. If we could unmute Rhianon. Go ahead, Rhianon.

Thank you. Diolch, Chair. Thank you so much for what you've already said. With regard to the conversation and discussion earlier, where it was highlighted in this committee that we've got the worst fall in living standards across the UK since records began, and mention there of the cumulative impacts of all of these different financial hits upon the most vulnerable in society, it's a very difficult job that you're undertaking, so I'd like to preface that.

My question, then, really—. There are two. In terms of public sector pay awards, as I raised earlier again, and I think it's already been commented upon by the Minister, we're still in the dark around what is actually happening in terms of consequentials to Wales. My question really is should there be some sort of a mechanism in place, similar to the guarantee that we had during COVID, that protects our interests, bearing in mind what's now happened in Scotland from the independent review around the Scottish Government's fiscal framework, which included annual changes to borrowing and reserves linked to inflation, and the relaxation of annual draw-down limits.

As you know, this is a topic that we keep coming back to. But if this is now impacting or happening across Scotland, what more, further to the conversations that we've got in front of us that you've updated us with in this committee during your letters, Minister, can be done to make our fiscal arrangements with the UK Government fit for purpose? Because, quite frankly, they're not. Sorry that it's a long question.

Thank you. Just to reflect on the first part of your comments there, I think it really highlights the importance of our strategic integrated impact assessment, which we publish alongside the draft budget, showing the cumulative impact on people with protected characteristics, for example. I think that it just shows how important it is for us to look at more than one impact at any one point, and the way in which a number of policy decisions might have an unacceptable impact on particular groups, if you look at them collectively, whereas, individually, they might not show up as being something of concern. So, that kind of work, I think, is really, really important.

But in respect of the review of the fiscal framework in Scotland, we've been keeping very close to Scotland on that, to understand their experiences through it. And I think that there are things that have now been agreed for Scotland that would be absolutely appropriate for us here in Wales, particularly around borrowing, and also the abolition of our annual draw-down limits. Those things are just relatively minor in the greater scheme of things—there's no reason why the UK Government would need to fully review our fiscal framework, which, in many ways, we think is working very well for us. But it's those flexibilities that aren't working.

Rhianon mentioned the idea of a kind of Barnett guarantee, but for other areas. We had it in COVID—it worked really well in COVID, it was really pragmatic on the part of the UK Government. But when they are announcing something particularly significant—public sector pay, for example—then I think it would be entirely appropriate for them to offer a same kind of guarantee, so that we would know that we would have X number of million pounds added to our budget, and it wouldn't fall below that. And I think that would give us confidence then to plan, confidence to understand the impact of the choices that we're making in relation to public sector pay, bearing in mind half of our budget is exposed to pay—so a 1 per cent increase does have a big impact on our budget. So, that would be a really sensible thing to do, and I'm keen to explore that, actually, with the CST at our meeting on the twentieth of this month. So, I'll happily report back to colleagues on that.

Yes, please. I think that would be something the committee would be very, very interested in. Because obviously, the knock-on effect, in terms of our scrutiny, et cetera, is another point, but to be able to plan, you have to have that information. And if there is no real barrier to that information coming to us, if they've got that information, it seems to be grown-up governance to be able to passport that to Wales.

And finally, Chair, then, if I may, just a quick point. We've talked about the lack of transparency to Welsh Government in regard to public sector pay awards and consequentials, but in terms of our own cost-of-living payments, Minister, to directly funded bodies, it says that there's an estimated cost for providing the £1,500 cost-of-living pay award to Welsh Government civil servants. On that particular point specifically, have you identified how that will be funded? And then, secondarily, given that directly funded bodies, obviously, are directly funded bodies, with all the caveats within those, they don't have that power to hold reserves outside of this committee—they have been asked to make those awards out of their own existing budgets, and the question there, really, Minister is: is that fair?

So, the cost-of-living pay award for our Welsh Government civil servants is £9.8 million, including employers' costs, and that is part of the overall pressure that we're talking about in terms of the exercise that we're doing to identify funding that can meet the pressure. So, that is part of the pressure. But then I also mentioned that every part of Government is playing its role in terms of identifying funding, so if I can just confirm today that there have been some savings identified within the broader running costs budget within the central services and administration MEG. What I don't want to do as part of this exercise is identify a pressure and then point to a particular budget that has been cut in order to meet that pressure, because I don't think that's the best way of describing it. So, what I want to do is identify the overall pressure and then show the activities that we've undertaken. But I think that gives an example, really, of where you've got a particular pressure in respect of the cost-of-living payment, and then you've found some funding from within a particular budget line that can help manage it. So, that's just an example of the work that we're doing at the moment.

In respect of the directly funded bodies, unfortunately, the UK Government didn't provide any additional funding in respect of the civil service cost-of-living payment. It would have been almost impossible, I think, for us not to have awarded the payment. We want to reward our staff, we want to recognise the cost-of-living crisis on those staff. So, we thought it was the right thing for us and our directly sponsored bodies to do. We would love to provide more funding, but, unfortunately, there isn't any. So, just as in the UK Government departments they're having to manage it within existing budgets, we have to, and I'm afraid we have to ask our directly funded bodies to as well.

There's a slight distinction, isn't there? You've got directly funded bodies and then you've got Government bodies, arm's length, like Natural Resources Wales and some of the others. They're in a slightly different situation, where some can carry reserves and some can't. Some of the discussions that we've been having—well, I've been having with chairs of the directly funded bodies and chief execs—is how they manage the expectation with their staff and, obviously, how they manage the cost-of-living payment and the consequences of doing so. They're all slightly different because the directly funded bodies are funded in different ways because they're set up in different ways. Some are looking at a supplementary budget, some are not. And I'm just wondering: did you consider, with the exercise that you're going through and that you've been going through over the summer, an additional supplementary budget to wrap up some of the elements of directly funded bodies, but also some of the changes that you're making in-year in an additional supplementary budget in the autumn?

I did consider it, but there are so many moving parts at the moment that will keep moving between now and the time when we have to balance the budget at the end of the year. And I didn't think it would be the most useful activity that we could do, but that's not to say that I don't want to be completely transparent because, of course, I want to make a statement to the Senedd and provide as much information as we can. But it's still the intention to publish a second supplementary budget in February of next year, but I might ask Gawain to come in with a bit more detail.

Just on that point, just something to note is that any supplementary budget by a directly funded body would be attached to that one in February, so the knock-on effect for people working in that, potentially, is that they don't get that cost-of-living payment until after this winter, because there would be no certainty that that would be agreed by the Senedd in time for that. So, it's just something to bear in mind on the operational side of the way it works. But Gawain, I don't know if you want to come in on that.

Only to confirm what you said, Chair, about where we are with the budget. Yes, there are a number of organisations in the public sector in Wales that are part of the Welsh Government boundary, and as you say, we're very limited on the reserves that we can hold. Obviously, local authorities work to slightly different rules, and as you know, are very little able to hold reserves in that way. So, I would just confirm what you were saying, that there is a distinction between different types of public bodies in Wales.

And other public bodies, and directly funded bodies in particular, come to this committee to be scrutinised, and their budgets are slightly different from the ones that come to Government for that. So, that's where we're going to be having discussions with different bodies over the next few weeks, I'd imagine, where they're grappling with this figure and how this is implemented in there. So, it was just to—. We're sympathetic, and we're all put in this position because of an announcement by Westminster that wasn't followed through with funding to go alongside it. So, you're in a position that you're effectively nearly a soldier of fortune—it's expected to happen—and others are as well. And everybody is trying their best to alleviate the cost-of-living crisis, which is affecting all people in the public sector, as well as everybody in society. So, were there any thoughts of how, if your budget is fully allocated, and the majority of it is on pay, how do you find those cuts to, basically, afford to give the payment? Have you got any thoughts on that, because obviously you're going through similar exercises in similar departments?

I think that will just demonstrate how difficult those choices are, because I think inevitably there will be areas where there are fewer jobs. Now, whether that can be accommodated by recruitment freezes in some areas is one thing, but then I think that is just honest, really, about the level of the difficult decisions that are going to need to be taken. And that's why I want to have as much clarity and certainty from the UK Government as early as possible, because we're really only going to get it, the full picture, in the supplementary estimates, probably in February of next year. By that point you've already taken a lot of difficult decisions, many of which can't be unwound if there is more money available than we'd anticipated. So, that's why just clarity and, you know, that kind of honest picture is really important. But getting information is very, very difficult.

Peter, and I think Rhianon wants to come in as well.

I was going to say there's a real moral dilemma with this, because it just seems unfair that some parts of public service can get this and others won't be able to. I would hope that perhaps a Government who stands alone as a government should say, 'Well, actually, we're going to be pragmatic. It's either fair for everybody or we don't do it', and I'm really wrestling with this, how one group of public servants will get something, because there are levers to do it, and others won't. I just think it's morally wrong.

I think it just shows the difficult decisions that are going to have to be made. So, if we were to provide additional funding to some organisations for this, there's no additional funding, so it comes from—. We have to cut these jobs here to pay the uplift over there. That's how difficult these decisions are, really, and how awful the choices are.

Rhianon wants to come in as well. Rhianon.

Thank you. This is a very interesting discussion, and it sort of hangs on the previous discussions we've had around supplementary budgets and directly funded bodies, but I think, in a sense, Peter is right in terms of this being external to us, and it comes back to the crux of the matter, as to how, when we have United Kingdom decisions, that then works with us fiscally. It does come back to the issue of having better, more refined, refreshed, recalibrated arrangements about these types of matters in a general principle. Because we can always go to specifics around this or that or whatever, and these are real management issues—they are management issues that everybody in the public sector is having to deal with, and that's a fact now—but I really think that, fundamentally, it comes down to what sort of mechanism is needed to be put in place so that we have the best, optimum governmental cascading of public funds. And at the moment, we seem to be being treated like a child in the classroom, and that's not good enough. Sorry, that's more of a statement there—apologies.

Thanks, Rhianon. Well, we've come to time. As always, thank you so much for your time this morning. It's always good to have you with us to go through your thought processes, to get that clarity on the things that you're grappling with and for us to understand where you're coming from and, obviously, to ask some pointed questions as well about what we need to understand and to hopefully help the public understand the situation of what you're dealing with, and how we're spending the money and how we're collecting the money as well. I know we've asked for a couple of letters, but we'll write to you about that, just to make sure that we cover off those. But thank you so much. Diolch yn fawr iawn for your time, and we'll see you again soon.

Thank you.

Diolch.

Diolch. We'll now go back into private, as we agreed earlier. Diolch yn fawr.