Finance Committee

We'll move on now to one of the main items this morning.

The substantive item this morning is pre-budget scrutiny with the Cabinet Secretary for Finance and Welsh Language. Are you able to introduce yourself and your colleagues, please, Cabinet Secretary?

Good morning, Chair. I'm Mark Drakeford, the Minister with responsibility for finance and the Welsh language. With me this morning is Andrew Jeffreys, director of the Treasury in the Welsh Government; and Emma Watkins, deputy director with responsibility for budget.

Thank you very much and thank you for joining us at this meeting. Of course, we had a discussion last week as well.

It was good to have you here last week as well. Just to remind Members that this is a session following on from the Plenary debate that we had at the end of the last term, on 17 July, where we presented a report on the priorities that we had been listening to as a committee from stakeholders and the public. Obviously, we've had some engagement over the summer, and I know the Welsh Government has been doing a listening exercise over the summer as well. You've been conducting that listening exercise over the summer, and the First Minister has been out and about doing that. How has this exercise, then, fed into your budget planning process? Can you share some examples of where that exercise is resulting in a change in direction for the upcoming budget?

Well, the First Minister's listening exercise resulted in her statement on the floor of the Senedd last week. That statement will shape budget preparations. It will be an important strand in the way in which we will align the ambitions that Ministers will have against the realities of the budget available to meet those ambitions. It will be an important strand, but not the only strand in the preparation of the budget, because in many ways, the overriding responsibilities of the finance Minister are to—in a cliché we've used over the years, it's to land the jumbo jet of the budget on a postage stamp, so that we maximise the spend, we spend right up to the very limit, we get the maximum value out of the expenditure that the Welsh Government makes and we don't overspend, because overspending in the settlement we have takes you into very difficult territory. So, while the First Minister's priorities will be guiding our decisions, all those decisions take place within that wider set of responsibilities that a finance Minister has to take the primary responsibility for ensuring across the whole of the Government.

So, you're possibly in a fortunate—or unfortunate, you tell me—position. You've done this role before. You've been health Secretary, or health Minister, and you've been First Minister, and now you're back in this role. From all that experience that you've got, what are your priorities in the role now, and maybe beyond just the budget, but from a fiscal framework and those sorts of priorities as well that we take a keen interest in, what those discussions are looking like? So, could you elaborate on what your immediate priorities are and possibly your longer term 18-months priorities?

Well, I don't have any separate priorities to those of the First Minister, as set out. The job of the finance Minister is to enable the rest of the Government to achieve the ambitions and the priorities that the Government as a whole will set out. But in terms of the specific responsibilities that the finance Minister has, then negotiating relationships with the UK Government in finance matters is obviously one of the things that falls to the finance Minister. And there are a series of things over the coming period that I will want to pursue with my colleagues in London.

There are a set of legacy issues, policies that were important priorities to the last UK Government, which have an impact here in Wales. So, on free ports, where we did strike an agreement with the previous UK Government, we have done all of the things that we need to do; the UK Government has not completed all the things it needs to do. So, pursuing that to a conclusion will be a short-term priority.

There is the whole investment zone policy. We had a sort-of agreement with the UK Government on that, not as good an agreement as we secured over free ports. Two investment zones were identified in Wales. The previous Government set aside sums of money over a 10-year period to support those investment zones. There's more exploration to do with the incoming UK Government as to what ambitions they have for the investment zone programme. They may wish to fine-tune it, they may wish to take a different approach to it. My job is to make sure that the money that was promised comes to Wales on whatever new terms the new Government wishes to set out.

And there are the legacy issues in relation to European funding. So, I'm afraid the shared prosperity fund was one of the sorrier examples of spending by the previous UK Government. As was widely predicted, the spending is not being achieved in those projects that were agreed by the UK Government. There is talk of the need for an extension for another 12 months to allow the projects that are already in the pipeline to come to a conclusion. I will wish to have conversations with my UK colleagues about the longer term transfer of post-European funding back to where it belongs. That's to say here in the hands of the Senedd. So, those are legacy issues that we need to attend to.

There are a couple of very important unresolved issues, so these are places where we've not come to any form of resolution with the previous Government: coal-tip safety expenditure. The Welsh Government has now identified £65 million that we will invest in making coal tips safe for an era of climate change. That’s the reason why we need a programme, because the standards of coal-tip safety, which were the right ones in their day, are no longer the right ones in an era of extreme weather events, as we saw in Tylerstown back in 2020.

You were involved in the last conversation around that, from memory—

I was indeed.

Are you more hopeful that you'd be able to get a resolution that benefits Wales from that?

Well, I think the fiscal framework has genuinely been to the benefit of Wales. We can point to significant sums of money that came to Wales as result of it, and I was the finance Minister at the time that was negotiated. David Gauke was the Chief Secretary to the Treasury and, in my experience, was someone with whom you could have proper conversations—give-and-take conversations—over how you negotiate something of that sort. The problem from our point of view has been, as you know, that the numbers that were struck—the amount you can borrow, the amount you can put in the Welsh reserve, the amount you can draw down from the Welsh reserve in capital and revenue—are still the figures that we agreed as the right figures for 2016 and for the size of the Welsh Government budget then.

The Institute for Fiscal Studies, in its review of these things, said that, at the very least, those figures needed to be uprated in line with inflation. Well, we were never able to persuade the previous UK Government to do that, and I know we were supported in that by finance spokespeople from the opposition here too, because all we were asking was for those figures to remain in line with the changing circumstances. Now, I will want to have a two-stage approach to the fiscal framework. My first ambition is simply to get that done—the basic things. After that, I think there are wider reforms that we would look to that have already been conceded in the Scottish case and in a different way in Northern Ireland as well.

In the end, this is money that is the Senedd’s money, and micromanaging it from Whitehall, in the sense of exactly how much we can have in any one year broken down into different types of money in it as well—. I would hope, over time, if we can get the first phase agreed—just the uprating of the figures—we can go on and have conversations about freeing up some of the micromanagement of our affairs by the Treasury, giving us more scope to deploy our funding in what I think would then be more efficient and effective ways. That’s the reason for wanting it—that at the moment our hands are tied and we don’t get the best value out of the money, necessarily.

And we're not able to use the levers that we have to maximum effect.

No, exactly.

You spoke a little bit about what Scotland have got and what we haven’t got at the moment. Earlier in September, the Scottish Government outlined action being taken to save £500 million from its budget this year. The new First Minister said the Welsh Government won’t face similar issues. Can you confirm that the in-year budget position is secure and how the NHS, schools and other public sector organisations will be supported to manage those increasing costs, especially in line with what we were talking about last week in the Chamber around public sector pay and those decisions made in London, the knock-on effect they have here?

Okay. Thank you, Chair. So, I’ll take the first part of the question first, then. So, from what I have seen, as you know, the Welsh Government monitors the in-year position on a monthly basis. I’m expecting later today to see the latest set of data. It looks to me more like what I would have thought of as a normal year. There are parts of the Welsh Government that are spending a bit more than they had anticipated; there are some parts of the Welsh Government that are not spending everything they anticipated. There are, as ever, stresses and strains within the overall envelope, but they’re at a level that I would have recognised the last time I did this job. Last year, and to an extent the year before, the management of the in-year position was extraordinarily more difficult, and we went through that very, very painful exercise last year to bring the Welsh Government’s expenditure more into line with the reduced resources that we had available to us. So, the pain in Wales was very real but it was pain that we went through this time last year. The result is, this year, as I say, the budget looks much more like the budgets I remember managing. Scotland didn’t do the same thing last year. It’s having to do it this year and you may have seen that the Northern Ireland Finance Minister has recently told her colleagues that they have to embark on an exercise that looks a bit like ours.

In relation to pay, we don’t have the final figures and we won’t have them until the 30 October budget. The conversations we have had at official level, particularly with Treasury officials, give us confidence that the consequentials we will receive as a result of decisions made on pay by UK Ministers will be sufficient for us to cover the cost of the pay settlements in Wales without us needing to revisit other budgets.

Okay, thank you. I think Peter wants to come in. Peter.

A little point, probably going off piste a bit, but recognising the things you want to focus on now. One thing I've found of great concern is that whilst I’m always happy to see investment going to areas like the health service, it’s knowing that we are getting the best value out of the money we invest in. So, putting £450 million into health without checks and balances is difficult for me; how do I know that £350 million couldn’t have done it, if it were done in a different way? So, how are you going to be holding departments to account for performance management, achieving objectives and things, so you’ve got confidence that you can support your colleagues when they determine they need so much more money in the health service or whatever?

Thank you, Peter. I said in my first answer that the responsibility of the finance Minister is to try to make sure we spend all the money that we have, but then secondly to make sure we spend it wisely, so that we’re getting the maximum impact out of the money that we have. So, that’s a responsibility that I will pursue in every meeting that I have with all my Cabinet colleagues. The same principle is true for every other Minister as it is for the health service. Of course, because the health service is such a very large proportion of our budget, then that question is even more acute when you’re talking to the health Minister. I’ve already begun some very preliminary discussions there about the way we might be able to use—it's a big 'if'—if we’re in a position of having more capital available to us next year, how can we deploy the capital in a way that allows the health service to be more efficient. Because, I'm afraid, after a long period where we just haven't had the capital we need to invest in the infrastructure, the equipment, we have people working in the health service who are very highly skilled and very, very committed, but are working with machinery that doesn't allow them to be as efficient as they could be if they had a more up-to-date piece of kit there in front of them, or they're working in a building where the building—. I remember a staff nurse in Bronglais hospital saying to me, after we opened the new accident and emergency department there, 'I've spent 10 years in a building that worked against me, and now I'm working in a building that works for me.' We have too many people in Wales who are still in buildings that work against them, and so, if we do, Chair—and, as I say, it's a big 'if'—have any capital available next year, I've started conversations with the health Minister about, 'How can we deploy capital to assist you with efficiency and get better return on the revenue investment that we make?'

Is there any thought of doing a deep analysis to understand if systems work right, because I think this is what lots of the public and lots of people are worried about, that the systems aren't efficient and are creating problems. We've seen it with one of the newest flagship hospitals in the Grange, for instance, where, actually, capital investment isn't actually working—not all of it is working—for the people that it was meant to serve. In the same way as the UK Government have done that deep-dive to try to make some assessment, could Wales be doing that to make sure that we've got confidence that the money is being best spent? Because if we could get away with—I'm using the analogy of £350 million in health, as in last year's figures, and an extra £100 million in social care, wouldn't that be a better way of utilising the money? But we can only do that if we've got confidence in how money is spent in the health service. Sorry, I'm going off piste.

Well, that is a really interesting contribution. I'm very happy to think a bit about it and to see whether there are things that we could do of that sort. There's always a tension between keeping what is a system under huge pressure going and stable enough to allow it to be able to operate day by day against the more fundamental review of the way that processes and ways of running the service are being carried out. But I'm very happy to take that idea away.

Just following on from that as a—. I don't know how it would work, but, obviously, within the Cabinet now, you've got a Minister for Delivery. Would that be something that she, potentially, could look at? I'm just hypothesising and don't need an answer on that. But, in the same way, in your role, you've got finance and you've got the Welsh language, which don't always go hand in hand in people's minds, or side by side. How are you going to manage those two areas that don't align as closely as some of the other parts?

I don't there is a link or an alignment of that sort. First Ministers, in having to find homes for all the different responsibilities that the Welsh Government discharges, have to find a home for many different things. So, Jane Hutt is the Trefnydd, the chief whip and the social justice Minister. I was the finance and local government Minister at one point. You have to cut the cake in ways that, in the end, allow you to dispose of those responsibilities, and they'll be separate parts, really, of what I do. I myself always think it's quite important to try to keep a clear line between spending decisions that you make as a finance Minister and as the recipient of those decisions. So, I'll be discharging both responsibilities, but they're relatively separate in the way that I'll do it.

But one won't be at the cost of the other, as in from your time and your focus.

No, I think it's possible to discharge them both. As I say, at one stage, I was the Brexit Minister, as well as the finance Minister and the local government Minister, and that was quite a—

That was a challenge.

That was quite a challenge.

Yes. Diolch yn fawr. Rhianon.

Thank you very much, Chair. We've referenced the Scottish situation in terms of the capital borrowing increases, and you've mentioned Northern Ireland, as context, and the 2016 levels that we're on now, but we're also living in a period when prices are 20 per cent higher and living standards are in the 1920s, so there's been much discussion around the painful budget to come and anticipation around that. What are your funding scenarios, Minister, for next year's budget planning and what are the assumptions that you are working to around the UK budget? And obviously, you've mentioned all those legacy issues, but can you elaborate?

Yes, of course. Thank you. Chair, at this point—and this is ahead of 30 October, when I think a number of these assumptions will change, because we will be in possession of much better information about the current Government's approach—at the moment, what we have to go on are the Office for Budget Responsibility figures that we used at the time of the March budget. They assume a 1 per cent real-terms growth on the revenue side and a flat budget on the capital side. So, at the moment, those are the parameters that we are planning within. I have some optimism that things will be a little bit better than that after 30 October. I think we heard some things over the last few days, particularly on the capital side, that the UK Government is willing to invest in order to do some of the things I was discussing with Peter, in the health service, for example. But, for now, I would rather, with my colleagues, be planning on what looks like the more pessimistic of those forecasts. There will be plenty of things beyond that that my colleagues will be keen to do if things are better, but we won't know that—. And I'm not expecting them to be hugely better, by the way; I don't think it's going to be a sudden turning on of public expenditure, but I think that things won't be quite as tight. That's my hope.

Yesterday—I think it was yesterday—the First Minister talked about the conversations that had been had over the summer with the Chief Secretary to the Treasury and Rachel Reeves, as Chancellor. Have you personally had any conversations, since taking up the role, with your counterparts in London?

I had a meeting last week with the Exchequer Secretary. So, there are four Ministers in the Treasury and the Exchequer Secretary is the fourth in line. So, I met with him last week and we talked about a number of the issues that we've talked about today, as legacy issues—the free-ports issue and so on. I also talked with him about my ambition to revive the idea of a vacant land tax for Wales, which we—

Which we'd be in support of. We'll be happy to add our weight to that, then.

Yes. Thank you. So, I raised that with him. Next week, I'll meet the Chief Secretary to the Treasury. Next week, there is a FISC, Finance: Interministerial Standing Committee, meeting, so I will have a chance to raise a series of these points with him as well. I haven't met the Chancellor in the last 10 days since I was appointed here, but I've no doubt that those opportunities will happen.

Thank you. Diolch.

Thank you, Chair. You've mentioned you've met with the Exchequer already, so, comparing the new UK Government with the previous administration, what is the difference in terms of information being shared and the conversations being held around the upcoming budget? And can you comment in terms of any conversation that's been had around the decision making in terms of the winter fuel payments?

Thank you. Chair, I'll try and start with a point I often make. The period from 2010 to 2024 wasn't uniform in our relationships with previous Governments. When I became the finance Minister in 2016, I received a telephone call from Philip Hammond, the Chancellor of the Exchequer at the time. I negotiated the fiscal framework with David Gauke. There were periods between 2010 and 2019 where it was perfectly possible to have proper relationships with Ministers at the UK level even when they were of a different party. It was the experience of 2019 to 2024 that stands out as being very different, when those normal courtesies of the way in which inter-governmental relations are conducted became far more frozen and unproductive. I think we can very definitely see a change since 4 July. At official level, we have more open, more regular, more engaged discussions with Treasury officials. As the Chair said, the First Minister has met the Chancellor of the Exchequer twice now in that very brief period, and we will see the fruits of all of that when we come to the end of October. But, in terms of the quality of engagement, I think it’s been very different in the last three months than it was in the previous number of years. On winter fuel payments, there was no prior announcement with the Welsh Government in any of its aspects, and no engagement by the Welsh Government in that decision.

Thank you very much. In terms of new financial structures being established—and you’ve given an overview at the start of this session, Minister—what changes in these early days do you know of that are being implemented to our existing structures, and also in regard to facilitating relationships between ourselves as devolved Governments and the UK Government?

My experience in the brief time I’ve been doing it is that some of the things that you would expect to be there are definitely there and working. I’ve met with the Northern Ireland finance Minister, I have a conversation with the Scottish finance Minister scheduled for this week, and that is in the lead-up to the FISC happening in Belfast next week. So, those are the standard machinery-of-Government ways in which finance Ministers engage with each other, and that seems to be in good working order.

The FISC, colleagues may remember, in terms of the inter-governmental review machinery, is in the middle tier. There is meant to be a meeting that involves the Prime Minister and the three First Ministers. That part of the machinery has never met, but I’m told that there are purposeful conversations now about getting a meeting this year. There was no meeting at all of it in the last calendar year.

There is also a commitment by the incoming Government to a new council of the nations and regions. That will be a forum where devolved Ministers will also meet with UK Ministers and English regional leaders, which I think is very important. It's been a missing piece of the inter-governmental jigsaw. No meeting of the council has happened yet, but, again, I’m told that preparations are in hand to make sure that there is an early meeting of it.

Thank you. I think the committee would be really interested to be updated in terms of when and if that top tier of the FISC meets.

Rhianon, if I may, also, the Cabinet Secretary mentioned in the statement yesterday that we’re in the process of putting a report together around inter-governmental relations. Obviously, you gave—. I can’t remember who gave evidence. I think it was Rebecca Evans that gave evidence to us as part of that. There might be some useful suggestions within that report that you might want to mull over and see how that feeds into FISC and other aspects, as that goes ahead.

Diolch yn fawr. I think the report will be very timely. Because we’re a new Government, there is an opportunity in its early stages to put new ideas into the mix. There’s the whole Gordon Brown report—that’s where the council of the nations and the regions is drawn from—and there’s a wider range of ideas for inter-governmental relations in there. So, I look forward very much to seeing the report and to benefiting from the ideas in it.

I'm going to move swiftly on to priorities for the forthcoming budget. What did you take away from the committee's spending priorities—you spent a little time on this at the beginning—debate prior to summer recess? Has that debate influenced your planning for the draft budget? Obviously, in terms of Wales's art funding, it is one of the lowest in the UK. On top of that, what areas have you got within the Welsh Government budget that you have identified to be deprioritised?

I've had a chance to look at the committee's report on the engagement that you carried out, so I've seen the work that you did at Yr Egin and Coleg y Cymoedd, and so on. Of course, I wasn't the finance Minister at the time you were doing this work. On 17 July, when the debate was held, Emma, I think, would have been the lead official, working with Rebecca at the time on it, so shall I ask Emma if she can fill in how the Welsh Government has gone about responding to the committee's report?

Diolch, Cabinet Secretary. We always find the engagement with the Finance Committee, and particularly the engagement sessions the Finance Committee runs on the budget, hugely valuable, and I think they contribute to that patchwork of things that the Cabinet Secretary has to consider when putting the budget together. Several of the themes that came out of the engagement sessions that you held, or that were raised in the Senedd debate, are quite similar to themes that the First Minister has outlined in terms of the priorities that she will take forward. I know the NHS and health was a key priority for the engagement sessions; likewise, education and communities, as well.

When we are considering that advice that we put to the Cabinet Secretary on the budget, as well as looking at discharging the services that the Government has to provide, we will be looking at the First Minister's priorities. We will also look at the ideas that have come through those engagement sessions with the committee, but also with external stakeholders as well—the social partnership council, local government, commissioners, for example—and they all form part of that. So, it's definitely part of our thinking.

One of the things that certainly we were struck by, looking at the engagement session, was the need for increased investment in prevention, which I know is something that comes up quite frequently. That's always a challenge to do in the short term; that's definitely a factor as we go into the longer term and start looking at the next spending review as well. So, I would say the ideas definitely contribute to the whole set of considerations that we have when putting the advice to Ministers in terms of putting together the budget.

Were there any outliers—as in things that were different—within some of the things that you've been doing and some of the things that we came up with?

One of the things I was struck by, looking at the report, is the reference to building communities, not just houses, and the importance of a community where a young person can be, or families can be. I thought that was quite interesting, and certainly something that we would want to consider. And also some of the emphasis placed, I think, around women in the economy as well. So, there were a couple, under those bigger headings, of interesting areas there that were slightly newer, I think, for us.

Those holistic things that we were talking about there, like the gender budgeting, are strategic across all aspects of Government. From your experience of doing the role before, and First Minister and health Secretary, how will you use that experience to strategically help your Cabinet colleagues to work across, rather than in silos?

We are very fortunate that we are a very small Government, and we see each other all the time. It has struck me as one of the huge differences with Whitehall particularly, but even with the Scottish Government. We all work in the same place; you bump into each other all the time. It's interesting hearing the experience of some Whitehall colleagues who were working hard together in the run-up to the election, and now barely see anybody, because they're out at the Elephant and Castle, or wherever their office has taken them. We have so many more natural opportunities to capitalise on the ability to work across portfolios, because the physical conditions under which we work help us in that way.

You do need some structural ways of doing that, bringing people together for particular purposes. The last Government had a Cabinet sub-committee on justice, for example, to make sure that all the people who had a part to play in that got around the table together to do so. I will look, where I can be, to be helpful with my colleagues in making sure that, as we go through the budget process, we identify those cross-cutting things. The budgeting in relation to women, for example—gender-based budgeting—has been a theme of the Welsh Government over a number of years, and to do that you've got to bring people from across the Government together.

I'm glad that you’ve mentioned gender budgeting, Chair. In terms of the areas within the budget that you have identified, are there any that are going to be deprioritised? I don't know who would like to answer that.

I'm certainly not doing that in relation to next year's budget as yet. It would be premature to do that exercise, I think, until we know better what our landscape for next year is. Chair, you asked me a question earlier about the in-year budget, and I said it looked more like a normal budget, but that does mean that we will have to use the normal levers that we have, and if a portfolio is heading to spend beyond the budget that it has, the first responsibility will be for that portfolio Minister to use the techniques of delaying expenditure, deferring expenditure, reducing expenditure, reprioritising within the main expenditure group. So yes, that activity is going on in-year, but it's doing it as you always would. The scale of overexpenditure being reported is within the limits that you can deal with by using those normal levers, but reprioritising and deprioritising is always part of that. If you're managing a budget as a Cabinet colleague, and that budget is looking like it's overspending, you've got to use those techniques to bring it back into line.

I'll bring Mike in and then Peter.

Productivity, especially in the public sector—. I've just referred to a Nuffield report in the early 2010s, which identified that as the amount of money spent increased, as the number of staff increased, the number of interventions per member of staff decreased. How can we ensure, or how can you ensure, that expenditure is improving productivity, and that we're getting at least the same number of bangs for our bucks as we currently are? Otherwise we will end up continually having reduced productivity. Health was the classic example, and I'm sure you're well aware of that Nuffield report.

I think it's a bit more complicated than that description makes it sound. Police were never more productive, apparently, when there were the fewest number of police on the ground. You reduce the number of public servants, and they all look like they're dealing with far more than they were doing before. Their productivity hasn't gone up at all, but on paper you can make a case that it has. When numbers of staff went up in the health service, part of that was to make sure that the quality and the safety of the service was improved.

When I first came to work in the Welsh Government, we still had theatres running with one consultant running between the two of them. They'd start off an operation in theatre 1, then junior staff would carry on, the consultant would run across the corridor, do what was needed in theatre 2, and run back. You could say that that person was twice as productive, but as a patient, would you rather have somebody who knows what they were doing with you all the time, or would you rather have someone dashing in and out and doing it that way?

I think some of those productivity issues are a bit more complicated than the headline figures might draw you to think. My own view of it, Mike, is that the people who work in our public services are not any more or less productive. It's making sure that they have the physical conditions, the equipment they need, to be as productive as they possibly can be, and 14 years of austerity eroded that considerably.

I don't disagree with that at all. Now we've got a situation that if the French only worked four days a week, they'd be as productive as the British are on five days a week—it’s having those electronic and other devices at their fingertips for them to be able to increase productivity. Carrying on from that, do you see a role in the next budget for expenditure that improves productivity?

I do, particularly on the capital side, where, as I said, the things that I will be looking for from my Cabinet colleagues will be exactly the sort of thing that Mike Hedges has said—those investments that will make a difference, Andrew would probably say.

I just wanted to add that public sector productivity is a bit of a—. It's work in progress in terms of understanding the drivers and how that's changed over time. The Office for National Statistics are doing some more work on this at the moment, which we are involved in, and that will, hopefully, help improve that picture in terms of understanding what's been happening to public sector productivity in different sectors, because, of course, the contexts are very different in different sectors and what kinds of things contribute to increased productivity, and what kinds of things, conversely, negatively impact on productivity. So, it's important to note that that's work in progress.

How often does the ONS produce those figures?

It's gone into a bit of a hiatus, actually, in the last few years. The ONS used to do quite a bit of work in this space and then stopped for a while, and they're picking it up again.

It might be something that this committee could write to the ONS about and ask them about that. Would it be helpful for you to have regular good data coming through from them?

Absolutely, in particular to try and understand better what kind of investments, as the Cabinet Secretary was touching on, really do make a difference, from what you see across the UK because, of course—

That's something I'm sure this committee could write to the ONS about and ask them about those points. I'll bring Peter in.

Thank you. A couple of my questions I think we've pretty well covered, but, just given the tone of the pressures now that the UK Government have identified and their cautious approach going forward, and recognising how that probably is going to constrain funding to devolved nations, I would imagine, what consideration have you given to utilising your own tax-raising levers? Whilst I understand you wanted to explore, perhaps, vacant land tax as an additionality in the future, but, the ones you've got, your levers at the moment, have you thought about how you might, perhaps, want to raise income tax to offset what might be a difficult situation, moving forward?

Chair, first of all, just to say, of course, we've got a significant piece of work going on on landfill disposals tax, and that is partly about making sure that it is raising the money it should be raising. It should be a declining tax, as we know—we want less material going to landfill—but it is a major piece of work and the consultation has just ended to make sure we are setting the rates at the right place, and so on, to maximise our take from that.

Just on that, is that work looking at avoidance as well?

Yes.

Because there's been a lot in the press around that as well. So, we'd be very interested in understanding that.

I can say a bit more about that, if you'd like me to. But on Peter's second point—income tax—we will look at it, of course, as we always do. It's an important lever that the Welsh Government has and, in the budget process, there will undoubtedly be a Cabinet debate about whether or not we should change the Welsh rates of income tax—every year, in my experience, particularly in the toughest years. But the only way you can raise significant amounts of money from income tax in Wales is by increasing the basic rate. The additional and the higher rates do not bring you in anything like a sum of money that you could genuinely regard as being useful to you in a budget process, and there are all sorts of untested issues there about the extent to which people who are higher paid are mobile. Our population is very close to the border. You wouldn't have to move very far and you'd be paying less, so we don't know what propensity there would be for people. So, using just the two top rates is not attractive, so you've got to think about raising the basic rate.

As I say, we'll have the debate, but I myself, just to say, would need quite a lot of persuasion. Fiscal drag, as you know, because the thresholds are all frozen and frozen until 2028, is bringing more and more people into income tax. You'll be paying income tax on an income of £12,500. I was telling my colleagues here when we were preparing to come to the committee earlier in the week of a constituency case that came my way at the end of last week of a young woman who is working, who is doing a very important job, but where her ability to meet her bills from her very, very modest income is just beyond her ability to manage. This is a very responsible person. Her letter to me said that she hadn't eaten for three days because she'd paid her council tax bill and that had left her with nothing to manage on. So, that's the person I have in my head when we talk about raising rates of income tax, not people who are able to do it and would want to make a bigger contribution, but the people who are right on the very edge of managing, and sometimes not managing.

Where are you with looking into commissioning any work around additional bands, which would help alleviate some of the pressure—that lady you were talking about—similar to a Scottish model, where you've got more and more bands? Something I know we've discussed in this committee quite a lot is people being able to move, and commissioning actual work on modelling that and seeing if it's fact, if it's fiction, or where in between and what would happen. So, are you in a position to be able to commission some research work around that?

I'll ask Andrew in a moment. On the second point, I think we have done some work on that, because that's a decision we could make today. So, you want to have the best information you can as to whether or not it would create mobility across the border. The evidence isn't easy to pin down, because it's different in different places. I went to the Basque Country when I was the finance Minister the last time, to talk about their regime of taxation, which is very interesting—it's when we were setting up the Welsh Revenue Authority. Now, the tax rates in the Basque Country are not marginally higher than their neighbours, they're significantly higher than their neighbours, and I asked this question to the Basque finance Minister: 'Don't people just move across the border?' I struggled to get him to understand the question, and when he eventually did, he said to me, 'Well, certainly not; nobody moves across the border.' And I said, 'Well, why is that?' He said, 'Because they are Basque'. It wouldn't occur to them to give up their Basque identity to move over the border to save a bit of money on the income tax. So, it wasn't the financial calculation; it was to do with identity and belonging, and all of those. So, it's quite a complicated area to research, because there are many different factors at play that would contribute to a decision. So, it's not just homo economicus—isn't that what they say—economic man, it's other things that are happening as well. But I'll ask Andrew to come in.

We have done a fair bit of work on this already, certainly in terms of understanding the evidence that's already out there from other countries. As the Cabinet Secretary has made clear, there are lots of countries that have different income tax rates within the overall same state. So, there's a fair bit of academic evidence around that. In terms of the UK evidence base, that is developing. HMRC published some really interesting research a few months ago, which the committee might be aware of already, which is longitudinal research, trying to understand better the behaviour of taxpayers in the UK now that there are different tax rates in different parts of the UK. Obviously, Scotland now has some different tax rates than England and Wales. So, that evidence base—. And we and the Scottish Government are working with HMRC on that data and the research that can be generated out of that. So, it is a developing field, but, yes, it's still pretty difficult to draw very robust conclusions about implications.

I think we talked about this last year: the Scottish Government, when they increased the top rate of tax in Scotland in their last budget, the adjusted revenue implications of that, after allowing for behavioural effects, the revenues generated were about 80 per cent less than the mechanical effect. So, they're expecting to lose 80 per cent of the revenue that they would've raised, because of behavioural effects, and that just shows, at the top end, how significant some of those effects could be in terms of eroding the revenue you can generate from increasing rates.

It's certainly something that this committee is very interested in, so anything that you can share, as that work develops, then we'd be very interested in seeing. Peter.

I must put it on record that I'm not advocating that we do increase income tax. It's certainly something I would be very supportive of you not to do. But, just moving on, and I think we've covered this a little bit, I recognise that the Chancellor is expecting to find £3 billion-worth of savings in the UK to help with some of the pressures around pay awards, but you are quite confident that you'll be able to deliver pay awards without too much disturbance. Would that be because you're confident that there may be sufficient consequentials allowing you to manage or smoothe that?

Yes. Chair, that's exactly the basis of our confidence. The detail will be part of the budget in October, but all the indications we have are that the amount of money that will come to us will be real. We will have a genuine consequential of the amount that Barnett would expect us to have, and, if we do, then we're confident we can fund those pay awards without needing to draw money out of other parts of the Welsh budget.

Great. Thank you for that clarity. That's really helpful. I was going to talk about fiscal frameworks, but we've covered that. But, on one element around Barnett, the BBC reported that the First Minister wants to press for, I quote,

'a fair approach to the application of the Barnett formula'.

I wonder if you could give your understanding of what's meant by that.

Well, I think the First Minister was answering a question specifically in the rail context. So, just to give it a context, she was talking about the way HS2 had been taken out of a comparability factor that we have with the Department of Transport. Again, I think there are two stages in the way that we want to approach this: the first one is to make the current system work properly, because, and not everybody here will agree, my interpretation was that we dealt with a Government in the last five years who were determined to try to subvert Barnett wherever they could, and if there was a way of interpreting the rules that meant less money came to Wales, they stretched the interpretation as far as they possibly could in that direction. And what we are looking for, in the first instance, from the incoming Government, is a fairer approach, a more even-handed approach, to the operation of the Barnett formula, where if there's money that should come to Wales, it comes to Wales. And that's why we are confident about the pay settlements, because the approach we are seeing from Treasury officials is not an approach that looks to find ways of minimising the consequentials they would otherwise give us. It's a fair application of Barnett, so that's what the First Minister, I think, was referring to—to get back to the days in which there was a straight-down-the line approach to Barnett rather than one that sought to find a way of minimising its consequentials for us.

The second phase, then, is that the Welsh Government's long-held ambition is to replace the Barnett formula with a needs-based formula that will properly recognise the needs of Wales. That's beyond the first phase.

And that'll be part of the conversation that you'll have, no doubt, when you start looking deeper at the fiscal framework and how you can review it, in a similar way as you reviewed it in 2016, making it more relevant.

Yes.

I'm very conscious of time. I know Rhianon wanted to come in, but I'd rather bring Mike in, if we can, unless you've got a very short question.

Mine's a very short one.

Okay.

In terms of the Scottish situation and their increases this year around capital borrowing, will we be asking for that fairer framework in terms of borrowing, in terms of reserve usage and flexibility?

Yes.

Good.

Thank you. Mike.

Can I just say it's not just five years, though, is it, Minister? We had the London Olympics—the title gave away where it was—which generated some new regeneration, and instead of getting 5 per cent of it, we got almost a fortieth of that, because it was called a British event, even though it was, by definition, a London Olympics. So, it has been a problem. Do you agree that this is something that really does need sorting out, in the sense that, if something is only for one area, it cannot be for Britain?

Well, fundamentally here, Chair, is the way that the Treasury, over many, many years, has regarded itself as judge and jury in these matters, and the Court of Appeal as well. So, we’ve long argued for a more rules-based system, and a system in which there is an independent element in the arbitration of any disputes. In the inter-governmental review, the one department that refused to have any element of independence looking into disputes was the Treasury, and it hung out to the extent that, in the end, Michael Gove and others put it to us that we couldn’t get that to happen and we signed up to an IGR that has independence in disputes with any other part of Government, but not the Treasury. There is a culture—whoever is in Government—within the Treasury that is one of exceptionalism, and our rules-based approach would erode that.

And I think our report will, hopefully, make interesting reading for you when we do publish it.

I’ve got two questions that I think could quite easily be put in writing—one on land disposals tax and the other one on budget protocol. The question that I would like to ask now, though, is: the Chancellor is to launch a multi-year spending review, but it won’t conclude until spring next year. How much long-term certainty are you hoping to have come the UK Government’s budget in October, and how are you currently planning to budget beyond 2025-26?

Thank you, Chair. Well, what we’re told by the incoming Government is that we’ll get a one-year settlement in October, and then, in the spring, we will get a three-year [correction: a further two-year] revenue and a four-year capital horizon. So, that’s what we are working on. That will be hugely welcome, of course, because it would allow us to plan, and allow us to give indications to all those partners who rely on our budgets as to what they might expect in those future years. If we can get back to that—we’ve been in that territory in the past—that would be hugely welcome.

So, we are carrying out a Welsh spending review—our own approach to that—and that will allow us, if we are in that position, to be able to take a longer term view of the Welsh Government’s own ambitions. I hope it will certainly give us some scope, as Emma said, to put a greater priority on the preventative aspect of Welsh Government spend if you’re able to plan over that horizon. That work has already started. I know I have meetings in my diary to catch up on where it’s got to and to continue to work with colleagues on that.

Mike alluded to a couple of questions there that we might write to you on. One would be on budget protocol. We’ve had a good discussion over the past couple of years, really, with your predecessor. Hopefully, that engagement will continue with you in developing our thinking around the protocol and ironing out some of the areas where, possibly, there’s still some disagreement at the moment, but it’s certainly something that we’d be keen to continue with you.

Yes, by all means.

Thank you, excellent. Okay, thank you very much.

Thank you very much for joining us this morning. Sorry that we’ve run over time a little, but we're very pleased—. There will be a transcript for you, so that you can check that it’s accurate.

I intend to go into private session now. So, under Standing Order 17.42(ix), I propose that the committee resolves to exclude the public from the remainder of the meeting. No problem. Thank you very much.