Y Pwyllgor Cyllid

Finance Committee

22/12/2021

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

Carolyn Thomas MS Yn dirprwyo ar ran Rhianon Passmore
Substitute for Rhianon Passmore
Mike Hedges MS
Peredur Owen Griffiths MS Cadeirydd y Pwyllgor
Committee Chair
Peter Fox MS

Y rhai eraill a oedd yn bresennol

Others in Attendance

Andrew Hewitt Pennaeth Deddfwriaeth Treth, Llywodraeth Cymru
Head of Tax Legislation, Welsh Government
Andrew Jeffreys Cyfarwyddwr, Trysorlys Cymru, Llywodraeth Cymru
Director, Welsh Treasury, Welsh Government
Anna Adams Dirprwy Gyfarwyddwr, Strategaeth Trethi a Chysylltiadau Rhynglywodraethol, Trysorlys Cymru, Llywodraeth Cymru
Deputy Director, Tax Strategy and Intergovernmental Relations, Welsh Treasury, Welsh Government
Emma Watkins Dirprwy Gyfarwyddwr Cyllid a Busnes Llywodraeth, Llywodraeth Cymru
Deputy Director, Budget and Government Business, Welsh Government
Lynsey Edwards Cyfreithiwr, Llywodraeth Cymru
Lawyer, Welsh Government
Rebecca Evans MS Y Gweinidog Cyllid a Llywodraeth Leol
Minister for Finance and Local Government

Swyddogion y Senedd a oedd yn bresennol

Senedd Officials in Attendance

Ben Harris Cynghorydd Cyfreithiol
Legal Adviser
Christian Tipples Ymchwilydd
Researcher
Georgina Owen Ail Glerc
Second Clerk
Leanne Hatcher Ail Glerc
Second Clerk
Martin Jennings Ymchwilydd
Researcher
Mike Lewis Dirprwy Glerc
Deputy Clerk

Cofnodir y trafodion yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir trawsgrifiad o’r cyfieithu ar y pryd. Lle mae cyfranwyr wedi darparu cywiriadau i’w tystiolaeth, nodir y rheini yn y trawsgrifiad.

The proceedings are reported in the language in which they were spoken in the committee. In addition, a transcription of the simultaneous interpretation is included. Where contributors have supplied corrections to their evidence, these are noted in the transcript.

Cyfarfu’r pwyllgor drwy gynhadledd fideo.

Dechreuodd y cyfarfod am 09:30.

The committee met by video-conference.

The meeting began at 09:30. 

1. Cyflwyniad, ymddiheuriadau, dirprwyon a datgan buddiannau
1. Introductions, apologies, substitutions and declarations of interest

Bore da. Croeso i'r sesiwn y bore yma. Rydyn ni yma efo'n gilydd jest cyn y Nadolig fel hyn, so mae'n dda eich gweld chi. Dwi'n meddwl nad fi ydy'r unig un efo coeden yn y cefndir, felly mae'n neis gweld hynny. Mae hwn yn cael ei ddarlledu'n fyw ar Senedd.tv. Rydyn ni hefyd wedi derbyn ymddiheuriad gan Rhianon Passmore, ac mae Carolyn Thomas yma—croeso cynnes iddi hi i'w chyfarfod cyntaf, yn stepio i mewn ar y funud olaf, chwarae teg. Diolch yn fawr iawn. Oes yna unrhyw fuddiannau i'w nodi? Dwi ddim yn meddwl, felly fe wnawn ni symud yn ein blaenau—mae gennym ni bapurau i'w nodi.

Good morning. Welcome to this morning's session. We're gathering just before Christmas, so it's good to see you all. I'm not the only one with a tree in the background, so that's good to see. The meeting is being broadcast live on Senedd.tv. We've received apologies from Rhianon Passmore, and Carolyn Thomas is here—a very warm welcome to her; she's stepped in at the last minute and we're very grateful to her. Are there any declarations of interest this morning? I don't see any, so we'll move forward—we have papers to note.

Hello, Carolyn. Can we unmute Carolyn?

Sorry, Peredur. Should I declare that I am still a county councillor until May?

Yes, the same, just in case we start talking about local government funding.

2. Papurau i'w nodi
2. Papers to note

Felly, papurau i'w nodi. Yr unig bapur i'w nodi ydy cofnodion cyfarfod 16 Rhagfyr. Dwi'n derbyn bod y rheini'n gywir, oni bai y byddaf i'n clywed yn wahanol gan unrhyw un arall. Dyna ni. Fe wnawn ni nodi'r rheini. Diolch yn fawr iawn.

So, we'll move to papers to note. The only paper to note is the minutes of the meeting of 16 December. I assume that they're an accurate record unless I hear differently. Excellent. We'll note those papers. Thank you.

3. Craffu ar Gyllideb Ddrafft Llywodraeth Cymru ar gyfer 2022-23: Sesiwn dystiolaeth 1
3. Scrutiny of the Welsh Government Draft Budget 2022-23: Evidence session 1

Welcome this morning. It's great to have the Minister and her officials here with us. Maybe, Minister, you could introduce yourself, your team and your roles as well, if that's possible.

Yes. Rebecca Evans, Minister for Finance and Local Government. I'll hand over to the team to introduce themselves.

Hello. I'm Andrew Jeffreys. I'm director of the Welsh Treasury. 

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

Gwych, diolch yn fawr iawn.

Excellent, thank you very much.

Thank you very much. It's good of you to join us this close to Christmas. I know it's been a busy few months for you, and laying the budget on Monday. Obviously, you've had a lot of time to look at it; we've had very little time to look at it so far, so we'll get a lot more information from you during this session, hopefully. So, we're going to go, as we normally do, through some questions, and if any Members want to come in on a question, just raise your hands and wave at me frantically. That would be great.

So, we're going to take about an hour and a half this morning with you, and then have a bit of a break and then we'll see you again. Thank you very much for that as well—we'll do the scrutiny of the tax Bill, then, at midday. That would be good.

So, I'm going to kick off, if I may. I think there was a joint statement by the Chancellor and the Secretary of State for Wales that said that Wales

'is well-funded to deliver...their devolved responsibilities while the people in Wales will also benefit from this Government's commitment to levelling up opportunity.'

Now, that's their opinion. Obviously, we'll hear the Minister's opinion now. But, actually, to start off with, are we able to look at what the overarching principles are that are underpinning the prioritisation of funding between the priorities within this draft budget? Maybe you can talk through a little bit of that to start with.

Yes, of course. So, our budget preparations continue to respond to a really distinct set of challenges that are building on the unprecedented circumstances of the last few years. These preparations have really been shaped and impacted by the ongoing nature of the pandemic and the necessary response, and also, of course, the repercussions of the United Kingdom's exit from the European Union. Clearly, tackling inequality and the urgent need to respond to the climate and nature crisis are at the heart of our preparations as well. But alongside this, of course, we have faced particular difficulties in terms of the UK Government's decision not to provide the Welsh Government with the full £375 million a year of EU funding. That's a significant amount of money that we would have received from January of this year. So, that's an additional challenge for us, as is the UK Government’s decision not to acknowledge the full funding needs relating to the remediation of coal tips and border infrastructure. Those are adding further pressures on our Welsh Government settlement.

That said, receiving the multi-year settlement covering the period 2022-23 to 2024-25 has enabled us to have a level of certainty for the period ahead that hasn’t been possible in recent years, and, of course, we’ve been keen to pass that certainty on to public services in Wales. So, it is a challenging multi-year settlement. You will have heard me say before that if our settlement had risen in line with the economy by the end of the period, we would have had £3 billion more, as compared or if it had risen in line with the economy since 2010-11. So, it does show that austerity has had a significant impact on our resources, and, of course, the capital settlement is particularly challenging. By the end of this period, it will be 11 per cent lower than at the start. So, there are some challenges with this settlement, but, that said, the three-year certainty is welcome.

Really, we’ve been focused on our vision for a stronger, greener, fairer Wales, and you’ll see those principles running as a thread right throughout the budget and the choices that we’ve made. And, of course, spending is part of the picture; tax is the other part, and we’ve got our well-established tax principles that underpin our decision making in respect of tax, and that’s about ensuring that taxes here in Wales are simple, clear, fair and that they also enable us to respond to our responsibilities under the future generations Act and so on. So, the principles that underpin the tax element are very in tune, if you like, with our decision-making principles in respect of the spending.

09:35

Lovely. So, I suppose, what are you hoping to achieve with this budget?

So, a stronger, fairer, greener Wales is what we're hoping to achieve through this budget, and I've been clear that this really has to be a budget for today because we're experiencing significant pressures and we're likely to see those pressures continue into the first of these three years. But it also has to be the budget that puts us on that path then to that more sustainable future, one that takes us towards our net-zero ambitions, for example, one that deals with tackling inequality in Wales and one that, obviously, puts our public services at its heart, and I think we've been able to do that with the particularly generous settlements that we've been able to provide our public services to put them on a strong footing for the future as well.

You touched on it there, and, obviously, the seriousness of the omicron variant would have become apparent towards the end of your budget-setting process. Have you managed to respond to the new challenges with this budget, or are your allocations based on the previous direction of the pandemic? So, how's that latest thinking affected the budget?

Well, there's a lot going on at the moment in terms of our in-year management of resources, and we'll have a chance, I know, to get into that in some detail when we start the scrutiny process for the second supplementary budget. So, we won't go into that too much today, unless you'd like to. But, looking ahead, recognising the important role that public services will have in terms of continuing to respond to the pandemic, both in terms of the acute end of it but also the recovery end, is really, I think, reflected in the good settlements that we've been able to offer both health and local government, recognising their important roles. It should give them the level of flexibility that they will need in order to respond to what continues to be an evolving situation that cannot be easily predicted.

I think there was a report published earlier this month that there's an unallocated £505 million of COVID funding within this financial year. Will that be rolled over into next year, or how are you—? Is that going to be part of something that—? Could you go into that in a little bit more detail?

We've been really pressing Treasury to allow us a full financial year [correction: a full additional financial year] to spend any additional funding that comes forward within a financial year, because that would help us a great deal with our budget management. So, in the last financial year, Treasury did allow us to carry over some funding into this financial year because of the very, very late nature of those allocations. They came through almost at the very end of the financial year. So, we would like Treasury to give us that level of flexibility, but unfortunately it doesn't look like they will do that again this year or in future. But, again, we press them to do that because it just will help us manage our budgets better, help us to make the best possible choices for the deployment of those moneys, and also it's something that the Northern Irish and Scottish Governments have been very keen to support us on as well. So, those are things that we continue to discuss with Treasury but have yet to have any luck.

09:40

Andrew, did you want to come in? I think Peter wants to come in as well. 

Yes, just to make clear, echoing what the Minister was saying there, that our budget plans for future years don't assume any exceptional carry over from this year. They assume that we're living within the Wales reserve limits. So, by implication, that indicates that we don't expect the Treasury is going to allow us any additional carryover this year, although they may do later on. 

Peter, did you want to come in? You're just on mute a sec. If you can unmute—. There we are. 

Yes, just very quickly on that point, can we be clear—there's £550 million that we're—

So, £505 million that we're hoping to carry over. Are we saying then, if that's not agreed, we lose that money?

We're not working on the basis at the moment that the UK Government will allow us to carry over. It would be helpful if they did. But, at the moment, we are seeing significant pressures in relation to the omicron variant, so there's a lot that we need to do. So, although we do have significant reserves left that are available to us within this financial year, we also have plans to deploy that funding as well. So, you'll see announcements shortly in respect of support for business, for example, and I know that transport are likely to be requiring further funding as well. So, it wouldn't be the case that we would be looking to return money because we can certainly be using it, but that level of flexibility is useful. For example, if the UK Government came forward with even further allocations in respect of consequentials within this financial year, then if they come very late, as they did last year, that does present us with challenges, because the size of the Wales reserve that we're able to use to manage the money across years is very small.

Okay. The budget notes the financial transactions capital reserves of £265 million and that allocations will be included in the final rather than the draft budget. What allocations are you planning, and why were these not included in the draft budget?

We're still considering what allocations will be made at the final budget in respect of financial transactions capital. So, hopefully I'll be able to say more to you at that point, or certainly during the process, as we start to crystallise those requests that are coming forward from colleagues. 

But, is it worth saying something, Chair, about our new approach to our reserves strategy—

—because we've introduced now a new fiscal strategy in terms of seeking to maximise the available funding? What that means is that, from 2023-24, the Wales reserve will be used to manage the in-year financial position, without holding any unallocated departmental expenditure limits. So, any draw-downs will be made within the appropriate supplementary budget. So, that's a different approach to that which we've taken previously, where we've had unallocated DEL to draw on to manage our funding. We're looking to the Wales reserve to manage that. And I know that will probably be of interest to committee because it is a different strategy to that which we've deployed previously. 

So, what will be the benefit of doing it like that, rather than the way that it is now? What do you foresee as the benefits?

It helps us when formulating our plans to maximise the benefit of all the funding available to us. So, it makes us more clear, really, in those plans and allows us to allocate funding more clearly at the start. 

But this will not affect departmental reserves. Health always keep a very substantial departmental reserve. That'll still be in place, won't it?

09:45

So, health will have to manage its budget in the normal way, so decisions for how health manages its budget will continue to lie with the Minister for health.

That means 'yes', that they will still be able to have their own health reserves.

So, yes, health is able to manage its budget, and you'll see the budget expenditure lines published within the budget that we published last week for health.

I mentioned that statement right at the beginning that the Secretary of State had made; has there been any improvement in the transparency of funding consequentials from the UK Government allocated to the Welsh Government to help to plan this budget?

No, I would say that transparency continues to be a challenge, to be polite, in respect of relationships with the UK Government. So, you'll have seen in the spending review that, on 27 October, the Chancellor confirmed an extra £314 million revenue and £111 million capital to be used in the remaining months of this financial year, and you'll have heard recent announcements in respect of consequential funding too. This is not a good way in which to help us manage our budget in terms of being very late in making these allocations and announcements. So, we do need that greater level of flexibility that we're seeking.

Just a sort of additional point there that at a spending review—. So, we had the UK spending review in October, and what you see at a spending review is consequentials at a departmental level rather than at a programme level, and I think part of the result of that is that—. There are a lot of announcements in a spending review about specific allocations to specific programmes in England and people ask questions about, 'Well, what does that allocation to a specific programme in'—I don't know—'the environment department in England, what does that mean for Wales?' And of course, we kind of end up sort of falling back on this rather convoluted explanation that we actually get the net effect of all of the different allocations within that departmental budget. And so I think, around spending reviews, the transparency issues are particularly acute; quite a lot of questions arise about spending on particular programmes that we're not really able to answer in a meaningful way, and that causes frustration, I know. So, yes, the system we've got has some merits, but transparency is not one of them, I don't think.

Okay. Thank you. I'd like to just move on a little bit to tax borrowing and forecasting. What approaches have been proposed in this budget to maximise funding available to the Welsh Government in 2022-23 to 2024-25, in terms of changes to taxation and borrowing policy?

So, in terms of taxation, the draft budget recognises the need for that balance between important investments in Welsh public services and then our responsibility to our taxpayers, which is obviously very, very acute in these unprecedented times. So, you'll see that the draft budget delivers on our programme for government commitment not to raise Welsh rates of income tax for as long as the economic impacts of the pandemic last. Clearly, the economic impacts are absolutely with us at the moment. And we also have the commitment within the programme for government to maintain the one percentage point increase to the higher residential rates of land transaction tax that are paid on the purchase of additional properties, such as second homes and buy-to-let investments, and that will then provide additional funding to invest in our housing priorities.

Also in tax, we're increasing the landfill disposals tax rate in line with inflation from April 2022 and that's consistent with the UK landfill rates and, of course, it limits then the risk of waste tourism, which is a consideration.

In terms of borrowing, the draft budget reflects our plans to maximise our capital borrowing drawdown, drawing the maximum annual of £150 million a year. So, that means we'll borrow an additional £450 million up to 2024-25, and that's the maximum that we are currently able to access within the fiscal framework. Obviously, the limited capital settlement that we received from the UK Government in the spending review means that we have to maximise the levers at our disposal in order to deliver on our capital investments. So, again, this is a new strategy this year. We'll be using an over-allocation of general capital, which will enable us to further stretch every available pound of capital funding, helping us to manage and respond to any underspends that emerge during the financial year. So, the approach to reserves is different within this draft budget, as is the approach to capital allocations.

09:50

You're saying you've over-programmed your capital spending; what does that mean if the consequentials don't get received? If you don't get those, or they're not as you expect them to be, where do you then draw the line as to what you spend on?

So, the over-programming isn't contingent on expectation of additional capital funding, it's more in respect of managing underspends, which do emerge in-year as projects perhaps slow down or various things prevent the full allocation being spent. So, it's a new way of managing that. That said, though, the capital budget has been so disappointing that one almost imagines that the UK Government will have more to say on capital across the years ahead, because, as I previously said, we're 11 per cent lower by the end of this period than we are at the moment in terms of the capital allocation. So, it seems—. With all of the importance of tackling the climate emergency, lots of our levers and ability there are within the capital sphere; it almost feels that the UK Government will have more to say on capital in the period ahead.

Yes, thanks. I think this approach to capital in a way is trying to learn the lessons of the last few years, which partly, as the Minister says, is that we get lumps of capital later in the year, but also, as the committee have noted on occasion, that we haven't maximised our use of borrowing in the last few years; we've come to later on in the financial year and have been in a position where we've not needed to borrow. And so the over-allocation approach is an attempt to ensure that we maximise the use of available resources. We'll still have to spend within our spending limits, and that will either be achieved because we've had additional consequentials allocated or because we've used underspends to manage down within the budget. So, yes, it's a new approach, and I'm sure the committee will have an interest in how it works in practice.

One more question from me and then I'll go over to Peter. What are the timescales for longer term tax changes and reform, such as the council tax and possible amendments to tax policy regarding second homes, and how does this budget work towards achieving those aims in those policy areas?

Well, alongside the draft budget I published the annual tax policy report. It's one of the suite of documents that we published alongside the budget, which I really do commend, because they are really important in providing that full picture as to what the draft budget means. It does set out the latest progress against the five-year tax policy work plan, which I published in November. But, specifically, the budget delivers on our programme for government commitments, including the launch of the 14-week consultation on the local variation of land transaction tax on second homes and holiday lets. It also provides resources to prepare for a consultation in the autumn of next year on the arrangements for providing local authorities with the ability to raise a tourism levy, and that consultation then will focus on exploring potential impacts from the proposals, and any considerations to make when implementing a levy. It also includes resources to take forward research into growing our tax base, including how we can attract and retain people to work, study and live here in Wales. So, you'll see those parts of the tax policy work plan reflected in the budget.

Thank you very much. I'll go over to Peter—I'm sure he's got quite a few questions to ask. There we are, Peter.

Yes. Well, formally, good morning, Minister. It's good to be here today. I've got a few questions. Firstly—. I'll go straight into them. On domestic rates, could you give us a flavour of what the changes are going to be with that and what impact you believe is going to happen on this draft budget, and perhaps what might be going to happen in the future, as you move forward?  

09:55

Right, okay. So, £35 million has been provided in the draft budget to fund the freeze of the non-domestic rates multiplier for 2022-23, and then, of course, that's been taken into account in the calculation of the distributional amount. And this is then built into our budget plans for the future to ensure that the overall amount of funding for local government in the settlement is unaffected by that decision to freeze the multiplier next year. And then the draft budget also includes a £116 million package to support a 50 per cent rates relief offer for businesses in the retail, leisure and hospitality sectors for 2022-23. That will be capped at £110,000 per business, and it does mean then, of course, that businesses in these sectors will continue to receive significant support next year, as they continue to recover from the impacts of the pandemic. We have invested an additional £20 million on that on top of the consequential funding that we received from the UK Government in respect of this to fund the decision. And that's because of the different nature of our tax base here in Wales. It does mean that the extended retail, leisure and hospitality relief scheme, in combination with our existing permanent relief schemes, will ensure that over 85,000 properties are supported in paying their rates bills in 2022-23. And, of course, that brings our total since the start of the pandemic to the provision of over £2.2 billion of support for ratepayers through the reliefs and the grants schemes. 

Thanks for that, Minister. I think everybody would be very welcoming of that additional support for businesses through what is such a challenging period. Obviously, when we get to the end of that support, there could be, possibly, a cliff edge. How are you planning to transition businesses from that support back into normality? Because things are going to be really still very difficult for them, I'm sure. Have you got any thoughts or plans around that?  

Well, the future, obviously, will still include our small business rates relief scheme, which a significant number of businesses do benefit from, but I think the fact that businesses at the moment, when they are still currently feeling the effects of the pandemic, and particularly of the new variant, here in Wales aren't paying rate relief in those hardest-hit sectors is really significant. And that should assist them as they go through to April, and then, of course, it's 50 per cent for the full 12 months following that. So, I think that that does provide a good offer to businesses that has been warmly welcomed, I know. 

Thank you for that. What sort of preparedness have you been putting in place to look at the revaluation of non-domestic rates for this future year? Have you got some plans on that? Is there some work going on? 

Yes, we work really closely with the Valuation Office Agency, and the VOA is already well advanced in its work to deliver on our revaluation for 1 April 2023. That will be based on market information and trends as at the antecedent valuation date of 1 April 2021, ensuring that the new rating list will take account of the impact of COVID-19 on rateable values. And I think that that will be really important. So, over the course of the next year now, the VOA will confirm the updated rateable value list, and then Welsh Government will consider and consult on, as appropriate, any other decisions that are required in relation to the revaluation, and also into ongoing improvements to the non-domestic rates system. You'll be aware that we're interested in improving the appeals system, for example. So, in response to the 2017 revaluation, we established transitional relief to assist small businesses whose entitlement to small business rate relief was adversely affected, and that scheme was fully funded by the Welsh Government. Following the 2023 revaluation, we will obviously review the impact on the tax base and consider whether transitional support is appropriate going forward.  

Thanks, Minister. You've discussed with the committee previously around difficulties with the process in setting a devolved tax in relation to proposed vacant land tax. Can you give us any further update on any developments in that area?

10:00

Yes. This continues to be a painful and disappointing process, unfortunately. I did meet with the new Financial Secretary to the Treasury last month to understand what further information is required in respect of the request to devolve powers for a vacant land tax, and I've recently received a letter from her, which unfortunately doesn't move the process forward in any kind of meaningful way. We've provided the information outlined in the agreed process, which the previous FST had indicated was sufficient to proceed. However, the UK Government is now requesting information that actually can't be known until the Senedd passes legislation to introduce any new tax under the powers that we're seeking. So, we find ourselves in a bit of a catch-22 situation here. I think that the current arrangements aren't working, and it's my view now that they do need to be reviewed and reformed. And I'm not the only person who thinks that. The Chartered Institute of Taxation said in a press release, just yesterday, that,

'the process for introducing new taxes in Wales has been fraught with difficulty.

'Recent experiences with plans to introduce a Vacant Land Tax have highlighted these challenges and it is hard to dispute Welsh Ministers' claims that the process for devolving new tax powers to Wales is not working and in need of reform.'

So, that's something I would like to see us work on, with the UK Government, in the period ahead.

Thank you. We look forward to further updates on that, then. I'm going to move us on, if it's okay, to looking at the impacts of the co-operation agreement. I note that Wales Fiscal Analysis estimates that there will be 'significant additional spending commitments' as a result of this. We know they've got to be paid for, moving forward. So, I just want to explore a little bit of this. The mechanisms around the co-operation agreement suggest that the Government will consult and collaborate with Plaid Cymru throughout the development and scrutiny of all stages of the annual budget process. How has the agreement changed the process for making alterations to the draft budget, and to what extent have designated Members of Plaid Cymru been involved in the budget-setting process? So, basically, is it going to really skew your normal approach of managing the budget, now that you've got to appease Plaid Cymru?

I think one of the most important things to recognise from the start is that the budget and the items that are funded within the budget in respect of the agreement are only part of the picture. I think that the full co-operation agreement includes lots of really exciting things that we're committed to work on together, such as Senedd reform, council tax reform, and so on, which at this point don't have a sum attached to them, but they are policy areas in which Plaid Cymru and the Welsh Government will work together. So, I just want to be clear, really, that this isn't just about the budget. But that said, the items within the updated programme for government that relate to the co-operation agreement are contained in chapter 4 of the Welsh Government budget document, and also within the infrastructure finance plans. So, you'll see details of that in the published material.

In terms of the process, this year, I think, has been different, because obviously, as you know, we start to prepare for our Welsh Government budget before the summer recess, so the initial discussions start then. And so, the budget preparation was quite well advanced by the point at which the co-operation agreement crystalised, but, that said, it was a really opportune moment when that crystalised, because we hadn't locked down the numbers of the budget, there were still discussions going on and I was still having bilateral meetings with fellow Ministers. So, I think that the point at which the agreement came into place was very fortuitous, because it was at a point when I was able to make allocations within the draft budget in respect of the shared areas of interest. Examples, I think, would be the £4 million to expand Arfor, to facilitate new and innovative methods of supporting economic development; supporting the Welsh language through encouraging business growth in areas with a high proportion of Welsh speakers, for example. That's one, I think, really tangible example of funding that has been secured for a co-operation agreement priority within the budget.

10:05

Yes, thank you, and obviously now we've seen the budget, we obviously see some of those headlines. I think there needs to be a bit more clarity and committees will pick this up as we go forward—things like free school meals allocation, understanding what that means and when for children and the like, but I'm sure that will be picked up in due course.

So, some of these questions had been posed before the announcement, so we understand a little bit more now I think about what's in the agreement. Are there areas where you have had to rein back previously planned investment to secure funding to fulfil proposals under your co-operation agreement? And what areas have been deprioritised in the budget to enable you to reprioritise resources to the co-operation agreement?

So, I think the FM's been really clear that there's nothing that's contained within the co-operation agreement that is fundamentally inconsistent with our values as a Welsh Government and there's nothing in there that we wouldn't be happy to support. So, I think that that's important. And also, as I say, the timing of the budget meant that we were able to factor these items that do require funding, such as the free school meals provision, childcare and so on, within the process as it went along. So, it wasn't a case of finalising a draft budget and then having to look for places to cut so that we could accommodate the items within the agreement. I think the timing was all very fortuitous really in terms of being able to consider the agreement alongside the other preparations with colleagues in Welsh Government.

So, conversations were probably going on for a long time in advance of the budget to enable you to smooth that situation a little.

If I can move on to climate change then, and carbon reduction, I just want to understand: how has the approach to decision making in the budget changed in light of the level of ambition in the net-zero plans?

One thing I would really draw attention to is our new Wales infrastructure investment strategy, and that comes about as a result of a fundamental zero-based review of capital, which, again, is something new that we've done this year. And we've built up our capital budgets then from the ground around the four pillars of social, economic, environmental and cultural well-being. So, again, this is a different approach and, of course, at the heart of that then is tackling the nature and the climate emergency. And the Wales infrastructure investment strategy is a 10-year plan, setting out, really, the outcomes that our investments in capital must enable. So, I think that's been a new approach and obviously underneath that then sits the Wales infrastructure investment finance plans, I should say, which set out the specific things that we will be investing in. So, I think that this has been a new approach and it really has helped us to refocus our minds really on the nature and the climate emergency and to allocate our resources in line with that. It's been a useful and really productive approach, I think.

Yes, thank you, and the allocations are welcomed, I'm sure, by everybody, and we've seen how that's been apportioned broadly in the budget. One thing that I'm sure lots of Members and the public will want to try and understand is how those key areas of concern for them, like flood defences, are factored in when you take considerable lumps out for the decarbonisation of housing, for instance—the remainder looks quite minimal to address some of those other major issues that we're facing as a result of climate change. So, I don't know if there are any perspectives or clarity that can be provided—or perhaps it's for a different committee—on the nature of how—. Because, obviously, there's an impact on our budget going forward if sufficient investment isn't put into flood defences, for instance.

So, this budget does set out significant additional funding in flooding. It also sets out significant funding for the remediation of coal tips as well. So, I know that my colleague Julie James will probably get into some of the detail of that in her committee scrutiny, but in terms of what the department felt was required for both of those things, I was able, I think, to meet the requirements of those departments—of those requests, I should say.

10:10

Thanks very much; thank you, Minister. Thank you, Peredur.

Just before I bring Mike in, you talked about coal tips there. Has there been any progress made with the UK Government around funding for the long-term impact of coal tips? Because, obviously, it's remedial work that you're looking to fund currently. Any thawing of the stance from UK Government?

No. We really hoped that the UK Government would take the opportunity within the comprehensive spending review to support the Welsh communities with a package of support in the long term, but there's been a complete absence of any funding for this work. We'll continue to try and discuss this with the UK Government, because I think the arguments speak from themselves, in the sense that this is an issue that predates devolution. The settlement that we have doesn't take into account coal tips, and clearly these are communities where, if the UK Government wants to level up, it would be a great place to start. So, we'll continue those discussions with the UK Government, but in the absence of their support, we have, clearly, made the allocations ourselves, because, obviously, safety of our communities is a top priority, so we've been pleased to make those allocations.

I'm very pleased to hear the Minister mention nature as well as carbon reduction; I'd like the environment to be mentioned as well, but I assume that was just an oversight rather than excluding it. But what do we expect to see at the end of this year in those three areas—carbon reduction, environment and nature? What changes do we expect to see, following this budget, at the end of the year? Put simply, what do you expect to achieve?

So, we would expect social homes, for example, to be leading the way by being built to standards that are in excess of Part L. You'll see the infrastructure finance plan includes funding of more than £1 billion over the three years of capital allocations for social housing build programmes, so we would want to see those being built to a more environmentally friendly standard. We would want to see some progress made on creating the national forest for Wales, so the infrastructure finance plan there sets out £57 million of capital investment over the next three years to create new woodlands and to greatly increase the amount of carbon that would be captured and stored. And, obviously, that is part of our national forest. And then, also, increasing modal shift in respect of active travel. So, you'll see in the budget £220 million of capital funding allocated to our active travel programmes over the next three years. That means that we're investing more than £23 per head per annum over that period in infrastructure to hopefully encourage and promote the uptake of active travel. And, similarly, allocations in respect of promoting the circular economy and also decarbonising the rail network.

So, I think that we can be making some tangible improvements with allocations such as those through the climate change portfolio, but we're also really clear that this isn't just a job for Julie James and Mike Hedges, actually; this is something that every department needs to be contributing to. So, within my own portfolio, I'm really keen that Ystadau Cymru, for example, works to support public services to decarbonise their own estates, as we're seeking to do with the Welsh Government estate as well.

Thank you for that answer. You talked about transport and moving towards sustainable transport, but aren't we seeing major behavioural changes at the moment and people are travelling less? The Government is asking them to travel less, but even without that, people were travelling less; more people were working from home—and again, despite the Government asking for it, it was happening before that was being asked for—and we're seeing a change in the way services are being provided. Is there any money in this budget to continue along that route? Because I believe that we're not going back to people all working from offices, all travelling many miles each day in order to get there and travelling back again, either in a traffic jam or on crowded buses and trains. 

Absolutely. I know Mike Hedges has spoken before about the fact that some of these changes are really transformational in terms of how we live and work. You'll see in the budget, through support for town centres, for example, that we're exploring how we can support more remote working hubs. So, for lots of people, working from home won't necessarily be working from home, it will be working away from their normal office, but perhaps in a local hub that is closer to them and that has the resources that they might need. For example, not everybody has broadband at home or a quiet space to work. So, support for that kind of remote working hub that isn't necessarily your home is something that, obviously, we want to see through our town centre regeneration funding. That's just one example, really.

10:15

Thank you very much, and I think that it is the direction of travel, and as you can probably see, I'm working from my Morriston office now, which I walked to this morning, and I think that's an example of the best form of travel. But can I move on to health? I think perhaps my walking is probably doing my health some good, but moving on to health, there's a lot of additional money for health, and I think everybody welcomes that. Maybe I missed it, and if I have, apologies—how do I split that money up between money for new services, money for catch-up and money for dealing with wages and the pandemic?

Lots of that detail should be within the BEL tables, but if there's anything that isn't provided that committee needs, obviously, we'll seek to provide that as soon as we can via Eluned Morgan following committee. But I think it shows, over the next three years, that we'll be investing an additional £1.3 billion in the NHS, taking NHS spending to over £9.6 billion. In terms of how some of that is broken down, the committing of £170 million recurrently, for example, to support the transformation of planned care to help deal with the backlog of patients for whom treatments have been delayed, I think, will be important. Alongside that, we're also investing £20 million recurrently to support a focus on value-based healthcare, delivering outcomes that matter to patients. By the end of the budget, we will have invested over £800 million in NHS recovery, demonstrating the commitment to provide or invest £1 billion over the course of the lifetime of this Government in the recovery of the NHS. So, if there are specific items that we haven't provided sufficient clarity on, I'd be keen to explore with the health Minister how we can provide committee with more information.

As I say, there's a lot of information there and maybe I missed it, but I was trying to break it down into four areas: the additional money that is needed for pay; the additional money that is needed to deal with the pandemic, which is actually there; the additional money that is needed to catch up on people who are waiting for a series of often non-life-threatening, but life-changing surgery; and the general—we talk about support for people leaving hospital, but that has to be ongoing, doesn't it? If you can move everybody out of hospital who you believe ought to move out of hospital in the next week, then in six weeks' time, you have exactly the same problem again, unless you've got throughput going through continually. Otherwise, you just end up with a different group of people ready to be discharged.

So, I've seen the additional money for social services, and I very much welcome that, because I think social services has for too long been a cinderella service compared to health. I welcome the movement of people working in social care up to the real living wage, and you might say this is for Julie Morgan, not for you, so, apologies, but should we not be looking to have more direct service provision by local authorities of these services, so not only do they fund them, but they control them?

That probably is a question for Julie Morgan, but I do have a view, and I think that local government does provide excellent services within the social care sphere, and also, local government is always, I think, very good in terms of trying to ensure that the staff they employ are employed on good wages and conditions and so on. So, I think that local government does play an important role in the overall picture of social care provision, and if local government does have an appetite to move further in that space, I'd be keen to explore that, and I know that the Deputy Minister's also interested in the role of not-for-profit and co-operative models in this space, as well.

But, that said, I think from a finance perspective, as Mike Hedges has outlined, there is significant additional funding now for social services. So, in 2022-23 alone, we're providing an additional £250 million for social services. That includes £180 million within the local government settlement, direct investment of £45 million, plus £50 million of additional social care capital, relative to 2020-21. So, I think all of that is important in respect of social services. And we came to those figures by having really good and regular discussions with local government in terms of what was required. So, for example, we'd speak to local government leaders, and ADSS Cymru was very helpful in providing us with data as well. So, we worked hard to come to a sum that we felt was the right one and was able to respond to the level of need in social services. 

10:20

Mike, if I may just come in on that quickly. With regard to allocating funding especially for paying for increases in salary for nurses and doctors in the NHS, what thought process has gone into the equivalent allocation being made then for things like hospices, which employ nurses at the same level as the NHS? They don't necessarily benefit directly from an NHS pay rise but would have to do the same thing to maintain their staffing levels. Have you given any thought to how that allocation is being made to the voluntary sector or that element, especially hospices, paediatric hospices, and that sort of thing?

Shall I ask the Minister for Health and Social Services to provide a note to committee on that, because I think that's slightly beyond my responsibilities? I do have responsibilities for public sector pay, but that's in the space, really, of policy. So, looking to ensure that there is equality within the system, and so on. I appreciate things are different in hospices, which have their own funding models as well. So, perhaps I'll ask my colleague to write to you on that. 

My final health question, and this drifts into local government to some extent as well, and to other areas: health improvement. Is it any surprise that people living in cold, damp conditions that are overcrowded and who are not eating particularly well are more likely to become ill than those who are not? What is being done, not within the health budget necessarily, but across budgets, to improve life chances and improve the health of people, especially those who are in the poorest quartile or even the poorest decile in our communities?

Tackling poverty and supporting people at the earliest opportunity has been central to our thinking in terms of the budget. So, there are several examples I could point to. For example, the first is our additional investment in the enhanced commitment to free school meals. That will go some way towards addressing child poverty, and you'll see that there is a specific grant for local authorities of £40 million in 2022-23, £70 million in 2023-24, rising to £90 million by 2024-25. And that's supporting the commitment to extend free school meals to all primary school pupils.

But also within the draft budget, you'll see that the child development fund is supported. So, that was established in response to the impact of the pandemic on some of our youngest children. So, funding of £7 million will be allocated in 2022-23 to local authorities to provide additional support to children and families impacted by the pandemic and to address some of those concerns around developmental delay in areas such as speech and language and communication, fine and gross motor skills and also personal and social development, to try to ensure that we're intervening early to tackle some of the damage that the pandemic is having.

And then funding of £7 million for early help is incorporated within the children and communities grant, and that's to enable local authorities to continue to drive down waiting lists for early help and support services and provide support as early as possible to help address the adverse effects of the pandemic on young people and children, especially those who are newly vulnerable because we know that the pandemic has brought people into poverty who haven't experienced poverty or difficulties of this kind before. And of course, as Mike Hedges says, housing is absolutely critical to a good life and a healthy life, so our housing support grant aims to prevent homelessness and support people to have the capability, independence, skills and confidence that they need to access and/or maintain a stable and suitable home. So, this year, we invested an additional £40 million, bringing the overall grant to £166.7 million, and we've been able to maintain this significant uplift now in the draft budget for next year. And also, we've been able to give local authorities indicative funding for 2023-24 and 2024-25, which allows them then to plan better in the period ahead.

10:25

Yes, thanks, Chair. Just to point Mike Hedges to some of the case studies that are at the back of the main budget narrative document. There's a set of five or six case studies there, as well as our impact assessment, which covers some of these areas that you've talked about, particularly in relation to poverty and how our investments are going to be making a difference there, and we'd be happy to pick that up again if helpful.

Finally, moving on to local government—and I don't often say that the local government settlement appears fair, and I think you've been generally welcomed by local authorities—but local authorities themselves fund a huge number of organisations in the third sector/voluntary sector/housing sector. Have you any expectations for local government support for those third sector organisations within this budget?

Local authorities now will be able to have that certainty for the period ahead, so they'll be looking, I know, in terms of the organisations and the support services that they're able to fund, and I've also introduced a new system within Welsh Government in respect of grants for the third sector, so it allows us to allocate grants for a longer period. So, I've been keen to share with local government some of that thinking and some of those new ways of working that we've been developing within Welsh Government in respect of grants over recent times, and we've been doing that in partnership with the third sector. So, local government will hopefully consider new ways of working to provide that longer certainty for recipients of grants, which I think will help those organisations provide more sustainable services and make good choices for the people they support.

Just moving on, continuing with the third sector: next Friday, a week Friday, a number of third sector organisations are in serious danger of sending out redundancy notices to their staff, as they do every New Year's Eve, because they haven't got certainty of income for the following year, and they have to get people off their payroll by 31 March, because April starts a new financial year. Are there any words of encouragement you—or you in conjunction with the Welsh Local Government Association—can give these organisations so that people don't get their annual redundancy letter?

I think local government is now in a position to work quickly to provide any certainty that they're able to to third sector organisations, but one of the new ways of working that we've been adopting within Welsh Government has been to look at rolling over grants, so where organisations have met benchmarks and they've met the standards and the outcomes that we have required of them in respect of grants, then they would be able to receive funding for a further period. So, we're looking at new ways of working there, which I think will give that kind of stability, really, to the third sector. So, I've been encouraging local government to explore the work that we've been doing in that regard, which could, I think, have a good impact on the ground locally as well. 

Just a quick one on the local government settlement, and I think it's well recognised that it's a far better settlement. I think there will be clarity needed to understand what year 2 and 3 look like within that £750 million allocation. I'm conscious it's probably £400-and-odd million gone on the first year, so what do local government partners have to assume out of that for the following two years? I think they would like that three-year position to be clarified a bit. Thank you.

The reason why we've provided the local government level allocation in the settlement for the next financial year, but then only the global figures for the following two years, is because the data that we need in order to make those decisions about what the local authority level funding will be will be changing over the coming year. We'll be having new population data, for example; some of the data that is really fundamental in terms of making those allocations will be changing over future years. But that said, I think that the level of certainty that treasurers now have, at least about that global figure, will allow them to make at least some plans for future years. And as that data starts to come in, which will be updated and will allow us to provide the latest position to local authorities, I think they'll be keeping a close eye on that, and we'll obviously work with local authorities and treasurers to give as much information as quickly as we can. But as I say, the reason why we haven't just given three-year allocations for every local authority is because some of the data that underpins those sums will be changing in the coming years. 

10:30

I think, on that point, the sooner you're able to give that clarity to local authorities, the better, because that impact then on the third sector that they fund as well, and having that—it's a knock-on, domino effect all the way into all our social services and all those fantastic people that are doing so much work in supporting the most vulnerable in our society. I'd encourage you to be able to give that clarity as soon as you possibly can.

It was a difficult choice, because I want to provide as much clarity as I can, but then it would be difficult in the third year, when new population data, for example, has been provided, and other kinds of data that are used within the settlement, and within the formula—then it would be very difficult for local authorities to be redoing the sums and looking at what they could have had had we only used the most up-to-date data. I think that would have potentially opened a whole world of other considerations and problems. So, I think that providing a settlement based on up-to-date data is the way in which we should be moving, but also I think that kind of global certainty does at least give treasurers some parameters within which to plan.

I think Andrew just wanted to come in and then I'll bring Carolyn in.

Just to amplify that point, really. The best that we can really do in the circumstances we're in is to provide that kind of broad view or indicative view of what the settlement is going to look like in years 2 and 3; the precise view has to await the information that the Minister talked about. But I just thought it would be worth saying that our colleagues in Scotland, because of the uncertainties that we've got at the moment, have decided only to do a one-year budget, but obviously Ministers here took the view that providing that three-year view was the most helpful way of proceeding, whilst of course there will be a lot of water to pass under the bridge before firm budgets are set for years 2 and 3.

Thank you, Andrew. Carolyn, you've sat patiently throughout. There we are—over to you.

Good morning. Thank you. I welcome that three-year budget for local government. I think that's really important.

I'm just going to ask a few questions regarding business support. Minister—good morning—what have you done to understand the issues facing businesses in the lead-up to the budget, and how is the focus of business support changing going forward?

Thank you. In the lead-up to the budget I had a meeting with the Welsh Retail Consortium, for example, because they I know are a sector that has been hit particularly hard recently. I also met with our social partnership council, of which members include the FSB and CBI, so I'm able to hear directly from them in those important engagement meetings as part of the preparations for the budget. But then I know Vaughan Gething has been doing lots of work to understand the nature of the business support that will be required in the period ahead. Services provided by Business Wales, for example, have really evolved during the course of the pandemic, and there's a clear need, I think, for more and enhanced support for those who are thinking of starting a business. I know that those things have been important as the economy Minister has been going about setting his particular department's budget.

10:35

Okay. A little supplementary on that, then. I'm just asking about any evidence you've used from previous business support schemes to inform your future thinking. 

We've done analysis of previous business support schemes. Evaluation has been really important, and that's been built into the support schemes that we've had as a direct response to the pandemic. But, of course, more widely, I know that the economy Minister is always considering the impact of the support made through the Development Bank of Wales, for example, through Business Wales and the other interventions that are applied through his portfolio when he's considering which schemes to support and to what extent, and what the parameters of those schemes might be in future. So, these are things that primarily, I think, are considered by Vaughan Gething and his team as they start to prepare their departmental budget.  

Thank you. The committee recommended during supplementary budget scrutiny that information on the reprioritisation of road schemes is clearly and transparently presented in future draft budgets. Is the recommendation carried through in the budget documentation? 

While the budget reflects the anticipated outcome of the roads review, to date, the panel has only provided an interim report. So, we still await the final report, following which further review of budgets and priorities will be necessary. But again, most of that will sit within the climate change portfolio, so they'll be looking closely at the outcome of the final report. 

Okay. Thank you. I know I've talked previously about infrastructure schemes and maintenance for local authorities. It's something that I've always asked about, and is a concern, just the ongoing maintenance of our existing infrastructure. So, I'll have a closer look at the document and see if it's in there.

And a supplementary regarding Cardiff Airport, please. Are allocations and repayments of funding for Cardiff Airport transparent within the budget? 

Funding support for Cardiff Airport is reflected within the aviation BEL, but that BEL does cover other aviation-related expenditure in addition to that for Cardiff Airport. But, that's where you'll find Cardiff Airport within the draft budget. 

Sorry. Can you hear me now? Thank you. Okay. Tackling poverty and inequality; so, what has been the focus of the budget advisory group for equality leading up to the budget, and what can we see in the budget in terms of understanding the impact of the budget on different groups?

We've maintained the focus on—[Inaudible.]—and you'll find more detail on that within our budget improvement plan. But, essentially, in the new year we'll be looking to launch a reformed and strengthened budget improvement and impact advisory group. It's a new group with a new focus, really. The purpose of the group will be to engage with key stakeholders on improving the budget process and also the tax processes, to ensure that the outcomes are aligned to the delivery of the budget improvement plan. And again, that's another document published alongside the budget that I really do commend to people. We're evolving it every year in response to questions and ideas that people come to us with in terms of what they would like to see the budget look like, and also how the process for developing the budget can be improved. The new group will support those discussions about the wider impact considerations of the budget, seeking then to align to the broader socioeconomic, cultural and environmental priorities of creating a greener, stronger and fairer Wales. 

As part of this work, I've undertaken lots of engagement in preparation for the budget. I've met with all of our statutory commissioners. I've had a meeting with the third sector and also local government representatives and our social partners, which I referred to in response to the question about business support. And that was, really, to hear their views and their priorities in light of events this year, and also in light of where we should be going in terms of continuing to respond to the pandemic, but also, then, moving on to recovery and addressing all of those climate and nature concerns that we've had. In terms of the details of the impact of our spending decisions, you'll see the budget narrative has lots of detail on that in chapter 4, and then we've also got a separate strategic integrated impact assessment, and that provides an overview, then, of the strategic evidence that has informed our spending decisions. Hopefully, that will be transparent, really, in terms of how we've gone about factoring in these various considerations in our plans.

10:40

Thank you for that really comprehensive answer. In terms of understanding the gender impact of the overall budget, could you give a comment on that, please?

We still remain committed to our gender-focused response to making spending decisions, and we've started our journey, really, in terms of gender budgeting. The personal learning accounts was the first area in which we started that journey on gender budgeting, and now in the new year we also intend to introduce pilots in the active travel and young person's guarantee space, to ensure that the choices we are making are the right ones there. To do that, we continue to engage a great deal with Iceland and with Canada, who are further along on their journey in terms of gender budgeting. We really want to learn what we can from them in terms of starting the journey, but then also maintaining it. I think that will be one of the challenges as well. While things are still at a pilot stage, it's exciting, it's new, but then we need to see how we embed this over time in a more fundamental way. So, work, I think, is going well, and we're really grateful for our international partners in terms of the support they're offering us there.

Thanks. Just to add to what the Minister has said there as well, we've also engaged regularly with the Welsh women's budget group, which is a fairly new group, and through Chwarae Teg as well, both at ministerial and official level, and we've engaged them through training, for example. And also, we'll continue to engage them into the new year, particularly through the budget improvement and impact advisory group. So, it's a very important stakeholder for us.

Thank you very much. Is there anything else you'd like to add regarding evidence included in the budget to show that this budget is tackling the root causes of poverty and other inequalities in the most effective way? Is there anything else you'd like to add on that before we move on?

I'd just really commend again the strategic integrated impact assessment of the budget, which looks at the ways in which people are affected in a number of ways by disadvantage. It recognises that you might be disabled, you might be a woman, you might have a number of things that are impacting on the services you receive and your ability to maximise your income—all kinds of different things. It tries to take that kind of intersectional approach to ensure that we have a wider view, really, of the impacts on people. And then, I think you can see the way in which we've responded to that in the budget by the allocation, for example, on the universal basic income. That's been a really interesting and exciting intervention. That's a £10 million pilot that we are providing in the first instance. And then, other examples would be the extra support for the discretionary assistance fund, for example, so an additional £7 million there to ensure it's there for people when they need it most, and a targeted package of £12 million to support delivery of our priorities of tackling poverty and inequality. That includes funding actions within the race equality plan, the disability rights taskforce, the LGBTQ+ action plan, and commitments to further embed period dignity. So, there's a package of measures there within that £12 million.

Thank you. My final question is about EU funding replacement. You talked earlier about being £375 million worse off, and I know EU funding was used for infrastructure, research, a lot of things—apprenticeships. That's been a really big concern of mine. So, what support is provided within the draft budget for sectors that have previously relied on EU funding? And how are you able to tie in support with UK Government funding streams, such as levelling up? I know that it's up to local authorities and communities to bid for that level of funding, so how can you tie the Welsh Government budget into that as well?

10:45

Yes, thank you. I share absolutely your concern about the impact of the loss of EU funding for Wales. We will receive just £46.8 million from the pilot shared prosperity fund in this financial year as compared to the £375 million in new EU funding that would have been available to us in January 2021. So, obviously, this loss means that there will be uncertainty for sectors that relied on this funding and we're not going to be able to replace that £375 million regional funding in full.

However, in line with our programme for government, we are investing in key Government commitments in many of the sectors that it did cover, including, for example, in skills and in training through our apprenticeship programme, also the personal learning accounts, which I've mentioned in respect of our gender budgeting approach as well. So, you will see us supporting those sectors and, obviously, we're continuing to try and make our towns and villages and cities even better places in which to live and work. So, there's an additional £100 million capital funding up to 2024-25 in respect of that as well. So, you'll see us trying to respond to those sectors, but there's just no way that we can replace the full £375 million, unfortunately.

And in terms of how we're engaging, Welsh Government hasn't been engaged on these schemes. I think, you know, we had the systems in place; we had done lots and lots of ground work with the Organisation for Economic Co-operation and Development in terms of what good regional investment would look like in future, but unfortunately, the UK Government's decisions in that respect have cut us out, really, of that decision making, which is a shame, because we would have been better placed, I think, to make wiser investments than UK Government has, I think. As you've seen, there have been a small number of schemes that they've announced that don't even come close to meeting the level of need, or come close to even keeping that promise that we wouldn't be a penny worse off.

I met with a couple of scientific researchers who were funded by EU funding and their funding stream was running out this financial year—well, one was March, actually, and one's due next year. And it's really interesting and important research, so that's a big concern for me, how that will be funded going ahead. So, have there been any developments in Welsh Government's involvement in funding schemes operated by the UK Government in Wales? Has that progressed at all?

No. So, the UK Government still hasn't published a framework for the longer term shared prosperity fund, despite the fund being first announced in 2017. It has, of course, announced that there will be a UK-wide £560 million multiply scheme to support basic numeracy skills among adults who will be supported, and that will be supported by the shared prosperity fund, beginning in April. But, of course, that was done with no consultation and is absolutely another encroachment into devolved policy areas, because clearly numeracy and adult learning are both within our responsibilities, so, in the Welsh Government.

And for the levelling-up fund, there were definitely more losers than winners, with just a few communities receiving funds for 10 bids worth £121 million. Of course, the majority of that—60 per cent—is going to Conservative constituencies, and colleagues will make their own minds up about that. But, yes, we're continuing to be excluded from any meaningful discussion on these schemes and certainly from any genuine co-decision making, despite our efforts to engage.

I'd just like to put on record that Monmouthshire is the only Conservative-controlled council in Wales—properly controlled—that didn't receive any levelling-up funding. I'm just assuming—. I note the Government's hostility to future interaction with the UK Government, but I assume that when shared prosperity funds do emerge properly, and further levelling-up schemes come forward, we will be working collegiately with the UK Government to make the very best for Wales, not to continue to promote a sense of disparity between us.

10:50

I would say, Chair, that I really don't recognise the characterisation of Welsh Government acting in a hostile way; I would say it's quite the opposite. We are constantly reaching out to the UK Government to find ways in which we can work together within the parameters of our relative responsibilities, and the example of the vacant land tax would be one. We've provided every bit of information that we possibly can, and every bit of information that is required in the legislation, and yet the UK Government, for no apparent reason, seems to be blocking every effort in that regard. So, I think that we are trying to work in a collaborative way, respecting devolution, but it's the muscular unionism of the UK Government, and the fact that, down the end of the M4, they don't seem to hear the mood music in Wales, which is stopping that meaningful collaboration. So, we've made it clear to UK Government Ministers that there's a standing invitation to collaborate with us on shaping the funding arrangements for the successor funds to the European funding, based on a clear commitment to the UK Government and Welsh Government being partners in co-decision making, but clearly we haven't had a positive response to that.

That you very much. Does anybody have any further questions? I've got one more question before we finish, but I'm looking around this virtual room to see if anybody else has their hands up. No. Just a very quick one before we finish—and thank you very much for your time this morning. What was the hardest decision? What's the one that kept you awake at night throughout this budget process? What was the one that you agonised over?

[Laughter.] That's a good question. I think the thing that keeps me awake at night in these respects is probably the challenges of public sector pay, just because the Welsh Government's budget is exposed—around 50 per cent of our budget is exposed to pay in one way or another—so you want to ensure that public sector workers are paid appropriately and well for the jobs that they do, that they have the terms and conditions that you would be proud for them to have, and all of those things, but you recognise that even the slightest move in pay has a huge impact and affects the budget significantly. So, just trying to balance that need to provide the public sector with the pay that it deserves with the impact that it has on budget management is a really difficult one.

I suppose I and the host unmuted me at the same time then. I think that I absolutely agree with you on that, but a number of the grants you've given out—some of the housing grants, for example—you've kept at exactly the same rate for the next three years, so they have no money in their grants to pay for wage increases.

Yes, and there have been lots of difficult decisions like that made right across the budget. So, when we do our budget process and then I send a commission out to all colleagues to explore what's needed by them to deliver on our programme for government and so on, inevitably, what comes back is well in excess of the resources available to us, so there are difficult decisions to be made right across the budget, and these are, as Mike Hedges says, examples of them.

Diolch yn fawr iawn ichi, Weinidog, a diolch yn fawr i Andrew ac i Emma am fod efo ni y bore yma. Dwi'n gwybod eich bod chi'n dod yn ôl am hanner dydd i fynd i sesiwn arall ynglŷn â'r Bil Deddfau Trethi Cymru etc. (Pŵer i Addasu).

Thank you very much, Minister, and thank you to Andrew and Emma for joining us this morning too. I know that you'll be returning at midday to a further session on the Welsh Tax Acts etc. (Power to Modify) Bill.

4. Cynnig o dan Reol Sefydlog 17.42(ix) i benderfynu gwahardd y cyhoedd o eitemau 5 a 7 ar yr agenda
4. Motion under Standing Order 17.42 (ix) to resolve to exclude the public from items 5 and 7

Cynnig:

bod y pwyllgor yn penderfynu gwahardd y cyhoedd o eitemau 5 a 7 yn unol â Rheol Sefydlog 17.42(ix).

Motion:

that the committee resolves to exclude the public from items 5 and 7 in accordance with Standing Order 17.42(ix).

Cynigiwyd y cynnig.

Motion moved.

Fyddwn i'n cynnig o dan Reol Sefydlog 17.42 fod y pwyllgor yn penderfynu gwahardd y cyhoedd o eitemau 5 a 7. Ydy pawb yn fodlon? Dwi'n cymryd bod pawb yn fodlon, felly fe awn ni i mewn i sesiwn breifat. Diolch yn fawr iawn.

I would like to move a motion under Standing Order 17.42 that the committee resolve to exclude the public for items 5 and 7. Is everyone content? Yes. We will therefore move into private session. Thank you very much.

Derbyniwyd y cynnig.

Daeth rhan gyhoeddus y cyfarfod i ben am 10:54.

Motion agreed.

The public part of the meeting ended at 10:54.

12:00

Ailymgynullodd y pwyllgor yn gyhoeddus am 12:00.

The committee reconvened in public at 12:00.

6. Bil Deddfau Trethi Cymru etc. (Pŵer i Addasu): Sesiwn dystiolaeth 1
6. Welsh Tax Acts etc. (Power to Modify) Bill: Evidence session 1

We now are ready to begin. The public broadcast of this meeting will begin now, so that's great. Welcome back to the Minister and your officials. We've changed officials from the budget scrutiny that we had earlier. Maybe we could get the team to introduce themselves.

Hello, I'm Anna Adams. I am a deputy director in the Welsh Treasury. My title is tax strategy and inter-governmental relations.

Good morning—sorry, good afternoon now. My name's Lynsey Edwards, I am a lawyer in legal services, Welsh Government, and I am the lawyer working on the Bill.

Prynhawn da. Andrew Hewitt, head of Welsh tax legislation.

Lovely. And, obviously, welcome, Minister. Nice to see you again. I hope you had a nice lunch. I think we've all had a quick sandwich and a coffee, but it's good to see you back.

So, we're here to have a look at the Welsh Tax Acts etc. (Power to Modify) Bill that's been laid before us. I'm going to go straight into some questioning, if I can. So, the Bill is seeking to introduce the power to enable future amendments of certain elements of tax legislation in Wales when required. It'll confer a regulation-making power on Welsh Ministers to enable them to modify Welsh tax Acts in specific circumstances. Could you start off by outlining the rationale for the Bill and the powers it intends to confer on Welsh Ministers?

Yes, of course. So, the vulnerability, really, of the Welsh Ministers in respect of being able to respond appropriately to tax policy changes made by the UK Government is quite clear, and Welsh Ministers should be in a position to provide near immediate responses to certain external events through the use of made affirmative regulations, and, where necessary, in some cases, retrospectively too. There is an issue of parity here, because the UK Government has the ability to make changes to existing taxes with immediate effect through the Provisional Collection of Taxes Act 1968, but the only element of the Welsh tax Acts that can be changed immediately is the tax rates and tax bands, and that's via the made affirmative procedure. So, the Bill really is essential to provide Welsh Ministers and the Senedd with the necessary powers to address an external event that the UK Government doesn't itself have to address, of course, and that's the tax decisions of the UK Government itself. This is an aspect of the devolution settlement that is significant and that the Welsh Government must have the tools to be able to address quickly and in an agile manner.

Just to provide an example, really, to bring this to life, our land transaction tax revenues generated by large non-residential transactions are potentially vulnerable to aggressive and concerted tax avoidance. So, in the period April to October 2021, for example, there have been 110 transactions where consideration given was more than £2 million, and so they have generated, in total, £52 million of revenues, given the rates that there are, and those are 73 per cent of the revenues generated by all non-residential transactions. So, of course, then, it would only take a small number of avoidance of tax to significantly impact on the revenues in a relatively short period of time. So, that really is just an example of why we would need to have agile powers to respond to and to stop such avoidance activity with near immediate effect if it should occur.

And also, there might be times when Welsh Ministers want to pass on the benefit of tax reductions to Welsh businesses or citizens as soon as possible. So, again, the use of made affirmative procedure regulations, again, potentially retrospectively, would enable those tax savings to be provided as soon as possible, and that would then give taxpayers early certainty.

So, how often do you think you might need to use these powers?

The powers would be only utilised when necessary to respond to external events that can't be foreseen. And that's one of the challenges, really, because as the last couple of years have shown, none of us can predict what might happen. So, actually, it's not possible to, nor would it be right for me to, give a precise answer to this, but what I will say is that the powers would not be used for Welsh Government-instigated policy changes, only to respond to specified external circumstances, where they meet those four purposes that the Bill seeks to address. So, I wouldn't anticipate the powers being used regularly, but they would be important tools for the Welsh Government to have to respond quickly, if necessary. 

12:05

So, if you didn't have the tools, what would be the consequences of this Bill not passing?

If we didn't have the necessary tools, we would have to look to other tools to respond to the external events. For example, an emergency Bill might be one way in which we could do that. But, I think the emergency Bills, obviously, they've only been used rarely and in exceptional circumstances, and they provide limited opportunity for scrutiny. And one of the things that is at the heart of this Bill is respecting the Senedd and respecting the importance of scrutiny. So, an emergency Bill wouldn't be the optimal way in which to respond to those four types of external events. And I think the powers within the Bill are more user-friendly and more flexible than the emergency mechanisms that the Senedd does have. But, if there were external events that we needed to respond to and the Bill wasn't there as an available tool, then emergency legislation could be a way in which we could respond. 

Okay. The Bill can be categorised as an enabling Bill, which means the Senedd is being asked to delegate the powers to the Welsh Ministers to be used in certain circumstances, as you've mentioned. The House of Lords report noted that the use of skeleton legislation would, in effect, be signing a legislative blank cheque. Is the level of delegated powers that this Bill confers appropriate?

Yes, I do think it's appropriate, and that's because the scope of the power within the Bill has been deliberately constrained by the inclusion of the four purpose tests, and that sets out absolute clarity, I think, in terms of the circumstances in which the power may be used. So, as such, I do think that the level of delegated powers is appropriate. 

So, there's no similar legislative process in modifying primary tax legislation in the UK. Has the legislative process proposed in this Bill been implemented elsewhere, or is this a unique approach to modifying tax legislation? And, if so, what's unique about tax law that merits this?

Well, my understanding is that it is relatively rare for legislation to include such a process as proposed by the Bill, but of course that shouldn't be a reason for not adopting an innovative and agile process that's right for Wales. Such a regulation-making power, whilst uncommon, does already exist in one of our predecessor taxes. So, section 109 of the Finance Act 2003 provides HM Treasury with a bespoke power to make regulations with immediate but temporary changes to stamp duty land tax legislation, and regulations made under that section are subject to the provisional affirmative procedure, which is similar to the Senedd made affirmative procedure, meaning that they have to be approved by the House of Commons within 28 sitting days in order to have permanent effect. The regulations do, however, have a sunset clause of 18 months, meaning that to give longer, permanent effect, the legislation in the regulations would need to be included within a future finance Bill from the UK Government. And, similarly, changes made by the UK Government through its Provisional Collection of Taxes Act 1968 resolutions bring not only rate and band changes into effect before they are scrutinised by Parliament but also technical and substantial changes to the UK Government's taxes.

So, this Bill does really seek to provide Welsh Ministers with similar powers and abilities to those of the UK Government in relation to its ability to make immediate changes to their tax legislation. So, what we're proposing isn't very common, but then it's not without precedent either.

12:10

So, does this Bill highlight the need maybe for a legislative budget process to enable the changes to the Welsh tax Acts to be made through primary legislation rather than secondary?

Yes, I know there is ongoing interest in this, but I think that my position does still remain: I don't consider the timing is right to introduce an annual primary legislative route, such as a budget or finance Bill, through which changes to Welsh tax Acts can be made. A key consideration for the Welsh tax Acts specifically is the volume of secondary legislation that these Acts have so far generated, so landfill disposal tax and land transaction tax; that level of legislation isn't significant. However, as we develop more devolved taxes, hopefully in future having powers for example for a vacant land tax being devolved—I had to get that one in there to continue our discussions of this morning—either those that have predecessor taxes or new Welsh taxes, the case I think for an annual finance Bill may strengthen, but it's still my view that at the moment, the case isn't made. But that said, I think even if we did have an annual finance Bill, we would still need the powers that are provided in this Bill, which enable us as Welsh Ministers to respond to external events that wouldn't necessarily coincide with a Welsh Government finance Bill cycle. For example, UK Government, at a UK Government budget, there may be changes that occur, and that's not on a fixed cycle—it sometimes occurs more than once a year—so that would have to be a consideration as well. And also, this Bill would allow us to make changes as close to the date that they're to apply from as possible, and for those changes to become law straight away, and that does provide certainty for taxpayers. And that differs really from the UK approach where changes to respond to avoidance activity often have to be made as part of a finance Bill, meaning that then there's delay before action is taken, which is obviously a concern, because it provides opportunities for avoidance and so on.

Okay. So, the Welsh Government proposed three regulation-making powers in its consultation document, which offered varying degrees of scrutiny by the Senedd. Can you explain how the Senedd lock proposal referred to in the consultation was intended to work, and why it was discounted when you brought this Bill forward?

Yes. The policy consultation proposed, originally, an extremely broad power that was intended to be used where Welsh Ministers considered it expedient in the public interest, and that mirrors the wording set out in section 109(1) of the Finance Act 2003, which provides HM Treasury with that general power to make regulations to vary SDLT legislation, other than to rates and thresholds. So, the original policy set out three separate powers, which were very wide in scope, and allowed Welsh Ministers to amend any element of the Welsh tax Acts for whatever reason they saw fit. It was felt that the wide scope of these powers did require a constraint, so the Senedd lock was suggested as a way of exercising that constraint. The lock would require a Senedd vote to unlock the use of the power to make the regulations, and that would mean that the general principles of the regulations would be scrutinised before they were made or laid. The consultation process itself did raise concerns on the broad and open-ended nature of this power, and after further consideration and analysis, we took the decision to reduce the scope of the power to just those four purposes in order to provide the constraint that the lock was intended to provide. So, the Bill sets out with absolute clarity now the four purposes for which the power may be used. As there's no uncertainty now, or subjectivity as to how the power may be used, I think that the lock would no longer be required, because those four purposes in a sense negate the need for the lock, which is why the proposal has now been removed, having narrowed things down so much. 

Thank you very much, Minister. Carolyn, if we go over to yourself.

Okay, thanks, Chair. Given the powers in the Bill would be used for unpredictable events, does the Minister foresee any potential scenarios where significant changes would need to be made to the Welsh tax Acts, and whether the proposed legislative approach would be suitable to make such changes?

12:15

So, the Bill seeks to provide Welsh Ministers with the necessary tools to be responding to external events in the most appropriate manner at the most appropriate time. As I mentioned, the Bill does seek to limit the use of the power to the four specific purposes, all of which are external events. They've been identified as the most likely future external events that might impact on our devolved tax revenues. As such, the timing of these events is unpredictable, but it's certainly possible that they will occur. I'm not aware of any other types of external events that we would need to include in the four purpose tests; however, I'm really interested in the views of committee and other Members of the Senedd on the proposals at this stage or following, perhaps, the evidence that you as a committee will take from stakeholders. We want to be sure that we've captured what we should in those four purposes.

The aim of the legislation and the purpose tests is to capture those scenarios where we would need to respond at pace, and again, that's an important consideration. In the scenario that there is an external situation that is not captured by the four purpose tests, and to which we would want to respond urgently, then we'd have to look to a different legislative mechanism. So, the Chair was asking about what would we do if we didn't do this Bill; one example might be emergency or expedited legislation, which we would have to consider. It would have to be considered, really, on a case-by-case basis then, dependent on the nature of the change and the urgency of the response that was needed.

Okay, thank you. What in the Bill limits, Minister, your discretion in areas such as imposing further penalties on increasing tax liabilities?

Yes, so the Bill does limit ministerial discretion in several important ways. Firstly, we have to be satisfied that any changes that Ministers want to make fall within one of those four purpose tests as set out in clause 1. That's really important, it's really tight, and I think that that is very much with a view to limiting the discretion. Secondly, Welsh Ministers have to be satisfied that the changes are necessary or appropriate to achieve one of those four purposes, and the sole reason for these limitations was to constrain the discretion of the Welsh Ministers to legislate in these areas.

Aside from the discretion, I think there are additional checks and balances in the form of Senedd scrutiny of the regulations, and we've been really keen to ensure that scrutiny is at the heart of this legislation. Where those regulations are not approved, the taxpayer is protected from the changes imposed with any increased tax liability by it being repayable, and any penalty treated as though it never arose. So, I think if there are risks, they lie with Welsh Ministers rather than taxpayers, which is also important in this Bill.

Thank you. And why does Welsh Government feel existing regulation-making powers are inadequate, and how do the additional powers in the Bill address this?

So, the regulation-making powers included in the Welsh tax Acts were those that were considered appropriate at the time the respective Bills were introduced, and there's always a balance to be struck between the attractiveness of the regulation-making powers from a Government perspective and then the powers to be included in the Bill on introduction. With the exception of the made affirmative powers to make changes to the rates and bands for our two taxes, most other regulation powers can only be exercised using the draft affirmative procedure.

The regulation-making power provided in this Bill provides an additional fiscal lever to effect certain types of changes. For example, there are areas where we may already have existing secondary legislation powers, but only via the draft affirmative procedure, and if the UK Government introduced a new relief at a fiscal event then Welsh Ministers wouldn't be able to respond to them other than by the draft affirmative regulation. This would mean that the changes coming into force would be later here than across the border, where the changes would be immediate, and there could be some repercussions of that.

And then the regulation-making power in the Bill will allow Welsh Ministers to make changes using the made affirmative procedure if they consider changes must be made urgently, thereby giving immediate legal effect to the changes, and that is important in terms of protecting Welsh revenues, protecting Welsh citizens and businesses as well. So the ability to use the additional power in the Bill will ensure that, whatever changes are made at a future UK fiscal event, or are necessary due to avoidance or court cases, then we'll be able to respond in an agile and flexible way, and I think that that is an important tool for Welsh Government. 

12:20

Okay, thank you. So, the Tax Collection and Management (Wales) Act received Royal Assent in 2016. What's the rationale for Welsh Government introducing the Bill now, given that it has been in effect since 2016?

It's clear that seeking new regulation-making powers should be only done through robust consideration and scrutiny, and I think that we've had experience now with these existing pieces of legislation, which have helped us consider what additional tools might be necessary. So, we've sought to limit the scope of the regulation-making power in this Bill by the inclusion of the four purpose tests, and this decision has taken time, but this is not something that has just been a piece of work that we're only now starting to look at. So, even when I first came into this portfolio, fairly early on, back in February 2019, we were starting to engage with tax and law specialist organisations on this piece of work, and then, subsequently, undertook a consultation in 2020, continuing engagement with all of those organisations. So, this has been a piece of work that has been in the making for some time, but I appreciate these are fairly new taxes for us still, despite having them since 2018. 

Carolyn, before you go on to your next question—Mike, did you want to come in on this question about the question you had earlier?  

Yes. My question is really: these taxes are relatively new, why didn't you—you weren't the Minister in charge; why didn't the Welsh Government—bring them in at that time? Why are you bringing them in three years down the line? 

So, Mike's right, I wasn't involved at the start of the this journey. But I might ask officials if they have any reflections, with their collective institutional memory of this piece of work. I don't know if perhaps Andrew or Anna might be able to help. 

I think—. The wonders of hindsight are very good, I think, and it is true that, in some ways, there was a lot of debate around whether we should include something that looked close to section 109 at the time. But, if we remember the drafting process, we got to the point where we'd reached a stage, I think, where possibly we'd thought that stamp duty and land tax in particular might have reached a stage of being relatively stable, but then the UK Government announced its higher rates change, and that had a big impact on our thinking as to what changes might be coming, going forward. And, yes, there might have been a chance to make amendments of this sort, but at the time a lot of effort was being put into making sure that we got the higher rates right, and we got them right to the extent that, in fact, the UK Government has followed some of the changes that we instigated. And so I think there's a balance between wanting to have some experience of the taxes up and running, wanting to see if there was continued liveliness around changes to the taxes, and then thinking more about the sorts of things—. Because, in some ways, this Bill is a sort of foundational Bill, but a foundational Bill based on experience, in the sense that we can see that there are a lot more changes that are going to be coming. And, looking to the future, 20 years down the line, there will be avoidance attempts on our Bills and stuff, and this feels like the right time now to bring it forward.  

But land transaction tax has both been volatile in terms of the amount of money it brings in—probably the second most volatile tax—and also there have been continual changes, not every year but certainly every several years. Landfill disposals tax is slightly different. It's been a fairly standard tax; all that's actually changed is the rate and the exclusions. 

Do you want me to go ahead, Minister?

Yes, by all means. I don't think we would disagree, Mike, with what you're saying about the tax, but I'll let Andrew elaborate a bit more. 

12:25

That's absolutely right. Our landfill disposals tax is slightly more different, I think, to the landfill tax in the UK. I think there were more changes introduced into that. But I think for us it was largely the big dramatic change that happened with the introduction of the higher rates, and the UK Government has now introduced another type of surcharge that Scotland haven't followed and we haven't followed either. But there's this sort of dramatic change that seems to be happening. We have sort of tried to project and predict what would be coming. So, for example, with—. There were quite a few draft affirmative procedure changes—draft procedure powers—that were included in our Act in terms of being able to make changes to reliefs, and we also tried to look at what was hot, as it were, at the time. So, the Office of Tax Simplification is always looking at partnership rules, so we included a power to enable us to make changes to partnership rules. So, we did try to do the sorts of things that Mr Hedges is talking about, in terms of predicting what was going to be coming. But, having seen more of the changes that have come, I feel, or the Government feels, that there should be this flexible power in order to be able to make those changes in the future, and possibly quicker as well than it would be for our own powers that were already taken in the Bill, in the tax Bill.

And if we are able to have further devolution of tax powers, then these tools will help us respond to these changes under those four purposes in future with new legislation as well.

Thank you. Sorry for cutting across you there, Carolyn. You carry on with your next questions. Thank you.

Thanks, Chair. So, section 1 of the Bill mentions that the exercise of regulation-making powers is subject to purpose tests, which are intended to constrain the use of the powers. Could you elaborate on the purpose tests and how they will be applied, and also whether the Welsh Government would seek alternative—I can't say this word very well—legislative procedure if the proposed exercise of regulation-making powers failed the purpose test but it was deemed that change to tax legislation was necessary. So, really, questions about those purpose tests. Thank you.

Great. Thank you. So, the regulation-making power can only be used to respond to those external events where we, as Welsh Ministers, consider it necessary or appropriate and in response to those four specific purposes. And yes, as I've mentioned, this is an important part of constraining the use of the power, and I think that in doing so we should be able to then provide assurance for the Senedd and other interested stakeholders that the power wouldn't be used to introduce Welsh Government-instigated policy change, because that's not the purpose or the intention of this Bill, and so we would be constrained from doing that.

I think that—. Just to set on record, really, because we haven't yet talked about those four purposes. So, the scope of the power would be limited to any of the following four purposes, the first being to ensure that landfill disposals tax and land transaction tax are not imposed where to do so would result in non-compliance with any international obligations. Then to protect against tax avoidance in relation to landfill disposals tax and land transaction tax; to respond to changes to predecessor UK taxes—so that would be stamp duty land tax and landfill tax—that could impact on the amount paid into the Welsh consolidated fund, affecting Welsh revenues; and to respond to decisions of the courts or tribunals that affect or may affect the Welsh tax Acts or the regulations made under them. So, this does really constrain the powers within this Bill to meeting these external challenges and events.

If there were a need to respond to external events that sit outside of those four purpose tests, then we would have to look to other mechanisms, such as the emergency legislation or expedited legislation, for example. But one of the things I'm keen to understand, through scrutiny by this committee and the work that you will do scrutinising stakeholders, is whether there are external events that can be identified that should be added to that list of four, because we think, in discussion with stakeholders, that we've got the right list there, but I'm keen to hear if there are other items that should rightly be on that list.

12:30

Thank you. Just a final question from me regarding the 'to protect against tax avoidance' in relation to devolved Welsh taxes—so, why the Bill confers powers on Welsh Ministers to protect against tax avoidance when there is already the general anti-avoidance rule enacted in legislation. So, if that legislation already exists, why would this Bill confer powers on Welsh Government to protect against tax avoidance?

So, for both devolved taxes, there is always the risk that there will be individual or mass-marketed avoidance activity that Welsh Government and the Welsh Revenue Authority might want to stop with immediate effect. That could be because there is a lacuna or gap in the legislation that facilitates the avoidance activity or, based on UK experience, a need for clarity to the legislation to make it clear that the law operates in a manner that doesn't permit the avoidance activity. So, the general anti-avoidance rule is an important anti-avoidance tool available to the WRA to counteract instances of tax avoidance. However, it can only be used after the fact, where a specific avoidance scheme has been used to gain a tax advantage, so it doesn't prevent future taxpayers from exploiting the same avoidance opportunity in the future, whether intentionally or not. So, the new power would enable Welsh Ministers to change the law and close down any perceived opportunities for avoidance before they could become widely exploited.

In many cases, it's desirable to make the change to the legislation to provide greater clarity to stop the marketing of avoidance schemes that ultimately the courts find didn't work as the promoters contended. And that sort of change actually protects taxpayers from taking part in avoidance schemes that can result in them paying the tax owed and also the fees for the advice and services as well, so it would seek to protect Welsh taxpayers as well. 

Thanks, Minister. Before I go on to Peter Fox, I'm just interested in knowing: was there a fifth purpose test or other purpose test that you thought that you might need, but you've discounted?

I think within the four, we've captured everything that we think might be likely, but shall I—? Perhaps the officials want to reflect on any of the consultation responses or any of the engagement activity that we've been doing around the four purpose tests.

I think the Minister's referred to it already. The original consultation, or the consultation, set out—. In the three powers that were proposed in that consultation, there was one that referred to 'expedient in the public interest', which is a very wide possibility. But then, even in the more constrained power, what was called power 1 previously, again, we were looking to capture—. One of the conditions would be, 'such other circumstances where it is necessary and appropriate to address cases of exceptional need'—so, again, looking for something that's non-defined, and this is the key point about change from the consultation to now, that we've looked to move very much towards a constraining of the power.

And so, in the past—. It would be helpful for the future—for the future, for the next millennia—to have a power that enabled the Welsh Ministers to tackle any particular thing that came along—the 'unknown unknowns' in a Donald Rumsfeld kind of way—but that's extremely wide. With hindsight, or with reflection and in consultation with our stakeholders, we can see that that's actually probably something that shouldn't be there, that the use of the power should be constrained to the four purposes. And that's where we've ended up. So, other than an 'unknown unknowns' one—that's sort of the fifth one, but that's sort of a silent magic that we can't go to, in truth. 

Thanks, Chair. Minister, I'm just going to reflect quickly, or ask a couple of questions, on section 2, about legislative changes made retrospectively, and just to understand what compliance the Bill has with the convention rights, particularly in relation to retrospective effects and whether we can expect a detailed assessment of compliance with the convention accompanying any further regulations under the Bill.

12:35

The Bill provisions have been subject to very detailed legal advice by lawyers within our Welsh Government legal services and the advice provided to me, as a result of that analysis, confirms that the Bill will not in itself engage convention rights. However, the future exercise of the power conferred by the Bill, and particularly in relation to the power to make legislation with retrospective effect, may well give rise to convention rights and then, in particular, article 1 of protocol 1, of course, which is the right to the peaceful enjoyment of possessions. It's not possible at this stage to undertake a definitive analysis of the issues that might arise as a result, as these things, I think, will inevitably depend on the policy proposal that is underpinning any future regulations. However, it is well recognised in the context of tax that there may be justification for making retrospective legislation in order to ensure fairness within the tax system and to prevent the abuse of the rules. In relation to potential breaches of article 1 of protocol 1, the courts have been known to give considerable margin of appreciation to national authorities who, when legislating retrospectively, attempt to strike a fair balance between the general public interest and the protection of individual rights. So, I think that does provide us with some comfort in terms of where we are in that regard.

And then, just in terms of the future, yes, the making of future retrospective secondary legislation will require detailed legal scrutiny on a case-by-case basis, including the possibility of the breach of convention rights, and the results then of that analysis will be included in any explanatory memorandum to those regulations.

Thanks, Minister. I'll move on to section 3 of the Bill where it requires you to publish a statement of your policy to make regulations that have retrospective effect. I'm going to focus on the scrutiny element. What role should the Senedd have in scrutinising the statement and should the statement be approved by the Senedd?

Sorry. I was on mute, sorry. [Laughter.] The Welsh Government has made retrospective legislation on a number of occasions previously, for example, in relation to teachers' pay and conditions in 2021, however, we haven't in relation to tax, so this would be new for us. Retrospective tax legislation in relation to tax avoidance though has been made by the UK Government over a long period of time and there have been a number of principles that have been developed over that time and a number of statements and protocols issued by the UK Government. So, I think it's right then that Welsh Government should also make a statement on its approach to making retrospective legislation in relation to taxation. That will give taxpayers and their advisers clarity on when and how we intend to use the power provided in the Bill retrospectively. The statement on the use of power retrospectively was published when the Bill was introduced, so I'd obviously be interested in the thoughts of the committee and other Members of the Senedd on the content of that, either now or following the scrutiny session. And just to reassure you that officials are also working with external stakeholders to ensure that the statement is clear and meets the intention to provide clarity on when and how Welsh Ministers would use the power with retrospective effect. 

In terms of the role of the Senedd, I don't intend to seek Senedd approval in relation to the statement. The Bill, if approved, provides Welsh Ministers with the ability to use the power to make the regulations that have retrospective effect and the statement is a policy statement on how we would use the power, given by the Senedd, to make that retrospective legislation. Welsh Ministers are sometimes required by statute to provide policy documents. For example, section 9 of the Environment (Wales) Act 2016 requires that Welsh Ministers prepare and publish a document setting out their general and specific policies for contributing to achieving sustainable management of natural resources in relation to Wales. So, I see that statement and this statement as meeting that desire for the sorts of obligations that the Welsh Ministers should have in terms of setting out how something should be done. But, most importantly here, I think, is the fact that any regulations that propose to use the power retrospectively will only be made once a thorough legal analysis has taken place, and that will obviously be done on a case-by-case basis. And, of course, importantly, if the Senedd disapproves of the use of the power retrospectively, they can and should reject the regulations, and that, I think, is the correct time for the Senedd to voice its approval. You'll see, then, that we've got safeguards in place for the taxpayer in terms of what would happen if the Senedd did reject the regulations. 

12:40

I recognise that Ministers may have to act, at times, quickly, but I think you'll agree with me that scrutiny is a fundamental part of the governance of any administration, and clearly important for our Senedd. So, do you think it's appropriate that the Bill allows the Welsh Ministers to revise policy at any time without Senedd approval? I know that there is the right for you to do that, but is it appropriate?

Yes, and I absolutely agree with you that the Senedd's role in scrutiny of legislation is essential. Whenever I'm involved in Bills, I'm always very conscious that we're not just making legislation for the current Government; we're making legislation for future governments, for different Ministers. So, it's important that we get the Bill right and it's important that we get the balance of scrutiny and the level of opportunity for scrutiny right as well. Of course retrospective legislation merits the same level of scrutiny as prospective legislation, giving particular consideration to the reason why it's been made with retrospective effect, and the date that it's to be effective from and who will be affected from that date. However, any retrospective regulations will only be made, as I say, after that thorough legal analysis has taken place, and if the Senedd does disapprove, then we have safeguards in place there. So, I think that, in that way, the Senedd is really able to voice its approval, its disapproval, and provide the level of scrutiny that it desires. I think that what we have here is a better level of scrutiny than that which might be in place should we have to react to an emergency Bill, for example. Because, if this legislation isn't in place but external events take place that we have to respond to, then we will have to respond, and the other option would be an emergency Bill, which doesn't have the same level of scrutiny as we're proposing here.  

Okay. Thank you, Minister. If I could move on quickly to some questions about the made affirmative procedure, I just really want to understand the rationale for including a 60-day scrutiny period for made affirmative regulations to take permanent effect and how the Government will assess which procedure will be used to make those regulations.

For both the draft and made affirmative regulations, the key rationale is to ensure that those regulations must be voted on before the legal effect is made permanent. I think that that is a very, very important part of this Bill. Welsh Ministers will propose a timescale for both procedures before the vote that reflects the date by which the regulations need to come into force, the complexity of the issues involved, the length of time needed to provide suitable scrutiny, and the desire for early certainty to be provided to taxpayers. I'm very mindful at all times of the need to strike that balance between the need for the vote on the regulations to occur quickly, to provide certainty for taxpayers, and also, then, the importance of the scrutiny.

This, I think, is an issue that arises with the UK finance Bill, and we've looked very closely at the time frame provided there, to inform our decisions here. The time between the publication of a finance Bill and Royal Assent is frequently around four months, including any periods of recess. So, I consider a maximum of 60 days should be sufficient for scrutiny, when it's remembered that the regulations that Welsh Ministers make will, in all likelihood, relate to a small number of specific issues, unlike the finance Bill, which addresses issues potentially in all of the UK's taxes. So, I think that what's being proposed is proportionate. And although, in a different legislative context, the use of the 60-day period for made affirmative regulations seeks to provide Ministers with a similar ability to make legislation to that of the UK Government, albeit restricted to those external events, the made affirmative regulations have effects similar to the UK Government's use of resolutions under the Provisional Collection of Taxes Act 1968, which enable changes to be brought into force immediately and scrutinised and voted on subsequently. So, we're seeking a similar kind of power. 

12:45

A final question from me. The Bill does not include any review period in order to assess how effective the legislation is. I just wondered whether the Government will periodically be reviewing the legislation to determine if it is fit for purpose. 

Yes, I agree in principle to the review of the legislation. I think it would make sense for the legislation to be reviewed after the powers have been used a number of times, or in a number of different scenarios. So, there would be some consideration given there as to the body of evidence that we have to review. So, I think it's different to some other Bills—sorry, some other pieces of tax legislation—where we've put a firm time limit on when a review might take place. I think, in this context, given the fact that these powers would be used, I imagine, not frequently, then we might want to think about the kind of, as I say, body of evidence that we would want to be scrutinising and to be considering in any review. 

Thank you, Chair. Thank you, Minister. From what you said earlier, I take it that when we eventually get aggregate tax, which we seem to have been waiting for forever, these rules will apply to that. And if we had a land value tax, it'd apply to that. And any further taxes that come in, this will apply to.

Yes. The regulation-making power would be extended for any future devolved Welsh taxes. The use of the power would be constrained in the same way, for any new Welsh taxes, to the four purpose tests. Shall I check with officials if they have any reflections on any processes that might need to take place for this legislation to apply to future tax responsibilities? Andrew.

I was going to say, obviously, the new Bill, for example, if there were to be a Bill for aggregates levy to be introduced into Wales and become a devolved tax, then, obviously that would include and need to include amendments to this Bill to include them in the list of taxes. So, currently, there are only two taxes listed, so then there'd need to be three taxes listed. But I think the other important point to recognise is that, in relation to the external events—. And, interestingly, Mr Hedges raised two different types of taxes. So, one would be the vacant land tax, which would be a self-generated tax, a Welsh tax, that didn't have a UK equivalent or a UK predecessor tax, so, obviously, in that case, the rules related to changes to predecessor taxes wouldn't impact on that. So, there would only be three possible reasons, or three external events, that would impact on Welsh-generated, truly Welsh-generated, taxes, as opposed to ones where there is a predecessor tax. Whereas, obviously, with aggregates levy, that would have a predecessor tax, so all four of the purpose conditions would apply.

And moving on, responsibility for the administration of land transaction tax and landfill disposals tax is with the WRA. How confident are you that the WRA can react quickly and effectively, and do you expect them to incur extra costs if they do?

We work really closely with the WRA to consider the implications of any changes in devolved tax policy and their expertise and advice on tax design does help us to ensure that proposals are appropriate. So, we've worked—. We have quite live recent examples of how we've worked with the WRA at pace to implement tax changes successfully, such as when we introduced the LTT holiday in July of 2020 in response to the coronavirus impact on the housing market. So, I think the WRA is very impressive in how speedily it can respond to the changes that we have implemented.

And then, in terms of costs, I think it's difficult at this point to say what the costs might be, because some changes might be very simple and could be absorbed within the general operating costs of the WRA, whereas it might be the case that, in future, system changes might be necessary or some more fundamental changes might be necessary to the way in which the WRA deals with some of these taxes. It would be more difficult to say in that case, but generally speaking they operate and respond very quickly and are able to do so within the core budget that they have. 

12:50

Thank you. That takes us further on to the position of cost. One of the things this committee, and as a Senedd in general, has been very keen on is realising that costs of implementing legislation mean less money available for other services. Many of us, I think probably the majority of us in the Senedd, see the provision of services as the key role that we have and the funding of those services. You don't appear to be able to provide a detailed explanation of the costs involved with this Bill. Is that because it's de minimis, or is it because you just don't know?

I think that the reason why we're not able to provide costs is because we don't know precisely to what external events we will be responding and what the necessary response might be. As I say, some of those costs could just be absorbed within the normal operating costs, whereas there might be other costs involved in terms of preparing the WRA, for example, to be able to respond. That said, not having this legislation could equally present challenges and have cost implications for the WRA in the sense of not being able to respond to tax avoidance activity in an agile way. So, I think there could be costs either way, but my assessment is that costs would be generally relatively low and be able to be absorbed in the normal operating costs. But, of course, if we had specific proposals or were responding to a specific external event, then in providing information to the Senedd we would be able to provide more detailed analysis of the costs specific to the specific external event we were responding to. I don't know if officials want to provide any more thoughts on the cost issue. 

Andrew Hewitt