National Assembly for Wales

Thank you, Chair, and good afternoon, committee. In terms of our legislation, which we're currently consulting on at the moment, that proposed legislation would provide Welsh Ministers with powers to make regulations in relation to the Welsh tax Acts, using the provisional or made-affirmative procedure in specific circumstances, and of course that, then, would mean that the effect of such regulations can come into force immediately.

The implications of not being able to make such changes are that we would have to use either the powers in the Welsh tax Acts that exist already, or introduce primary legislation. And the impact of not being able to make any immediate changes for things such as avoidance activity, for example, would be that that activity would continue until such time as the law changes. So, the proposed legislation would give us that ability to act quickly and in a very agile way. I think that's also important, because the UK Government sometimes undertakes measures and takes decisions that have a direct impact on our devolved taxes, and consequently on our budget.

So, for example, where the UK Government makes changes to our predecessor taxes and those changes are introduced with immediate effect at a budget or shortly thereafter, then it could, for example, result in the greater tax effort being made by individuals across the border, and then, obviously, that would have an impact on our block grant adjustment, increasing the block grant adjustment and reducing the resources available to us. And, of course, the contrary would be the case if the UK Government took the opposite decision. So, clearly, there would be a need to operate and move very quickly in terms of our response, because there could be an impact directly on the Welsh Government's budget, and we might want to take decisions that are in the same field as well.

Thank you, Chair. We need to grow our tax base. I think that is something everybody agrees with. How we do it—there's a lot of disagreement, but we actually need to do it. There are two things we need to do. One is to increase the working population, and, secondly, increase the average income of those in work. Now, none of that falls under your remit, but what discussions are you having with your Cabinet colleagues on the importance of this? And also remember, as I'm sure you do, that Scotland did very well on the amount of money they had per head, because their population went down. So, there's a double-edged sword in there somewhere. But having more people paying more tax and more people in the higher income groups, and also increasing productivity in areas where you could increase productivity, which doesn't include things like teachers, for example. Giving a teacher a class of 60 rather than a class of 30 would be a 100 per cent increase in productivity, but would not be a 100 per cent increase in educational attainment.

Thank you, Mike, for that question, and I completely agree with you that this isn't simply a tax policy issue, and our wider policy development needs to take account of the importance of growing our tax base to raise revenue to spend on public services over the long term. And I do think that that is well recognised in our tax policy work plan, which really does recognise the importance of taking action to support growth in the Welsh tax base, and also to develop the means to monitor progress.

Some of the key determinants of changes in the Welsh tax base that we're seeking to look at are population and demographics, including household formation, employment rate and wage growth, productivity trends and determinants, migration and commuting flows across the Wales-England border and, of course, land, construction and property market trends as well. Clearly, influencing these determinants requires a lot of non-tax-policy levers as well as tax levers, particularly in economic development, skills, planning and housing policies.

So, one of the places where you'll see some of that work come together now is the national development framework—the national plan 2040—and that plan aims to support the growth in the tax base by identifying where housing and employment should be growing in future, and the kind of services and infrastructure that we would need to locate to support that as well. So, I think that that is one of the key areas of work where we're trying to support the increase of the tax base.

This is really a difficult question to ask you, because it's really a question for a different Minister, but what do we do to bring in more high-value employment into Wales? We're very weak, if you compare us in percentage terms, against England or against other areas, in terms of a whole range of things—professional services, ICT, life sciences, all these high-value employments. Are you just having these discussions that, if we are going to grow our tax base, we need to get more highly paid people coming here?

Yes, I absolutely agree with that, and some of the work that you can see there is the discussions we've been having about growing skills, particularly in the cyber sector, for example. So, Wales is getting an increasingly good reputation, globally, as a leader in the cyber sector, and those jobs are really good jobs and they pay well, but then other challenges come with that, because we know that women and girls are less inclined to go into that sector as well. So, as well as putting that focus on cyber, then we need to surround that with the mechanisms to ensure that we also have that diverse workforce as well.

So, these are certainly discussions that are going on. As Mike says, lots of this lies in other Ministers' portfolios, but I'm really clear that I have a job to do in order to work with colleagues to support these efforts. And as well as encouraging people to come to Wales and settle in Wales, we have to ensure that people in Wales are able to maximise their own income as well, and you'll see lots of that with the work that's been going on in terms of our skills agenda, the apprenticeships agenda and so forth. But then also we have the huge challenge of COVID, and what that means for employment in Wales generally, and the immediate interventions that you've been seeing that we've been trying to introduce in order to save jobs in the first instance to ensure that those kind of scarring effects on the economy are minimised as much as we possibly can.

Can I just move on to another topic, council tax? It's been said—. We've been told it's a regressive tax. I see Alun Davies and Nick Ramsay in front of me on the screen. One of Alun Davies's constituents, living in a £60,000 house, and one of Nick Ramsay's constituents, living in a £1 million house, will not be paying—Nick's constituent will not be paying almost 100 times that of Alun Davies's—

That's not my house, by the way. [Laughter.]

Thank you. They'll not be paying 100 times more. We've had Gerry Holtham come along talking about instead of taking bands, actually taking spot house values, so that you don't have the situation of somebody in a £400,000 house and somebody in a £4 million house in exactly the same band, as we have at the moment, but a percentage of the value of the house, or a land-value tax, which the First Minister was very keen on at one time.

Yes, and we've been really pleased to make some progress in terms of establishing the evidence base, which will help the next Government now, I think, determine the way forward in terms of local taxation—both council tax and non-domestic rates. We've commissioned the Institute for Fiscal Studies to consider the impact of a council tax revaluation, and the opportunities that that might provide to make the system less regressive, and I know this is something that you, Mike, are particularly passionate about. We've also commissioned Jennie Bunt from Cardiff University to conduct research into whether council tax could be based on local assessments of household income.

So, those are two parts of the pieces of research that we've undertaken, but one of the other major ones is the work that Bangor University was commissioned to undertake. And that explores whether local taxes in Wales could be based on the value of land, rather than the current position, which is the amalgamation of land and property value, as well as those factors such as household composition. Bangor University published the findings there in March, and you can find that on our website. It does provide an initial appraisal and some international comparisons as well, identifying further work that would be needed to take that forward. But it's something that I'm very interested in. I'll be bringing together all of those different pieces of work in the coming months to make a statement in the Senedd, but I know that committee will be interested in what those pieces of work tell us about potential fairer options for the future. 

Can I just urge caution over using household income there? Great skills exist amongst people, especially in the higher earnings bracket, to minimise their income tax by a whole range of activities, which I don't want to go into at the moment, but there are a whole range of those, and, if you go for household income, I think you may well find that some of the people who have the highest income end up with very low tax. We know that happened in America, because Donald Trump didn't pay tax for a year, despite the claims he's a billionaire.

I would just agree, Chair, that there are plenty of dangers in terms of a local income tax based on individuals' income, but, obviously, if that was a road that Welsh Government, in the future, would seek to go down, we'd seek to minimise any possible risks of tax avoidance and evasion and so on. But, clearly, that will just be one of those factors that will need to be considered, as all of those different potential options are worked through.

And I'm sure that's true of nearly all taxes as well, isn't it, really, not just that particular one.

It's not true of all taxes. It includes taxes that are—

Well, other taxes that are susceptible to the same.

[Inaudible.]—rates or business rates, and the other one is the council tax as it is as the moment. That's why you find lots of the very rich disliking both of them intensely. They don't mind corporation tax and income tax; they can find their way around those.

Okay. And I'm not disagreeing with you, Mike, in case you think I was. Okay, we'll move on to Mark Reckless, then. Thank you.

If I can address this question to the finance Minister rather than my fellow committee Member. [Laughter.] You've said, Minister, that you don't feel the mechanism for introducing new taxes is fit for purpose. Why did you say that, and what are you doing about it?

Well, as you'll be aware, the mechanism is set out in law in terms of the steps that Welsh Government would need to take in order to see the devolution of further tax powers, and we have, in really good faith, engaged with the UK Government for more than two and a half years on this agenda within the context of a vacant land tax. My most recent meeting was in person with the Financial Secretary to the Treasury back in March of this year, and, at that point, I thought we had made some decent progress and that the next step then would be for him to write around to his colleagues in the UK Government to ascertain their views. But, unfortunately, in August we did receive a really disappointing letter that just sought to reopen the whole series of questions and debates that I thought had already been answered in previous negotiations. So, in that sense, the mechanism just hasn't proved fit for purpose.

The crux of the problem is UK Government is the final arbiter on whether enough information has been provided to support a proposal, and I think that's one of the areas that we really need to review, because UK Government can, quite rightly, take a view on the competency issues, but then the policy issues really are for Welsh Government and the Senedd to be determining.

You say it's not fit for purpose, but whether it's fit for purpose surely depends on whether one's purpose is to devolve more taxes or not. Isn't it just possible that Welsh Government, looking at this clause, has thought, 'Ah well, this is a mechanism to allow us to devolve more taxes, and let's just tell the Government in Westminster what taxes we want to have and answer their questions and then taxes should be devolved'? However, isn't it possible that, at Westminster and in Whitehall, that isn't the understanding of what this clause is and they don't see it as having a purpose of devolving more taxes and hence it's not operating to do so?

No, I wouldn't agree with that. I think that we both understand what the purpose of the legislation is in terms of allowing the devolution of further taxes, and I think that we had been making, as I say, some good progress. Certainly, at March of this year, we felt that progress had been made and that we were now moving on to that next step along the process in terms of the write-around to UK Government departments. But then, all of a sudden—and I'm sure it's political, rather than anything else—the decision was made to start asking questions again, which just reopened the whole process. Really, the reason why the vacant land tax was chosen as the first tax to seek the devolution of powers for was because it's relatively small and contained, it's relatively uncontroversial, and it felt like the right kind of tax. I remember the First Minister, when he was in this role, used to talk about testing around the track and so on, and it felt like the right area to do that. But, unfortunately, we're just not making any progress. So, I say it's not fit for purpose because I can't envisage a way in which the system as it currently is could allow the devolution of any further tax-raising powers to Wales.

Well, I'm glad to hear that, Minister. Could I ask you, on the Welsh rates of income tax, which have already been devolved, how you feel it's working in terms of identifying Welsh taxpayers with Her Majesty's Revenue and Customs? Is the position satisfactory there, do you think?

Yes, we've got a really good relationships with HMRC in terms of how we are working with them on this particular agenda. We've got a service level agreement between Welsh Government and HMRC, and that includes some performance measures designed to ensure that there's a continued focus on ensuring that we have identified and maintained an accurate and robust record of taxpayer population here in Wales. There's a regular cycle of activity included in that service level agreement, including the HMRC data scans, for example, to ensure that the data is accurate. So, I do think the system that we have is working well there. I had a really good meeting recently with the senior official who's dealing with this at HMRC, and I think that if they haven't already given evidence to Finance Committee, they're due to, as well, to let you know how things are from their perspective.

HMRC explained in their evidence to us about identifying Welsh taxpayers and then sharing the appropriate tax code with employers. They then, in their evidence, said,

'We are then reliant on employers to operate those tax codes correctly'.

Is that the case now, or would that only apply if Welsh rates of income tax were different from those applicable in England?

Well, we still need individuals to have been coded correctly, because it is important that individuals understand that Welsh Government is now the beneficiary of part of the tax that they pay. And I think that's important in terms of establishing those relationships between Government and the individual and the tax system that surrounds that. And that's one of the reasons why we're trying to make some improvements in terms of awareness of WRIT through our annual tax summary, which individuals will be able to find a link to on the UK Government's website. And that will show a breakdown, then, of how their Welsh rates of income tax have been spent.  

Andrew just put his hand up. I wonder, Andrew, if I could share the hypothesis I have, that when the rates of income tax are the same, what matters is the employer just pays the tax for the relevant person and ascribes it to the relevant person when they report to HMRC, but they're not required to do anything in terms of changing the tax that individual pays because they're a Welsh taxpayer. Is that understanding correct, would you say?

It's correct in the sense that whether you've got a C code or you haven't got a C code, at the moment it doesn't affect the amount of tax that you pay. It does affect how the tax you pay is distributed, obviously, because some of that money comes to the Welsh Government and some of that money goes to the UK Government. But the point is that, as soon as the Welsh rate of income tax was introduced, the C code then should apply to anybody who is resident in Wales and paying income tax. That's the correct tax code for that individual. But it doesn't have any material impact on the amount of tax they pay at the moment, so I suppose the incentives, particularly on the taxpayer—. There aren't the incentives that you would have if there were different rates. So, you would probably expect more inquiries and queries about tax codes if the rates were different, which would probably mean that the rates at which people made sure their tax code was correct would be higher. 

Her Majesty's Revenue and Customs said in their evidence to us that their identification of Welsh taxpayers was correct in 98 to 99 per cent of cases, and what I infer from that is that they test a subsection of the people they've identified as Welsh taxpayers and follow up and find out that, in 98 to 99 per cent of cases, that's accurate. What I'm more concerned about, though, is people they haven't identified as Welsh taxpayers who might be Welsh taxpayers. What are they doing in that respect? Andrew. 

There is a variety of techniques that HMRC have for checking on that kind of thing. So, for example, one of the things that they do is something called the data clash, where they take their own database of Welsh rate taxpayers and they compare that to other data sources that may be relevant—electoral registers, a variety of other data sources. And where there's a mismatch between the two things, then they will correspond with the taxpayer and give them an opportunity to correct things if they've been incorrectly attributed as a Welsh rate of income tax payer or the other way around. None of these things are entirely perfect, but there are some methods that can be used to try to whittle down the number of mistakes in the system. 

Finally from me, do you think there may be an implicit bias, which I don't say in a pejorative way, but just in the way the system works, that, in order for us to get income tax money, someone has to be identified as a Welsh income tax payer, and the default is that they're not one unless they're identified as one? So, to the extent that data is uncertain or ambiguous or addresses aren't always properly filled in, isn't the bias in that that we lose out by people not being recognised as Welsh rate income tax payers more than we benefit when they are incorrectly identified so?

I think it would be hard to argue the contrary, but this is why it's so important that the work that HMRC is doing in terms of the scans and in terms of the comparisons of data is so important in terms of ensuring that we have the best possible record of our taxpayers. We see improvements all the time in terms of the scans that HMRC are undertaking. The latest scan was in September and showed a 2.9 per cent error rate, and that's down from 3.3 per cent earlier in the year. So, they're making constant improvements in that regard, and it's something that is always discussed, I know, in terms of the service level agreement meetings that officials have with HMRC as well.

How is that 2.9 per cent consistent with 98 to 99 per cent? Surely it should be the remainder of that. Andrew.

So, the 98 or 99 per cent is HMRC's estimate of the accuracy of their records. The C codes are the responsibility of the employer to put onto the payroll. So, the accuracy of the C code is, in part at least, a function of employers applying the correct code. HMRC have their records, employers have their payroll systems and the two things then automatically match up. So the figure, then, is the difference between HMRC's records and employers' application of the C code.

Yes, okay. That makes sense.

Thank you very much. Briefly, before my line of questioning, I'm very interested in the discussion now as to the premise around the vacant land tax. You did mention, Minister, the rehashing of established, unresolved negotiations now being upended, and you identified this as potentially political. So, can you outline for me, really, and perhaps the wider committee, what you believe lies behind this seeming sudden change of approach? I mean, what does that mean in terms of Welsh determination, practically, for Welsh policy and the Senedd? I don't know if you caught that, because I've got a dog. [Laughter.]

I did; I was just unmuting myself. In terms of what's behind this, I think, fundamentally it's a dislike of devolution and an unwillingness to engage properly with devolution. I think that's what's behind this, more than a fundamental disagreement about the competency for vacant land tax. I'm afraid that's my assessment of it.

Okay, thank you. I just find that interesting. Thank you. In regard, then, to understanding of Welsh rates of income tax for the public, there's been discussion that that remains quite low, so how is that being monitored in regard to public awareness, and what conclusions have you made from those findings?

So, the baseline measurement awareness levels were taken ahead of its introduction in 2019, and I'm really pleased that we have seen a significant increase in awareness, of 14 per cent, by then, and I think that that is particularly positive, given the fact that rates haven't changed. You could imagine that were rates to change, the level of awareness would be much greater. But I'm seeking, really, to use the budget to set the context for the role that Welsh rates of income tax plays and to give it a greater profile as we continue to try and engage with individuals on this particular agenda.

And as I mentioned previously, we're developing an interactive Welsh rates of income tax calculator, and that will illustrate for people how their Welsh rates of income tax are being spent on key public services in Wales. A link to that tool will be included with every individual's annual tax summary in order for them to go online and investigate further, really, how their money is being spent.

Thank you, Minister, for that response. We discussed this earlier, but in regard to how appropriate the data is from HMRC in allowing us to develop our own forecasting and economic models for our receipts, what is your view upon the appropriateness or otherwise of that? And also HMRC mentioned that it's in discussion about a new project to deliver longitudinal data for Wales, which I do believe is really badly needed. So, can you also expand on that project, and what level of access stakeholders, such as academics, have into this project, which is, I would have thought, very worth while for Wales?

Yes, certainly. The OBR provides the forecasts of WRIT for Welsh Government's draft and final budgets, and analysts from the Welsh Treasury are involved in those discussions regarding the models used and the forecasting judgments made. Julian's here in the committee meeting today, so he might want to provide some insights and reflections on that. In addition to that work, the Welsh Government also undertakes its own modelling of WRIT, and that uses the detailed data set that is provided by HMRC in order for us to be able to undertake that.

I think that officials would argue that that data set has been improving in recent years, and that those improvements have been very much arising from the work of the analytical working group. That brings together analysts from the Welsh Treasury, the OBR, HMRC, the Scottish Government and the Scottish Fiscal Commission in order to ensure that the best data set possible is now provided. I think it's fair to say, again, that that information is now being provided more promptly and in greater detail than previously, which is also to be welcomed as well. I think that officials would also say that there are still opportunities for further improvements, but it is very much constraints around taxpayer confidentiality and the long lags in data due to the way that self-assessed tax data is collected.

So, those are two particular concerns—or challenges rather than concerns, I think. They do relate to that HMRC work that you referred to as well, which is very much at an early stage. I think that some of those practical issues relate to that piece of work. I understand that it may initially only cover higher income tax payers in the first instance, but then it could be expanded to cover all taxpayers in due course. And of course, again, this is really about access to the data and trying to access data in a way that maintains confidentiality for the taxpayers concerned. But I'll just turn to see if Julian has anything to add on his discussions in this field.

I think you've covered that pretty well, Minister. There are undoubtedly challenges in income tax data, largely due to the long lags in getting outturn information, because people don't file their self-assessment returns until well into the year after the year in question, and then by the time all that's processed, by the time you get the statistical data set out of that, it's a good few years down the track. I think we're currently using detailed data from 2017-18, so you have to project forward from there just to get to where we are now, let alone into future years. But in the Welsh Government we're in exactly the same boat as HMRC and the OBR and the Scottish Fiscal Commission in using that data, so those challenges are not different for us because of a lack of access. The challenges are the same for everybody.

Okay. Thank you.

Thank you, Rhianon. We'll move on, then, to Nick Ramsay.

Diolch, Gadeirydd. Afternoon to you all. Can I ask you about the suitability of the Barnett formula and what alternative arrangements there could be? Obviously, the Barnett formula is used for calculating changes to the Welsh block grant, and has been forever now, it seems to me. What discussions have you had with the UK Government on alternative funding arrangements that would fairly reflect the funding needs of Wales?

The Welsh Government's long-term aim is for a much more needs-based funding system that operates consistently across the UK. You'll have seen that set out in the two documents: 'Reforming UK funding and fiscal arrangements after Brexit: Securing Wales' Future', and then also in the finance section of the 'Reforming our Union: Shared Governance in the UK' document. But I think there are some benefits to the Barnett formula, and we've seen them through the COVID crisis in the sense that it allowed Welsh Government to receive funding in a very quick way. So, that kind of speed I think was really useful for us in terms of allowing us, then, to respond with speed to the challenges of COVID. So, while being far from ideal, it does at least allow the rapid allocation of resources to devolved administrations, and we've seen the benefit of that. But as the committee recognised, I think, it doesn't—

That's the first positive I've ever heard about the Barnett formula.

There are plenty of things that are not in its favour, but I think that allowing speed within a crisis is certainly a really valuable thing. There are other things, obviously, that could be improved with the Barnett formula and all of the mechanisms and structures that sit around it, though.

You've just touched on the pandemic. How has the allocation of funding for the pandemic through the Barnett formula impacted on your ability to plan your spending? Obviously, you can get the money quickly, but then you've got issues over how much you're getting. 

Originally it was more difficult when we were having allocations made on a case-by-case basis following announcements across the border in England. So, negotiating the guarantee of funding, which now stands at £5 billion, has been really important in allowing us to respond quickly, but also not waiting for announcements from across the border. It brings its own set of challenges then, because we're still waiting for the reconciliation work to be done with the UK Government so that we can fully understand exactly to what the allocations that we've had relate. So, that's problematic because we don't know if there could be further funding coming within this financial year and, if so, we need to know that kind of information in order to properly budget and manage the finances. Overall, it's been good in terms of speed, but there is a lack of transparency, I think, as well. 

It's obviously been tinkered with now, the Barnett formula, so we've got the guarantee and we've got this needs-based factor to it, which is obviously a good thing. Will that in itself need to be kept updated over the months and years ahead? Is there a danger that if the UK Government say, 'You've got that now' and it's just left as it is, then that won't keep up to date with the needs of Wales? 

Our block grant funding per head is expected to converge slowly with the comparable funding in England. At the point at which the block grant funding reaches 115 per cent, that transition period that we're currently in will end, and the needs-based factor will then be set at 115 per cent. As part of that and as part of the agreement, there are review periods set out within that as well. I'm not sure if officials want to reflect on the review periods and when we can expect some further engagement on that. 

I'll come in on that if you like. When the agreement was reached, there was a presumption that there wouldn't be very frequent reviews, but there would definitely be a review of it before we reach the end of the transition period. Also, it's open to either Government to request a review, and that review could easily involve outside bodies to help to provide an independent view, I suppose. So, there is definitely a mechanism there that allows us to ask for a review if the Welsh Government feels that the framework is not working in the way that it was expected to.  

Okay. And just two more questions from me on the Barnett formula. What consideration have you given to Gerry Holtham's commission's work that developed the needs-based formula to replace Barnett eventually? And what issues have emerged regarding the application of Barnett in the recent spending review, if any? 

The 115 per cent in the fiscal framework agreement is based on that needs-based work of the Holtham commission, and that Holtham commission was really highly influential in the formation of the agreement. The commission's needs-based formula provides a relatively simple approach to needs assessment, but I don't think that we can underestimate, really, the challenges that would arise to try and find a needs-based formula that would be acceptable to all four of the UK Governments. I think that would be a hugely difficult piece of work; that's not to say that it shouldn't be done, though. But then, also, in terms of the recent spending review, the Barnett formula has been applied in the same way as usual at a spending review, by applying the comparability factors to increases relating to each UK Government department, depending on the degree to which the programmes are devolved. But there has been one exception to this in the latest review, and that is that COVID funding has been allocated at a programme level, so each individual programme is either 100 per cent or 0 per cent devolved. So, that's the relationship to the spending review. And also, as in 2020-21, the farm funding element has also been calculated outside of the Barnett formula.

In terms of that COVID spending, then, that's been—. I was going to ask you about ways that the formula has been bypassed; that would come into the bypassing of the formula. You said it's been allocated on a programme basis.

Yes, so any funding that the UK Government has allocated to COVID, we have received a 100 per cent share of that, or 0 per cent, depending on if it's been allocated via departments. So, in that sense, there hasn't been a great deal of negotiating to be done. It's just an automatic allocation, if you like. One of the extremely disappointing things about the recent spending review was the determination by the UK Government that Wales should have zero comparability with either Network Rail or HS2 infrastructure programmes. That now means that we have a comparability factor of just 36.6 per cent with the Department for Transport, so we only receive a population share of around a third of changes to the DfT budget, and that compares to a comparability factor of more than 80 per cent in previous times. So that, clearly, was one of the big disappointments, I think, of the spending review last week.

Andrew has indicated he wishes to come in, as has Mike, and then Rhianon. So, we'll move to Andrew first.

Just a very quick point to expand on what the Minister was saying about the COVID funding. So, in a spending review, the Welsh Government normally gets consequentials of departmental settlements. In the case of transport, for example, the departmental comparability factor is now 36.6 per cent, so we would get 36.6 per cent of any increases to transport. But the COVID allocation has been done at the programme level, so where in transport there has been additional funding for public transport in England, we've had a 100 per cent consequential of those COVID allocations. Hopefully, that's clear.

Thank you for that, Andrew. Mike.

I wasn't sure if I had to unmute myself or if it would unmute me. It's unmuted me. Just very briefly, the Barnett formula is the minimum, isn't it? Northern Ireland, for example, has quite regularly had substantially above what it should get under the Barnett formula, because the Westminster Government decided to give it that. So, it's a minimum, not a maximum. And the second one is that transportation is a problem. The problem with transportation is how it is defined within transportation. If it is defined as national rail, we get nothing. If it's defined as local rail, we get some. I would urge the Minister to try and get, within the Barnett formula, a set percentage of transportation money allocated to us, rather than allowing the Treasury to decide what to call it, and then, when it decides what to call it, to decide how much we get.

Mike's point is really important about the Barnett formula being the minimum, if you like, because one of the areas where we're seeking additional funding from the UK Government is in respect of the major flooding events that occurred earlier this year, and I think that that is one of the areas where Wales has been disproportionately affected. Another area is, of course, our coal tips legacy, and again we are very much disproportionately affected there as well. Coal tip safety is so important and has a strong resonance, clearly, with Welsh communities. Both of those areas are areas where we would expect to receive funding over and above the Barnett formula, and of course the Prime Minister did promise that funding would be passported to Wales in respect of flooding, but we have yet to see that. I think I have a meeting with the Chief Secretary to the Treasury in the first part of December, so I'm happy, of course, to update the committee on any progress that we might make.

We'd appreciate that, Minister. Thank you. So, briefly, then, Rhianon, if you would, because we've got another two areas that we need to cover.

Yes. Mike's sort of asked the question for me. I think, in order for clarity, is it a failure or a bypassing of the mechanism or of Barnett around our lack of consequential in terms of infrastructure and HS2, or is it a lack of a mechanism?

I think it depends largely upon how the UK Government views these things. So, UK Government would view HS2 as a scheme for England and Wales, which is ridiculous, because UK Government's own documents show that Wales would be worse off to the tune of £150 million a year as a result of HS2. We do acknowledge that there could be some benefits for north Wales, north-east Wales in particular, as a result of HS2, which clearly is a good thing, but then that's very much offset by the negative impact that it would have on south-west Wales, making Swansea and further west much less of an attractive investment proposition, due to the times of travel involved. So, overall, as I say, the UK Government's own analysis suggests that it's £150 million a year that Wales will be worse off as a result of HS2.

But my question—sorry—if I may: is it a failure of the existing mechanism or a bypassing of it, or is it lack of a mechanism with regard to why we're not gaining what we should around that? Or is it, as you say, just their interpretation?

I would suggest an interpretation. I'd be interested to see if officials agree, but in my thoughts, that's an interpretation.

Andrew wants to come in.

Yes, it's a difficult question to answer. I think interpretation is at the heart of the problem here. Part of our argument is that Wales now has a share of the rail infrastructure in Wales devolved. The Valleys lines are now operated by the Welsh Government through Transport for Wales, and as a result of that, then rail infrastructure is at least partially devolved, but the Barnett formula doesn't really deal very well with—[Inaudible.] So, I think it's just the failure of a rather creaky system to deal with a complex context.

Yes, okay. Thank you for that. We'll move on now then to Alun Davies. Diolch.

Thank you very much. I was enjoying the conversation, as it happens. In terms of where we are, Minister, we've spent some time having these conversations with lots of different people, and the conclusion I'm coming to—and I'd be grateful for your observations on this—is that the fiscal framework, such as it is, works reasonably well in a very straightforward, technical way. We say we'll do this, and that happens, and it works, technically, reasonably smoothly. I haven't, in any evidence session that we've had here over the last period, come to the conclusion that there's any problem with the machinery and the mechanisms that are in place to implement it. But the framework itself falls far, far short of what is required to adequately run the complex funding and financial arrangements of what is, to all intents and purposes, a federal state. Is that the sort of conclusion that you would come to, or do you think that there's an issue with that impression or analysis of mine?

No, I would agree with that. Some of the issues relating to the framework that don't work as well as they could relate to the funding flexibilities, which we've talked about quite at length in committee. And you'll know that some of the flexibilities we're currently seeking relate to carrying funding over across financial years. I can understand why Treasury would be unhappy at that proposition, but actually, we're in an incredible situation at the moment, which this framework wasn't designed for. So, I think it would be reasonable to allow us to carry COVID-related funding particularly over across financial years in order to allow us to plan there. So, that's one example. Other examples, of course, are around borrowing and how much we draw down from the Wales reserve and so forth. I think that these are things that if Governments were able to engage on them in a collegiate and helpful way, then we could address them, because they're not asking for additional funding, just the ability to manage our funding better.

That's quite a statement to make: essentially, telling us that UK Government are not engaging in a collegiate way, which is really quite something. But the structures of governance have to go further than that, don't they, Minister? Because one of the criticisms I make of the structures of the United Kingdom at the moment is that they rely too greatly on personal relationships—Ministers getting on with Ministers, officials getting on with officials—and being able to overcome some of the structural failures that we have to deal with. And the real issue here, though, is around not simply the borrowing aspects, which are reasonably technical matters, but the structure that lies at the heart of this fiscal framework, which is, as you've described in terms of the rail issues in answer to a previous question, where the UK Government acts, essentially, as judge and jury and then acts like a robber baron in terms of just saying, 'Frankly, we're going to take this cash whether you like it or not. Who do you appeal to? Well, my colleague Minister, who'll agree with me. And where's the appeal after that? Well, that's to another Minister in the same administration.' That's not the structure of federalism and that's not the structure of fairness.

I absolutely agree, and as you were saying 'judge and jury', I was writing down 'judge and jury'. So, clearly, we're on the same page on that one. And you will have seen in the documents that Welsh Government has published on how the UK could operate in future that we would envisage there being a kind of independent arbitrator for disagreements on various issues, but one of those would be funding. Because, at the moment, it's very difficult for UK Government to be, as you've described, judge and jury when there are discussions and debates to be had. Things can be—I'm trying to think of the word for 'moved up to'—escalated to Joint Ministerial Committees, but at the end of the day, UK Government chairs those, UK Government has the majority on those, and there is no genuine place where we can have a fair hearing when there are disagreements, unfortunately.

Oh yes, it's a complete waste of time. It's a fiction of a structure; I've got no doubt about that. But can I invite you to go further than the Welsh Government did in that document that you described? Because I must say, when I read that document, I thought, 'It's a very nice starter, but really, I'm looking for a main course here.' I was thinking, 'Why don't you look at the structures of governance that a country such as Australia has with the—I think it's the commonwealth grants committee they have there?' The Office for Budget Responsibility was, I felt, a very good innovation, frankly, of a previous Conservative administration, where you had an independence inserted into the work of the structural financing of the United Kingdom. I don't know this, but I'm sure the Treasury were very put out at the time. That level of independence is crucial when you've got two Governments—or three or four Governments, however you want to put it—who have differing interpretations of the same words, and different views on the same formula. And then you need somebody who isn't a part of the conversation, but somebody who is able to actually say, 'Do you know what? This is the best way to deliver this, whatever it happens it be.' So, I would invite you, Minister, to throw caution to the wind, possibly, on a Monday afternoon in November, and say whether the Welsh Government would actually want to say that the structures of federalism go far beyond an appeals mechanism.

So, I will admit that I'm not well versed on the structures in Australia that Alun Davies has described, but I'm absolutely keen to explore what works elsewhere, so I'll definitely give that commitment to exploring that further to come to a view.

Okay. But in terms of where we are at the moment—I'm grateful to you for that, Minister—the National Audit Office noted in a report recently that, unlike UK Government departments, of course, the devolved administrations do not have the same relationship with the Treasury, which is, again, what you would expect, and that you don't involve yourselves in the same way in direct negotiations with the Treasury on funding settlements, which is partly resolved through the Barnett structure, as we currently have. But taking that as—I assume you accept the view of the NAO—can you explain to us, to give some life to this report, how you were involved in negotiations with the Treasury running up to the spending review? For example, you've quoted the issue on rail funding. Did you have conversations about that? Did the Treasury warn you about what was going to happen? The shared prosperity fund has been a pretty sorry tale from UK Government, where—I hate to use the word 'fib', but, you know, they haven't been completely honest with either their own backbenchers or anyone else. So, have you had those rich negotiations or conversations around these UK fiscal events that enable you to actually agree a position when it's announced?

No, unfortunately, we didn't have those discussions, and I was surprised. I've been in this portfolio since 2018 and this is my first spending review, and I was absolutely surprised at the lack of engagement that there was. I did think that there would be detailed meetings exploring these particular issues, especially in such an important year, when we're talking about replacement EU funding, and so on. But there were no meetings of that sort.

We were in a position where we had to approach the UK Government with our planning assumptions, because of course we had to draft a budget within just a few weeks of the spending review, so we were approaching them with planning assumptions upon which we were starting to undertake our budget planning. So that, I thought, was wholly unsatisfactory. I know from an official perspective—and I'm sure Andrew or Julian will come in on this—there were quite frequent discussions on some of the technical elements of it. But from that wider, politically important perspective of the future of EU funding—for example, farm funding, comparability factors, and so on—there was no meaningful engagement at all, and we only learned about funding settlements at the very end of that process when I had a phone call on the morning of the spending review with the Chief Secretary to the Treasury. That's the point you just get those high-level figures, at that point, and even on the issue of European funding, there was almost nothing said within the statement from the Chancellor on that. So, again, that then relies on officials poring through some of the detailed spreadsheets that arrive after the Chancellor has sat down from making his statement.

That's very, very poor, and very important as well. Chair, I'll conclude my questioning at that point, but could I ask that we make a specific note of this? Because certainly, as somebody who was a European programmes Minister at the time of the last EU multi-year financial framework, and their budget negotiations, the Welsh Government had a far stronger and more effective input into those conversations around those programmes, both in agriculture and in terms of structural funds, than the Welsh Government appears to be having now. I think that's a very important point for us to return to.

Yes, okay. We'll discuss that once we're in private session and reflecting on the evidence that we've heard. Diolch, Alun.

Chair, is it worth just inviting Andrew Jeffreys to reflect on some of the discussions that he had? Because a lot of these discussions do go on at an official level ahead of the spending review.

It's going to have to be brief, but otherwise, I'm more than happy to take that from Andrew, yes.

Just to be very brief on this, I think there are lots of discussions, but at official level, anyway, I think they're largely technical discussions. I don't think anyone would recognise them as a negotiation, and there is definitely an absence of—. Negotiation is something that generally happens mainly at a political level, and there isn't really much scope for that in the way that spending reviews are done by the UK Government at the moment with the devolved administrations. It's more kind of, at best, consultation, and at worst no contact at all at crucial points in the process. So, I think, yes, it's deeply unsatisfactory from that perspective.

Okay, thank you. Right, Siân. We'll move on to Siân, then.

So, we've requested from the UK Government an increase to our borrowing powers, both in terms of our annual and aggregate borrowing powers, and that's part of the package of requests that we have put forward in relation to funding flexibilities. But, as we've explored previously, we haven't had a positive response to those requests, unfortunately. 

Yes, a limit linked to tax revenues is certainly an interesting alternative approach and could be something that we would explore. I think that any system, really, has to have a clear rationale for setting borrowing limits and how they should change over time. And the system that, actually, we have at the moment, in terms of the annual capital borrowing limit of £150 million and the aggregate ceiling of £1 billion, doesn't really have a concrete or understandable rationale behind that. So, I think that, certainly, one link to tax revenues would at least have a clear rationale behind it, which I think would be important. 

So, it's interesting. It's not something that we've done a huge amount of work on yet. 

'Yet', you say, but it is something you would be prepared to explore. 

Yes, as an interesting alternative. 

Well, the borrowing limits will be particularly challenging in the next financial year, given the very difficult and disappointing capital settlement that we had in the spending review. So, inevitably, it just limits and constrains our ability to be as ambitious as we would want to be in the next financial year, and that's a live example, really, of what the constraints are doing. We've talked about how important capital spend is as we move out of a crisis situation into recovery and, again, it doesn't really make an awful lot of sense that the UK Government has limited capital spend so much in the next financial year. 

Our Wales reserve is relatively small in the greater scheme of things, and I think that being able to access more of that in a crisis situation would be really helpful. And equally, as I mentioned in answer to a previous question, just having that ability to spend funding over and across the financial year, even if it is just COVID funding and even if it is just for one year in this incredible year that we're facing at the moment, that would be really useful, rather than having that perverse incentive to spend funding in a way that just looks towards dates and ends of financial years and so on, whereas we know that the virus is no respecter of those kinds of things. 

But you're not getting anywhere, really. 

Not at the moment. All of us across the three devolved Governments are always making strong representations in terms of flexibilities. We've continued to have those discussions. I don't think the door is yet shut on some of these issues, and particularly trying to pursue that one of carrying COVID funding in particular over across to the next financial year.

I don't think that anyone could have really envisaged the kind of situation that we're in at the moment and the kind of flexibilities that we would be seeking to require. What we're experiencing is completely exceptional at the moment, and I don't think there are many frameworks across the world that wouldn't be stretched by the kind of situation we're in at the moment. But, as I've committed to Alun Davies, I'd certainly take an interest in the examples from elsewhere that the committee has been looking at, and be keen to familiarise myself with those issues more.

Okay. There we are, then. Okay, thank you, and I was reminded as well, of course, when we were discussing the spending review, that we have as a committee written to you, inviting you to come before us next week, if possible, to maybe probe a little bit further some of the issues that we're starting to tease out in this session, so, clearly, we hope that you're able to come, and we'll await your formal response in that respect. But, with that, can I thank you and your officials for your attendance? You will, as always, be sent a copy of the draft transcript to check for accuracy, and we will now, as a committee, go into private session. So, thank you to the Minister and your officials. Diolch.