Y Pwyllgor Cyllid

Finance Committee

01/03/2023

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

Mike Hedges
Peredur Owen Griffiths Cadeirydd y Pwyllgor
Committee Chair
Peter Fox

Y rhai eraill a oedd yn bresennol

Others in Attendance

Emma Watkins Dirprwy Gyfarwyddwr Cyllid a Busnes Llywodraeth, Llywodraeth Cymru
Deputy Director, Budget and Government Business, Welsh Government
Rebecca Evans Y Gweinidog Cyllid a Llywodraeth Leol
Minister for Finance and Local Government
Sharon Bounds Dirprwy Gyfarwyddwr, Rheolaeth Ariannol, Llywodraeth Cymru
Deputy Director, Financial Controls, Welsh Government

Swyddogion y Senedd a oedd yn bresennol

Senedd Officials in Attendance

Martin Jennings Ymchwilydd
Researcher
Mike Lewis Dirprwy Glerc
Deputy Clerk
Owain Roberts Clerc
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 yn y Senedd a thrwy gynhadledd fideo.

Dechreuodd y cyfarfod am 09:32.

The committee met in the Senedd and by video-conference.

The meeting began at 09:32.

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

Bore da. Croeso cynnes i'r cyfarfod hwn o'r Pwyllgor Cyllid y bore yma, a Dydd Gŵyl Dewi hapus iawn i chi i gyd. Mae'r cyfarfod yma'n cael ei ddarlledu'n fyw ar Senedd.tv a bydd y Cofnod ar gael ac yn cael ei gyhoeddi wedyn. Dŷn ni wedi derbyn ymddiheuriadau gan Rhianon Passmore ei bod hi'n methu bod efo ni, felly fe wnawn ni adio hwnnw i'r cofnod. 

Good morning. A warm welcome to this  meeting of the Finance Committee this morning, and a happy St David's Day to all of you. This meeting is being broadcast live on Senedd.tv and the Record of Proceedings will be available and will be published as usual. We have received apologies from Rhianon Passmore, as she's unable to be with us this morning, so we'll add that to the record. 

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

If we move on, then, to item 2, papers to note, we've got a fair few papers to note there. Are we happy to note them, or do we need to put anything on—? Yes, note them. Lovely. Diolch yn fawr.

Yes, we'll pick up anything in there in private session later, so that's fine.

3. Craffu ar Ail Gyllideb Atodol Llywodraeth Cymru ar gyfer 2022-23
3. Scrutiny of the Welsh Government Second Supplementary Budget 2022-23

So, we'll move on to item 3, and, for item 3, we've got the second supplementary budget and the scrutiny of that. It's lovely to see the Minister here, with her officials. Are you able to introduce yourselves and your roles, please? Diolch.

Yes, Rebecca Evans, Minister for Finance and Local Government.

Sharon Bounds, the deputy director of financial controls at the Welsh Government.

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

Croeso cynnes iawn i chi.

A warm welcome to you.

A warm welcome to you this morning. Thank you for all the documentation we've had on the second supplementary budget. We've got, as you'd imagine, a few questions to ask, and I'd like to start this morning by examining how the economic situation is impacting on the affordability of the current budget and how the Welsh Government is planning to respond to these pressures. We're obviously approaching the end of the financial year, and you've got a better view of the impact of inflation. What assessments have you made on how revenue and capital allocations for the financial year can meet your objectives and those of delivery partners?

09:35

Great. Thank you very much for the question and for the chance to talk about our supplementary budget with committee today. So, yes, it's absolutely the case that inflation is meaning that portfolio Ministers are having to manage their budgets very carefully, and it's obviously having implications right across Welsh Government, and beyond, I should say, in terms of local government and third sector and so on. So, in terms of the supplementary budget, what you will see is additional funding to the health and social services main expenditure group to support the exceptional energy costs arising in this financial year. So, that, I think, within the supplementary budget is the only thing that you will see specifically relating to this.

But, nonetheless, I think that beyond that, in health, for example, you'll see that the health Minister now has set out those six key areas in which she intends to focus her efforts and the efforts of the NHS. And I think that that really shows that we are having to really sharply focus our ambitions, and I think that that probably is a practical example of how that's happening.

I mentioned it is affecting others as well. So, our statutory commissioners, for example, are seeing exceptional pressures, and I know that colleagues have been able to support those commissioners with additional capital funding, in some cases, to enable them to take out different leases in different properties that will, over time, save them money.

And then, obviously, the voluntary sector and other partners are definitely feeling the pressure as well. So, just to give you an example, the policing in Wales group tabled a paper on the cost-of-living crisis to the policing partnership board, and that focused on the impact of inflation in particular and it talked about the capacity to deliver services being affected, the rising demand for services as more and more people are pushed into poverty, and obviously, then, the well-being and financial security of staff in the justice sector. I think that those three things, you could say, would apply to all parts, really, of the public sector here in Wales.

So, those are just some examples. But, in terms of the supplementary budget, it is only the exceptional energy costs in health that receive additional funding.

So, is that the one that gave you the biggest headache of having to find that money, because of the inflationary pressure?

I think the real big challenges are related to inflation. The biggest, I think, would probably be public sector pay, and that, obviously, is directly related to inflation. And then energy costs. The UK Government has introduced some measures to assist with energy costs, which will help, but, nonetheless, the costs are still far beyond, I think, what would have been expected a year or so ago.

Sorry, it was taking time to come on then. Diolch, Cadeirydd. Capital schemes: I mean, the great strength of capital schemes is that you can drift them. Is there any suggesting of drifting capital schemes expenditure into the next financial year, in order that the scheme gets carried out, just that it gets carried out slightly later, and 'slightly later' may be a month later? So, it's not really going to have an effect on the schemes, but it affects the financing of them.

I think you could probably look at the education and schools programme as an example of where we've set out a budget that we will spend, but we'll get less for that money. So, it's less about managing the money over financial years, but more about overall being able to buy less for the money that we've allocated towards those projects.

So, just to clarify, the schools programme will take slightly longer—you'll do less each year, so it will take slightly longer to complete.

Yes, I think it's fair to say that. We can get a note from the education Minister about the programme itself. Either that it'll take longer to complete the programme or less will be completed, but we will still spend the amount that we'd originally allocated.

So, based on that, then, the education Minister would then work with partners and work out either you're not going to build that school, or that you'll build that school down the line a bit further when money becomes available. So, in the different areas of those spends, what conversations have you been having with colleagues, then, to see how you prioritise, how you go about, 'Well, that school's desperate, but that one can wait,' or, 'That hospital is desperate, but that one can wait'? What sort of conversations—? How do the conversations happen between you and the Ministers in charge of those portfolios as to how that priority works?

09:40

Those Ministers will work with their officials and others to put in place a pipeline of projects—put in those projects that are most urgent at the front of the list, and they will manage that programme then in discussion with the relevant partners. So, yes, it's mostly for individual Ministers to prioritise within the resources that they have available to them. 

But you've got the overall funding, so are you able to look across Government and say, 'Well, actually, there is this funding that hasn't been allocated there', and are you able to move that around and has any of that happened at all?

It's less a case of money that hasn't been allocated, but when it does get to the end of a financial year and underspends might start emerging, it's at that point then that you are a bit more able to move money across from those areas of underspend to areas where there is the potential to spend late on in the year, or it depends on the situation in terms of the Wales reserve—it might be preferable to add money into the reserve. So, there are different choices as you get to the end of the financial year.

We're not looking at last year, but we're looking to not make the error of last year. Last year, we were told on the Public Accounts and Public Administration Committee that £150 million or so was paid back to the Treasury because it had not been spent. Are you telling us that that will not happen this year?

Well, a few things: just robustly to say there was no error made in that financial year. So, 2020-21 was an absolutely exceptional year in relation to the fact that it was the year of the pandemic, and Welsh Government saw an extreme increase in its resources in order to respond to the pandemic, which was related to the consequential funding we received from actions taken in England. 

In England, of course, they took different choices and didn't drive value for money. We can go on ad infinitum about the personal protective equipment contracts and the approach that they took to test, trace, protect being different to that which we took here. Our projects were very much about driving value for money and delivering a good service rather than awarding contracts to favoured people and fast streams and so on. That did mean that we spent less in that particular financial year on those items, and it did mean that we were able then to make other choices. For example, our support to businesses here in Wales was over and above that which was available to businesses elsewhere in the UK because we were able to drive value for money on the health side of things.

And as a result of that, when you got to the end of the financial year, the health department alone in England underspent by £25 billion and that was returned to Treasury. We spent everything within our overall departmental expenditure limit—so, everything within our overall amount of funding that we were able to spend. However, the UK Government didn't approve a very late-in-the-financial-year switch from revenue to capital, which meant that some of that money was returned to Treasury—£151 million. 

Our Barnett share of what was returned to Westminster from UK departments would have been over £1 billion. So, you can see that we clearly had better value for money driven right through the process here in Wales, and it was just the late decision on the part of Treasury not to approve that switch that meant that the money had to be returned. But, overall, we remained fully within our DEL. I've got Sharon here just to fact check what I've said, because she's been very involved in that end-of-year process.

I think the lesson learnt is that we don't want to ever send any money back and there should be enough forward planning to make sure that all that money is utilised in the best way. If we can exceed the level of help we were planning to give, then value for money may be an enhanced benefit to the community by investing in different things. So, that requires further forward planning. I regret that we have to send money back, and I'm sure we won't be doing that again.

And I think it's easy to forward plan when you have time to forward plan, but unfortunately, in that year when we did have the pandemic, we were having late additions to funding. We had, if you remember, the funding guarantee of £2 billion, but then, a little while later, there was an additional £400 million coming through, so the funding guarantee was only worth so much in terms of giving us confidence to plan ahead.

If the UK Government had agreed to a revenue-to-capital switch at the end of the year, which isn't an extraordinary thing for us to ask of them—we're not asking for any more money; we're just asking for it to be accounted in a different way—then, obviously, we would have remained fully within the DEL that was available to us. So, I think that it's just important to recognise that the amount of money that was our Barnett share to send back was over £1 billion, which wasn't the case. And had we been allowed that late switch, as we have been many times before, then we would have not had to send any back.

09:45

That's something we'll be discussing in the Public Accounts and Public Administration Committee tomorrow, but the point I'm trying to make is that you are confident that we will not be paying any money back this year.

So, I am confident, because the headroom in the Wales reserve to accommodate any underspends arising at the end of this financial year is £221 million. So, I am confident.

Thank you. An interesting discussion there. Your narrative, it includes a reference to the budgetary impact of the UK supplementary estimates, which includes both positive revenue and negative capital consequentials. Were you informed of changes before these supplementary estimates were laid on 21 February, and what impact is this having on your financial position and budgeting?

So, we received the estimate of potential changes on 18 January. Those details were shared with us in confidence by HM Treasury, and we were notified at that point that any revisions to the estimate outside of a 10 per cent tolerance could be carried forward into 2023-24 without impacting on the Wales reserve. Now, that is a step forward, I think, in terms of how we manage our budget at the end of the year. We've talked a lot in the Chamber and in committee about the need for better flexibilities at year end. So, it is a small step forward, but certainly not sufficient. 

When we did have those final estimates on 3 February, the final change to revenue was lower than the estimate but less than 10 per cent difference. So, that didn't make a change in that sense. But the final change to capital was more than 10 per cent lower than the estimate received, and that translated into £18.5 million, which could be, then, deducted from the 2023-24 capital budget. That option is still available to us if we notify HMT before the end of March. But we're going to take it in this financial year, bearing in mind how difficult the next financial years are.

And I think this point itself speaks to the importance of proper flexibilities at year end and, I think, almost an inherent unfairness that we're notified right near the end of the financial year that we'll be having deductions from our budget just because UK Government departments haven't managed to spend their budget. So, that obviously, I think, puts us in a difficult position. I think, obviously, it's easier to accommodate increases in funding, if UK Government departments are awarded increases, but, equally, if we're being asked to spend money very quickly at the end of the financial year, it doesn't always mean that you can plan that spend strategically; it might not always go on the best projects possible. So, our ongoing discussions with the UK Government about improved year-end processes are important, and I know it's an issue that affects colleagues in the other devolved Governments as well. 

How is the relationship these days? Obviously, we've had quite a few changes over the last—well, even the last six months. How is the relationship between yourself and your counterparts in the Treasury? Is that more constructive in these discussions, because obviously it boils down to compromise at times and flexibility, as you said? So, is that better than it was, or is it something similar, or worse, or—? How would you classify it at the moment?

So, the latest Chief Secretary to the Treasury, John Glen, and I have had a bilateral meeting the week before last, I think, [correction: 9 February] alongside also our Finance: Interministerial Standing Committee meeting, which also involved the Deputy First Minister of Scotland in his finance role. That was a really productive meeting. I am hopeful that the relationships will improve under the current Chief Secretary. I think the fact that he was willing to at least explore the 10 per cent tolerance level issue is hopeful, but I don't think that resolves the year-end issues. So, we do need to continue those. But I'm always keen to establish constructive relationships, and I've certainly found the new CST, in our discussions, willing to listen. But I think what will matter now is what changes he's willing to implement as a result. 

Whilst we're looking a little bit—. I know we've had the outturn report, and I know we're here to talk about the second supplementary budget, but there's one question that I had from the outturn report that we've seen. You've previously described the UK Government clawback of 2020-21 underspends from the UK Government departments and devolved parliamentary budgets as well as the £153.1 million adjustment in 2021 linked to this. There's also a £2.4 million additional adjustment to the opening balance of the Wales reserve for 2021-22. What does that relate to?

09:50

Yes, that was just an error from a previous year. So, when the outturn report came out, it's just a matter—. It's essentially an administrative error when we're reconciling, then, what goes into the report compared to what we've actually reported to the Treasury and through our—. The OSCAR system is what we call it, as we report to it. When we were doing a reconciliation through that, we found that there had been a £2.4 million error in what we'd reported last year in the outturn report. So, that has now just been put through this year, to make sure that the balance is correct at the end of that financial year.

And remind me: as a percentage figure, that would be less than—

Very, very small.

[Inaudible.]

I assumed it was, but good to know. So, thanks for that. We've talked a little bit, and Mike asked the question, about reserves, and, in the supplementary budget, reserves are very limited. Is there any risk that any reserves or anything, any revenue, general or financial transaction capital, will be above the carry-forward limits? I think you've answered that question, saying, 'There's nothing going to be sent back', effectively.

No, there's headroom now in the Wales reserve to accommodate underspends, so we're confident.

Okay. And we're obviously hearing news that the Royal College of Nursing has rejected the current pay deal. What risks does that pose to there being an underspend on pay in the NHS and teaching staff? Obviously, it's very time sensitive between now and the end of the financial year. What impact and what planning have you made to say, 'Well, if that money isn't spent on pay—'? What will you do with it?

We knew that we had to make an allocation within the supplementary budget for those awards in this financial year, both in terms of education and health, because, if the Senedd didn't approve the funding to be there, then, obviously, we wouldn't be able to make those payments. But we do have—. We are able to accommodate either situation. So, if the funding is needed in this financial year, if the agreements are made—. And I'm really hopeful that we are going to get to a good place, and those discussions I know are ongoing. Obviously, you will have seen the news yesterday about the majority of the unions being in favour of what's been proposed, but obviously these are really sensitive discussions that I'm leaving in the hands of the health Minister at the moment. But just to reassure committee that we have plans for either scenario in terms of that.

So, you've contingency-planned the 'what ifs' and you're confident that that will either be put back into the Welsh reserve or it will be made sure that we don't lose that money because of the time limits that we've got on being able to spend it.

Yes. There are a number of things that we can do at the end of the financial year. For example, we've planned to borrow £150 million this year. If it were the case that we were going to exceed the headroom in the Wales reserve, we could reduce the borrowing, for example. So, there are things that we can do to manage things at the end of the financial year.

And those can be done very quickly at the end, in the last few days of the financial year. Pete.

I'm just trying to get my head around that; I think I've got it. So, there is a way that you can carry whatever money you've put aside for pay, which might not be committed in this financial year—. You have a way of holding that over. Because I was conscious you said earlier that budget underspends will go into the reserve and will maximise the reserve, so you wouldn't have a lot of scope to put anything other in reserve. Where do you hold money, if it can't go in a reserve, that you want to carry into the next year?

So, all we can do is carry up to £350 million in the Wales reserve; anything beyond that, you have to find other ways to manage or it does get returned to Treasury. So, other ways to manage might include reducing the amount of borrowing that we wanted to do in that financial year. So, that's a tool that you can use at the end, if needed.

And then how do you—? If you make that commitment and then, suddenly, there's a pay deal set for 5 April or 10 April, how do you then pull the money out again to do that? Do you just draw it back out as a reserve, or—? How do you meet that commitment? If you've stored that money somewhere else, how do you release it again to make the commitment, or does it just get adjusted at the end of the year, through a supplementary or—?

09:55

Because that money for pay is set within the second supplementary budget, if the Senedd passes it, then it will be there, available to use. So, it's there, and we can draw it or not draw it, and then, at the end of the financial year, it would return to the Wales reserve, or we would look at other things that we could do. Maybe I'll ask Sharon to say a bit more about the process and some of the timescales involved, because there are points at which we have to notify Treasury about some of our plans as well.

So, as the Minister said, the money's been allocated, obviously, in the second supplementary budget—it's there, it's available, if needed, this financial year. If it isn't, then we're confident that those underspends then, there's room within the Wales reserve for that money to go in. When it comes to the next financial year then, the process in which to access that money is via, essentially, the supplementary estimates. The UK Treasury hold that money for us, so, once—. There are two occasions during the financial year, through the estimates process, which is when we can access that money. So, we usually leave it til the supplementary estimates, because of course we still have the main grant through the majority of the year; when we get to the supplementary estimates, that's when we can request that money, and it comes through.

And a final question on this element: you've made that money available to health and to education for those negotiations—where have you been able to move that money from? Which budget lines have been able—? Where have the underspends happened to be able to be able to make it available for health and education?

So, in significant part, this is about maxing out, really, what we're able to draw down from the Wales reserve in any financial year, and then it's about looking at underspends that are emerging late on in the financial year. So, we tend to see things globally, in terms of the amounts of money available in revenue and capital and financial transaction capital, rather than saying, 'Oh, we're moving—. So, we've got an underspend on this one particular project, and now we're using it for pay.' Because I think that that narrative is a bit more difficult in terms of explaining the complexities as to what's got to the point of having that small underspend. But, in terms of some of the underspends that are emerging, I'll perhaps ask Sharon to give a flavour of that.

So, in terms of this financial year, one thing I think to bear in mind is that, early on in the year, we were looking at some fairly significant pressures—one example being the energy costs in the health service, which of course were mitigated with the UK Government scheme. So, whilst there has been an allocation for that, it was a pressure that was earmarked early in the year, but it obviously has come down. The other area would be the support for the Ukraine humanitarian response, where there was a lot of uncertainty early on in the year around what support was needed, how much was going to come through from the UK Government. So, again, there are lots of areas where you have earmarked reserves, which, when you get more certainty, then not as much is required and therefore it releases it for other things.

The other elements, once we get to this stage of the financial year, where we see underspends coming through is mainly around demand-led programmes. So, one area specifically is around student support. That's an area that, as I said, because it's demand led, obviously the money needs to be there just in case, but we have seen that the demand there hasn't been as much as expected, and that's where some of the underspends have come through.

Is it worth just adding as well—? I can never miss the opportunity just to point out that £350 million as the size of the Wales reserve now is completely inadequate, given the way in which the budget has increased over time. There has been no increase in the Wales reserve, not even in line with inflation, and I think that that, again, is just a small, pragmatic step that UK Government could take to help us manage our resources better.

I absolutely agree; it's just silly. But I think what's also silly is that you can have a lump in there but you can only draw down your £125 million or £150 million, or whatever it is. That just seems ridiculous—I just can't work it out. So, I think that there are strong views on that.

I also have very strong views on that. I'll start off with: would the Minister agree that the Welsh Government should have the same power as local councils in putting money into reserves and drawing it down? 

10:00

We should certainly be able to have much more flexibility in terms of how much we put into our reserves and draw down. I should say that, again, a pragmatic response from the current Chief Secretary to the Treasury has been in relation to my request to be able to draw down more than the £125 million revenue from the reserve. But he has said that that might be available on an exceptional basis for the next financial year; we would need to make the case as to that. So, we're having some more discussion on that, but I think the fact that he's open to that discussion and has indicated some early willingness is positive.

And I'm sure you'd welcome the opportunity to have similar borrowing powers to those that local authorities have, because I can't quite get my head around the fact that a devolved Government can't borrow in the same way I used to be able to borrow as a local government leader. It just seems archaic.

I can see—. Because Mike Hedges has mentioned in committee many times about Welsh Government having prudential borrowing powers, and it going then to the Senedd to agree what our borrowing plan should be, and so on, as being a more appropriate model for the future; that's something we would support.

Whether that should be a supermajority or not is a matter that we could perhaps debate, but I think the point is, collectively, Welsh local government have substantially more in reserves than the Welsh Government, and they will pull down next year substantially more than the Welsh Government are allowed to pull down. That does seem a little ridiculous if one part of the areas covered by Welsh Government have powers to do things that don't exist with the Welsh Government. Would you agree? [Laughter.]

I would always want to have greater powers, and I do agree that some local authorities have greater resources, definitely in a relative sense, to us. So, there's definitely more that we need in terms of the amount of money that we're able to draw down, or to keep in the reserve and to draw down in any year. And then the flexibility to manage over financial years as well, so that when we get that very late injection of cash at the end of the year, being able to carry it over just as a matter of course into the next financial year, I think, would, again, be sensible. 

These things are just rounding errors to Treasury—they're such small figures—but, to us, they actually matter quite a lot.

Listening to colleagues on this committee, I think we're committed to working with you on those things and, wherever possible, that we're able to look at those things with you and work with you collaboratively on how we best move that forward. I'd like to move on; we've got a fair bit to cover still. And I'd like to examine the findings of the 'Administration of Welsh rates of income tax 2021-22' and the 'Independent Review of the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017'. The National Audit Office noted in its report on the administration of Welsh rates of income tax that maintaining an accurate and complete record of the addresses of the residency status of Welsh taxpayers remains a key challenge. It found that there's been an increase in the number of Welsh postcodes that were either missing or invalid in 2021-22, compared to the previous year. What are your views on this, and do you see this as a concern, moving forward?  

I think a small degree of error is to be expected in terms of taxpayers not telling His Majesty's Revenue and Customs when they've changed address, or employers not operating the codes correctly. Analysis of the latest address assurance scan, which is undertaken by HMRC, suggests that the correct Welsh taxpayer status is being applied in over 97 per cent of cases, but it's important as well to remember that the remaining cases aren't necessarily wrong; they're just uncorroborated. HMRC undertakes a number of exercises to try and corroborate that data. So, on a biannual basis, they undertake a third-party data clash, which is where they compare data against the electoral roll and credit reference agencies, for example, to try and improve the information that they have. 

Just to say as well, there's no risk to Welsh revenues when you have cases where the data is uncorroborated. Often, they are accounts that are inactive or that have ceased, so there's no liability for them.

Is there a quantum there to that—? You talked about 97 per cent being accurate, or as accurate as they're able to corroborate. Do we know how much money we're talking about for the income tax raise, from that 3 per cent that we don't know or can't corroborate? I suppose it's going back to the conversation or the questioning we were having in the Chamber and in this committee about cross-border income tax, and raising and lowering income tax levels. Do we know what that risk is, and is it something that we need potentially to start looking into as we potentially look at whether or not we increase or decrease rates in the future?

10:05

So, certainly for those inactive and ceased accounts, which were the large part of those uncorroborated accounts, there's obviously no risk there. And at the moment, obviously, we have the same Welsh rates of income tax, so there's no risk in that sense. But it is really important that HMRC continues its activities to try and make sure that the C codes are correctly applied, and it has been trying to reinforce those messages. It's been using its social media, for example, the personal tax account, and people's annual tax summaries to try and provide information about the importance of applying the C code. And obviously officials meet with HMRC very regularly. We have our quarterly WRIT board meetings, for example, where this issue is explored further in terms of what more we could be doing to raise awareness and compliance.

I was going to say, as long as tax rates stay the same, and there's no financial advantage to being either English or Welsh, then it will only be genuine mistakes. Would you agree that that should actually equate, when you net it off, to somewhere near nil? Once there becomes a financial advantage to being one or the other then it probably wouldn't net off to be nil.

Yes, you'd need, obviously, to have to—. This is one of the things in terms of behaviour change as well; there is a range of things that we have to consider, not just where people are located, and so on. So, I think there is a whole range of things that need to be part of that wider conversation that we've talked about in terms of just changing rates, but also—

Yes. And we've talked about the interest that there is in the Senedd in different bands, and so on. So, I think it's a big picture that—

Because it'll be interesting to see how that's modelled through on the Scottish border, and also on the Northern Irish border as well, because obviously there are different rates either side of the border there and in Scotland, so it's certainly something that my party in particular are looking at, and obviously the impact of it, and how we look through that and model it to see what behavioural changes might happen, and the reality as opposed to what we might think might happen. And I think you've mentioned the Swiss study as well, haven't you, on that sort of thing?

So, again, it's something that I think this committee's got some interest in anyway, so it might be something that we want to get to explore further as we progress this conversation. 

Just to add that we do use the Swiss study in terms of our WRIT ready reckoner, so that people can understand what we've built in in terms of what we would expect to be behavioural change based on what is the best proxy, but there are so many unknowns. I think the work that HMRC is looking at in terms of that longitudinal data study would give us more information about behavioural change as a result of changes in Scotland, but again, Scotland isn't directly comparable because our population is much more along that border with England. There are so many different things that we have to consider, various different angles, just bearing in mind that Wales has its own context as well, so we can't read across definitely from other places.

The independent review of LTT suggests that announcements relating to LTT should be regular, and this could potentially be formalised as a devolved taxes fiscal event. Given the fiscal levers available to the Welsh Government, what consideration have you given to delivering an annual fiscal event?

First of all, just to say how pleased I was with the work that Alma Economics did for us. It was an independent review of the application of the LTT legislation, which was something that was agreed to when the legislation was undertaken. It was a statutory commitment to do that. And I think that the review was really positive in the way in which we've appropriately used the legislation and the kind of changes that we've made being appropriate and well executed. Yes, great read, so I highly recommend that, because it is a really interesting way to explore how a country does grapple with taking on a new tax responsibility and making it appropriate to that context.

But one of the areas where they did suggest that we were to give greater thought to was about having that kind of more predictable, if you like, approach to land transaction tax. I think there are pros and cons there. When we've been able to in the past, we have made changes as part of our draft budget. In December 2020, for example, I announced the changes for LTT and landfill disposals tax alongside WRIT as part of our draft budget process, because it was appropriate and timely to do that. However, you'll remember that in September of last year, the UK Government made changes to land transaction tax; then, almost immediately, there's pressure—'Well, what are you going to do in Wales?' It was my intention to make changes when we laid the draft budget in 2022, but I didn't want to have that period of a couple of months or so of uncertainty in the housing market, people not knowing whether to hold off on their purchases and so on, so we made the changes more quickly instead, and I think that it was helpful to us to be able to respond rapidly in that case, rather than waiting for the annual fiscal event of our laying of the draft budget. So, I think that was helpful to have that kind of flexibility.

There have been some other examples as well where external events have led us to make changes quite quickly. So, LDT would be the example there, in terms of relief to support restoration work at former landfill sites. So, those regulations were made close to the time that the work was to start on those sites. Now, if we had to wait for a draft budget or an annual event, then that work would have had to be delayed as well. So, I do think that there are arguments for being flexible as well.

But then, just to say that—colleagues will remember well—as part of the Welsh Tax Acts etc. (Power to Modify) Act 2022 work, we have committed to exploring the way in which we undertake tax work in greater detail, and that we've agreed to do that within four years of the day on which that Act came into force. That date was September 2022. So, we're making arrangements for that work, which will be undertaken within the timescales set out.

10:10

Thank you. I just wanted to explore a little further allocations in response to the war in Ukraine. I'll start by—. We know the supplementary budget allocated £92 million toward those various sets of support; £74 million of that was provided via the UK Government. I wondered where the other £18 million came from to balance that out. And I'm trying to reconcile that about something we said a little earlier about where the underspends were in the year, and there were some in the Ukraine side of things, which went towards the funding you gave to the NHS. How does that reconcile with what I'm asking there?

So, overall in this financial year, we've made £112 million available to support people arriving from Ukraine, and we've done that because we're absolutely committed to making our claim of being a nation of sanctuary a reality. That's why we've provided the level of support that we have.

As you say, around £74 million of that was provided by the UK Government through its support for people arriving from Ukraine. The balance was met from our Welsh Government reserves, so that's £20 million that was allocated, if you remember, in the first supplementary budget, and then the remainder as part of this supplementary budget. That funding came from reserves, so it was earmarked through the financial year, and the numbers solidify, if you like, as you get towards the end of the financial year, which is why we've been able to—. It will be very clear in this supplementary budget as to the amount that is required, but I'll check with Sharon if there's anything else to add on that. 

10:15

All I was going to add to that is that, this year, being different to going forward now, we did have an unallocated DEL, as well as drawing on the Wales reserve or looking to underspend. So, going in from the first supplementary budget, there was £152 million that was unallocated. So, we've been able to use some of that to support some of the reserve, the allocations that we've made in the second supplementary budget. So, this hasn't all come from underspends. Obviously, that's a different strategy, going forward, where everything has been allocated in the draft and final budget. But this year has been a transition year moving to that strategy. There were unallocated reserves in the first supplementary budget that we've been able to use. 

Well, that takes me on to the second part of that question. I'm just wondering what scope the Welsh Government have to continue affording more support without a draw-down or expectation of moneys from UK Government. Is there money left in that reserve Sharon was talking about there, which can offer more into the Ukraine relief scheme? 

So, in the final budget, which we published yesterday, we've allocated £40 million to our effort to support people from Ukraine for next year, and £20 million for the year after that. And that's based on what we understand, at the moment at least, to be our expectation in terms of the numbers of people arriving, which has slowed down very much over time—the numbers arriving now are very low—and, also, in terms of the kind of support that we're able to offer. So, in the first instance, our funding was aimed at a range of things, such as our welcome centres, initial accommodation, our contact centres, the arrival hubs that were there at train stations and so on. Now, that kind of level of support isn't appropriate now, given the fact that people are coming, they're here, they're starting to settle. So, moving forward, there is a reduction of funding, but it's based on what we understand at the moment to be an appropriate amount to put in, but bearing in mind, of course, the changing situation. 

A lot of what you're going to be doing, or you're currently doing, is done in partnership with local authorities, and the expectation is on them. Are they being funded in total from Welsh Government, or is there an expectation for local government to contribute?

So, we did fund in full the costs of the welcome centres, the initial accommodation and the contact centres, and, in some local authorities, those arrival hubs that I talked about; they weren't in every one. So, we fully funded that, but I just want to recognise the work that local authorities did, because we couldn't have done it without them. But, in terms of funding, we did that. 

Now, I do know that some local authorities are paying top-up payments to the host families, for example, because they recognise that, in terms of an invest-to-save kind of measure, providing support to prevent the breakdown of those arrangements is obviously much better than allowing people from Ukraine to find themselves homeless and all the difficulties that presents for those people, let alone also the additional cost and difficulties for local government as well. 

Absolutely, and I join with you in congratulating local authorities on what they've done. But have you heard through your conversations with local authorities that there may be some authorities that have struggled to provide the level of engagement or partnership or support that you would have hoped they could, because of any resource problems they have? Are Ukrainian refugees disadvantaged in some counties over others?

I think that some local authorities have found it hard, because there have been places where large numbers of people have wanted to settle, and, obviously, the pressures on local housing are already extreme. So, just being able to support people into the kind of housing that they want, and that we would want for them, has been very challenging, it's fair to say, because we want the best for everybody. So, local authorities, I think, have been working really hard.

They have found that, I think, to be a stretch on resources. And there have been other things that we've been asking local authorities to do, such as the welfare checks. So, in order for a person to be placed with a host family, it's important that the local authority is satisfied that that host accommodation is appropriate, and that the people who are also in that property don't have—. I don't know; I'm assuming that police checks will need to be clear, and all that kind of thing. So, they'll need to do that kind of work to make sure that there is safeguarding for the people coming from Ukraine, but also safeguarding for the host as well, because this has been an incredibly kind thing that people have been doing, and we don't want to find people giving that act of kindness when they're not really properly equipped to do so. So, there's safeguarding on both sides.

10:20

One of my anxieties was—. Well, to come back a step, through COVID, it was great how there was no formula-based allocation—their costs were met to meet this massive pressure we all had. In the same way, I wondered if that had been considered to meet the costs that local authorities are having to endure to accommodate all the refugees, so that some authorities aren't disadvantaged by trying to do the right thing. I just wondered if thought had been given to that.  

So, the £74.4 million from the UK Government, that's in the form of integration tariffs, education tariffs and thank-you payments. So, certainly the integration and the education tariffs go directly to local authorities following that individual. So, the local authority should have a relevant—

So, that would be allocated on a formula basis, though, wouldn't it?

I think that funding follows the individual to the authority. My colleague Jane Hutt can provide a more detailed briefing on this. But, I will say we are concerned about the reduction of the tariff funding for new arrivals, from £10,500 a year to £5,900 a year, and also now year 2 funding has been scrapped. So, that obviously is a concern for local authorities. Now, the UK Government will argue that people from Ukraine will very quickly integrate and they are able to access support, such as universal credit and so on. But, nonetheless, the kind of trauma involved and the difficult situations that people are leaving, I think, do warrant a greater level of support.

Sorry, I digressed a bit there, Chair. I'm conscious of the time.

Conscious of the time, and Mike's got some questions as well.

Right, great. I'll go back to script. In June, the Minister for Social Justice announced the supersponsor route would be paused. Recently, it's been reported that welcome centres are set to close. Can you detail what specific activity the funding in this supplementary budget supports and how it is changing?

So, the funding that you see in the supplementary budget and that has been provided all through this year, in fact, supports the welcome centres and the other initial accommodation as well as the wraparound services for people to make sure that they're supported in the first instance to register with the doctors, to make sure that they're accessing all the support that's available to them. We're also funding, in this financial year, the contact centre, data platform and the arrival hubs, as well as transport costs and translation costs. So, what we're seeing in the supplementary budget really confirms that spending on that support.

Okay. I'll move on to my last question. During this committee's scrutiny of the draft budget 2023-24, we heard about the pressures local authorities were under. I just wondered what consideration had been given to providing additional funding in the supplementary budget to alleviate the in-year pressures facing local authorities. Now, you know what my views might be on some of that, but have you considered giving additional support?

Well, I think, I'd just recognise that local authorities had a very good settlement—exceptionally good—of 9.4 per cent in this financial year. So, I think that they were, at least initially, well placed to meet the challenges. I know that what went from being an exceptionally good settlement has gone to being a challenging one as a result of the impacts of inflation. But, in terms of additional funding, what we have been able to do is provide some specific funding—for example, the additional support for essential recovery work following the floods in 2020, resulting from storm Dennis and the other storms in 2020. So, there is additional funding that we have provided in-year. I'm not sure if this is recognised in this supplementary budget particularly, but it's what we have been able to provide. And, of course, Mike mentioned the reserves of local authorities, as well. So, I think that a number of local authorities—many local authorities—this year have been looking to reserves to support them with some of the additional costs that they've been facing, as well.

But, as you'll see in the supplementary budget, there are only three key areas of support, one being Ukraine, which I think, arguably, local government does benefit from, because it supports it in the costs that it's facing. The other, of course, is the money for health and social services, for energy and COVID-19 measures, and then the third area is the money to allow us to come to those agreements on pay in this financial year. So, those are really the three key blocks. It's a more traditional supplementary budget in that sense.

10:25

And it would be remiss of me at this point, mentioning reserves—[Laughter.]

No, I won't go on about reserves. I think it's a given that the situation over the last couple of years has allowed many authorities to accumulate significant reserves, and we've had that conversation apart. But I think the underlying concern I have is that the nature of the formula and how it allows a situation to occur continuously where those anomalies rise between authorities demonstrates very clearly to me that there is this outdated process for funding councils. I know that the answer is, 'If leaders want to look at the formula, we'll look at the formula', but I would hope the Government might think that this is becoming an untenable situation where nearly £3 billion-worth of reserves sit in local authorities but unevenly spread.

I would say that the level of reserves held by local authorities is as a result of a number of things, including the spending choices that those authorities make, and the choices they make around the level of council tax that they apply to their local populations, as well. So, it's a range of things, and that overall figure only equates to around three months, overall, of local authority spend. So, yes, it is the case that reserves do vary quite significantly, I think it's fair to say, across Wales, and we are looking at that in a bit more depth. We do have a finance sub-group meeting immediately after the meeting today, actually, so there might be the chance to explore it further.

And I know this committee has made a recommendation before that you look at the amount of reserves and try to understand better why some of those have been held for such long times with no plans to be drawn down.

I'm hoping you'll indulge us by being late for that meeting by a couple of minutes, if you might.

Two questions, one following one Peter raised. Why will you not publish the standard spending assessment calculation and the AEF calculation for each local authority? Peter said they're wrong; you say they're right. Publish them for each authority, the calculations—you've got them there. Why can't you just publish them and make them available so everybody can look at them?

I think we do publish an awful lot of data, I'll double-check what gaps there might be in terms of what we've published. I know we've previously agreed to draw more attention to the work of the finance sub-group, for example, and the distribution sub-group in particular and the things that it's looking at—its annual plan where it looks at different data sources, updating data, looking at gaps in data and so on.

You publish the final results, you don't publish the calculations, but that's for another place and another time. The question I've got, very quickly: an official told the health and social care committee the Welsh Government had provided the cash local health boards needed in 2023, and it would not be writing off or just giving them money to cover deficits. I think I know three things—can you tell me which one of them is wrong? The health boards are part of the consolidated Welsh Government account. That's the first thing I think I know. The second thing I know is the health department has a health reserve. They call it unallocated expenditure, but, basically, it's a reserve to cover these overspends. And the third thing I think I know is that a health board, at the end of the year, has to pay all its bills; it cannot go negative. So, in saying you're not going to meet those, you have to, as long as the Welsh Government's got money, and if you don't do that, then it creates a far bigger problem. Those are the three things I think I know. Perhaps you can tell me which ones of them are wrong.

The health Minister will hold funding within her MEG to offset deficits within the NHS organisations. There are no specific allocations to the health and social services MEG to support deficits. This is a management choice that the health Minister will undertake. But, as Mike said, the evidence was given to the Health and Social Care Committee by, I assume, one of Eluned Morgan's officials, so perhaps I will ask for greater detail to be provided to this committee. But it is a MEG issue, I think, for health.

10:30

Yes, but, if their MEG gets exceeded by health board overspends, which is unlikely, because they hold a fairly large—I call it a health reserve, you call it unallocated expenditure within health—managed expenditure group. That's a matter of semantics there. But, if that gets exceeded, you will have to meet that. You cannot have Betsi Cadwaladr health board, who we talk about a lot, having at the end of the year a need for £10 million to pay their bills at the end of March, not having it, and the bills and the staff going unpaid.

So, I'll ask Sharon to come in on this particular point.

Yes, so I think that the key point to make there is the difference between what is—. You're absolutely right, and, actually, I think all the statements you've made are correct, in that the actual expenditure of the health boards is what will be reflected through the MEG. So, the MEG has to have sufficient funds or sufficient budget to cover that off. The bit to recognise there is what the actual allocation or the resource limits of the health boards are, which is not necessarily the same as the MEG. It's up to the health Minister to decide what those resource limits are of the health boards, so, if the actual resource limits are not increased, those health boards may very well go into deficit. If that is the case at the year end, that's what they will have to report in their accounts, and they may get qualified on that basis. And it's a governance issue. The overall expenditure—you're absolutely right—still has to be met within the overall MEG, but it's that difference between what is the allocation for the health board and what is actually held within the MEG itself.

We expect everybody apart from Powys to overspend and there are certain reasons for that, like it doesn't have a district general hospital within its area. Two points: the point I was trying to get across is, if the health MEG is exceeded, then the general Welsh Government budget has to cover that, because a health board cannot owe money at the end of the year.

Yes. As things stand, the health MEG is confident that it can cover the deficits in terms of the overall position, but that doesn't mean that that will be translated into allocations to the health boards themselves. So, as I said, it's a governance issue about where the responsibility for that is lying.

I'll stop there, which will probably please you. [Laughter.] If I can ask one very simple question: the European system of accounts has had an effect on whether money counts as capital or revenue within R&D budgets. It's a relatively small sum; it's not something that is going to cause you any concern. However, is there any expectation that this might happen, that other larger items of expenditure get reclassified?

Well, this is something that—. It was a reclassification that actually happened a number of years ago, and it's this difference between how, from an economic position, research and development is regarded, but there's a—. The criteria for capitalising research and development are quite tight when it comes to a financial classification of what goes through departmental accounts, as opposed to the economic definition of it, which is more looking at building skills, knowledge, and that kind of thing. From an accounts perspective, you actually have to have a tangible asset, which is why it's capitalised.

So, this was something that happened. As I said, it was a number of years ago; I think it might have been 2016-17. In order to address that, the UK Treasury allowed a revenue-to-capital switch. In most cases that happened, but because it was uncertain—the level—as far as the health boards were concerned with the research and development, we've got an agreement with the Treasury that it happens on an annual basis. So, this is a transfer that you would have seen, as I said, over the last five or six years.

It was just recognising the huge pressures we've got in the health service at the moment; we're seeing 75,000 people on those patient pathways. We're not meeting the targets of no-one waiting on a waiting list for a set period. I just wondered what the Welsh Government's additional funding into the NHS has actually achieved and how are you monitoring your expectations of that spend.

10:35

So, for the purposes of the supplementary budget, obviously, the only additional funding is in relation to the exceptional energy costs and the COVID-19 measures. I think the enormity of the question that you've just asked—[Laughter.]—warrants a more detailed response from the health Minister, if that's okay, because there are so many areas there to explore.

It is probably more of a health committee question, but it was there and, yes, we've run out of time, unfortunately. And with the timescale of having to turn a report around by next week as well, or the week after, then it's going to be a tall order to get any information, but any information that your colleagues can give us on that within a very, very short time, then, would be useful just for that. 

With it being St David's Day—

—here we go—and doing the little things, in hindsight, what little thing do you wish you had done maybe at draft budget or the final budget that you have done, but that you wish you'd have done sooner, if you like—that now, with hindsight, knowing how things have played out, you might have done sooner?

I think that's a really difficult question, given that this year has been so exceptional in the sense that, when we set the draft budget last year—so, I'm assuming we're talking about the current financial year—

When we set that budget, we had really no concept of what was coming down the line in terms of the war in Ukraine and also the impacts then on energy prices. So, with hindsight, I think that had we known what was coming then we would have been able to factor that, perhaps, into our plans. But I think that what you've seen in the supplementary budget does show that we've been able to be flexible, both in terms of responding to the numbers of people seeking sanctuary from Ukraine, but then also some of the specific inflationary issues around public sector pay and also the exceptional energy costs in the NHS as well. So, I think that we were able to respond to those, but, had we known about them earlier, we could have built that kind of thinking into our plans.

Yes, okay. Well, thank you so much for your time this morning. Sorry that we've gone over a little bit, but, as always, it's been fascinating and we'll endeavour to put a report together now for the debate we'll be having in a couple of weeks' time.

4. Cynnig o dan Reol Sefydlog 17.42(ix) i benderfynu gwahardd y cyhoedd o weddill y cyfarfod
4. Motion under Standing Order 17.42(ix) to resolve to exclude the public from the remainder of this meeting

Cynnig:

bod y pwyllgor yn penderfynu gwahardd y cyhoedd o weddill y cyfarfod yn unol â Rheol Sefydlog 17.42(ix).

Motion:

that the committee resolves to exclude the public from the remainder of the meeting in accordance with Standing Order 17.42(ix).

Cynigiwyd y cynnig.

Motion moved.

Felly, o dan Rheol Sefydlog 17.42, dwi'n cynnig bod y pwyllgor yn penderfynu gwahardd y cyhoedd o weddill y cyfarfod. Dŷch chi'n cytuno? Ie. Grêt, diolch yn fawr. Diolch yn fawr iawn.

So, under Standing Order 17.42, I propose that the committee resolves to exclude the public from the remainder of this meeting. Are Members content? I see that you are. Great, thank you. Thank you very much.

Derbyniwyd y cynnig.

Daeth rhan gyhoeddus y cyfarfod i ben am 10:38.

Motion agreed.

The public part of the meeting ended at 10:38.