Cynulliad Cenedlaethol Cymru

Yn ôl i Chwilio

Y Pwyllgor Cyllid

Finance Committee

11/07/2018

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

David Rees AC
Jane Hutt AC
Mark Reckless AC Yn dirprwyo ar ran Nick Ramsay
Substitute for Nick Ramsay
Mike Hedges AC
Neil Hamilton AC
Simon Thomas AC Cadeirydd y Pwyllgor
Committee Chair

Y rhai eraill a oedd yn bresennol

Others in Attendance

Georgina Haarhoff Pennaeth yr Is-adran Drethi: Polisi, Strategaeth ac Ymgysylltu, Llywodraeth Cymru
Head of Tax Strategy, Policy and Engagement, Welsh Government
Gerald Holtham Athro Hodge mewn Economi Rhanbarthol
Hodge Professor of Regional Economics
Julian Revell Pennaeth Dadansoddi Cyllidol, Llywodraeth Cymru
Head of Fiscal Analysis, Welsh Government
Mark Drakeford AC Ysgrifennydd y Cabinet dros Gyllid
Cabinet Secretary for Finance

Swyddogion Cynulliad Cenedlaethol Cymru a oedd yn bresennol

National Assembly for Wales Officials in Attendance

Catherine Hunt Ail Glerc
Second Clerk
Georgina Owen Dirprwy Glerc
Deputy Clerk
Joanne McCarthy Ymchwilydd
Researcher

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.

Dechreuodd y cyfarfod am 09:01.

The meeting began at 09:01.

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

Bore da, a chroeso i gyfarfod y Pwyllgor Cyllid. A gaf i'n gyntaf groesawu'r Aelodau a gofyn am ymddiheuriadau? Rŷm ni wedi derbyn ymddiheuriadau gan Steffan Lewis a Nick Ramsay. Mae pawb arall yma, a chroeso i Mark Reckless, yn eilydd i Nick Ramsay. A gaf i eich atgoffa chi jest i dawelu unrhyw ddyfeisiau electronig os yw'n bosibl? Ac, wrth gwrs, mae cyfieithu ar sianel 1.

Good morning, and welcome to the meeting of the Finance Committee. May I first of all welcomed the Members and ask for any apologies? We've received apologies from Steffan Lewis and Nick Ramsay. Everybody else is present, and we welcome Mark Reckless as a substitute for Nick Ramsay. May I remind you just to put your electronic devices on silent if possible? And, of course, translation is available on channel 1.

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

Yn gyntaf oll, cyn ein bod ni'n troi at yr ymchwiliad, rwy jest yn gofyn i'r Aelodau: a ydych chi'n hapus i nodi cofnodion y cyfarfod diwethaf a gynhaliwyd ar 5 Gorffennaf? Neb yn anghytuno, felly mae pawb yn nodi hynny.

First of all, before we turn to the inquiry, may I just ask the Members whether you're content to note the minutes of the last meeting held on 5 July? Nobody disagrees, and so everybody's content to note that.

3. Cost Gofalu am Boblogaeth sy'n Heneiddio: Sesiwn dystiolaeth 8 (Ysgrifennydd y Cabinet dros Gyllid)
3. The Cost of Caring for an Ageing Population: Evidence session 8 (Cabinet Secretary for Finance)

Trown, felly, yn ôl at yr ymchwiliad i mewn i gostau poblogaeth sy'n heneiddio, gyda'r Ysgrifennydd Cabinet, ac os caf i ofyn i chi ddatgan enwau a swyddogaethau jest ar gyfer y Cofnod, os gwelwch yn dda? 

We'll return, therefore, to the inquiry into the costs of caring for an ageing population, with the Cabinet Secretary, and, may I ask you to state the names just for the Record, please?

Diolch yn fawr, Cadeirydd. Mark Drakeford ydw i, a gyda fi y bore yma mae Georgina Haarhoff a Julian Revell.

Thank you, Chair. I'm Mark Drakeford, and with me this morning is Georgina Haarhoff and Julian Revell.

Diolch yn fawr iawn, a diolch yn arbennig am y dystiolaeth gynhwysfawr sy'n ategu'r hyn rŷm ni wedi'i dderbyn gan yr Athro Gerry Holtham—adroddiad annibynnol, wrth gwrs—a'r gwaith sydd wedi mynd i mewn i hynny. Os caf i ddechrau jest drwy eich holi chi am eich safbwynt chi fel Llywodraeth. Rŷm ni'n gweld y darlun o ba mor anodd yw rhai o'r penderfyniadau hyn, ond beth yw maint yr her mor belled ag y mae priodoli adnoddau yn y cwestiwn, a beth yw'r heriau yn arbennig sy'n ein hwynebu ni yn ystod y dyfodol agos? 

Thank you very much, and a special thanks for the comprehensive evidence that we've received that supplements the evidence from Professor Gerry Holtham—the independent report, of course—and for the work that has been done on that. May I first of all start by asking you about your position as a Government? We can see how difficult some of these decisions are, but what is the scale of the challenge in terms of resources and what are the particular challenges that we face in the near future?

Diolch yn fawr, Cadeirydd. Wel, i ddweud i ddechrau, mae'n faes cymhleth. Mae lot o wybodaeth gyda ni, lot o adroddiadau sydd wedi bwydo'n ôl yn y maes, ond maen nhw i gyd yn dechrau o bwyntiau gwahanol, maen nhw i gyd yn defnyddio gwybodaeth wahanol. Ond, pan oedd Andrew Dilnot o flaen pwyllgor yn Nhŷ'r Cyffredin, roedd e'n dweud yr un peth, ond roedd e'n dweud ar y diwedd,

Thank you very much, Chair. Well, at the outset I'd like to say that this is a complex area. We have a lot of information, a lot of reports that have fed into this area, but they all start from different points and they all use information that is different. But, when Andrew Dilnot appeared before the House of Commons committee, he said the same thing, but he said at the end,

while it's very difficult to be precise about all of this, because all these different reports have different assumptions, start from different places, cover different time frames, they all tell you one thing in common—costs are going to go up. So, he said it's very complicated on the one hand; it's very simple on the other. Every single report gives you that message. It's much more difficult to be precise about these sorts of projections.

You will know that we have some Welsh-specific projections: the Health Foundation suggesting an 80 per cent real-terms increase between 2015 and 2030; Wales Public Services 2025, with costs that are more or less in the same ballpark. But all these costs are very sensitive to the assumptions that underlie them. If you make a slightly different assumption in relation, for example, to mortality rates, or disability rates, or the rates of informal care, or the projection of earnings in the social care sector—let alone latent demand and how you factor that into your model—you will come up with very different costs. And I do think, just in the very beginning of what I've got to say today, I think it's also important to say to the committee that I think it's wise to avoid being over-deterministic in this field.

When I was the health Minister, we published an updated set of projections for the rate of dementia in the Welsh population, compared to a very scientific, very respectable study that had been done just before the Assembly came into being, and the rates of dementia in the Welsh population were markedly lower than they had been projected 20 years earlier, and that's a phenomenon that's now emerging across the western world. The rates of dementia in the United States are well below what they were projected to be 20 years ago. The very first thing I did in being an Assembly Member was to chair an inquiry by the health committee into residential care rates in Wales. And if you looked a decade earlier, you would have read lots of reports telling you that we needed to provide an awful lot more places in residential care in Wales, because we had an ageing population and the demand would go up, and actually, the rates of use of residential care in Wales fell every single year for 10 years in a row after those reports were written.

So, it's not to dispute the direction of travel, because that is clear, but it is just a warning about thinking that these things are to be followed as though they were a rigorously set-out path. So, that is, I think, how we are approaching it as a Government. We think we start in a slightly better place than across our border. Figures last year tell us that spending per head in the Welsh population for social care is 40 per cent higher than the figure in England. It was 20 per cent higher in 2010-11. That is partly because we have protected social care spending in Wales. It is more a reflection of the fall in the social care expenditure in England. But we start with a better platform to meet some of the costs that we know we're going to be facing in years to come.

09:05

Because your expenditure in Wales, what you just mentioned, actually is more or less flat. It's gone up 5 per cent, I think, but you've held it—

—at a global sum, if you like, whereas, as you say, in England it's declined quite dramatically, and relatively even more so. Just in what you set out there, which would you—. Because you say it's very difficult to predict some of these things, but you have the job of preparing budgets and trying to think of some of this, so you'll have to do some of it. Which would you say is the biggest factor there, because we've had two broad factors? One is costs—costs in the system. Costs in the system are going up, as you pointed out. The other is the demographic kind of pressure, which is different to costs, because if you've got a population that is clearly changing its demography and is moving towards the upper end of the age profile, there are assumptions made around the implications of that in terms of costs to the public purse. However, as you just pointed out, dementia has not followed that in quite the way that was expected. The older person's commissioner would quite rightly point out, I think, that, in her view, the older population does not have an overbearing cost on the whole public purse. So, which is the more—? Well, can you separate them out, first if all? And, if you can separate them out, is it the cost element—the costs of care, the costs of wages, the costs of a population that is much more mobile and moving around and away from family and all the other features we see—rather than the sheer demographics of it, that is stronger?

Well, Chair, I think there are a number of different bits of evidence you can try to use to cast a light on that question. The Lord Darzi review, published very recently said there were four key factors in driving costs. He puts demographics at the top of his list. He says that, between now and 2030, there will be a 33 per cent growth in the population over 65 in the United Kingdom and a 2 per cent rise in the working-age population. Thirty-three per cent over 65, 2 per cent in the working-age population, and he says demographics are the key driver. But he then goes on to talk about chronic illness and the rise of chronic illness, about the way which chronic illness is managed by the health service and how that has a significant impact on costs. New scientific and technological possibilities is his third factor, and then expectations is his fourth. What do the public expect in all of this?

I think, if you look at the experience in Germany and in Japan, then what we find is that the costs in their systems have both gone up faster than originally predicted, but the unit cost has not gone up. It is latent demand. In those cases, it is the fact that when you've got a more generous system, more people take advantage of it, because the system is now more available. We know, in the Scottish free personal care example, their costs were well above what were originally predicted because they hadn't adequately predicted latent demand. And we've got some experience in Wales, because when we set a cap for domiciliary care services, there was a rise in the number of people taking up those services because they became more affordable for more people.

So, in Germany and Japan, in answering your question directly, demographics turned out to be the greater driver. The cost per person has not gone up; there are more people using the system than they predicted and, therefore, costs overall have risen beyond what they originally assumed.

09:10

Just to carry on from there, I think that we know that people self-control demand don't we? We know that those who get it free will have the maximum amount, those who are very rich, it will not really affect them. But the vast bulk of people in the middle, getting pensions from the civil service, local government, schools, Ford—the sort of places with reasonably generous pension schemes—will self-limit what they have. Once you say it's free, that self-limiting comes off and the latent demand is created. Do you see that happening?

Depending on how you design it, of course—there are different ways you can design all of this and there are ways in which you could suppress demand, as well as ways in which you might draw demand to the surface. But in the circumstances that Mike Hedges just set out, I think all the evidence we have is that there is suppressed demand in the system and if you make the system more generous, then more people will come forward to take advantage of it, and you will get substitution of state care for informal care in that as well.

That's another point I was going to come to—a lot of people have a mix. Most people have a mix of unpaid care, either by neighbours, friends or, more often, family, and the formal care. That's sort of fairly normal, and anybody who's ever had elderly parents will be able to talk you through that. It's good in terms of society, but, in financial terms, which is all we're looking at, the danger is that some of the unpaid gets replaced by paid because people don't have to pay directly for it at point of use.

I agree with that, Chair, and one of the difficulties in this whole field is that where costs fall and where benefits fall, in the public purse sense, are not always the same place. So, in the carers field, Mike will know that there are many people who argue that if the state provides more generous help so that informal carers are no longer needed to the same extent, they go back to work, they generate tax revenues. In the big picture, actually, it's economically beneficial, the argument goes. But the costs are in one place and the benefits are in another.

We very often find that. That leads me on to the next part. The costs of social care currently fall on local government. Now, if I was going to be naughty or difficult, I'd say we're in serious danger of local authorities only being social care providers in the same way as the Welsh Government's only going to be a health provider in the direction things are moving. Obviously, that will not occur in either body, but there are huge social care pressures on local authorities. This is one of the benefits of not taking a simplistic approach of handing all the money over to the NHS and waiting for people to be ill but trying to stop them being ill in the first place, which is what social care and support does. What's going to happen in the medium term to local authorities' expenditure on social care? I know it's going to go up, but how is that going to be funded?

09:15

Well, I think there were some very complex questions in all of that, Chair. It assumes that we go on using local authorities as a main vehicle for funding social care. Myself, I assume that a future system will go on having to have at least four different elements in it, as far as paying is concerned, that there will be a continuing role for local authorities, and that the funds that they are able to raise, or have provided to them by the Welsh Government, will continue to be an important factor. There is the question of whether collectively we all need to put our hands in our pockets and provide a greater investment in social care in the way that the Gerry Holtham report—I know you're hearing from Gerry later— whether that's an increased contribution in the future. There will be self-funders. People will have to go on making a contribution to this themselves—those who are able to do it—and there will be informal care. So, the landscape is—. Not one of those strands is going to be able to take up the demand that we know is there, and I believe a mixed economy in which contributions from all of those four strands will be necessary in the future.

As you know, Mike, the Welsh Government's view of local authority funding is that we believe in putting money into the revenue support grant rather than tying local authorities down by constantly hypothecating the funding that they get, and we then have to find ways of working with local authorities to make sure that the money we are able to provide to them is spent on key priorities. So, I don't think there's any reason to believe that they don't regard social care as one of the major things that they provide, and will go on doing that.

I haven't looked at the standard spending assessment calculations for some years, so I start off with a disadvantage on that, but the last time I looked at them, local authorities, in total, were spending substantially more on social care than the SSA part of their rate support grant. So, I see no reason why that would have changed. It's more likely to increase. Don't we sometimes underestimate exactly what a good job local authorities are doing in terms of social care at the moment, with declining income and increasing demand?

Chair, you can go right back to the 1980s and you will find analyses of spend by Welsh local authorities compared to English local authorities, and Welsh authorities have always spent more on social services than English authorities with equivalent populations, and that's just a reflection of political choices made in different places. So, Mike is absolutely right on that. I've always said that that declining year-on-year picture of the use of residential care is an enormous tribute to local authorities in Wales, because the reason the figures have gone down is because of the investment that local authorities in Wales have made in providing alternative services that keep people in their own homes.

Chair, I'm drifting off finance now, so I might be called to order by the Chair in a moment, but, really, if you look at people as people and not as units of cost, very few people sitting in here or sitting or sitting anywhere else have an ambition of, 'Some day in the future, I'm going to end up in a residential home.' Some people may have to end up there, but that's not people's ambition. So, would you agree that the expenditure on keeping people in their home is not only good financially but is actually good for the people themselves?

I don't think there's any doubt, Chair, that research tells us that most people would rather remain as independent as they can, for as long as they can. I think we shouldn't completely set to one side the fact that, for quite a few people, residential care is care of choice, not simply care of the last resort. There comes a point, even when people are being looked after in their own home, if that simply means four calls by carers a day—one to get you up, one to put you to bed, one to make sure you've eaten something—that's the whole of your human contact. I met people very recently, actually, when I was visiting a residential care home, who went out of their way to say to me that they were there because they wanted to be there and because it gave them a different level of human interaction from when they were being looked after in their own home, but in that rather bleak way where, other than the paid people who came through the door, they saw almost nobody else from one end of the week to the next.

09:20

Can I just add something? The future generations commissioner has met with the Cabinet Secretary and also presented an event we did the other day on taxation, including social care. Her point that she's made quite consistently about this is the importance of prevention and the effort that we should be putting in to try and make sure that people live fulfilled lives for as long as possible. I think that's quite an important element of the work that we're trying to think about in this sort of place, and it adds another uncertainty to the projections for future demand as well, in terms of thinking about what impact could good prevention and good preventative action have on the need for social care in the future.

Thank you for that. That was the direction I hoped I was moving in when I was asking those questions. Thank you for clarifying.

I was going to ask to clarify that point. We're talking about the fiscal costs of social care, but, of course, social care need mostly depends upon community care and the preventative agenda to ensure that people can live longer and more independently as much as possible, and it's been mentioned that chronic conditions is one of the factors. Have you done an analysis as to what proportion of the health budget spend, in a sense, would be expected to be going to this area to ensure that that preventative agenda is being delivered, so that we are going to have a social care agenda that we are expecting?

Chair, I'd like to answer that in a slightly broader way than the question. I'm indebted to Mike Hedges for pointing out to me yesterday a Fabian Society publication on paying for social care, which came out just in the last couple of days. There is a very interesting chapter in it that argues that the debate about paying for care has been slightly trapped into focusing on what the chapter suggests is the 30 per cent of expenditure that goes into helping people to stay in their own homes with the care that they need, rather than the totality of state investment in it. So, they include, in this chapter, the money that the health service spends, which isn't captured by social care figures. So, if you've had a fall, as an older person and you've been in hospital and you go home, we capture the social care spend, but we don't capture the physiotherapist who is coming from the health service every week for six weeks to make sure that your mobility returns to where it was before you had the fall.

The paper argues that we don't include in the figure the money that is spent through housing, through Care & Repair, for example, who come and install simple things like grab rails and things that allow people to be safe in their homes for longer, and most of all, the paper argues, we do not count properly the money that comes through the social security system. The paper argues that the biggest contribution to social care is actually pensions, disability benefits and the money that is paid through housing benefit at the moment in the Supporting People field, and if you count all of that, the paper argues that the focus on paying for care has been much too narrow and needs to be broadened and to take in the 100 per cent of investment and to think how that might be used better to support people for longer in their homes in the future.

So, I don't think that I've got an analysis exactly of the sort that David Rees was asking for. This paper does put some figures on what it says is the contribution from health budgets to social care, but it goes well beyond that in looking at things in the social security system in particular.

Cabinet Secretary, when we've spoken before, I believe you talked about tax devolution as allowing us to find particular solutions in Wales to issues that may be different in Wales from elsewhere, and I just wonder, here we already have, according to your paper, 25 per cent more social care spending per over 65 than in England, and that's up from only 8 per cent more in 2010-11. Looking at the over 65s, by 2039 the number is projected to grow by 35 per cent in Wales—significantly less than the 45 per cent in England. Don't those figures actually suggest that while being a problem and an issue, it's actually significantly less of one in terms of the public service pressures than what we see over the border in England? 

09:25

I think Mark Reckless has made two important points there. We start from a better place in that our existing investment is higher than it is across the border, and at some points in the future the growth in England overtakes the growth in Wales. In the short run, it is higher in Wales than in England.  

Yes. And we know that they're here already, so those people are not likely to not be part of our population. The rates at 65 are different, because you know we're the only part of the United Kingdom that is a net importer of older people, and at that point people are making decisions about where they will live in the future. If they made it at 65 and they're still here at 75, they're not likely to be leaving. But part of the complexity of the model is to try and predict how many people at that 65 age will continue to flow into Wales and out of Wales and so on. 

So, in the short run, we have higher proportions and higher rates of increase, and the figures do show, in exactly the way Mark Reckless said, that you come to a point where that reverses, and the figures in England rise more rapidly than they do in Wales. Does that give us an advantage? In some ways it does, but if you took the Fabian analysis, which is that social security spending is the biggest contribution to social care, of course all of that comes from non-devolved sources and simply follows the individual. So, if there were fewer people in that age, there would simply be less money coming into Wales, not per head but in the quantum, because there would be fewer people than in England. But I agree it's an important point.   

The point I made was: doesn't that present something of a challenge for you—and, arguably, the general political arena—perhaps specifically in making the case to UK Government, through this process we have for seeing whether we have new devolved taxes, to the extent that the issue may, at least to the UK Government, appear to be less pressing in Wales than it is for them in England—? 

I think, Chair, that takes us into the bigger question of whether a Wales-only approach to this is preferable to a UK-wide approach, and the interface between the work that we've had carried out by Gerry Holtham and this committee is doing, and the Green Paper that we are expecting, now sadly delayed again into the autumn. For what it's worth, I still probably believe myself that a UK-wide solution to some of these things is preferable if it can be a satisfactory solution, and so we will look at that Green Paper very closely. 

The UK Government so far, in a very modest set of discussions with them, has not reacted adversely to the argument that an experiment in Wales, using something like the Holtham report, would be useful to them as well as to us, given that this is one of those public policy problems that has defeated successive Governments of different political persuasions for at least the last 20 years. Many Governments have tried to find a solution, and none so far has succeeded. So, when I talked to the Chief Secretary to the Treasury about it, I said to her that we were looking for co-operation from the UK Government, and wouldn't it be useful from their point of view, as well as ours, if we were to actually try something practical in Wales so that the learning would then be available for everybody.   

I think that's what the Scottish Secretary said about the poll tax many years ago. [Laughter.] So, I think you'd be courageous to— 

Well, you know, the living laboratory argument about devolution, isn't it, is that devolution give us an opportunity inside the United Kingdom to try out some different things in different places, and then the learning is available to everybody? 

Cabinet Secretary, having looked—and I'm not quite sure what balance of the stress I took in from the Holtham report and your own note that you kindly prepared for the committee when I read both of these last night, but, overall, I took away the impression that quite a lot of the push or the argument for why this might be a good thing is not so much the particular issues raising social care in Wales, but the desire, essentially, to build up a sort of sovereign wealth fund, albeit stated to be by hypothecation of a particular levy for social care, in order to be able to invest that fund in various projects that Welsh Government, or those who advise or act as agents for it, might think were useful for developing the Welsh economy or their particular political objectives for Wales. Is that a fair assessment?

09:30

Actually, I wouldn't put it that way myself. I think the sovereign wealth argument is a second-order argument, both in the report and the way that we think of it as well. I'm not saying that it's not an important argument, and the fact that there might be a fund that could be available to help with important Welsh infrastructure projects and so on, if it could be done that way, and I think there's some really complex questions that would need to be worked through as to whether that is technically possible, but, no, I think the primary attraction of the report is that it would allow us—. And I'm not implying that we have reached a conclusion that it is the right thing to do, but the case for it is that it would allow us to account for the costs that we know are coming, in the way that Dilnot said, and provide an extra boost to our ability to provide the care that would be needed for people in the future. That's a primary case for it, done in the way that Gerry suggests—it builds up a fund and that fund could be used for other purposes at the margins. I think he says it's at the margins as well. 

So, if that's the case, why have a separate social care levy and a fund? Why not just use the Welsh rates of income tax we will have devolved from next April?

That's a very good question. I think the report rehearses exactly that. You could do it through income tax, which are powers we have or will have in our own hands after April. The case for doing it through income tax therefore is that the powers are closer to hand, and that the administrative costs would be lower. One of the problems of Gerry's preferred model, as he himself recognises, is that the administrative costs of it through HMRC could be prohibitive in the end. Income tax, the administration, definitely easier there. You can do it on a pay-as-you-go basis through income tax, in the way that Gerry suggests. So, I don't think we've by any means written off the idea that if you did need to raise money, that might be a preferable, more practical route. The case that Gerry makes is that in order to make this palatable to the public—and remembering we're going to be asking people if we were to do it to pay more for something—is that it is easier to persuade the public to do it if they can see that the money that they are contributing is in a dedicated fund, carefully separate from everyday Government expenditure, safe from future finance Ministers, who are under pressure on other fronts and see a fund that they could dip into for these purposes, and that a revived national insurance scheme would give people more confidence that the money they're contributing is there for them when they need it. 

And, I think probably finally from me, Chair: are you concerned about the potential implications for the competitiveness of the Welsh economy, or how attractive it may be to come or to stay in Wales to work, if there is this extra tax or levy to fund social care in Wales while there isn't that in England, and potentially related to that, would it lead to a two-tier system for older people, in that people who had paid in would get better social care than those who hadn't if they had moved from England later in life?

Both of those are very good questions and well rehearsed in the Holtham report. On the first question, I've seen some evidence that the committee has had that if people are being asked to pay more in Wales than they are in England, that might create a barrier to recruiting people to come and work in Wales, and what about people who come for a short period and work here and then move—the mobile population, the porous nature of the Welsh border, and does that—? So, I don't discount those arguments at all. The extent to which taxation issues, particularly if they are at the modest end of things, have a determinative effect on people's decisions, I'm sceptical about, I have to say. I don't take the economic view of mankind that people are always calculating down to the last penny whether they want to be in one place or another. An attractive job, a job you'd want to do; a job that you know in the long run will be good for your career; an opportunity to come and do things in Wales: I have a feeling that those things might be more important to people than saying, 'Oh, but in Wales, you might have to pay a penny more on income tax.'

09:35

I think that is a more serious issue and a more difficult issue: how do you distinguish, in practical terms, between people who have paid into the system and people who haven't paid into the system if they're sitting next to each other in a residential care home? Gerry does have some ideas as to how you can do that, particularly in the way that you treat assets. And you'll be able to ask him this—he'll explain it to you better than I can—but I think that one of his arguments is that if you have been a contributor to it, then you might expect to be able to retain a larger share of your assets in order to recognise the contribution that you've made, whereas the person sitting next to you, who has not contributed, would not get a different level of care at the point of need, but they may be expected to contribute a higher level of their assets into the fund to recognise the fact that they've not made contributions in a different way. So, there are ways around it, but it is, I agree, a tricky, practical issue at the point when you've got actual people receiving services.

Yes, it's interesting in that we had evidence that that is already the situation now in care homes and that people are self-funders who may have worked hard on an average income all their lives and are sitting next to fully funded residents who are receiving those services. So, it's already clearly the case.

One of the issues, of course, in terms of Gerry Holtham's proposal, and you've already commented on this, is that he suggests that the scheme would supplement existing arrangements for funding. You've talked about the sources of funding, clearly through RSG, and there are still self-funding opportunities as well, but also through the opportunity with this new contributory scheme, it could also retain some element of means testing, which, of course, goes back to public perception and awareness too, because you'd have to have some kind of assessment in terms of access to benefits. So, these are the kinds of issues that, I'm sure, the public would have a view about in terms of already having made additional contributions, and that they might be subject to the policy of means testing, and whether this is something that we need to look at in terms of Gerry's proposals.

So, that's one question, but I also wanted to ask what you felt about the issue, if we did have a funded contributory scheme, in that it would have to be viable in terms of reasonable collection and administration costs and that those would have to be negotiated and also that they wouldn't be subjected to taxation either. That's a key point. So, you've talked about modest discussions with the Treasury. It would help to know a little bit more about that. The thought of Wales again being the trial, piloting this scheme, I think would be very attractive. But, isn't HMRC crucial to this?

To take the second bundle of issues there to do with the complexity of administration on the one hand and treatment of any fund on the other, HMRC is critical to it and our experience so far is ambiguous, let's say, at best. In some of the things that we've needed to do in the taxation field, we've had a reasonably good service from HMRC; in other areas, as you've seen, their costs suddenly more than doubled for the service that they are providing to us. It's also an organisation that, over the coming period, is going to be dedicated almost entirely to dealing with the consequences of Brexit. If you've been following HMRC at all, you will see that they've been publishing, very rapidly, revisions to its work programme, jettisoning whole areas of work that it was intending to carry out in order to release capacity to deal with some of the Brexit issues that will fall to it—and they are very significant. We've had to work quite hard, Chair, to make sure that the work they're doing for the Welsh Government on Welsh rates of income tax isn't a casualty of all of that. To be fair, we've had all the assurances we need that they are not intending to downgrade the work they're doing for us. But this will be a new piece of work that we will be expecting them to take on at a difficult period if you wanted to do it in a short run, and, you know, they're the only supplier in town, in a way, for Gerry's fund, and if you're a monopoly supplier, then the charges that they may want to invoke for providing that service might be quite high. Gerry obviously rehearses all of that as one of the disincentives to it all.

Jane touched on another point, Chair, which I thought was very important in terms of complexity, and it partly rolls in Mark Reckless's question, and I didn't address it there. Let's assume for a minute that a government were to go ahead with the Gerry Holtham proposals and create a separate fund. Mark asked me about the sovereign wealth aspects of it. We would at least have to have a conversation with the UK Government about how they would treat that capital expenditure. Would it be additional to Wales, or would it, in the Treasury's eyes, simply be a different way of raising capital within the envelope that we currently have? We've had this debate here in the committee, Chair, over bonds, haven't we? You know, we've recently acquired the power to issue bonds, but it doesn't give us any more capital expenditure; it just raises capital in a different way. And if the fund were to be regarded in that way, it wouldn't be a sovereign wealth fund at all, would it? It would just be a different way of securing the envelope we currently have.

How would the Treasury treated if it was revenue expenditure? So, here is a fund that is now being spent, not in capital terms, but in providing services to people every day. What if the Treasury were to say, 'Well, we'll reduce your block grant, because we're not prepared to raise the level of publicly funded revenue expenditure in Wales'? In Jane's point it was about the complexity of it. So, I've written recently, with Huw Irranca-Davies, to the Treasury, to the Secretary of State for Health, to the Secretary of State for Work and Pensions, initiating these more detailed discussions with them. Particularly if the UK Government were prepared to regard this as a useful experiment, then they would have to be prepared to create a rulebook around it that doesn't hold the whole scheme below the watermark before it's even started. But the potential is there in the detail of it for some quite difficult issues to become roadblocks to taking the scheme further forward.

And if I could very briefly, just going back to Jane's original point about it all, there's a very interesting quote, Chair, which I'll read to you. It's relatively brief. It's in the Lord Darzi report, and it's his effort to explain why it has been so difficult to solve this problem over the last 20 years. This is what he says:

'social care has been challenged by an unwillingness...to follow through with the funding reforms it so desperately needs. The political economy of social care mitigates against reform: it is a sector whose voice is rarely heard. Its workforce is low-paid with little job security and scant union membership—and often drawn from migrant workers. Providers are far more diverse than the NHS and almost exclusively in the private sector. By definition, the users of social care are typically those who are more vulnerable and less politically vocal.'

That is why

'social care has been marginalised in public policy.'

And Jane's first question about why it is so difficult to get all this done, I think that's a very interesting summary of some of the reasons why.

09:40

Just one question. We talked about HMRC and that end. What about the Welsh public policy end? Could such a system as proposed in Gerry Holtham's paper actually work without a national Welsh care system? How could it work with 22 different care authorities, in effect? Wouldn't you need to have uniform costs, uniform charging, uniform—? You couldn't have a system where I'd been paying in Aberystwyth and then getting different costs when I moved to Blaenau Gwent. Surely, that is also part of this equation.

I think if there is a national scheme of the sort that the Holtham report suggests, then it does undoubtedly move you down the road to a more national system altogether. This is a very old debate in Welsh public policy, as the Chair and I will well remember. During the One Wales Government when Gwenda Thomas published her Green Paper on reform of social care funding in Wales, one of the key messages from the public—there were 94 responses to that Green Paper, 74 from members of the public, and there was a single message in it—was the public's frustration at the ways in which costs differ so much from one part of Wales to another. That report did lead directly to the cap on charging for domiciliary care, which had a major impact on driving out some of those anomalies, and in portability of assessments. So, we've done quite a lot already as a result of that report and other actions to have a more uniform national approach to some of these key things, but I think the Holtham report would push us further down that road, and the public would expect it. 

09:45

All the discussion publicly so far has been in terms either of a Holtham-style social insurance scheme or funding social care directly out of taxation. But when we had the Minister for Children, Older People and Social Care at the committee on 23 May, we heard that other models are available to the Welsh Government under the Wales Act 2017. I wondered, therefore, if you could tell us what these models might be, if you are considering alternatives.

There clearly are alternative models. I'm not sure I've completely grasped the point of how the 2017 Act comes into play here. There is a very useful table, Chair, if Members haven't seen it already, on page 39 of the House of Commons select committee report, which looks at a whole range of other ways that social care could be funded in the future, by using existing largely non-devolved taxation instruments. So, it looks, for example, at winter fuel payments and asks whether paying for social care is a greater priority than providing that, or how that system might be reformed in order to release money. It looks at VAT, it looks at wealth taxes, and so on. So, there are undoubtedly a whole range of other ways in which the current tax system could be adjusted to release money into social care. It's largely non-devolved, but it's a useful page if Members are interested in it. 

The Green Paper that I referred to earlier—. In 2009, Gwenda Thomas, the then Minister for social services, published a Green Paper that had five different options for how you might pay for social care in the future. The Holtham report is a sort of derivative of one of those five options, but the other four options would still be there. Some of them were a lot more popular than others when these were tested with the public. One was a simple pay-for-yourself system. Some of the economists that Mr Hamilton occasionally quotes at me on the floor of the Assembly—

—would be in favour of that model, wouldn't they? They would no doubt invent some sort of voucher system to put in the hands of people who don't have enough money themselves, and would then say, 'The market will take care of you all because you'll be able to go out and shop and the market will provide the best outcomes for everybody.' So, that was one of the options. It was very unpopular with members of the public in Wales, but it's there and it's set out in that Green Paper, and there are other options there too. So, this in not the only horse in the race, if that is the right metaphor.

I think you're right to concentrate on what is going to be acceptable, if not popular, with the public at large, and that's one reason why I'm provisionally attracted by the Holtham solution to this problem. Lord Darzi takes a different view. He prefers a kind of NHS type of approach towards this, which I think is a rather heroic way to think of how we're going to solve this growing problem, because we know the perennial problem with the NHS is that it has to compete with other items in the budget. Although health is a vitally important element of any Government's work programme, it's always starved of money—we can always do with more—and social care is already exhibiting the same kind of pressures and needs. I do believe that if we are to gain public acceptance for putting more money into the system, there has to be some visible payback that they think they're getting in exchange for what they pay. But Lord Darzi says that a move to private or social insurance models isn't, actually, supported by the evidence and, of course, we all accept what you've said earlier on, that it would be a rather more expensive way of dealing with the problem than simply direct taxation would be. I know you're not going to plump for one solution or another at this stage—we're at a very early stage of consideration of these possibilities—but do you think, on balance, that the evidence that is available to support a social insurance model gives it some kind of advantage over other possibilities of funding?

09:50

I suppose it depends what you're comparing it with. So, in that 2009 consultation, the most popular option amongst the public was the Darzi solution—make social care the same as the NHS, fund it through taxation and make it available universally, free at the point of need. That's what the public said that they'd preferred. But it had already been ruled out by the UK Government of the time, a Labour Government at the time, on the grounds of the expense that it would involve and the raised levels of taxation that would be required. Now, if you're comparing social insurance against taxation, in the way that we rehearsed earlier, there are some arguments to be said for taxation in administrative terms, in terms of simplicity and costs, rather than a social insurance scheme. But the second most popular option in the Gwenda Thomas consultation amongst the Welsh public was a comprehensive compulsory social insurance scheme. People were not attracted to an option in the paper that was private insurance, and if you are comparing a social insurance model against a private insurance model, then I don't think there's any doubt that the evidence, since the Beveridge report onwards, is that social insurance is—well, I believe anyway—a better model and certainly cheaper. You remember that the example in the Beveridge report was of private insurance for burial costs, where you had a population of 53 million and a 106 million extant policies in the UK for burying people. And he looked at the costs involved in taking out those very small sixpence-a-week private insurance things against a state-provided benefit to help people with burial costs, and he concluded there was no contest between the two. My own view is that that remains true until today. And the German experience and the Japanese experience, I think, tells you the same thing. 

The model that Gerry sets out doesn't only talk about the difference between using the Welsh rates of income tax, for example, and a social insurance scheme. It talks about, as you know, the wide range of characteristics you'd have in the model—so, all the different issues you might want to consider around cohort effects, the provision of services and the offer you get at the end. And I think just looking at a social insurance scheme versus Welsh rates of income tax—it's a much more complex set of questions that we're thinking about in terms of Gerry's model. So, it's worth thinking about the other parts of it, as well as just the raising of the money.   

That's an interesting point. I think if Beveridge were alive today he'd be appalled at what his original vision has mutated into. But that's a much wider debate—

Exactly. The interesting point that you made earlier on, also, that Wales could be used as a kind of test bed for the solution to this problem as well—how far would the Welsh Government's plans be affected, do you think, by any proposals for reform of adult social care funding in England, the flip side of that coin?

As I said in answer to Mark Reckless, changes that happen—. There's a size issue, isn't there? If we could do something different in Wales, then we can be regarded as an experiment that might—. If changes happen in England, it's a sort of tidal wave that comes over us, because of the different levers that the UK Government has and the scale of the changes that they would be making. So, we are inevitably having to look very carefully at the proposals in England. As I said, we're frustrated at the delay that there has been in them. Since 2015, there has been an awful lot of kicking this further and further into the future, including not implementing the coalition Government's scheme, which was on the statute book, in terms of a lifetime cap in contributions, and so on. But nevertheless, we are promised a Green Paper now in the autumn—a new Secretary of State, of course, to be in charge of that, compared to the one who'd been in charge of it until very recently, so there may be further delays. But we are inevitably exposed to the scale of change that could happen elsewhere. And I repeat what I said earlier on: that if it was the right scheme, I think there are strong reasons why you would want to do it on a UK basis. So, we don't rule it out in that way.

09:55

But the likelihood is, because it would be a much greater upheaval in terms of Government provision in England, it would perhaps be much easier to use Wales as a kind of template, assuming that the Welsh Government's ideas were in line with the UK Government's, of course, or at least not inconsistent with them. I think that's an attractive element of devolution.

Well, both possibilities are still in play, I think, Chair, but I don't think it will be easy to resolve it until we see what the Green Paper itself proposes.

Following on from that, I suppose, we are looking at what's in play in the future and where we're going in the future. In your own written submission to the committee, you talk about the next steps. You talk about how you've commissioned Gerry Holtham for further work on this levy. You also talk about future funding priorities, social care for older people in Wales and future demands. What plans do you have in place, and how do they fit into the Welsh Government's document of proposals for health and social care, 'A Healthier Wales'? How are you going to work all that through? And perhaps a timescale, because obviously the time factor is going to be crucial here.

Yes. Well, Chair, that's a particularly important point in relation to the 'A Healthier Wales' document, because there is a commitment in that document to an analysis of future social care and health spending and the relationship between them, and that will be at a more granular level than previous studies. So, in terms of the further research we will need beyond what we have from Gerry Holtham, then that's already planned for and will inform us thereto. The other side of the coin, which we haven't talked about at all this morning and which I think is very important, is not simply what you pay, but what you get. So, this is work that Huw Irranca-Davies has commissioned. What is the model of social care that we see for the future? If people are being asked to contribute more, then I don't think it will be an attractive enough proposition to say to people, 'You'll get what you get now, but there'll be an extra biscuit with your morning coffee.' That's not going to—. In other words, just a slightly better—

Well, we'll see. The point I'm making is that I don't think you could sell this proposition to the public if what you're saying to them is, 'What this will pay for will essentially be what you've got now, with some marginal improvements.' What you've got to be able to say to people is that we are thinking about the sort of social care services that we need in the future. It's quite likely, taking up the point that Mike Hedges was making, that this will be an opportunity to provide more preventive services—lower level, earlier on services that help people to manage for longer—but we've got to have that offer better articulated, better understood, I think, if we are ever going to go out and persuade people that this was something they were willing to support. From the Gerry Holtham report, we've got a pretty good emerging idea of how it could be funded and what the possibilities there are, complex as they may be. What we don't yet have, I think, is a sufficiently worked up and articulated idea of what you'd say to people: 'And this is what you'll get for your money; this is what you'll be able to have in the future that you don't have now.' And I don't think—. If we can't answer that question, we can't make the report fly.

So, I'm assuming from that that you will also get public engagement activities to have those discussions with stakeholders.

Yes. As members of the committee will know, we had a level of public engagement around the four different taxes that were on the shortlist of Welsh-only taxes that we proposed to test the machinery, and there was a significant appetite amongst the public for a social care tax. We've got the figures from that and the engagement that we had there. But, in the new inter-ministerial group that Huw is chairing, it has five different work streams, and communication and conversation with the public is one of the five streams.

10:00

I'll come onto that in a second, because I appreciate the paper and the written statement made yesterday by the Minister, which give an indication that terms of references have been agreed, and there were five distinct working themes. Though I couldn't work out the five distinct working themes from the written statement, and therefore clarity, perhaps, on what those streams are would be helpful, and the terms of reference would be helpful, so we can actually see exactly what the intention is. That would be great, in that sense. 

Also, based upon, perhaps, the comments this morning on the Fabian report, which you highlighted, are you also going to look at that aspect of it, to look at the actual full costs and the implications of the preventative agenda, and what that might mean to the services you need to provide as well?

Yes. Thank you, Chair. We'll make sure that members of the committee get the information that David Rees is asking for, if it isn't clear in the written statement in that way. There are five work streams that were agreed at the first meeting of that group on 27 June. It is meeting again next week, on 18 July. Gerry Holtham will be providing direct evidence to the group there. Part of its programme we have already covered this morning. One of those work streams, and, as I say, I think a particularly important one, is the offer work stream—how to better describe what people would get if there were to be such a fund. There is a whole work stream there to do with the interface with the UK Government, which will pick up a lot of the questions that Members have asked this morning, and it's in that strand, I think, that some of the Fabian report will be particularly useful, because it shines more of a light than I've seen so far on the expenditure in the round, and the extent to which that lies in devolved responsibilities, and the extent to which payment that is used to support care of people in their own homes is actually through the benefits system and non-devolved responsibilities. 

The additional work streams—one of them is on communications, which the Minister has talked a bit about. There's one on finance, which is about Gerry's report and opportunities or alternative ways of raising finance for this, and thinking about some of the issues around the fund and all those sorts of wider challenges. The final one is about the distribution of any moneys raised—so, having conversations with local authorities in relation to RSG, the role of the private sector, and the wider care sector in that, and how those mechanics work, and how any money that was raised would actually gain the traction to make that change in the social care offer.

And, knowing that you have Professor Holtham before you before long, then there was a point I would have made in answer to Neil Hamilton's question. So, Gerry rehearses this question. In the end, he goes for greater vertical equity—so, you pay more if you're older—than horizontal equity. He doesn't have much horizontal equity in it, because you more or less all pay in the same, regardless of income, at that point in your life. But he proposes, for reasons of vertical equity, that someone starting to pay in their 20s would pay a 1 per cent addition—that would stay at that throughout their lifetime. And people over 40 [correction: 55] would pay 3 per cent more. That's an interesting debate in his report that you might be taking, following on from the point that you made, as to why he came to that conclusion that equity between the generations was more important than trying to say, 'People with greater incomes should pay more, wherever they are in their life.'

Just one final point: timescales are crucial. We understand that the Green Paper is a factor in some of this process, but Gwenda Thomas's Green Paper was many years ago. What type of timescales are you now working towards on this? Because, at some point, a decision will have to be made as to where we're going—I would have thought sooner, rather than too late.

I think, if you look at the Dilnot review, it says the time for action is 'now', and that's five years ago.

Yes. So, David Rees is quite right: there is an urgency about all of this, which means that delay needs to be avoided if you can. But there are a lot of imponderables here, which does make it difficult to confidently say, 'We can do it by this date.' The Green Paper is one; some of the complexities in Gerry's report; the relationship with HMRC and when they would be able to do work for us, if we were really wanting to do it, in a practical sense. So, I think the general point that David Rees makes is absolutely right. We need to get on with it. But I'm not in a position to give you a reliable idea of how quick that could be, given the number of factors that are not directly in our own hands.

10:05

Cabinet Secretary, you said that the better-off don't pay more under the Holtham model. Surely they do, because there's a fixed percentage of, in their case, a higher income, that they're paying.

They pay more in the sense that 1 per cent of the larger sum is more, but it's still 1 per cent. There's no attempt to say that you can take a higher percentage off.

We are going to have to conclude, and we do have Professor Holtham as well to explore some of these other issues, but I just wanted to ask you, finally—. If I've understood the proposals correctly, the assumption that's been made is that, broadly, local authority spending would continue to be the same, so we're talking about a social care insurance fund that would be in addition to that, and the additionality is proposed to be around, broadly, 20 per cent on top. That's much more than a chocolate biscuit, I accept, but the question is: is that—? Two questions, really—in your political take, is that a sufficient offer to people for such an investment? And what is—? I might be opening up a whole different new stage of inquiry here now, but the best way you can put it: what is the danger that that quantum would not be robust enough to take account of the rising costs that we've been discussing earlier on in this session? It's just your—. I know you haven't made a decision; I know you're still in discussion, you're taking this very seriously. But, you know, just your political take on whether this is an offer that has that sustainability built into it.

Well, I think that Professor Holtham has been very careful in this part of his report. I think he takes a relatively pessimistic view of how costs might rise, and I think he takes a relatively modest view of the growth, for example, that you might be able to secure if you had a fund of this sort. He looks at how much money would you expect the fund to be able to generate by itself, and he pitches it at the modest end of that. So, in that sense, I think he's very carefully made his calculations and comes to 20 per cent as a figure that he thinks is genuinely realistic in terms of what will be necessary. Can you sell this to the public on the grounds that this is not a magic bullet, and everything else that's already being paid would have to go on being paid? Well, Gerry says, as you know, that you can increase acceptability by having an hypothecated fund, and it being able to be visible; you can see it, you can know it's protected from other calls on it, and so on. I think the last point I would make, Chair, and I haven't made it yet, is that in all those other reports that I've referred to—the House of Commons report, the Darzi report—the one thing they all say is that, if there's ever to be any progress on this, it will have to be on a cross-party basis. But this has been bedeviled by attempts to do it that then get embroiled in the death tax, dementia tax—you know, the sharper end of political debate. And, if there is to be progress, then we're going to have to find a way, and it's a real challenge, isn't it? We have to find a way, and maybe it's partly to do with where this happens in a political time cycle. We've got to do it in a way that has greater buy-in across the political spectrum, because that will give confidence to the public as well. In that sense, this committee's own inquiry could be an important building block in that.

Diolch yn fawr am y dystiolaeth y bore yma. Fe fydd yna drawsgrifiad, wrth gwrs, i chi wirio'r geiriau ac ati. Rwy'n cynnig ein bod ni'n cymryd hoe fach o 10 munud, a dewch yn ôl am 10:20. Ocê, 10 munud. Diolch.

Thank you very much for the evidence this morning. There will be a transcript available, of course, for you to check. I suggest that we take a short break of 10 minutes, and you come back at 10:20. Okay, 10 minutes. Thank you.

10:15

Gohiriwyd y cyfarfod rhwng 10:10 a 10:18.

The meeting adjourned between 10:10 and 10:18.

4. Cost Gofalu am Boblogaeth sy'n Heneiddio: Sesiwn dystiolaeth 9 (Yr Athro Gerald Holtham)
4. The Cost of Caring for an Ageing Population: Evidence session 9 (Professor Gerald Holtham)

Galwaf y Pwyllgor Cyllid nôl i drefn, ac yn croesawu'r Athro Gerry Holtham. Croeso mawr i chi.

I call the Finance Committee back to order and welcome Professor Gerry Holtham. A warm welcome to you.

A warm welcome, and we've had your independent report, your further work, and also, as you know, this morning examining the Cabinet Secretary. So, if you're content, we'll go straight to questions if that's fine with you. 

Particularly in your report you talk of the challenge facing social care in Wales, and you describe it not only as a squeeze, but almost as a crisis. What is the thinking behind your using terms such as 'crisis' in that sense? Where do you think we're at in terms of trying to come to a solution to this?

I think the first thing to say is that I had to try and establish what the scale of the problem was, and the work I did there I think is highly provisional—highly provisional. I wasn't able to know what future policies would be. I certainly wasn't able to cost them. I wasn't able to look in detail at how developments in care sector might affect future costs. All I could do was establish orders of magnitude: are we in the ballpark, are we on top of Snowdon, or are we in the Gower peninsula? I couldn't get the map any finer than that, really. So, all I did was to look at the decline in expenditure per head of the population over the age of 70—not per head of people receiving care, but just, 'Here's the potential recipient population over 70', and what expenditure per head had done in the last couple of decades. And it's down nearly 20 per cent. That was the first point. So, that suggests, unless everybody's got mysteriously healthier or we've got more efficient, that probably there's a squeeze on assessment, and that may be leading to suppressed demand.

The second element was that we know that—. Everybody talks their own book, of course, but we are receiving a lot of news reports about the difficulties the care home sector is in, and the data show that the number of residential places in Wales is actually declining over the last few years, which lends some support to the claims of people in the sector that they're finding it difficult to make ends meet at current tariffs.

The third thing we know is that the population—sorry, the workforce—in the sector is not well paid, and if they were all to receive the living wage as opposed to the minimum wage that would raise costs considerably. So, put these three things together and there's a large—although I can't be very precise in identifying it, there's a large shortfall in current expenditure.

So, that was the first proposition, and I thought, 'Well, if we restore the 20 per cent decline, maybe that will go a long way to resolving these issues'. Should it be 23 per cent or 17 per cent? I don't know. That is work that needs to be done, but it seems to me that that at least puts you in the ballpark. So, we need a 20 per cent increase in expenditure per head at the moment, and then we have to look at the demographic outlook. I looked at data on morbidity—you know, what proportion of the population is likely to require particular care—and then I just took the central population projection, official projection, for the next 30 years. Put those together and you come up with the conclusion that you've got to increase expenditure over the next 20 years, for purely demographic reasons, by somewhere north of 50 per cent; I came out at 58 per cent. This calculation is a little more precise. That's what it's about. The thing about population projections is, the further out you go, the more ropey they get, because you don't know who's going to be born, but you know who's alive, so death rates are fairly reliable.

So, that bit of the calculation, I think, is sounder. Put them together and you're looking at an 80 per cent increase in expenditure required on top of the current £550 million. So, maybe it's not £400 million—maybe it's £350 million, maybe it's £450 million. Anyway, it's quite a lot of money as an annual payment, and so that gave me a ballpark to estimate to talk about how we close such a gap but, certainly, more work needs to be done on precisely delineating that gap and deciding what policies you want to make, and they, of course, will affect the calculation of what's required.

10:20

So, in taking that approach, which is looking at the quantums, looking at what's missing as well as predicting, as you say, on demographics, the inference is that you haven't really looked at policy changes within that, and the effect of policy changes. But one particular big policy change that the Welsh Government has certainly signalled is the one system of health and social care—the parliamentary review approach. Have you been able to reflect that at all, or do you feel that that kind of level of decision has to be outwith the fiscal work that you're doing with this report?

No. I mean, the things are interrelated. Obviously, the amount of money you need to raise will depend on what you're going to do. There have been a couple of reports. London Economics was commissioned by the Welsh Government a few years back to look at the cost of various public policy options, and I read those reports. Of course, they're a little out of date now, but they looked, for example, at what the cost would be of having free care, or reducing, or at least making more easy, the various means tests. I don't know how reliable those numbers are, but they're rather favourable. Those things don't seem to cost an enormous sum of money, so that gave me the hope that maybe the 20 per cent was going to be enough, whatever the public policy was.

But you've essentially got two dimensions for the improvement of care provision. One is, yes, the quality of care provision—how much you pay the care home or the workers who are helping with domiciliary care, and how you regulate that. That's one dimension. The other dimension is the access to supported care—what kind of means testing you have and, of course, to some extent, for a given sum of money, they're competitive. The more you spend on the one, the less you'll have on the other, so there's a balance to be struck in terms of where you put the emphasis. Again, that's something where further work is needed. I'm not able to help you very much on that.

10:25

Somebody said, and I can't remember who it was, that it's almost like a game of roulette. If you land on red, you get treated by the health service, which is all dealt with free, and, even if you end up in social care afterwards, health will continue to fund you free because your need is health. But if land on black, and you happen to be frail and elderly and need social care, then you end up paying everything yourself until almost all the value of your house has gone. Do you recognise that?

Yes, I think there is obviously a very furry border between the health system and the social care system; there's no question. Clearly, that's an area that policy does need to focus on.

Moving on from that, if we're not going to collect the assets of elderly people—which is what we currently do, causing much upset to both them and their families, until the money goes down to a certain level, in which case the state steps in—why do you think people would be happy, or do you think that people would be happy to pay more for social care now, betting on the fact that they may be one of the ones who'll land, from what I said earlier, on the wrong colour?

I was a bit dependent on public opinion surveys. One that struck me was one that was conducted by Demos, an organisation for which I don't have an enormous amount of fondness, but there we are. But it was conducted last year and they reported in December, and that showed that the general attitude of the public was they thought that social care was a shared responsibility; that it wasn't something that they thought the Government should take total responsibility for as it does for health. Now, it was a fairly extensive survey, and what was surprising was that the proportion of people who thought it was a shared responsibility and shouldn't be entirely a state function, was higher in Wales than in the rest of the UK. Now, that surprised me; I thought we had rather more collectivist attitudes here, but, in this particular area, that was the finding of that study. So, I responded to that. You could, of course, construct a system in which everything was totally free at the point of use. The taxes would be higher—it's as simple as that. So, the question is: do people want to pay 5p instead of whatever it is in order to have it totally free? I'm not here to tell people what they want. I've responded to that evidence that that was not what they wanted.

Of course, students already pay, or ex-students already pay, 8p, don't they, in terms of the student loans. You're probably old enough to remember when income tax was actually over 30 per cent. 

Isn't one of the problems that we've got into an economic situation where lower income tax is considered to be good, no matter what it fails to provide, and, secondly, business taxes have, in terms of corporation tax, almost become a voluntary levy on multinationals, and the amount of money we get from business taxes as a share of tax has reduced considerably? It's around about halved. So, I mean—.[Interruption.] Pardon?

10:30

No, I'm talking—. Sorry, in answer to Mark Reckless, who said, 'Not recently', I was was talking about in the last 50 years as a proportion of the tax take. I think that that, in itself, is a problem that we only seem—. Isn't it a problem that we only seem to have one group of people to aim at—that is, the individuals paying tax? I know the Welsh Government haven't got powers over this, in most of it, but shouldn't we be able to perhaps share it out more evenly between the businesses who benefit from the workers, as well as from the workers?

I think there are a couple of dimensions to that. The first is I didn't think it was part of my brief to tackle the whole issue of globalisation and what it does for the mobility of the tax base and the effects of tax competition on taxes on corporations. I share your frustration. I think it's a shame there isn't an international system of capital taxation, but there isn't, and I don't know what to do about it. But, in terms of tackling the initial problem, it's that dreaded phrase: we are where we are. As you say, the capital taxes are not devolved. The report I chaired actually did suggest there was a means of partial devolution of corporation tax. Nobody took it seriously, and that hasn't happened. So, I have to look at the available tax base to the Welsh Government.

I accept the basic rationale for your report, and we'd perhaps be in a less difficult position today if the original national insurance fund had not been raided by successive Governments, and private pension schemes had not been plundered in more recent years. The creation, therefore, of a kind of independent sovereign wealth fund to pay for these care costs in the future, if it can be ring-fenced effectively, seems to me to be a very attractive potential solution. There are others who take a different view. Lord Darzi, in particular, in his interim report on health and care in England, says that your proposals are not supported by evidence, or the move to private or social insurance models in general for health and social care provision are not supported by evidence, and that those systems are more expensive. Could you perhaps set out for this committee what evidence you think is available to support the idea of a social insurance model?

Well, I think you have to consider the counterfactual: what's the alternative? The Dilnot report assumed that, if the charges for social care were capped, you would develop a private insurance market that would look after care costs up to a certain level. They assumed that the private market would not be able to deal with catastrophic costs, but let's just rule those out, and then we will have a private market for routine costs, let's say. I think, comparing that possibility with a national insurance scheme of the kind that I've produced, evidence is quite hard to come by, because it's not as if we have lots of examples. We don't have a big sample of lots of examples of the different approaches. But, first of all, the thing to remark on is that everybody tells surveys that they think that looking after yourself in old age is partly an individual responsibility. They all say that, but they're not saving enough to do anything about it. The savings rate is wholly inadequate. Most people's savings rate is wholly inadequate to meet those costs. If they're not saving enough, why would they undertake voluntary insurance to an adequate level? It's the same thing: you're giving up current income in order to have provision in future. So, I think the risk of under-insurance would be considerable.

The second point is—the typical economist's answer—there's the problem of adverse selection. The people who, for whatever reason, have a shrewd feeling they're likely to need it, will insure, and those people who think they might not need it will have a gamble and not insure. So, you'll get adverse selection and a worse pool of insured than if you make everybody contribute.

I think this is one area where, even as an economist, I've got to say the state has a role. It's more efficient to have a broad insurance pool, uniformly managed, that avoids adverse selection. So, I think the Dilnot report was written at a time when the Institute of Economic Affairs's view of life was at its zenith, as it were, and really thought, 'Can't we get a private solution?' But I think—well, the second thing to say is that there hasn't been a large growth in that private insurance business anyway, so my reading of those developments is that, on the contrary, the evidence suggests that a compulsory scheme is probably going to be cheaper, or at least more effective, than one that is left to market provision.

10:35

And I suppose the political reality in Wales is, it's more likely to be acceptable along those lines here than it is anywhere else. So, if you look at it in practical terms, how we're going to solve this problem in a relatively short time frame, this does seem to me a pretty good starting point to use.

England has gone down a slightly different route so far, in that it's adopted a social care levy. What would your view be on something along those lines here in Wales?

Well, I think it is—. One of the difficulties in Wales is that, obviously, what it's practical to do depends on what happens in the UK as a whole. If the UK Government announces it's going to increase some direct tax, whether it's national insurance or whatever, in order to provide social care, I think that's going to make it a lot more difficult, politically, for a Welsh Government to come out and say, 'Well, okay, you're going to pay that, and now you're going to pay a bit more.' That would really make things quite difficult, so I think it does depend on what the policy response in the UK is.

Maybe I'm getting to be an old cynic, but I would not be rushing down to Paddy Power to put a bet on them doing anything adequate in the area. I think that they're likely to do something, but whether it would close the kind of gap that we've talked about here in Wales, I'm dubious. But I do acknowledge that they might do certain things that would make the solution that I proposed more difficult to implement.

We've had evidence from the Welsh Local Government Association and from the Association of Directors of Social Services Cymru of other possible fiscal levers that could be employed. One suggestion is that fees of the asset management industry could be capped to free up funds for social care. Another one—an interesting one, actually—is based on a proposal by the Royal London insurance group about a possible care pension, using the current freedoms that have been introduced recently on the use of pension funds for draw-down purposes, and not just having to purchase a single annuity—to combine that into a combination of draw-down to pay a care insurance element to a scheme.

Do you have a view on how effective other proposals of that kind might be to move towards some kind of a solution, even though there may not be an overall solution to the problem?

Well, I think some of them could have some purchase. My difficulty was that none of them were under the control of the Welsh Government. So, if you were assuming that whatever happened wouldn't be adequate, and you were saying to the Welsh Government, 'What should you do?', then the options were rather restrictive. That's the problem maybe.

Do you know, I must admit, I can't remember—I should know this, but I don't—whether someone's pension pot is regarded as part of their assets from the point of view of social care?

So, in that sense, if people wanted to draw on it for social care, it seems to me to be perfectly reasonable. 

Of course, to be most effective, it would have to be a tax-free draw-down from the pension fund. That would be a kind of quid pro quo for the Government to relieve itself of some potential costs.

At first glance, that seems to be quite a reasonable and interesting proposal. But, as I say, that's not under the control of the Welsh Government.

Just in terms of the overall architecture of this, and you could argue, just building on Neil Hamilton's point, that we have a kind of social care levy in Wales at the moment, which is right at the end—well, not necessarily at the end of your life, but towards the end of your life, and we reach in and do take assets. You do pay from your assets—not pension, but physical assets, certainly house value and savings and so forth. So, you do have to pay at that stage. This is seen as extremely contentious, however, inequitable on occasion—intergenerational equity as well, or perceptions of that—and you're treading a very fine line, I think, between where people think their individual responsibilities are and where they may intellectually believe that there's a collective responsibility, but individually, to go back to Mike Hedges's point, are willing to take a punt on their future health, in effect.

I just wondered how much of—. The current system is very creaky, we accept that, and very awkward in the way it works. But is there evidence that paying over a longer period from your twenties and thirties when people, really, don't have any conception of this at all, is going to be any more effective in getting public support, than just saying, at the end of your lifetime, 'Well, you took a punt, you lost your bet and you've now got to get £50,000 from your house'? 

10:40

Well, the evidence seems to be that people are quite concerned about that prospect, and, of course, you're absolutely right—as they get older, they get more concerned about it, which is one reason why I thought that a system of age cohort-related contributions might be acceptable, both because I think you could make an argument that it leads to better intergenerational equity over the long run, but also it corresponds to people's feelings. You know, when you're 20 or 30, you're going to live forever, aren't you? When you're 50, you realise, 'Hey, this is going to happen to me', so in that sense you're ready to pay at a higher level than you might have been earlier.

People seem to have a different attitude to their principal residence than to what they have to their other assets. There seems to be a sort of acceptance that other assets are wealth, and, yes, if you've got a lot of it, you should be using it, but they don't seem to have that attitude to their principal residence, which they think they ought to be able to live in and then leave to their descendents. That is why I think, if you were to introduce a scheme of this sort, you certainly would need to change the rules about capital assets with respect to getting social care. You would have to indemnify or protect some of people's assets.

Again, this is something where I wasn't able to cost different policies, but take as an example—. Suppose you said, 'Okay, we've got this £50,000 threshold'—at the moment you pay right until you've just got that and then you can keep that, but you can't keep any more—you'd have to say something like, 'On your assets above the £50,000, you have to pay 50 per cent'—think of a number; 30 per cent, I don't know, but think of a number like that—'That's what you have to pay. We will assess your assets, and your required contribution will be a proportion of the assets, but it can't be all of them, because if it's all of them, what—'. And, 'I'm not paying insurance, I'm paying a tax, because I don't get anything at the end, even if the worst thing happens and I end up in social care for five years.' So, you have to say, 'No, but there's something you get if the worst thing happens, and that has to be some protection of your assets.' So, you go from 100 per cent wealth tax, if you like, to—think of a number: 50 per cent might be right, it might be wrong—40 or 50 per cent, let's say, that you have to pay, and the rest you don't. So, at least part of your assets you can retain, and that's really the pay-off for your insurance contributions.

So, I think if you're going to bill this as insurance as opposed to simply a tax, then you have to do that, and that's a political choice. I mean, if politicians want to say, 'Look, damn it, we jut have to tax you. Sorry, it's a tax', then, you know, they can do what they like. But if they're going to bill it as compulsory insurance, then they have to change those qualification rules.

I think that what you've said is very much correct for now, but if we move forward 30 years, the number of people who will be coming into that age group, who will have lived in privately rented accommodation for the whole of their lives, will be substantially higher than it is today. Today's situation, where lots of people who have medium or above-medium incomes have managed to buy houses, have got a wealth of houses, and they've got a house to lose—. Unless something changes and changes radically, in 30 years' time or 40 years' time, those people won't have a house to lose, because they will be living in privately rented accommodation, and the cost for many of them will fall on the state anyway.

10:45

Well, two points: that reinforces the case for having age cohort-related contributions, but, secondly, if you spared the assets of the older generation, those people will inherit a house—at least some of them will—or they'll inherit some of the equity in the house. So, that will change the situation I think.

Okay. There are a lot of different personal circumstances that come into this as well. We'll move on with David Rees, if we may. Thanks.

Thanks, Chair. There are a lot of different personal circumstances. I also want to check on—you talk about filling the gap between the two, and this contributory fund is basically towards filling that gap and, at some point, we'll cross over. But what assessment of costings were you placing that gap on? Because the Cabinet Secretary came in and talked before you and mentioned the offer that would be available to people and to ensure that the offer was appropriate and adequate and a quality offer. Did that influence you in your calculations of the costs to look at what that gap was?

As I say, I made the assumption that a 20 per cent per head increase would be sufficient, and that is a tenuous conclusion. I think more work is needed on precisely what offer you want to make before you can then cost it, and then you have to make sure that the taxes you propose to levy have got a good chance of funding that gap. I made an initial shot at the gap, which is, as I say, highly provisional, and then worked out what the tax rates would have to be on reasonable assumptions in order to plug that particular gap. If you do more careful work on the gap and decide it's more or less, then the tax rates will go up or down in order to make the scheme work. So, I've been quite clear and frank about that from the beginning—that's further work that is required.

It's a fund, and you also mentioned that part of the benefits of the fund would be some form of ability to invest elements of that fund in other parts of social interaction, social activities or the social world. What proportion do you think you'd want to actually put into that category, and what proportion would you want to keep—?

Well, indeed. Now, I don't want to be evasive about that. That depends very much on the risks that attach to that investment. The main thing here is, if this is a fund that's going to do its job, you will have set the tax rates assuming a certain rate of return on the fund, and you'll make a conservative assessment, but they'll be a certain rate. I took 4.5 per cent as the investment return in real terms. So, any investment you do on social infrastructure or any other infrastructure has to return at least 4.5 per cent. If you've got lots of stuff—it might be social housing, where you get the rental income that will give you that kind of return—you can do as much as you like, but you can't go and push it to the point where you're investing in highly risky things or things that don't yield 4.5 per cent, otherwise you won't fulfil your obligations to the taxpayer.

Normally, I'd be looking at something like 10 per cent, maybe, you could invest in—that's a guess, but something like 10 per cent might go on social infrastructure in Wales. If the Welsh Government wants to build a road and is prepared to guarantee a 5 per cent return, you can do as much as you like.

So, there's a possibility it wouldn't necessarily always be, perhaps, going into projects that actually would benefit the social sector, in one sense, so that it's investing in projects that will provide improved quality of life for individuals in that sector.

The ideal is to find such projects that, nonetheless, have a pecuniary rate of return of at least 4.5 per cent. If you've got those, you can do as much as you like. What you can't do, conscientiously, is divert a lot of the money to projects that don't return, because then you're going to have to start putting taxes up at a later stage because the fund hasn't produced the returns.

Just on that, where do you think, again, in terms of what the Cabinet Secretary told us how important—if this were to be work that the public must have absolute confidence that this is a separate fund that isn't raided by Welsh Government for its own purposes at some stage in the future, as happened, indeed, to national insurance a long, long time ago, really. If the fund is used to invest in what people perceive as 'Welsh Government projects', a road or even a residential care home—you could invest in a care home to get an income stream, so that might work—but, nevertheless, would that dilute your aim of making sure that people had faith in this as a compulsory levy scheme? 

10:50

I think this depends on the institution and, for me, the ideal thing to do is to create a statutory body with its own board of trustees and directors, and to appoint fund managers to make investment decisions. The Government shouldn't have any direct role in either function. What it would have to do is to have a programme of payments out for social care. So, you'd need something like a 15-year rolling programme—you'd revise it every two or three years, but you'd have a rolling programme—of how much you'd expect the fund would have to pay out in order to meet the social care obligations. That means that the fund manager would know what the cash requirements would be and could plan the investments accordingly. So, you have to provide some sort of plan for the output of the fund, and you'd have a statutory provision that said that the fund is there only to provide the resources according to that stream of payments, and it can only provide them for social care. But then the way the fund is operated and the decisions that are made internally should be absolutely independent of the Government, and maybe the fund reports to a committee like this rather than to the Minister, or something, so that it's clear that it's—. 

I'd go further and say it would have an annual general meeting and the AGM is open to the public. They're all shareholders, in effect, so they could turn up. You could even—I don't know whether this is practical or not—you could even have a public representative on the board. It's difficult to get people to vote for things they're not immediately involved with and don't properly understand fully, but you could have a public representative on the board, as well as people appointed for their expertise. 

You're getting quite close to a Glas Cymru kind of model, potentially, but with a statutory footing.

Yes. Glas Cymru has this system where they have an independent committee. They have a board that appoints members who then pitch up to meetings, and things. Yes, some selection system for a public representative, as well as the experts who make up the trustees. So, I think you can find institutional arrangements that would give the public that kind of confidence. It would be unusual, because in Wales the Welsh Government has generally shown a suspicion of executive agencies or independent parastatal bodies, but I think in this case there's a strong argument. 

The analogy there, the only one that approaches that, is probably the Welsh Revenue Authority, which of course is responsible for independent Welsh taxation, so that is the agent, I think the only one that this Government has set up in that way, so, yes. Okay, Mark Reckless.

Why would you want to specify that the fund is required absolutely to provide these specified, fixed flow of payments over a specified time horizon? Wouldn't that lead to the fund de-risking its investments if it has to be absolutely certain of making those numbers, at the expense of a potentially significantly higher return? 

Well, two points, really. The statutory obligation would simply be that the outgoings from the fund have to go for social care, and maybe that means they make direct payments on ministerial instruction to local authorities. I don't think the size of the payments should be fixed in a statutory way, but I do think they will need a plan. They will need to be told, 'We think that at the moment we're going to want to draw money out at this sort of rate.' That is not going to lead to them being more risk averse. That's going to enable them to make investments that are not hagridden, if you like, by the need to keep a substantial pot of liquidity because they may or may not be called for. If you know what the requirements are, you can make provision for that, and the rest of the fund you can do what you like with. So, actually, a bit of certainty eliminates the need to have precautionary balances, which will yield less. 

10:55

But would we also be accepting some risk that the projected planned payments might not be made because investments happen to perform very poorly over the particular time horizon? Would we prepared to accept that risk in return for allowing the fund to invest in potentially a higher reward and higher risk assets than would otherwise be the case?

I'm afraid there's no escape from that. If you think it's inappropriate to take any investment risk, then you don't want to go down this route. But people have a very strange attitude to risk. They think it's low risk to invest in Government bonds. It's only low risk in that there's no risk at all of making any money. You're absolutely guaranteed to lose it because they're paying less than the expected inflation rate. So, to me, that's not minimising risk; that's crazy. So, essentially, you have to pick investments that are not speculative, certainly not; you're going to invest in blue-chip stuff, but you will be exposed to the risk of equity markets being up and down; that's certainly the case. The mitigating factor is that, in the early years of such a scheme, the pot is building up. At the moment, you're having to pay £550 million a year. By 2040, you're going to have to add another £400 million to that at current prices. You don't want to be adding £400 million now; you'd waste it. There's no way you can spend it sensibly. Maybe you want to add £20 million or £50 million now. So, if you've got £200 million coming in, that pot is building up, so it's not as if you're at the mercy of one or two years of equity returns. You've got a 10-year run to build the pot up, and therefore you hope that you will ride through those ups and downs. Of course, if you get into a Japanese situation, where we have the equity market lower now than it was 30 years ago, we're in trouble. But I think that's not been the historical experience in the west. So, I think it's a reasonable proposition. 

I agree. I just hope Mike Hedges, as one of the trustees of our pension fund, has been listening, when they've just decided to move over a tenth of it into index-linked gilts. Sorry.

I think we'll have this discussion outside the meeting, Mark; I think that that might be useful.

From what you've just said, you gave the impression that we're only going to be investing in British shares as opposed to the world market. 

No, no, on the contrary; I would invest in the world market. 

I would hope you would as well because if the Japanese had invested in the world market, they'd only be at risk of having a shortfall from their Japanese share of it rather than their world share of it, and if the world markets all collapse, then we'd have a different problem. 

Absolutely. I'm influenced by the fact that—. Well, there's the famous book by Piketty, which shows that, on the whole, returns to global equity investments have exceeded the growth of wages in recent decades. There was a period after the second world war when that wasn't the case, but before, and subsequently, it has been the case. So, if you don't have a fund, you are relying entirely on the buoyancy of wages in the economy to finance what you're doing. If you have the luxury of being able to invest some money, you're diversifying. Most of your income is still dependent on the wage total, the wage bill, but you've now got some that is dependent on the growth of international returns to capital, and that's a diversification, and there's a pretty fair hope it's going to be higher than wages. So, you will actually get more revenue at the end of the day. 

I think it's not sure to work. We could hit a cataclysmic crisis and you end up having to increase taxes anyway, but it seems to me, looking at history, a pretty good bet. 

I think we want some concessional diversification. However, given that the obligations of the scheme are denominated in sterling, what sort of balance would you want in terms of UK equity as opposed to international?

11:00

I'm not putting myself forward as a candidate fund manager, by the way. [Laughter.]

Well, the thing to say there is, there is a strong correlation between relative equity market performance and exchange rates, and they tend to offset. So, you can of course hedge; I mean, if you're investing in Japanese equities, you can sell yen forward, if you want to do that. On the whole, it doesn't work particularly well; you find that you're better off just taking the exposure, because if the yen goes down, the equity market will boom, because it will make their exports cheaper, et cetera. So, there tends to be an offset—a negative correlation between the exchange rate and the equity market.

Particularly for Japan.

Just going back to the overall scheme, you've got a lot of focus on raising the money. And I just wonder in terms of, what service is then offered. You've said clearly it has to be better to make it attractive as a social insurance scheme. But just looking at the people who are benefiting from it, is it suggested that someone who hasn't paid in because they've recently moved from England, say, is going to be getting less good quality of care or experience in a particular care home, or are you only saying that the attraction will be protecting a higher amount of assets, or paying a lower taper rate in Wales than England?

Yes, the latter. I don't know how you would reasonably discriminate at the level of the care provided between people who contributed and not contributed. I think that would create all sorts of difficulties, and public opinion would, I think, be revolted by that. So, it really does come down simply to the financial contribution you have to make. If you've made these compensatory payments, if you've made these initial payments, then you get the protection of your assets. Ideally, if you haven't made them, you're on exactly the same system as they have in England, whatever the ceiling is there—£50,000; well, it's not £50,000, it's £26,000, but it was supposed to be going up to £70,000 wasn't it, and it hasn't done so. But, whatever it is, that's what you get. So, I think you can only—if you can make the scheme contributory, you can only make it bite on the payment side at the level of protection of assets.

And are we only concerned about people who move in to Wales from England? What about those who haven't paid in, or haven't been in the English system, but have moved from somewhere else, do they default to the English regime?

And is there also any concern for people—? It's a compulsory scheme; do you presume that everyone in Wales compulsorily pays in, or is there an issue of people who evade that for some reason, and therefore you need something to make sure they don't benefit?

There are two classes of people who wouldn't be covered. One is people on benefits, and the other is people not employed, because they're dependants of people who are employed, and earning money. The other point to remember is, of course, we don't have devolved income tax on non-wage incomes. So, somebody who's a rentier, as it were, wouldn't be paying any tax.

There are political choices to be made here. Clearly, if somebody is on benefits, they have to have their contribution imputed. Whether that's imputed free—whether you just say, 'Okay, you're on benefits, so we count you as paying'—or whether you say, 'Well, you're on benefits, we're imputing three quarters of it, but you've got to put a quarter in the pot out of your benefit', that is a political choice. I didn't get into that. But clearly there needs to be an imputation scheme of some sort for people on benefits. I think there probably also—much less so now than back in the 1940s, in the Beveridge era—but still, to some extent, there probably needs to be a kind of family scheme as well, whereby if you've got a spouse who's a full-time home carer, he or she is covered by yours if you pay a supplement. And maybe you pay 50 per cent more, and they're covered as well. So, I think things like that do need to be ironed out, yes.

And, Professor, you inferred earlier that there was suppressed demand in the system, by observing that the spending per head had fallen by 20 per cent. Isn't it inevitable, isn't it desirable, to have an element of suppressed demand in an economy where there is limited, finite resource?

11:05

Yes. I don't think there's any risk that the kind of tax rates that I was discussing are going to lead to a land flowing in milk and honey as it were, where everybody is totally cared for and there are no marginal cases at all. You do need standards of assessment for whether people are entitled to care and that will continue to be the casea, and—

But is your report underlined by—? Is there an underlying assumption in your report that we're spending too little on social care and there is a combined market and Government failure, such that society would be better off, and we'd get more of our desires met better, if we were made to spend more in this area?

I think it's implausible that you would reduce the expenditure by 20 per cent and that that's entirely accounted for by the older generation becoming healthier or us becoming more efficient in the way that we provide social care, but—

I don't claim it to be the right figure. I merely say that there is going to be an element of unknown size of suppressed demand there—inappropriately suppressed demand. I don't argue that it's 20 per cent. But on top of that, I've got the fact that the payments we're making are not sufficient for care homes to be viable. Places are falling and we know that we've got to increase costs in the sector because the workers are underpaid—they're not receiving a living wage and some of them come from Europe and that tap may be turned off. So there are other reasons too to think we need to increase expenditure. Is the 20 per cent the right number? I've been completely clear: 'Look, it's a guess'. But there's an element of suppressed demand, there's a need to raise expenditure because of cost—there will be an inevitable cost inflation above the usual inflation rate—and at the moment it's not a viable sector for care homes. We've had a look at companies in this sector, and most of them you wouldn't want to invest in. They're on their backsides, basically.

You said in that answer 'suppressed demand' then 'inappropriately suppressed demand', and then again 'suppressed demand'. What is this concept of inapproprirately versus appropriately suppressed demand, given we've got finite resources? I find that a challenge in understanding your report.

Clearly, what has happened is that, under the scourge of austerity, if you like, or whatever the word is—the necessary economies of public spending—the local authorities have made it more difficult to apply for and get support for old-age care. They have, in one way or another, raised that hurdle. If they thought the original hurdle was appropriate, the only reason they've raised it is because they haven't got the money and not because they've made a conscientious decision that, actually, these people shouldn't get it. But I am unable to put a number on that; I've never claimed to be able to do so. I'm saying there is an element of that, which is clearly less than 20 per cent, but clearly more than zero, and I've got to add to that these other cost factors.

Isn't that ultimately a political judgment? I don't see why the 20 per cent higher spent before is any more the right amount than the 20 per cent that you say, lower now, is the right amount. It may be that Labour Members agree with you that there should be more money and less austerity, but at the moment, we already have 40 per cent more per head of population and 25 per cent more per head of over-65s spent on social care. Why do you diagnose that there's inappropriately suppressed demand that must be met? It's inevitable that there's suppressed demand, but how do you make this 'appropriate/inappropriate' judgment?

In the report, I did a bit of sensitivity analysis on that—so, what if you only increase expenditure per head by 14 per cent—and, of course, you can then get away with lower taxes. So, I don't wish to nail my colours to the mast at 20 per cent. As I keep saying, there are a number of elements. There must be some element of inappropriately suppressed demand, given the 20 per cent cut, for reasons of public spending pressure. Now, I don't claim it's 20 per cent—I don't know what it is—but it must be more than zero. Add to that these other factors of the necessary increase in costs, both to make the sector self-sustaining, which it doesn't seem to be at the moment, and, while making it self-sustaining, i.e. raising profits in the sector, also raising wages in the sector to meet the living wage. Now, if I add those two things to an unknown size of suppressed demand, 20 per cent is the guess, but it is a guess. It might be 18 per cent, it might be 25 per cent. I don't know. And it will depend on what policy you adopt. You’re absolutely right; I’m not denying there's a political choice to be made, but, you know, my objective was to be able to tell the Government roughly what kind of tax increase they might be talking about. I looked at 20 per cent, I did a sensitivity analysis on 14 per cent, and you can see the numbers.

11:10

Very briefly. Of course, there are three other things, aren't there, which have affected it. One is the move from residential care to home care. Secondly, the bringing in of social services moving to enablement for people discharged from hospital rather than looking to provide long-term care. And thirdly, the social services accountancy methods, where the amount of money—. They used to directly employ people and everything was directly paid by them. If somebody was earning £100 a week, there'd be a 20 per cent oncost to help pay for things like the chief executive. That disappears, doesn't it? There are a lot of these other things as well. So, I'm not disagreeing that the number is above nought and below 20, but where it is in there is a matter that really perhaps needs further research.

Oh, unquestionably, and I've said that all along. The objective seems to be to do several things. One is to improve the level of social care, and make sure that a private care home system is viable, and make sure that the workers in it can be adequately paid. You want to do all of that, and you also, if you're going to charge people money, you want to change the conditions under which they can access support—i.e. you don't want to take all their wealth off them. Now, if achieving all that can be done at less than a 20 per cent increase in spending per head, excellent; you're going to get away with lower tax rates. That's fine. But I'm not sure that I would bet the bank on being able to do all of that at much less than 20 per cent.

Yes. I mean, I could be wrong, and that's all it is. I'm not making any kind of claim for the 20 per cent.

Just to conclude this session, I want to start by thanking you for putting this on the policy agenda, because I think that, when Mark Drakeford was looking for the new tax policy ideas and a social care levy, you'd already positioned that as a possibility when it came through. I think that, to be fair, with this committee, there was great interest, cross-party interest, which of course, as we were saying with the Cabinet Secretary earlier on today—this is something where we'd need to get buy-in and interest and support, not just in terms of political parties, but, obviously, the wider world and public. So, the social care levy has hit a nerve in terms of opportunity, and I thank you for that, for bringing yet another policy option forward.

I suppose it is also, I would say, a duty, a responsibility for us, as we have sought to try and address the issue of paying for social care, that we've got to address this and look at this very carefully and seriously. I just wonder: we talked a bit earlier on today with the Cabinet Secretary about crucial issues relating to the viability and suitability of your proposed scheme, your social insurance scheme. Is there anything else you'd like to say on that? For example, HMRC seemed fairly critical in terms of how this would be managed and delivered. There are issues around, as Mark Drakeford said, you know, what would the UK Government do about this in terms of how would they treat this money, the fund, in terms of our fiscal framework. They are obviously interested so far in thinking about this, and we'll await the Green Paper as well as the House of Commons select committee paper, which has just come out. So, is there anything else that you feel that we need to do, or the Welsh Government needs to do, in terms of looking at the viability and suitability of your social insurance fund proposal?

11:15

I think there are several things. I think it's going to be quite difficult to get HMRC to operate a contributory system themselves. Of course, it doesn't have to be contributory, you can just say, 'Okay, everybody who's resident in Wales gets these benefits whether they've contributed or not.' I think that is a second best. You can do it. It's second best because in the first place you're likely to have higher cost because people coming in will qualify. You're actually providing a small incentive for people to immigrate to Wales if conditions are better and they have to pay less. So, you're pouring water into a bucket and you haven't put the bottom in it, as it were. It's not ideal, but you could do it. I don't think the immigration problem would be so huge as to negate the whole thing. So, it doesn't have to be contributory, but I think it's better if it is.

I do think it would be difficult to get HMRC to do it. As I understand it, they already outsource certain administrative functions, for example in the national insurance area. I think they should be told, 'We want you to release tax records to the Welsh Revenue Authority and then the Welsh Revenue Authority can administer the scheme.' It isn't rocket science. Every local authority operates a pension fund where they have to keep a record of entitlements. Of course, there are more people in Wales than there are in any individual local authority pension fund, but it's not an order of magnitude different. And this is simpler. You're not working out a detailed entitlement, you're just working out whether or not they qualify. So, I think, in that sense, it's not insuperable that we could be organised internally. The main issue will be to get HMRC to release the records to the Welsh Revenue Authority. They will be resistant to that too, I'm absolutely sure. But, I think if the British Government decides there's an interest in this happening, then they could be induced to do so. I think that's one very important point. I think a compensatory system is better, but it's not absolutely essential. It will be difficult to pull off.

I think as far as the other concerns are concerned, I'm a bit more hopeful, because the whole point about tax devolution is that it polishes off the old notion of a departmental expenditure limit for Wales. You can't limit Welsh expenditure per se now, if they've got a tax that they're able to increase in order to spend more money. So, yes, okay, you can control how much money you give them via the revenue support grant, but you're no longer in a position to say, 'You can't spend that money.' So, as far as I can see, this fund is being built up from Welsh taxes and therefore it's creating the possibility for expenditures over and above anything like a DEL. It seems to me it would be a total violation of the devolution agreement in both spirit and letter if they then said, 'No, you can't spend that money, we're going to cap it because you're over some—'. In that case, what have they devolved? They haven't devolved anything. So, I don't think that should be a problem. If the fund accumulates more income through its investments, it can't be prevented from spending that—it's an independent statutory body. So, I don't think that should be a problem.

I know the Secretary of State is also concerned about whether, at the point where people are able to get assistance with social care, this would compromise attendance allowance or other individual social benefits. I think that is a concern, but that's something that has to be discussed with the British Government. I don't think overall fiscal control by the British Government should be an issue in this case.

We've got this inter-ministerial group set up, which Huw Irranca-Davies is chairing, and I think they've got a whole series of work streams looking at the practicalities, the issues and the liabilities. I think much of that is going to be about how we handle your proposal, not about those external factors, which are crucial, obviously, in terms of practicalities. But would you agree that it's going to be considering the distribution factors and how we can ensure that there is fairness and intergenerational fairness, for example, and recognising that we want to avoid—? At the moment, we really do have an inverse care law, as Julian Tudor Hart, who sadly passed away very recently, described it. We have an inverse care law, in terms of social care, and we would want to address that. And I would say that, in terms of latent demand, of course, informal care is one of the key factors in terms of the way we actually care for our older people, our older citizens in Wales. So, there are crucial policy issues for us in Wales, I would suggest. Would you agree on that point? 

11:20

Indeed. There are a couple of brute facts, and then, after that, everything is a political choice. The brute facts are that, given the demographic deterioration, you are going to have to spend more money. Even if you have a poor system of social care, you are going to have to spend another at least £300 million a year from somewhere. Unless you are going to raid the rest of the budget, or unless the UK Government does something entirely satisfactory, the only tax base that Wales has got of adequate size to meet this is income. Those are the brute facts. Now, after that, there are all sorts of choices. Is it going to be contributory? Well, ideally, but it doesn't have to be. Are you going to make it age cohort dependent? Well, ideally, yes, in my opinion, but it doesn't have to be. If you charge everybody the same rate, it's about 1.5 per cent. If you stagger it, it's 1 per cent to 3 per cent. I think that Mark Drakeford said that you have to be over 40 to pay 3 per cent. No, no: I was taking, over 55, you pay 3 per cent; over 20, you pay 1 per cent; and there's a sliding scale in between. But, you know, you don't have to do it. You could charge everybody 1.5 per cent. And you don't have to have a fund. You could do 'pay as you go'. You could start off by increasing income tax by 0.5 per cent. You are going to need to put it up to 1.5 per cent in five years' time, and, in 12 years' time, it's going to have to go to 2 per cent. So, you know, these are all choices. There are many ways to do it. But the brutal facts are that you need £300 million a year, if not £400 million a year, from somewhere, and there aren't that many places to get it. That's where we are.   

One place to get it, of course, would be the UK Government addressing this.

Yes, I think that's right.

What's your take on whether this should be done as a UK—either this, or something similar, or a different approach that the UK Government might be doing in their Green Paper—that the political response from Wales, if you like, should be: 'You need to deal with this. This is a welfare state and social care issue, and, though we are interested in experimenting here in Wales, actually, this is not commensurate with the range of powers and fiscal levers that we have; it's such a narrow use of our fiscal powers that, in fact, our argument should be that the UK Government does it now'? When I asked the First Minister in the scrutiny of the First Minister session that we had on Friday—the committee in Aberystwyth—he gave a very clear impression that he thought that this, primarily, should be a UK response, and then, maybe, only if the UK Government didn't do anything about it, we should be looking at it. Is that the take that you have, or do you have a more, if you like, committed kind of approach that thinks that we should be trying to do something like this in Wales?  

No, I think if the UK Government wanted to do it, in many ways, that would be optimal. That would be better. I think the only consideration is—and I don't know the answer to this—is there a different political centre of gravity? In other words, do the Welsh electorate want to have more security about social care than the English electorate, so that, in a perfectly functioning democratic system, we here would want to have more than they would want to have? I don't know whether that's the case, but, if it were, that again makes the case for doing something supplementary. But, unless that is the case, clearly it's optimal to do it at the UK level.

The political choices and consequences of different spending patterns on adult social care in England and Wales suggest that, at least, the political environment tolerates something in England that wouldn't be tolerable in Wales, in terms of the actual expenditure, for example. 

11:25

That's a possibility. I don't know whether it's true, but it's clearly possible, in which case it creates a case for Wales doing something on its own account. But, assuming there's a general desire to do something about this, obviously social insurance works better the bigger the level you can do it at. So, I'm not putting this forward as a totem of Welsh independence or anything, I just think that unless they do something that we in Wales regard as adequate, this is something—

—we have to do. Yes.

Can I just ask a final question for myself, just for clarity? We've talked about this as a fund that's always paid in as a levy, in effect, by the residents of Wales, however you may want to arrange that. Do you ever foresee that this fund ever becomes propped up by Welsh Government or local authorities? Do you need, for starters, a pump-priming for the fund to start with? And, secondly, if, over a period of time, there was seen to be, for some reason, slightly less expenditure in one year, for example, by local authorities on adult social care—you know, £10 million was not spent—would you see that there is a possibility for that money then to be reinvested in the fund? Or can it only exist on the basis of individual contributions? 

Well, first off, I don't think there's any need to pump prime it if you start off with a tax rate of at least 1.5 per cent, because that will bring in over £250 million a year, and you're not going to be spending an extra £250 million a year for quite a few years. So, just that will allow the fund to build up. There's no need to pump prime it. In the unlikely event that you're so brilliantly successful with the investments that the fund gets to £32 billion or something—I think £3 billion is more realistic, but you only need a few years at 15 per cent returns and you're in nirvana—in that case, you can abolish the taxes. The fund will become self-sustaining. I think the chances of that happening are probably 5 per cent or less, so I wouldn't even talk about it.

One thing you do have to decide is who's going to bear risk here. If, on the other hand, investment returns are much poorer than you expect, and the fund isn't filling the gap that you hoped it would, who bears the risk? Do we say it's the taxpayers who bear the risk—okay, they've got to increase the tax rate—or do we say, 'No, no, no, it's the people who require care now: sorry, we'd like to improve care, but we don't have the money, so suck it up'? So, there is an issue, in the event of under performance, whether this is a defined contribution scheme, if you like, or a defined benefits scheme. 

So, there's a guaranteed—whether there's a guaranteed outcome or not.

Yes. If there's a guaranteed outcome, what that means is the accommodating variable is the tax rate: if investments have under performed, you've just got to put the tax up. 

Okay, I think we'll have to bring our questions to a conclusion there. Thank you very much. Diolch yn fawr iawn. There will be a transcript for you to just check for any facts and figures or whatever that might have been lost, and, with that, diolch yn fawr. Thank you. 

Thank you very much. Thank you.

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

Cynnig:

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

Motion:

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

Cynigiwyd y cynnig.

Motion moved.

A ydych chi'n hapus i fynd mewn i sesiwn breifat o dan Reol Sefydlog 17.42? Pawb yn hapus, felly. Diolch yn fawr iawn. 

Are you content to go into private session under Standing Order 17.42? Everyone content, okay. Thank you very much.  

Derbyniwyd y cynnig.

Daeth rhan gyhoeddus y cyfarfod i ben am 11:28. 

Motion agreed.

The public part of the meeting ended at 11:28. 

Archwilio Cynulliad Cenedlaethol Cymru