|Alun Davies AC|
|David Melding AC||Yn dirprwyo ar ran Nick Ramsay|
|Substitute for Nick Ramsay|
|Llyr Gruffydd AC||Cadeirydd y Pwyllgor|
|Mark Reckless AC|
|Mike Hedges AC|
|Rhianon Passmore AC|
|Rhun ap Iorwerth AC|
|Alex Chapman||Ymgynghorydd, Sefydliad Economeg Newydd|
|Consultant, New Economics Foundation|
|Andy King||Aelod o'r Pwyllgor Cyfrifoldeb Cyllidebol, Swyddfa Cyfrifoldeb Cyllidebol|
|Budget Responsibility Committee Member, Office of Budget Responsibility|
|Anna Nicholl||Cyfarwyddwr Strategaeth, Cyngor Gweithredu Gwirfoddol Cymru|
|Director of Strategy, Wales Council for Voluntary Action|
|Cathy Madge||Arweinydd Ysgogi Newid, Swyddfa Comisiynydd Cenedlaethau'r Dyfodol Cymru|
|Lead Change Maker, Office of the Future Generations Commissioner for Wales|
|Dr Helen Tilley||Uwch Gymrawd Ymchwil, Canolfan Polisi Cyhoeddus Cymru|
|Senior Research Fellow, Wales Centre for Public Policy|
|Dr Victoria Winckler||Cyfarwyddwr, Sefydliad Bevan|
|Director, Bevan Foundation|
|Eurgain Powell||Ysgogwr Newid, Swyddfa Comisiynydd Cenedlaethau'r Dyfodol Cymru|
|Change Maker, Office of the Future Generations Commissioner for Wales|
|Robert Chote||Cadeirydd, Swyddfa Cyfrifoldeb Cyllidebol|
|Chairman, Office for Budget Responsibility|
|Dr Edward Jones||Cynghorwr Arbenigol|
|Leanne Hatcher||Ail Glerc|
|Samantha Williams||Dirprwy Glerc|
|2. Cyflwyniad, ymddiheuriadau, dirprwyon a datgan buddiannau||2. Introductions, apologies, substitutions and declarations of interest|
|3. Papurau i'w nodi||3. Papers to note|
|4. Cyllideb Ddrafft Llywodraeth Cymru ar gyfer 2020-21: Sesiwn dystiolaeth 2||4. Welsh Government Draft Budget 2020-21: Evidence session 2|
|5. Cyllideb Ddrafft Llywodraeth Cymru ar gyfer 2020-21: Sesiwn dystiolaeth 3||5. Welsh Government Draft Budget 2020-21: Evidence session 3|
|8. Cynnig o dan Reol Sefydlog 17.42(vi) i benderfynu gwahardd y cyhoedd||8. Motion under Standing Order 17.42 to resolve to exclude the public|
|7. Cyllideb Ddrafft Llywodraeth Cymru ar gyfer 2020-21: Sesiwn dystiolaeth 5||7. Welsh Government Draft Budget 2020-21: Evidence session 5|
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 rhan gyhoeddus y cyfarfod am 09:15.
The public part of the meeting began at 09:15.
Bore da, bawb, a blwyddyn newydd dda i bob un ohonoch chi. Croeso i gyfarfod diweddaraf Pwyllgor Cyllid y Cynulliad. A gaf i hefyd groesawu David Melding, sydd yma yn dirprwyo ar gyfer Nick Ramsay? A gaf i nodi bod yna glustffonau ar gael, wrth gwrs, ar gyfer cyfieithu, os oes angen, neu ar gyfer addasu lefel y sain? A gaf i atgoffa Aelodau i sicrhau bod unrhyw sain ar eu dyfeisiadau electronig wedi'i diffodd? A gaf i ofyn a oes gan unrhyw Aelodau fuddiannau i'w datgan? Dim byd, iawn, dyna ni.
Good morning, everyone, and a happy new year to everyone. Welcome to this latest meeting of the Finance Committee at the Assembly. Could I also welcome David Melding here, substituting for Nick Ramsay? Could I note that there are headsets available for translation or for sound amplification? Could I remind Members to ensure that any electronic devices are on silent? Could I ask whether Members have any interests to declare? No, thank you very much.
Mae yna ddau bapur i'w nodi, sef dau set o gofnodion o gyfarfodydd y pwyllgor yma a gynhaliwyd ar 11 Rhagfyr a 18 Rhagfyr y flwyddyn ddiwethaf. A ydy Aelodau'n hapus i nodi'r papurau hynny? Diolch yn fawr iawn.
There are two papers to note, namely two sets of minutes of the meetings held on 11 December and 18 December last year. Are Members content to note those papers? Thank you very much.
Iawn, wel, ymlaen â ni, felly, at brif eitem gyntaf ein cyfarfod ni yr wythnos yma, sef, wrth gwrs, i barhau â'r gwaith o graffu cyllideb ddrafft Llywodraeth Cymru ar gyfer 2020-21. A gaf i groesawu ein tystion ni ar gyfer y sesiwn gyntaf yma y bore yma? Croeso i Victoria Winckler o Sefydliad Bevan, i Helen Tilley o Ganolfan Polisi Cyhoeddus Cymru, ac i Anna Nicholl o Gyngor Gweithredu Gwirfoddol Cymru. Croeso i'r tair ohonoch chi.
Fe awn ni'n syth i mewn i gwestiynau, os ydy hynny'n iawn gyda chi? Fe wnaf i gychwyn, os caf i, efallai, drwy ofyn: a ydych chi'n credu bod cyllideb ddrafft Llywodraeth Cymru yn cynnwys strategaeth gydlynol i fynd i'r afael â thlodi?
We move on, therefore, to the main item on the agenda, which is to continue with our scrutiny of the Welsh Government's draft budget for 2020-21. Could I welcome our witnesses for this session this morning? I welcome Dr Victoria Winckler from the Bevan Foundation, Dr Helen Tilley from the Wales Centre for Public Policy, and Anna Nicholl from the Wales Council for Voluntary Action.
We'll go straight into questions, if that's okay? I'll start, if I may, by asking whether you believe that the draft budget of the Welsh Government includes a coherent strategy to address poverty.
Shall I go first?
I think, to answer that question, you need to understand that there are probably three different ways that a strategy can try to tackle poverty.
It can include specific measures to tackle poverty; a particular problem such as, as we have in the budget, the provision of sanitary products, free school meals, or help for holiday schemes for children on low incomes and so on. And I think the budget this year, the draft budget, has a lot more programmes and expenditure of that type. I think there are questions about the standards that might be included in that type of activity, the delivery mechanisms and whether they're of a sufficient scale, but I think we have seen quite a change since the previous budget towards including more of those specific, quite targeted interventions.
I think the second way that a budget can have an impact on poverty is in the broad shape of expenditure. So, is it spending money on the kinds of activities and public services that are used primarily by people on low incomes? You can see that we don't have the detail to really scrutinise that, although the Welsh Government has said it will be looking at distributional impact, and I think that's very welcome. But you can see some quite, perhaps, unusual things just from the data that we have got. So, for example, there's more than twice as much being spent on rail as on bus, and yet people on low incomes tend to use bus rather than rail. There's more being spent on—well, there's a substantial amount being spent on Help to Buy, I think there's £68 million, and that's a third of the amount that's being spent on the social housing grant. But we simply don't have the information in order to be able to look at that distributional impact.
And then the third way that a budget can make a difference to poverty is whether it is expending money on interventions that address the root causes. We know that the root causes are: lack of decent jobs—not enough and not well paid enough; lack of affordable housing; and the way in which the social security system operates. I think, on that measure, I would have some bigger reservations. Notwithstanding that not all of those things are within the Welsh Government's gift, I think we still, in my view, don't have enough of a focus on addressing those root causes.
So, I think the budget does more to address poverty than in previous years, but whether it's yet a coherent strategy—I don't think it's quite there yet, to be honest.
How will we know that it is a coherent strategy, because there'll be different initiatives emerging every year, won't there?
Well, I would say that the long-term focus of the Welsh Government should be on the root causes. I understand the wish to address some of the symptoms, if you like, whether that's holiday hunger or whatever, and I also understand that it's a very useful way of putting money in people's pockets. So, I absolutely don't want to be critical of those; I think they are very, very welcome. But I think if you are serious about long-term addressing poverty, you need to be doing some heavy-duty stuff around the state of the economy, around the interface of the UK social security system with devolved powers and people's lives, and around housing costs.
Okay. Would anyone else have any comments to add? Well, go on then, Alun, if you want to come in.
I wanted just to follow up on the remark you just made. Coherence is an important point, and I'm wondering whether you see the linkages between different departments. Do you get a sense that departments are doing their best, working hard, trying to make the allocations that you've described, but doing so in isolation? Or do you get a sense from reading this budget that there is a coherence in policy that isn't reflected in the budget, or that there is a lack of coherence in policy as well?
I think underlying a relative lack of coherence—. I mean, there's more joining up than there was, right, but I think underlying that is a lack of clarity about what the Welsh Government wants to do about poverty anyway. How does it define poverty? What does it see are the root causes? What are its three headline actions that it would like to take? I know there are a lot of calls out there from other organisations concerned about poverty about wanting a poverty strategy or a poverty plan. We are much more relaxed about whether or not we have one, because you can have a poor policy or strategy document; what matters is the focus of your efforts.
So, I also think it's difficult because there is so little wriggle room for the Welsh Government because of the dominance of health—. The three big—health, social care and education—just take such a big chunk. But, for example, I would like to see much more within the budget around more and better jobs. I'd like to see much more in the budget around closing the attainment gap. So, although we have an allocation, for example, for the pupil development grant, that doesn't necessarily close the attainment gap. To try and answer your question, I think there's more coherence than there was, but I think the lack of coherence comes from the lack of bigger vision, I suppose.
Yes, there's important stuff there. Rhianon, you wanted to come in as well, and then David.
You've touched upon some very interesting points this morning. In regard to the statement you made around root causes, you've gone into some more detail as to what you would like to see around the interface with benefit, social security, and in terms of more and better jobs. I'm not here to do that job, but I'm sure Welsh Government would say that they have focused upon that; they have focused upon social housing; they have focused upon the need to get to that target number. What more specifically would you like to see them do? Bearing in mind, obviously, the levers that they have at their disposal around those bigger economic issues around root causes in terms of low wages, in particular, and the gig economy. I may be straying into different territory, Chair.
The fair work agenda is very important, and we've had the report of the Fair Work Commission, and we've got legislation intended. But there is much more that can be done. So, living wage: much more could be done to increase take up in the private sector. We're actually quite concerned that some of the focus on the foundational economy is in the lowest-paid parts of the economy, and unless you couple your stimulation of that sector with boosting wages you're actually going to increase the amount of low-paid work. So, we think there could be much more done.
I don't like to draw parallels with Scotland because, 'Different country, different Government', but in Scotland there is a very active living wage campaign with accreditation not just in the public sector and third sector but in the private sector. We are way, way behind that. There are things that can be done. We'd like to see much more stimulation of decent jobs in the Valleys and in parts of rural Wales. We're concerned that the focus on cities will actually just reinforce their advantage. It is perhaps a subject for another session, but I think then you're into the content not just the balance of the expenditure.
Okay. We'll come to David, and then I would like to hear from Helen and Anna, if you have anything to add.
I just want to ask something about the process, I do apologise, on the clarity of the presentation of financial information in the budget. I certainly agree with you, I think in terms of poverty's long-term alleviation you're looking at housing and education and skills as probably the biggest levers we have, but their budgets tend to get dispersed quite a bit into many areas. Even the housing one will take you into tenant support and programmes for highly vulnerable people and such. Education and skills, perhaps more so, would come in a variety of forms, the measures that you need.
Do you think that the presentation of the information is enough for us to answer the basic question that the budget allocation in totality—for social housing and its support, and education and skills to meet attainment gaps and improve basic skills, basically, and take them up to higher and intermediate skills—is something we can look at and say, 'Well, yes, clearly, the Government has identified that, and you can see the resources flowing in greater measure because of that', or is it still a maze, and it's very difficult to match rhetoric and performance in financial decisions?
I remember saying that last year, and it is still difficult to link the Government's ambitions with its allocation of funding. I think it's easier to see this year, in that there are some headline commitments and you can track those through, and it's also easier to see because most budgets have got some level of uplift. I actually began to look at—. Because the raw figures are meaningless on their own, really, aren't they? You go, 'Oh great, an extra £10 million', but actually, if the demand is for an extra £100 million, it's not enough.
So, I started just doing some very simple benchmarking of expenditure per head, and then looking at expenditure for different age groups as well. Now, that's incredibly crude, but it gives you, then, a sense of what the budget allocation is against. So actually, particularly for health, you can see that—off the top of my head, I can't remember the figure, it's gone out of my mind—whatever the uplift is, actually per head it's not so much given the changing nature of the Welsh population. So, if you look at it for over-65s, for example. I suppose there's a question about whose job it is to do that level of scrutiny. It's easier than it was, but it's not as easy as it could be, is my answer.
Only very briefly that some of our members have fed in that they're pleased to see that poverty is back as a—it's not just prosperity, it's also looking at the poverty focus as well. I think there are many different levels of tackling poverty, and of course there are benefits and the macroeconomics. There's also a kind of bottom-up community development angle to it, supporting some of those vulnerable people outside of the employment market, et cetera, at the moment. And I know that there is some good work going on there looking at some of that. But actually following, I suppose, Communities First, we've talked about empowering communities, but, I'm not sure if there's that coherence of where does that bottom-up approach fit within the overall strategy. But we welcome the fact that there are all the different initiatives around tackling poverty.
Also, WCVA runs an active inclusion grant scheme that is distributing European funds to increase employment skills to people outside of the employment market et cetera. And, obviously, these sorts of programmes now will be closing with Brexit, and so I suppose it's important that we look at a Welsh response now to ensure that that sort of activity is maintained.
I've just a very brief point to add to what has already been said from the other providers of evidence. I'd just like to build on the issue of the analysis of the budget information. One thing that came across very clearly in the evidence that we looked at from international experiences of gender inequality budgeting was that it is important, of course, to engage beyond Governments and, has already been said, having that feed-in from civil society and also the analysis of using the resources that are there in other sectors to feed in and provide that analysis is very valuable indeed.
If I could turn this on its head, in one respect, what have wealthy regions got in common, which is what we haven't? Leaving aside those that are the oil-rich places et cetera, which are built on natural resources, what they've got are highly educated people. Would you agree with me that education is the most important anti-poverty measure in the long term? If we end up with a better educated workforce, then we will get better employment coming here. We have far too many people in the gig economy. We have far too many people in what was called the foundation economy, which I would call the support economy. Creating another 100 hairdressers in Swansea is not going to increase the wealth of Swansea one iota, but reduce individual people's wealth. What we need to do, don't you agree, is in the long term actually get people better educated in order that we can improve our economic output?
And on the other side of it, relating to something Victoria said, it's not just income, it's expenditure as well. Don't we need to be looking to provide more public sector housing and don't we want to take further action on dealing with some of the reasons why it's incredibly expensive to be poor? For example, the additional cost of electricity and gas. I said to a committee yesterday, which the Chair was at, that there are very poor people paying more of their income to be cold than I pay to be warm.
I think education is part of the mix. High levels of qualifications in the workforce are certainly one of the characteristics of wealthier areas and one of the characteristics of better-off people as well, because they're not necessarily the same. But we already have in Wales a significant level of underemployment of graduates. So, they have a qualification, but they're not in work that is using that qualification. And even if they were, there will always be jobs in the labour market that are the least well paid. There will always be cleaners, there will always be drivers, there will always be process operatives in factories, and someone will always do those jobs. And unless we address the terms and conditions of those jobs, so the people who are doing them, no matter what their qualifications are, have enough to live on, then we're not succeeding as a society, in my view.
And in that regard, bearing in mind one of the biggest levers around that is social security and, for instance, the diminution of working tax credits, in that type of functionality within Wales at the moment, how would you advise—or any of you contemplate these issues—in terms of how, then, Welsh Government can actually impact upon that type of an issue? Because without a shadow of a doubt, everybody in this room, I would hope, would agree that there has been a diminution in those types of support, of in-work benefits.
The value of most social security benefits has been frozen for nearly five years, so people simply get less. The eligibility has been cut back and now we have, with the roll-out of universal credit, changes in the way that it's paid. Now, some people can manage fine with that, but a lot of people can't. The consequences of that for about 40 per cent of the Welsh population are huge, and it would have been nice to have seen in the budget some recognition that this major upheaval going on in the incomes of the lowest 40 per cent of people in Wales. What is Welsh Government going to do about it? What are the consequences for housing supply and housing affordability?
With respect, I'm asking you and, obviously, you are not Welsh Government, but you are an expert and you are a renowned organisation, as all of you are. What would your thoughts be around that?
We've suggested that the escalator of social rents needs to stop because it's going up. The guideline puts social rents increasing above inflation and above housing benefit levels, which puts a direct squeeze on people on low incomes. We think that there are things that the Welsh Government could do to supplement that—for example, increasing the discretionary housing payment. There's a welcome increase in the budget for the discretionary assistance fund, which is great, but we've discovered that half of applications are being turned down. So, is this budget—? What am I trying to say? Is the budget providing a cushion and a buffer? Probably not, although we don't have some of the detail. We would love to be able to come up with a—. I mean, we did make some suggestions earlier this year about things that the Welsh Government could do, but we're a very small organisation.
We have a large number of areas that we wish to cover, so I think we need to move on. Mike, are you—?
It's coming up to two years since the Bevan Foundation outlined key steps for growing an inclusive economy in Wales, as you put it. Looking at the budget that we have in front of us now, do you see in it actions that will help grow that kind of inclusive economy that you defined or outlined?
Not yet, really, no. Some of the steps are in place—the economic contract, steps to recognise the role of the foundational economy—but I think there's quite a lot more that could be done. There's still an element of business as usual going on in the economy. We talked about boosting pay and conditions, as I've already said, making the most of procurement, practical steps to connect people to jobs, which is not just about the metro network but about the integration of bus with it and making bus fares affordable, and also making sure people have a voice. So, I think, certainly, the economic policy section feels like something quite familiar.
What should we be pushing the Minister on next week on this particular area?
To do with poverty and inclusion?
I would want to know—. I think the economic contract is an interesting idea, but I'd want to know how many businesses have benefited from it and how he proposes to roll out the reach of that new approach into the economy as a whole. I'd want to know what he's planning to do about low pay and poor conditions in the worst sectors of the economy, which are accommodation, hospitality and health and social care.
But in terms of, if I could stop you there—what could there be in this budget that could address some of those areas that you mention?
What he could do is make provision in procurement for more organisations to pay the real living wage. He could allocate a modest sum on the scale of the budget to an active living wage campaign. He could try to develop those parts of Wales that are seriously lagging, so the Heads of the Valleys and parts of rural Wales, because the two big drivers of wages—one is worker voice, so having union representation, and the other one is having a tight labour market, because employers can't get away with paying low wages if you've got a lot of jobs and not so many people. So, just focusing the growth on the areas with the weakest labour markets. We still have parts of Wales where youth unemployment is more than 25 per cent.
Isn't it simple, though, for the Welsh Government? They could make paying the real living wage to be something you have to do to be able to bid for any Welsh contracts, but not only just the real living wage, because we concentrate far too much on wage rates, don't we? It's pointless being paid £20 an hour if you're only working five hours. It's the ending of exploitative contracts. Now, that could be written into all Welsh Government contracts, and via them, all Welsh Government-funded organisations, which include heath and local authorities, in such a way that we would be attacking poverty in that direction. It's not part of the budget, but isn't that a direction of travel the Welsh Government could go in order to deal with it? I'll take that as a 'yes'.
[Inaudible.]—your comments too, Helen and Anna, on the moves or lack of them towards including an inclusive economy at the heart of this budget.
I think I'd echo that moves like the foundational economy, the circular economy—these are positive, and I know there is funding now going into some of these areas, including in our sector. And I suppose one of the challenges will be to speed that up, then—the learning—and try and push that out. But we definitely support the living wage. That seems to be—. I didn't see a reference to it in the budget documentation, so we'd really support that at WCVA. Also, in our grants, we're a living wage grant giver, so we'd expect people who are receiving our grants to be paying the living wage. And we agree that there's no reason why that can't be pushed out much further. Also, then, we'd also highlight, I suppose, that voluntary organisations employ some 10 per cent of the workforce, and a lot of the social enterprises et cetera are trying to create a more inclusive workplace et cetera. So, I think that, again, it's making sure that, as part of that narrative, we're including the voluntary organisations, I guess, as often a value-driven, not-for-profit part of that, creating a more inclusive economy as well, and across towns in Wales, not just in the big cities or big industries.
To briefly add, in terms of procurement, I would take that line, and we've done some work on that area that highlights that there are opportunities, in terms of having sustainable and strategic approaches to procurement that are innovative, that provide opportunities to be able to take some of these measures forward.
And one other question from me—brief comments as well from the three of you—on the Government's attitude towards devolved taxes and the use of them, or deciding not to change various rates and so on. What opportunities do you think the Government is taking, or do you regret they're not taking, given the doors that are open through the new taxation devolution?
I think I would describe—
And this is not on the inclusive economy, by the way, this is on tackling poverty—[Inaudible.]
I would describe the Government's approach as cautious. For once, I have to say, I think that's the right approach, because it's a new area and it's a very sensitive area. If they get it wrong, then the consequences, in terms of reputation as well as people's finances, are very significant. So, I understand that caution.
I think the truth is that taxes have—. Income tax in particular has a very limited impact on people on very low incomes, because for most part they don't pay it. So, when you raise the tax threshold, for example, or reduce the rate—which, of course, the Welsh Government can't do—on the lowest band, the people who benefit most are people who are higher paid. So, it's actually not a very good lever specifically for people on low incomes.
I'm not sure I have a huge comment on the tax system overall, but we have the landfill disposals tax community fund that we deliver in WCVA, and have felt that, actually, being able to have taxes that are paid in Wales and then developing a mechanism, and consulting with the communities there to say, 'How should this be spent?', has been really positive, and the scheme seems to be going well. So, it's having that—and I suppose, in the taxes in general, I'm not an expert on that in any way, but in the sense it's really finding ways to involve people and communities and understanding what the options are and what might be best for them. I think that's a difficult job to do, but I think that that community fund has been good like that.
Can I just add? I should have said, if you include council tax as a devolved tax, which, of course, it is, then there is very big scope for change, but I—
I wasn't necessarily referring to that, but it's a very good and important point. Yes.
Yes. I would just point out, I accept Victoria's point that for the poorest part of the workforce, raising the threshold to pay tax is going to have minimal effect. But there's quite an important group above that, and you can adjust the other tax rates, obviously, to ensure that higher taxpayers, in effect, lose at the other end any gain they make from a higher start in terms of the threshold at which you pay income tax in the first place. But it requires some skill to—.
Yes, and particularly with a porous border.
Well, yes, and that's the subject of a whole other inquiry that we're undertaking. Helen, and then we'll come to Alun.
I haven't anything.
No? There we are. Okay, that's fine. Alun, shall we move on to your questions, then, please?
The future generations commissioner, in a consultation submission, suggested that she's not seeing much evidence—and I quote—that the definition of preventative spend
'is being applied across Government, and is having an effect on decisions'.
Do any of you agree with her?
I think a lot of voluntary organisations are also pushing hard to have that definition of prevention, so we welcome that there is that definition of prevention. I think it is difficult to see, in some cases, where that's being used. Some of our members would also say that it feels quite like health and social care definitions, rather than some of the—. We also need to be thinking about environmental preventions, et cetera, so it's not entirely—. We're happy it's kind of there, but we're not clear how it's being used.
I think in terms of prevention in the budget, again, we'd see that the sorts of activities, say in health and social care, that some groups do—like sports groups, like, I don't know, anything, the sorts of activities that are preventing social isolation—bring people together and can play a huge role. I think we've got something in the paper, there's something with social prescribing, where some organisations have found that where there's been social prescribing out to more community or voluntary activities, there has been about a 28 per cent reduction in demand in GP services. Now, there are going to be lots of caveats around that, but in a sense, what is not clear in the budget is that sort of—to me, it's how it's making a much more fundamental shift towards that sort of preventative activity rather than putting more—. Well, the NHS is obviously going to be important, but in a sense, I think we're not seeing an obvious shift, really, or, it's not clear still, using those definitions, how to kind of track that.
I think there is a lack of clarity about what prevention means. I'd agree with Anna that it is dominated by a health and social care concept insofar as there is one, and I think it's certainly yet to make much difference on the ground.
In terms of reading the—. Christmas in the Davies household is always a laugh a minute. I spent a great deal of time at Christmas reading the budget, and my children were delighted. And as I read through it, I thought, 'This is a very traditional Welsh budget—we've got a bit of additional funds, so, therefore, we'll divvy it up, largely, in a very traditional sort of way.' This budget could have been produced 10 years ago prior to austerity in many ways. And I'm thinking, in terms of preventative, there are certainly the issues that Anna has described in terms of policy initiatives and responding to different things, but there's a more fundamental sense of prevention as well.
I was reading through the chief economist's report, for example, and reading through the Office for Budget Responsibility's analysis and the rest of it, and the word that stood out to me was 'uncertainty'. Now, whatever your views on Brexit, and they're all well advertised and well known, but there's a sense of uncertainty in terms of future tax revenues and a sense of uncertainty in terms of future need and programmes. We understand that the UK budget is going to focus on capital and not just revenue expenditure; we understand from future projections that if we continue to spend—and you've all suggested it this morning—similar elements of our budget on health and social services, then all other parts of the budget would be squeezed significantly in the first part of this next decade. And I felt, and I wonder if you'd agree with this, that preventative can also be about reforming the public sector—Mike has argued for reform of the health service, and I'd agree with him; I'd say we need to go further than that—to ensure that these future uncertainties are met with a public sector that's more fit for purpose than perhaps it is today.
It is a very traditional budget, which I suppose is understandable, as it's the last of the current administration and also given the lack of any forward planning. But I think, and it may well be, that the work to produce a very different kind of budget needs to go on in a different place, and maybe we'll see a different kind of budget for 2021-22—who knows? But certainly, when we look at the scale of the challenges that lie outside—so, if we think about climate change, demographic change, automation, economic change, all of which, or some of which, are summarised in the chief economist's report, we have huge—. Some of which are known, some of which are unknown. The budget doesn't feel like it's taking account of that, and having what arguably are the major shifts that you need in thinking.
For what it's worth, I think, for example, that the social contract between the state and the public is changing. People are being promised fantastic public services, and also promised low taxation. Well, you can't have the two. That underpins a lot of the incrementalism that's in the Welsh Government's budget, and certainly, probably in the UK Government's budget as well. Now, who knows what's going to come out on 11 March, when the Chancellor announces things, but we could see some radical changes that could then leave us, the Welsh Government and public bodies, completely unprepared for what's ahead. Sorry.
On that, I suppose, yes, uncertainty definitely feels like a theme throughout, or is a theme throughout, and it is all the time at the moment. So there are a few things like that—that transformation of services that one feels is needed. As you said, if you look at the chief economist's report, it isn't always clear, if these are the issues, exactly how the response or the preventative side comes in for, for example, ageing population and fewer younger people. What are we doing around things like that? Is there something in place, then, to address that, so that we're not just looking at the future trends, but we're perhaps preventing them from happening in the first place? I know that Scotland has worked on its migration with refugee populations, looking at changing their age profile in different places, et cetera. So, what are we doing in response to some of those things?
Also, I think with the public services, we'd argue that we do need some sort of transformation where it needs to be much more about not the sort of top-down, public bodies delivering everything to people, but a lot more that we shift to that co-production model that is talked about in the Social Services and Well-being (Wales) Act 2014, which we talk about a lot, but actually, we're not really seeing that come through. We need to see that shift in spend to enable that to happen, I'd argue. So we've got that improvement—I can't remember the word properly; 'improvement plan', is it—attached to that sort of direction of travel. There are some elements in there that maybe we need to be—. That was really great, to be able to have that and to be able to have that forward look, but are there elements, including prevention, where, I don't know—are we doing enough now to get further along the line, in a sense, on some of this?
I'd also argue that with voluntary organisations, this is having a direct impact, then, on how organisations can deliver services where they're funded by not just the Welsh Government, but local government, public bodies. There's huge uncertainty, so obviously, there's a limited amount that Welsh Government has been able to do in the sense of the wider context of uncertainty—Brexit, the UK Government budgeting, et cetera. On the other hand, this has been going on for some time now, where voluntary organisations are increasingly told, 'One-year budgets', or having funding in-year that is sometimes relatively substantial and it's difficult to spend properly in that time.
So, I suppose, given that uncertainty seems to be a fairly constant thing at the moment and is not going to change, I suppose we'd argue that we need to find ways of budgeting and including funding. So, for us, we're obviously working with voluntary organisations. Is there different scenario planning, et cetera, that you could do to give some more certainty about, 'If this happens next year, then we could—'? It's only 1.8 per cent of the Welsh Government budget that goes to, say, voluntary organisations. 'If this is the situation, then you would have X', or whatever, or there would be a continuity. If our budget gets wiped out, then obviously we're not going to be able to do that. But there's something where we have to, sort of, almost look at how we plan our budget and funding further in advance within this new context of uncertainty.
I'd agree that the budget improvement plans really welcome longer term perspectives on initiatives that are going to be taken and I think the challenge of short term—or medium term now—uncertainty almost emphasises the need to transcend the short term and look further into the long term, because there's a need, in the context of the uncertainty, to actually bolster the capacity of the public sector to be able to plan, to be able to override some of the backwards and forwards and the chopping and changing that's happening in the short term to be able to work towards longer term goals. So, I think it's particularly important, given the uncertainty.
Can I, perhaps, press people with a particular example in this, sort of, preventative area—social prescribing and the potential for that to take pressure off the health service, both at the primary and the secondary level? How would you assess what the Government is doing in that field, in that budget? How are opportunities being taken up or otherwise? Does anyone feel qualified to talk on that one?
Well, in a limited way. A lot of our member organisations have been much more involved, including the county voluntary councils, but, I suppose, broadly, we would really welcome social prescribing as a policy direction and feel that that is important and can be a way of taking pressure off public service spend as well. So, we have had some examples where—. In north Wales, Mantell Gwynedd, they do a lot of work on social return on investment and have been able to track some of that. So, where activities are happening more out in the community, it is resulting in what we'd see as what should be less demand in the future. But, some of the issues around that include—. It's all very well to prescribe out to a running group or to a choir, but, actually, those organisations, then, they don't need much resource, necessarily, or the same sort of level, but, actually, you need to have the community centre running to host the singing group, or whatever people have been going to. So, there does need to be that kind of baseline and some resource needs to shift that way. And also, I suppose, making sure that those organisations are prepared, especially if people have—if they're going there with various mental health issues, et cetera, that we have the right safeguarding, or we have the right support in place and those organisations that are doing the social prescribing element are able to do that effectively and safely.
I mean, social prescribing risks being the latest shiny new thing that is in fashion and then fades. I think it can play a valuable role in preventing all kinds of mental and physical health problems, but there's a lack of evidence about what really works and there are lots of assumptions made about, 'If you refer somebody to do this, then it will achieve that', but we don't necessarily know. There are some concerns about the standards, particularly standards of commissioning, so, when somebody is referred to an organisation, is it clear that the service that that organisation is delivering is of good enough quality? We don't know about what quantum—. We know how much exercise you're supposed to do, but how much social contact is good? So, there are huge questions around that, and then, there are also issues around reach. I mean, we've heard anecdotal evidence about people being referred to exercise sessions in their local leisure centre, but they don't have the sufficient income in order to pay to get the bus to that leisure centre to attend, or there isn't a bus service for them to attend. So, it's one of those things that sounds good but actually needs more—I would say—rigour about its implementation.
Drawing out just another example, if I may, the initiatives around climate change in the budget, what do you think in terms of the rigour or otherwise of how Welsh Government assesses which of these initiatives are going to be most cost-effective and how to get the best bang for their buck in that area?
I couldn't comment on that, I'm sorry.
Either of you feel that you can comment on the climate changing? I think anyone who does the sort of—. You know, if Welsh Government's going to give money, whether to local government or to a voluntary organisation or third sector of any type, presumably they're going to be keen to promote the particular projects they are doing, but how does Welsh Government sensibly make an assessment of where best to put that money?
I couldn't comment.
No. I suppose this would be across the budget, in a sense. We'd be hoping that there's an evidence base and as much as possible used and, where it's coming to voluntary organisations, pushing at that it's on an outcomes basis, so we understand the difference that's been trying to be made and work together to measure that. But I don't know the details of climate change.
I suppose there are parallels with the poverty point that you were making earlier, in that you need to see it in the broad shape of the budget but also in specific interventions.
Absolutely. And I think one of the things that I wonder about is whether the budget is attempting to achieve so many things—. There's a paragraph of words around poverty reduction, climate change, prevention, et cetera, et cetera—. There's a question in my mind about can all those be achieved or are some of them contradictory. And I don't have an answer to that, but I think there's almost—. It is so ambitious in what it's trying to achieve, in a way it's almost guaranteed to fail, I suppose.
So, you're referring—. There are eight priority areas or eight targeted areas, aren't there?
One point that I would have on that is that there is a real need to build the data capacity to be able to make those sorts of analyses and to enable meaningful analyses to be able to support. That's an obvious point, but—.
Finally from me, just referencing back to a question earlier, there seemed to be a consensus or enthusiasm, I thought, from the panel for requiring the public sector across the board to pay the real living wage and potentially to require anyone contracting with any part of the public sector to do that. Have any of you given any consideration to the possible impact of that on levels of council tax, which can be for a very significant proportion of spending for some poorer households?
We haven't looked at that, no. The calculation of the value of the real living wage takes into account all the taxes and benefits that people pay and receive. So, it's not—. If people were to avoid poverty and have enough to live on and not receive any benefits to help with their living costs, the real living wage would be very much higher than it is. And although I would say that embedding the real living wage throughout the public sector is important, it will not alone solve the problem, because the real concentrations of low pay are in the private sector. They're not in the public sector.
There is, yes. Yes. But what—. You would not want the public sector to have such differential terms and conditions that it had an impact, a negative impact, on the private sector and it became almost anti-competitive.
Are you not concerned—? I think there was a bit of that in your answer there, but, if that trend continues, aren't we going to see ever-increasing diversions between the terms and conditions and wages in the private sector compared to the public sector, and is that fair?
Well, that's why you need a whole labour market approach. That's why we would say—. That's why I've said already you need to focus on the private sector jobs that don't pay as well as—. I would not be in favour of simply focusing on the public sector.
Moving on to integrated impact assessments and the discussion around whether there is anything lost within that bundle, what is your positioning around the fact that, obviously, women are demonstrably the poorest in our society and, obviously, going back to the poverty discussion at the very beginning of this session, the whole debate around gender impact, gender budgeting, is very prevalent, and Chwarae Teg has obviously done their second phase review—how do you feel that is portrayed within this budget? Do you think that it's had an impact? What would you like to have seen done differently around gender budgeting?
Firstly, I would very much commend the commitment to gender budgeting with the pilot that's being initiated and I think that's a very welcome development. I would stress that it's a long-term approach that's being embarked on, and the evidence points to very much long term, having an openness to learning lessons, which is evident in Wales, which has been recognised as well. So, I think that in this budget some steps have been put in place to start the process, but it's at such an early stage that I think it really is the initial first steps that are being taken. I'm not able to comment in detail about the current budget and where that's got to, but just to emphasise that I think there are certain things that can be done in terms of developing the framework for impact assessment and actually having the impact assessment taking place at the start of the budget process, which—
So, specifically—I gave you a very long preamble—. So, specifically in regard to the place of gender impact assessment, putting aside the budgeting issue itself, within the integrated assessments, do you feel that there's anything lost by having an integrated approach? Because, obviously, previously there were criticisms around the fact that it was duplicative and complex and obviously this is a reaction to that. But have you an impression, Victoria or Anna, in regard to whether that's sort of lost in the importance of that or do you feel satisfied that that is the correct approach at this moment in time?
I think—. Personally, I welcome the fact that it's there and that it's being done. I think the difficulty is that it is quite broad-brush and there are sometimes some assumptions made about the impact of x on y. So, for example, it's assumed that childcare is good for women, but the design of the current childcare offer doesn't necessarily benefit women on low incomes, for example. So, the devil is in the detail, I think, but I think, as an approach, it is a step forward.
Yes, again, I suppose we'd welcome that there is gender budgeting and that work is going on. I'm not sure—. I know our members have been concerned, about integrating all the different elements together, that perhaps some areas will be lost, and others argue that there's huge potential, with more integrated assessments, that you can see some of the cuts, the way things cut across and have a kind of whole conversation—
So, you'd see it as a step forward, but as part of a journey. Is that incorrect for me to summarise?
I'd absolutely agree and I think having the intersectional approach is critical so that you do capture the interplay of gender on race, et cetera.
I think one of the issues and criticisms from the second-phase report is that there is no real disaggregated data around gender to be able to therefore look at what the real actions to be taken are. So, how important do you feel that would be in terms of moving that agenda forward?
That's critical and that is a key part of that longer term journey, as you mentioned, to—. There's always going to be a challenge, I think, in Wales in terms of working with a smaller sample size, and working with averages hides a lot of the information that needs to be drawn out. However, investment in having rich data from which to be able to undertake the analysis is critical to be able to understand and to be able to have the assessment at the right stage in the budget process to be able to inform the policies—
Okay. So, as we don't have that yet, in terms of where we are on that journey, would you say that we're at the very beginning, are we midway through?
I'm not quite certain how they evolved—. Particularly, what we do welcome is the budget advisory group on equalities, that then you have a kind of expert group that is able to feed in more. That hasn't always been meeting, so we're glad to see that back up and in there to do that advice.
Okay, thank you. So, in regard to your views on how the Welsh Government should change the budget allocation process and associated documentation to achieve progress in meeting gender equality ambitions, what would you like to see differently, apart from the issues that we've just talked about in terms of the importance of data allocation and analysis?
In terms of the role of the advisory group on equalities, I think there are key opportunities for that group to be able to engage with experts and to feed in—so, establishing the depth of analyses at the right time in the budget process, which also raises a lot of challenges in terms of the willingness to be able to share the data with the experts and the proposed policy choices as well, at the right times in the budget process. So, I think there are a lot of challenges that need to be ironed out, but I think the importance—and, again, the evidence points to this—of working with a range of actors at key times can really enhance the analysis and allow the Government to make informed policy choices along the way.
Sorry, I'm just thinking as well the—. So, with the data there, there's a kind of voice and having people's experiences. Some of the groups we work on in the budget advisory group are then linked in to lots of networks and an understanding, I suppose, of people's lived experience within that as well, so I think that challenge of voice as well—. It's not so easy on the Welsh Government budget, but having much more of a participatory budgeting approach as well, especially at the smaller, local level—in a sense to build that in, making sure that different groups, including on a gender basis, can have a say on how spend takes place in their community and sector—. Getting that involvement, I think, is really important.
Thank you. So, finally, in regard to the budget improvement plan, and also in regard to the longer term financial planning, how would you like to see this develop—you've partially touched upon this—in future?
No, if you haven't asked the question, that's fine. We touched on the budget improvement plan earlier, Anna, didn't we? Do any of the other members have any comments about that?
No, just to echo I think it's a very welcome development, but extending it into the longer term. I think, also, associated with the budget improvement plan, having clear and realistic objectives—so, it's that balance, isn't it, between ambition, which is certainly there, and also having realistic objectives that work alongside a plan for developing the capacity to be able to implement those. I think that's all I'd add.
Just, I suppose, yes, we would reiterate that we welcome that there is an improvement plan. Maybe there are improvements to the improvement plan that could be done over time or whatever. But in a sense—and I suppose, for us, one of the areas we're particularly interested in is that engagement element and how do you get—. We talk about disconnected communities and people feeling disempowered et cetera, so I think we'd be really interested in working with the Government to look more at how you involve people in these issues.
My only question is, if we have a more active planning process around the budget, concepts like redundancy come into play big time, don't they, because some programmes simply don't work, some big policy areas are not particularly effectively addressed. Victoria's example was a really challenging and excellent one. You'd think, 'Childcare, yes, that's really going to help all women,' and then you tie that to women in work and you immediately take out a vital group, perhaps the most important group, in terms of their support so that they have a more coherent lifestyle and are able to build on that and their well-being and seeking skills or whatever. But you've taken them out of the programme from the beginning.
So, I just wonder how your sectors will respond to the fact that some programmes would go, and then you wouldn't be in the happy situation of a three-year budget being rolled over in an inert way constantly. There would be big shifts in a more active, planned, preventative budget cycle, wouldn't there?
It's very difficult when you have stakeholders involved in decision making of any sort, because, either overtly or without realising it, stakeholders will often defend their own organisational interests, which are not necessarily the same as the interests of the people that they claim to represent, and there may well be people in wider society who aren't represented at all in that. So, there does come a point where there needs to be that political direction and political leadership and that political willingness to say, 'No, this ends,' or, 'Yes, this starts.' So, I suppose that's a caveat to the kinds of processes that have been described.
On that, I suppose that we'd encourage building up that evidence base. We are concerned that, sometimes, working with public funders, we're not necessarily getting clear agreement with outcomes and sometimes there's micromanagement rather than the ability to be more experimental and to find the best solutions for the particular issue that we're trying to work with. If that were the case, that we had a stronger evidence base, hopefully it would help with some of these things, and we would not feel that decisions are made—well, not on a whim, obviously; sorry, that's not the right wording, but, in a sense, we feel that sometimes really effective projects can be cut in difficult times when, actually, they are good preventative services, but without the evidence base, it's hard to—
Even major programmes? If there was testing built in, and so little public expenditure gets effectively tested, then you'd have winners and losers, wouldn't you, quite properly? So, do you think your sectors are going to be willing participants in that more—? I think it's a very important area, and we'd be surprised at some things that actually sound good, but don't end up working. Social prescription, I think, was an excellent example. Is it an outcome if you want to take exercise and join a choir and all the rest of it, or is it something that if it's given to you then the rest of your life suddenly gets put back together? These are profoundly important things, and there's very, very little—. We're not going to end up with a medical model of testing and blind samples and all that, but there are ways of trying to get some idea of how effective public spending is in its actual implementation.
And that's right both at a macro scale in terms of, 'Does our model of'—I don't know—'education or healthcare, does that work?' but it's also important at a micro level. I mean, for example, on the specific initiatives to tackle poverty, why those ones? Why holiday hunger? Why period poverty? Do we know that those are the things that matter most, or are they the things that have grabbed the headlines because there have been effective lobby groups? Now, I don't disagree with them, but I think there are questions to be asked. How do you withdraw from—
It should be an uncomfortable process, shouldn't it, really, for everyone involved?
That's right. What's key to some of those is the delivery. If kids are just turning up for sandwiches and chips, that's not necessarily reaching the—. Or if there's stigma attached to attending, that's not necessarily going to achieve the objectives, and then how do you withdraw them? So, I think you are absolutely right that asking difficult questions has got to be part of the process.
And, hopefully, we're doing that, or at least will be. So, there we are, we've come to the end of our allocated time slot, so can I thank the three of you for your evidence this morning? We've covered a lot of ground, and I know a lot of what we've received from you will, I'm sure, be reflected in our conclusions. So, thank you, the three of you. We'll now break for five minutes, but I would ask Members just to wait here for a moment before disappearing. Diolch yn fawr. Thank you.
Gohiriwyd y cyfarfod rhwng 10:19 a 10:31.
The meeting adjourned between 10:19 and 10:31.
Croeso nôl i'r Pwyllgor Cyllid, ac a gaf i groesawu ein panel nesaf ni yn y gwaith rydym ni'n ei wneud i graffu ar gyllideb y Llywodraeth? Gaf i groesawu Cathy Madge ac Eurgain Powell o swyddfa Comisiynydd Cenedlaethau'r Dyfodol Cymru ac a gaf i groesawu hefyd Alex Chapman, sydd yn ymgynghorydd gyda'r New Economics Foundation? Croeso i'r tri ohonoch chi. Mae, wrth gwrs, Sophie Howe, comisiynydd cenedlaethau'r dyfodol, wedi anfon ei hymddiheuriadau, a hynny oherwydd amgylchiadau personol.
Felly, croeso i chi. Mi awn ni'n syth i gwestiynau, os ydy hynny'n iawn, a gwnaf i gychwyn, os caf i, drwy ofyn a ydych chi'n fodlon â'r cynnydd sydd wedi cael ei wneud gan Lywodraeth Cymru o ran ymgorffori Deddf Llesiant Cenedlaethau'r Dyfodol (Cymru) 2015 yn y broses o wneud penderfyniadau, yn enwedig yn y modd, efallai, mae'r rheini'n cael eu hadlewyrchu yn y gyllideb ddrafft sydd o'n blaenau ni?
Welcome back to the Finance Committee. Can I welcome our next panel in the work that we're doing on Government budget scrutiny? Could I welcome Cathy Madge and Eurgain Powell from the office of the Future Generations Commissioner for Wales, and could I also welcome Alex Chapman, who is a consultant with the New Economics Foundation? Welcome to the three of you. Sophie Howe, the future generations commissioner, has sent her apologies because of personal circumstances.
So, welcome to the three of you. We'll go straight into questions, if that's okay, and I'll start, if I may, by asking whether you're satisfied with the progress that is being made by the Welsh Government in terms of incorporating the Well-being of Future Generations (Wales) Act 2015 into the decision-making process, particularly in the way that those are demonstrated in the draft budget before us?
Thank you. So, firstly, I think we want to say that there's quite a lot to be positive about in this draft budget. Our focus this year has been on decarbonisation and prevention, and we can see visible shifts in relation to both of those areas. We also welcome the inclusion of the budget improvement plan as part of the documentation. So, that was a recommendation both from us and from this committee last year and we think it's really positive that Welsh Government have developed the plan, as it provides a vehicle for a much more robust understanding of year-on-year progress in relation to the budget.
So, there definitely are positives, but the question is whether we're satisfied in terms of the overall progress, and we think there's still considerable scope for progress. So, whilst there are some real positives, a lot of scope for progress, particularly this year, given the likelihood of the UK spending review. So, I know we said this last year, because we expected there'd be a spending review—
Well, hopefully, we won't be in a position of saying it every year. But, this year, it would be really, really surprising if there wasn't a spending review, and so we think the Welsh Government should take that as an opportunity to really be making more transformational strategic decisions.
And then, in terms of your question around incorporating the Act into decision making, we think there's more scope for that as well, and we think that Government possibly took a backward step this year in terms of the structure of the budget. So, last year, it was structured according to well-being objectives, which are obviously one of the key elements of the well-being of future generations Act, and this year, this isn't the case. This year, it's structured by a more prosperous Wales, a greener Wales and a more equal Wales, which relate, to some extent, to the well-being objectives, but aren't exactly there. So, we think that there's scope for that to be reconsidered as well.
And then, finally, whilst there are positive things to say, a lot of those relate to new spend, so, the uplift that Welsh Government had from the UK Government, and our interest is in the entirety of spend. We feel that four years into the well-being of future generations Act, we should be seeing considerable improvement in relation to existing spend, as well as new spend.
We've heard in the past how you as a commission have been working with the Government to embed some of these principles in Government decision making. Can you tell us a bit about how, maybe, you were part of that working up to this budget and whether you had that kind of role to play, as much as you would have liked to, and maybe how did that compare this year compared to last year, given that maybe you're saying there are some better things, but then again, there are some areas where the Government might have gone back?
Yes, of course. So, I think it's worth saying that we've engaged with Government throughout the year, so we understand the importance of the whole budget process, as well as this very, very—this year, even more—concentrated period of drafting the budgets. This year, in relation to previous years, we've taken a much more focused approach, so we've really focused in on decarbonisation and prevention as two areas that we've identified where a lot more work needs to happen, and also where we feel that our office can add real value. The way we've approached the engagement has been different in two main ways.
Firstly, we've consciously broadened out our engagement from just the finance Minister and her core budgeting team to the whole of Government, because I think we realised quite early on, in terms of decarbonisation and prevention, the scale of the cultural change that's needed, the finance ministry can only do so much there. So, we've consciously engaged across Government. The commissioner, as you probably know, has written to the whole of Cabinet several times specifically around the budget. She's met with a number of Ministers specifically about the budget too. And in terms of our conversations, we've also widened those out for officials across Government.
And then, secondly, I think we've explored issues in a lot more depth than previously. So, again, decarbonisation and prevention. Decarbonisation: we published our 10-point plan back in June, following the declaration of the climate emergency. So, that was a very conscious decision to really start the conversation about responding to the climate emergency really early on, and we were clear that that document was sort of a starting point for discussion. We weren't saying that everything there was perfect, but we wanted that conversation to really kick off. And then we also followed up with a number of Welsh Government teams, so we ran a workshop with several directors on decarbonisation in September, and have then used that as an opportunity to really focus in, particularly on transport, housing and renewables, in terms of what we expect to see. In relation to prevention, we've taken a similar approach. We've particularly focused on the prevention of homelessness as a sort of lens to explore how Government is working collaboratively to have those cross-departmental conversations about prevention. But we've also actively engaged with the operations teams in Welsh Government as well. So, that's the approach we've taken. And I suppose we'd say that part of the reason there is a lot of positive stuff to say, we hope, is because of that approach.
So, is that level of engagement, that intensity of engagement, because you've listed quite a comprehensive list there, is that at a level that you're satisfied with or do you feel that you could actually engage even further? Are you seeking to engage further or are you content with where you are in terms of that level of engagement?
Well, I know what the commissioner would say to that question if she was here; she would point out that we've got quite a small budget for the remit we've got.
So, I think that we've consciously focused a lot more resource—I'd say 50 per cent to 60 per cent more resource—this year on the Welsh Government budget. We've also resourced expert input from the New Economics Foundation—so, Alex—and also an organisation called Social Finance on the prevention side. So, we've actually resourced work to support us to be able to do a good job of engagement. I think we'd like to continue it, and we think that the sort of cultural change that's needed probably does need us continuing to push and push, I'd say again, particularly in relation to these two areas. But it is challenging in terms of the scope and the remit of our office.
Sure. And what about that balance between specific areas of policy such as decarbonisation and of course the broader thrust of that cultural change happening as well, are you happy that you're engaging on both levels sufficiently?
It's a really difficult balance, but I think certainly the office's approach is that if we talk about the broad—all of the well-being goals, all of the five ways of working, any topic you can think of could be fitted under those. We just don't manage to have the impact that we want to have because it's too broad and there's potentially more wriggle room for Government.
Well, the Government could say that about the whole budget, of course.
Well, they could, that's true.
That is true. So, I think that we've identified decarbonisation and prevention as key elements of the well-being of future generations Act that we don't think any other organisation is pushing in the same way as us. So, we think we've seen an impact, and hopefully will continue to do so.
You've welcomed the budget improvement plan, but you've suggested that it could be strengthened, so could you just explain to us what you think its weaknesses are?
Yes, of course. So, in terms of the budget improvement plan, our analysis has been around three elements. So, first of all, the extent to which it facilitates the tracking and understanding of progress around the budget, and we think this is really important both in terms of the budget process and spending decisions. And we've had some quite interesting conversations with Welsh Government around this, because they feel that it's more in the space of process, so the year-long budget process. We agree with that, but think it should also be a vehicle to analyse and understand spending decisions. Secondly, you probably will have picked up that we're keen that it shows a continuum of change, from simple changes, more basic changes, to more transformational changes. Again, both in relation to process and spending decisions. And then thirdly, we want to see it demonstrating the integration of the five ways of working.
So, we think there are three main areas of weakness, and we've fed this back to Welsh Government. First of all, we think that the level of ambition and vision should be raised, because the Act is aspirational. So, we think that a starting point for this, or if not the starting point certainly a consideration, is thinking about what a budget that fully embeds the well-being of future generations Act might look like and working back from that; whereas we feel that the approach the plan has taken is to look at where we are today and work forwards. So, that's one of the key differences.
Secondly, we think that the improvement plan should enable stakeholders to hold spending decisions to account and track how transformational change is. So, we understand, again, that it needs to be about the whole process, because there is a real tendency to just focus on the very narrow process of producing the budget itself. But we think there's scope for that to be a lot broader, and we've drawn parallels, in speaking to Welsh Government, with the New Zealand well-being budget approach.
So, if I could just summarise that really quickly, what they do there in relation to new spend is they select priorities and then cross-Government groups make spending proposals against these priorities with impact assessments alongside that. The Government then selects proposals and publishes the spending decisions that have changed as a result. So, it's much more transparent and it's much easier to see what's actually changed. So, we think that Welsh Government should be doing something similar to that, at the very least in relation to new spending decisions, if not entire spending decisions.
And then the third weakness, we think, is in relation to the five ways of working set out in the Act and also the broader mechanics of the well-being of future generations Act. So, we think that the plan is relatively stronger in terms of collaboration, involvement and integration, which are three of the five ways of working, but there's more to do potentially on prevention and long term. So, whilst there's a section on prevention, we think that prevention isn't reflected well enough through the entirety of the plan and, in terms of long term, we feel that not enough consideration is given firstly to the timeframe of the plan, because it's only five years, but also to the ways in which Government could make different decisions to enable other organisations to make longer term decisions.
Sorry, yes, there is.
I'm sure we'll come back to some of that as we continue our scrutiny later on. So, we'll move on to Alun now.
Thank you. I'd like to focus in on some of the issues around decarbonisation and climate. I was very taken by the language you used in your document responding to the budget and 'Section 1—Investing in the Climate Emergency'. You're very brutal in your response to the Government, very gently brutal, but brutal nevertheless, and I wanted to test you on some of that. You say there are pockets of funding for activities but no evidence of systemic or transformational change, and then you say there appears to be a disconnect between policy commitments and budget allocations. Can you give me some examples of what you mean by that?
Yes, of course. So, obviously we feel that the Welsh Government has clearly recognised that this is the first budget that they're putting in place since declaring a climate emergency. The commissioner welcomes the announcement of the additional £140 million for new capital funding for climate and the environment. However, what's still very difficult to tell is whether this £140 million of capital has actually been allocated in the right way, because the evidence base in terms of the carbon impact of this spend isn't actually available.
We also welcome the increase in terms of the total spend on sustainable travel. That's gone up from £160 million to £290 million. So, obviously we welcome the increased focus there. But again, it remains the case that we don't know what the carbon impact of the budget is in its entirety. So, it's difficult to gauge in terms of responding to the climate emergency.
In terms of the discussions and the responses that we've had from Welsh Government Ministers and officials over the last few months, as you've referred to, they talk about the examples in terms of the small pockets of funding here and there; that's evident in terms of the breakdown of the £140 million. But we're not seeing that level of transformational change or a more systematic approach in terms of prioritising the allocations across the whole of Government.
We're concerned then in terms of not seeing evidence that Welsh Government has a clear process to classify or assess how much they're currently spending, or indeed they need to spend, on decarbonisation actions to deliver the statutory carbon budgets and targets that have been agreed in terms of the legislation.
Can I stop you there? Because you're reading, there, the document, and I accept that in terms of your views, but you say:
'There appears to be no evidence that Welsh Government has a clear process'.
What sort of evidence are you looking for?
So, one of the comments we've made in the report that you refer to is the fact that Welsh Government have published a very clear plan—'A Low Carbon Wales' was published earlier this year to show what needs to happen in terms of achieving the carbon reduction targets. What we're not seeing, then, is those policy commitments and the clear actions within 'A Low Carbon Wales'—how they are translating in terms of the decisions around the budget allocations. We're not seeing that really clear line of sight and, when we've challenged some Government officials around that, they've not been able to demonstrate that evidence to us.
Just for me to clear on what you're saying there, you've got the policy commitments that were made in March, the document that was published then, and you're not seeing the funding to deliver those policy commitments as part of this budget process over the last month or so.
We're not seeing the clear evidence that the decisions that have been made—
Yes, on the budget. I don't know if Alex has got anything to add.
I'm grateful to you for that clarity. You're also saying that there's no consistent approach to undertaking carbon impact assessments for infrastructure projects and you're not clear on how carbon impact is informing decisions. Again, what were you anticipating seeing to deliver the sort of clarity and the comfort that you would be seeking?
So, it might be worth me just mentioning briefly how we've attempted to calculate levels of spend relating to decarbonisation within the budget. So, last year, we went through this exercise—and we recognise the approach we've taken is probably quite crude, but, actually, it is very challenging to assess levels of decarbonisation spend, or, indeed, the carbon impact of the Welsh Government's budget, because of the way it's currently structured. So, last year, we estimated that around 1 per cent of the Welsh Government budget was allocated towards decarbonisation. That was broken down into around £70 million of direct spend, and another, roughly, £100 million on indirect spend.
This year, working with NEF, we've revised that methodology and we have included some additional spending lines—so, for example, capital expenditure for Transport for Wales. So, when we compare the figures for our new methodology, the spending for 2019-20 that we consider is directly linked to decarbonisation was around £385 million, so slightly higher than the previous figure, and this was around 2.1 per cent of the total budget, whereas then, if we compare the spending for the 2020-21 budget, that's gone up to around £495 million, so roughly a 2.5 per cent figure. So, again, we're encouraged, really, that the figures seem to be going in the right direction in terms of increasing. In terms of carbon impact assessment, are you able to elaborate, then, in terms of—?
I think the issue is, if you're putting £140 million into these initiatives, which, by and large, to me look like excellent initiatives, but you have these lines in the budget under, for example, mostly capital spend—you know, big ones, multiple hundreds of millions in transport, in health—we've no way of knowing what the carbon impact of those spending lines is. We may actually have here in front of us a budget that's a net carbon-emitting budget, but we have no evidence to be able to know whether that's the case. Now, we looked in, just as an example, the five largest currently active road-building schemes that we understand that the transport team have on their plate, and they all appear to be net carbon-emitting projects. So, without that holistic view, actually, the good work that's gone on here in responding to the emergency with those investments may be wholly undermined until we have that transparency. And, in the context of an emergency, I would regard that it is imperative to have that level of scrutiny if we are taking this seriously.
You say later in the same document, and I quote:
'It is clear that Government have no consistent approach to do this at the moment, and they have asked me'—
'to resource this work.'
So, does this mean that you are working to deliver that sort of consistency with the Welsh Government?
So, we mentioned earlier, in terms of having a more significant focus on the budget work for our office, that we have made the decision to bring in external resource to support us—we don't have capacity or expertise in everything—and doing this in a huge amount of detail. So, that's the reason we have brought in external support from organisations like NEF and Social Finance. So, NEF have been looking at what could be possible in terms of developing a carbon impact assessment or a carbon impact account that Welsh Government could then publish alongside their annual budget. So, that's something that Alex has been working on.
We're doing that to inform our advice to Welsh Government.
Just for clarity, really, in regard to what may be two separate issues. You talked about the way that the budget is structured, and you've elucidated, Alex, in terms of what you say that you can't assess. Are you saying then that the carbon impact assessment, if it was somehow integrated within that structure, would then give you the clarity that we would all like to see? Or is it just purely the way that that budget is structured in terms of the formatting of it? Or is it both?
I'm interested in—. The budget, of course, doesn't happen in isolation. We saw the declaration of a climate emergency and we saw the decarbonisation strategy, 'Prosperity for All: A Low Carbon Wales', published in March. You've been very clear in your evidence this morning that there's a disconnect between the two. But do you believe that the strategy published in March was in itself sufficiently ambitious?
The strategy they published in March of last year was the plan that linked to the five-yearly carbon budget, which began in 2016 and ends this year. So, I think Welsh Government have—
The targets have been missed, yes.
So, I think Welsh Government have had a very challenging piece of work on their hands in terms of introducing all the necessary regulations and accounting mechanisms and being able to publish that plan within that first five-year period. We would very much hope—. Obviously, as you've mentioned, the declaration of a climate emergency came after that plan had been published, and then we saw the further advice coming from the UK Committee on Climate Change in May, recommending that the targets increased from 80 per cent to 95 per cent. We welcome the fact that the Minister wants to go even beyond that 95 per cent target. So, I guess we feel that Welsh Government have got quite a big job on their hands in terms of work towards publishing the next low-carbon Wales plan in 2021 to reflect the next five-year budget period. The actions within that plan will have to be a lot more ambitious than what we've seen to date.
Isn't it a bit—? You miss a lower target, so you set a higher target. I'm not sure I would have done that. But anyway.
Well, they're Government targets, aren't they? So, we'll ask that to the Minister next week, I think. Mark.
You say you welcome the Welsh Government saying it will go further than what the committee on climate change says, but, elsewhere, don't you welcome that they're following the advice of the committee on climate change? Which of those is it to be? I mean, if we haven't got a plan to get to 95 per cent reduction, why welcome just asserting, 'Oh well, we're going to get to 100 per cent'?
The UK Committee on Climate Change have got the expertise in terms of advising Welsh Government on what needs to happen or what policies need to be put in place in terms of achieving the emission-reduction targets. So, we would very much suggest that they take the advice of the committee as the expert advisers.
But didn't you say just now that you welcome them saying they would go further and, notwithstanding advice to have a 95 per cent cut, they would have 100 per cent cut?
We welcome the commitment and the ambition from the Ministers, but, I guess, being realistic on what can actually be achieved in Wales as well.
Do you think they have given sufficient or indeed any consideration of the long-term requirements for the Welsh budget to obtain this reduction, whether a 95 per cent or net-zero target? There was a suggestion of potentially—it was very broad brush—an estimate of £1 billion per year of the Welsh Government budget to take those measures. Is that something that Welsh Government is seriously planning for?
We would probably say that it is very challenging to have that longer term view, given the annual budget cycles that they need to operate within, but on the whole, we'd say that the detail in terms of that long-term planning is largely missing from the draft narrative.
So, you're working with the New Economics Foundation and Social Finance, which I know less about. The assessing of the budget, and we've had some discussion with the finance Minister on various projects or initiatives that she has announced, on what are the relative impacts on climate change or at least emissions of them, and I think broadly, we've been disappointed with the answers so far. I just wonder, even if you can get to an assessment that's better than now of what the impacts are, don't we need to go further than that and assess what would be the potential impacts of things we're not doing? For example, substantial investment in electric buses—we assume potentially for Cardiff, perhaps one or two other big cities—what's the impact of that spending compared to, say, providing some buses in, for example, Blaenau Gwent, where there have been significant cuts to the bus service? We're not seeing increases in the bus subsidy that some people think might be a more effective way of tackling emissions for a fixed budget.
Prioritisation of spend is obviously critically important, and in the budget improvement plan, the Government has committed to assessing and building the evidence base in order to be able to make those strategic decisions about where spend is best placed. However, I think linking back to your comments on the budget improvement plan, there can be a tendency, especially in the context of an emergency, to say, 'Well, we must wait; we must wait until we have the evidence.' If everybody around the world keeps waiting until the evidence is absolutely perfect and the best evidence, then we'll be too late. So, action is going to need to be taken, and there are already emerging examples around the world where scientifically led decarbonisation policy is being channelled through budgeting. We were going to bring up the example of the Oslo climate budget where, okay, albeit at a city level, the annual budget is firmly tied into an evidence-led suite of decarbonisation policies, which have been through a prioritisation process such as that.
I don't think the suggestion is that we shouldn't do anything until everything can be measured absolutely accurately and we can be certain which is going to be best, there surely should be a middle way. Isn't there more Welsh Government should be doing on the various initiatives—and they're spending this £140 million extra on capital projects—shouldn't it at least be assessing in a more rigorous way, as it is spending that money, which of that spending is being most effective and publish an evidence base regarding that?
Yes, I'd agree with that.
We haven't committed to doing that for the entirety of the Welsh Government budget, because that would be a huge exercise, and we don't believe it's our role. So, what we've been trying to do is to, as I say, bring in expertise from other organisations and explore solutions from other places across the world to see what can be done.
Can I preface what I think will be my final question? I'm open to the idea that it may be the future generations commissioner is the right place to be doing this; I'm not suggesting it is not. I just wonder what is the rationale, as you see it, for it being your office that should be leading on this work, particularly now that, rather than doing that in-house, you're the mechanism that outsources that work to others? Why is that the right model? Is that the model Welsh Government's going down, as you see it, or is your initiative just one of a number that they're doing in terms of this assessment? And to the extent that you are doing it, why is that the right way, in your view, if it is, to do that work?
I'm not sure I'm understanding the question correctly, so apologies if the answer doesn't—
—answer it. But we've made the decision that the budget is an important piece of work for the commissioner and that we will, on an annual basis, work with Welsh Government to provide advice and support, but also to scrutinise the budget process as well. We don't feel we have sufficient expertise within our team, hence the reason for looking to source that externally.
In an ideal world, we would want the Welsh Government to develop their own understanding and capacity to do this internally. I know from working with the decarbonisation team within Welsh Government that they are, unfortunately, a very small team with very limited resource and capacity just to cover the policy commitments that are needed across Government. So, this would be an additional area that they would need to start looking at in terms of looking at the link between the policies, the actions and the best way for Welsh Government to spend its budget to support those. But, yes, as I say, over the long term, we would hope that they are able to bring in expertise and develop their own internal capacity and understanding—
You say the ideal way is within Welsh Government. Isn't there, though, an argument for a degree of independence in measuring the various options, and if so, is the future generations commissioner's office the right place to do that, or is it external organisations who bring a greater degree of independence?
Again, we'd see a role for, potentially, the UK climate change committee. They're the statutory advisers and they have the broad range of expertise needed in the various policy areas as well. So, I'm not saying that we're best placed to do this.
Yes, just briefly. Whilst, I think, agreeing with Mark that there needs to be an element of independence, certainly, is pushing for and asking why there isn't more capacity within that decarbonisation team in Welsh Government a key part of our ask, now, whilst also reflecting on the fact that this needs to be cross-departmental? We can't just leave this in the decarbonisation team's hands.
Can I come in on that? My understanding from when we were speaking with the decarbonisation team is that, at the moment, their brief is seen very much as overseeing progress on the national carbon budget. It's a bit unfortunate that that uses the word 'budget', because it means that we start confusing what we're talking about. We have our five-yearly carbon budgets, but they're not actually budgets from the Welsh Government's point of view, it's a national thing. Now, we're talking about what are the Government's spending decisions' impacts upon that national context, and now we're debating whose responsibility that is. I think there might be an argument that that decarbonisation team within the Government would be the appropriate place for that to take place.
One thing that we are arguing for is that the carbon impact assessments that would need to take place systematically across Government would need to be aggregated in a central location, and maybe that's the location. But it's going to need to be a cross-departmental shift in the way that the Government does things to get those impact assessments done consistently across the board.
We've talked a lot about expenditure, can I talk about income, or, effectively, taxation? Landfill tax will go up again this year, as it goes up every year, but we aren't seeing any action on single-use plastic cups—taxing single-use plastic cups, taxing a whole range of carbon-expensive items, and the more we put up landfill taxes, the more we make it economically better to engage in incineration. Should we have an incineration tax, because we know that incineration cannot produce less carbon than landfill? It'll almost certainly produce more, but unless we're rewriting the laws of chemistry and physics, it cannot produce less. Therefore, shouldn't we be taxing incineration? If you put a plastic body into landfill where it sits there for, what is it, 1,000 years or whatever, that's bad. If you actually burn it and throw out some nitrous oxide, carbon dioxide, that's good. I don't understand, in terms of carbon, why that is the case.
I'm not a waste expert, so I'm not going to focus on the specifics of that particular case, but I would like to take the broader question about what the appropriate mechanism is to deal with sources of carbon. There are a whole suite of things that the Government can do, ranging through investment spend, regulation, taxation, behaviour change initiatives, things like that. A package of all of those is likely to be appropriate to deal with an emergency. The Government should be drawing on every lever that it can, but what we would say, or at least, certainly, the New Economics Foundation, is that using levers that are not Government spend but are regulation or taxation based, should be done with due caution to the fact that that may impact on the poorest within society and ultimately costs may filter down to unintended recipients of those costs, whereas costs borne by the state—and this is where it relates to the budget, investment and spend—the Government has a degree of control over who those can then be borne on.
Can I come back to you on that? Let's take a classic example: some of us are old enough to remember when you went to a chip shop, they gave you chips in paper. Now, they tend to give it to you in a plastic tray. Now, I'm not sure how that—
But a number of them give it to you in a plastic tray. Can I say that that is not impinging on the poorest in society, by any stretch of the imagination—whether they're in paper or a plastic tray? But the taxation of those plastic trays would actually change behaviour in such a way that we would return to using greaseproof paper and newspapers. So, I'm not sure that all these behaviour taxes are going to hit poor people; some of them are just going to change behaviours. You could have said exactly the same about the 5p levy on carrier bags, because everybody had to pay it. But what we've seen is a lot of people don't pay it, because they take their own bags now.
Absolutely. The Government's going to need to have a holistic assessment of where the different sources of carbon are, and where the appropriate mechanisms to deal with that source of carbon come from and what they might look like. For sure, that's part of this evidence base that we're discussing and is mentioned in the budget improvement plan. That's that evidence base; that's saying we know mostly where the sources of carbon are, but what's the appropriate way to get to them and to tackle them? But within the context of the budget, the wider debate is about how much of it falls on Government spending. We talked about percentages of how much is being targeted through spending versus how much might go through new legislation, regulations and things like that.
Sorry—what you've said is absolutely right if we'd had this conversation three years ago, but now the Government have got taxation powers as well. I mean, you can't just say, 'They need to spend this'; there are taxation powers they could use. But you don't, any of you, have any views on incineration as a means of pumping more carbon dioxide in than putting things in landfill.
In terms of our response to that, we haven't looked into it in detail. We don't have the technical expertise on this particular area, so we'd have to go away and look at it before we'd be able to give you a response to that.
Okay, that's fair enough. That's fine. Okay, we'll move on to Rhun. Oh, sorry, David—yes, okay.
In large, established programmes like waste disposal, you would expect, if we have a climate emergency, to be addressing some of these issues. I don't know the technicalities, and I'm not asking you to comment on them, but it might be necessary to go back to some landfill, for instance, and try to eliminate as much incineration as possible, whereas five or six years ago, that wouldn't have been the general drift. In the budgeting process long term, if we're talking about prevention and long-term measures, we should be looking at that. Industrial investment—we should be looking at that. There are huge issues about certain large employers that we back at considerable cost, and are big carbon emitters. Should we be taking a different approach and perhaps preparing those economies for alternatives that are much greener? The whole housing programme and the way that we deliver energy—these are big, big factors. Should we still be farming marginal land? George Monbiot would be talking about all these things, wouldn't he, if he was before us. We may be dismissing some of these, but if you put a higher value on woodland, then I'm sure lots of farmers would be quite happy to go into that. They are ultimately about being entrepreneurs. Is there any sign of this sort of vitality now coming into our forward-looking, longer term budget process?
That's a big question.
I'm not saying, 'Have they come up with the answers', but are these the things that they're now starting to address and look at? Because we're in an emergency, apparently. The Minister has stood in front of the Assembly and said, 'We have a climate emergency.' Well, okay, if there's an emergency, you'd expect some emergency responses. If something as extraordinary as that needs to be stated, then there needs to be an extraordinary response, doesn't there? Otherwise, why state it?
So I guess your point refers to the fact that we know where our emissions come from in Wales, and in terms of the breakdown of those emissions, areas such as power generation and industry form a huge percentage of Wales's emissions, and I guess that we would acknowledge that the Welsh Government's budget process isn't able to probably do very much in terms of those high-emitting sectors. So when we've looked at decarbonisation within the Welsh Government's budget previously, we've made the decision to focus on areas such as transport, housing, et cetera, areas where we feel Welsh Government are able to make more of an impact in terms of changing the way they think about investment allocation.
I can see that that's pragmatic, but what about future investment to sustain those levels? What should the Welsh Government's attitude to that be, not current fixed expenditures that would cause huge disruption to reverse? What about the future? That's what I'm talking about.
Yes. We've not been able to have these conversations, I guess, with Welsh Government in terms of looking at their holistic approach, so I don't feel I'm in a position to answer that.
I don't think that the long-term plan is in place just yet. In defence of the Government, they are awaiting the next round of advice from the Committee on Climate Change, which will enable that and make that easier to do. But I think a long-term plan is absolutely going to be essential. With the well-being of future generations Act in place and the focus actually on prevention, then there's the cross between those two issues, decarbonisation and prevention. The Welsh Government is now in a position to lead the way on this internationally, I would argue, and a great example of where that's going to come up is in the redesign of the common agricultural policy, which is going to tap into some of those issues you've just raised about land and how it's managed and looked after, and can we shift, for example, that system to one that has a prevention focus in terms of how those payments are made, in the area including decarbonisation, but other areas of well-being as well that relate to Wales's land stock as well.
I'm listening to this exchange, but, really, we need to have a slightly different conversation, don't we, about the role and the structure of public finances, because at the end of the day, when all is said and done, core business has to be maintained. We've got to pay the wage bill for the NHS, we've got to pay for teachers to sit in front of classrooms and the rest of it, and nobody's arguing that we close Nevill Hall Hospital to plant trees. Nobody's arguing that. Is it unrealistic to believe that we can meet the ambitions of a climate emergency within current budgets? And, if we're serious about restructuring the role of the public sphere in its wider sense, we've got to increase taxes, because we need additional resources to do it. And anything else is really dancing on the head of a pin.
I'd agree with Alex's previous point; we recognise this is an emergency and it means that Welsh Government need to use all levers possible and engage the public and look at the role of behaviour change, individually and organisationally, and wider, culturally, is a very important aspect as well.
So, are you saying you think they should raise taxes when you say, 'Use all levers'?
I don't think I said that. Again, I'm not an expert and I wouldn't be able to provide that answer.
But there is this balance between being able to resource some of the initiatives and some of the changes that we need to see, and whether you do that through taxation or whether you do decide that, actually, you stop doing certain things.
So, just to say, it's an emergency, so a lot is going to need to be done. Massive progress can be achieved within the existing frameworks. Yes, there is a lot of funding that is already in a fixed position, and that was what we heard a lot from departments when we were speaking to them: they don't have the wriggle room. The first thing I'd say is, well, let's look at the conditions that we use when we allocate funding, social housing grants and things like that: hundreds of millions going out in key areas for decarbonisation. A bit of tweaking to those conditions to make sure that all houses are being built to zero-carbon standards, and suddenly you're spending quite a lot on decarbonisation. That's a short-term focus. The second one is capital spending, and that's why within the remit of this carbon impact account that we're advocating for, we would say let's start with the whip, the infrastructure investment plan, the major capital projects, and see how that funding can better address the climate emergency.
Beyond that, and now I'm speaking with my New Economics Foundation hat on, not on behalf of the commissioner, but the Government should explore all levers for leveraging more finance, particularly for areas of decarbonisation that are investments, not just money hauls, in terms of sorting out the housing stock, for example. Yes, there is clearly a funding shortage if you look at the recent reviews talking about figures of £0.5 billion to £1 billion a year needing to go into retrofit. Where is that money going to come from? Well, there are areas around borrowing that could be looked at there, we would say, and that is potentially going to need negotiation with the UK Government around those restrictions, potentially. But this is an emergency, so we should be looking at all those angles. My understanding is that there have been situations where arrangements have been made; for example, the M4 had particular arrangements around borrowing that was going to enable it. Why can't those arrangements be made to stop the climate emergency when it comes to sorting out the housing stock, which will simultaneously address issues of fuel poverty and health issues?
Diolch yn fawr iawn; difyr tu hwnt. Os gallwn ni edrych ar wariant ataliol yn fwy cyffredinol, y llynedd mi wnaeth Llywodraeth Cymru gynnwys diffiniad o 'atal', ac fe wnaethoch chi helpu i'w ddatblygu yn y gyllideb. Ar ôl gweld y diffiniad yna yn gweithredu yn ymarferol, ydych chi'n dal i gredu bod y diffiniad yna yn un cywir ac mai dyna'r ffordd orau i weithredu?
Thank you very much; very interesting. If we could look at preventative spend in more general terms, last year the Welsh Government included a definition of 'prevention', and you helped to develop that definition. Now, having seen this definition in practice, are you still of the opinion that that is the correct definition, and that that is the best way to proceed?
Just to clarify in terms of the question, we were involved at quite a late stage in the development of the definition, so I wouldn't say that we necessarily helped to develop it, but we really welcomed it being in place as a way to provide a lot more robust understanding of prevention.
So, I think the first thing to say is that there is really evidence of some progress in relation to the budget narrative; so, a lot of evidence that greater prominence is given to prevention in the choice of the cross-cutting priorities and also prioritisation in relation to new spend. So, we think there are some positive decisions. We've done a bit of analysis. We've tried to apply the 'prevention' definition to table 6.1, which is additional revenue allocations, and, based on that, we think about 90 per cent of those new announcements could be classified as primary or secondary prevention, which is really positive. So, we think it is positive, but we think there's more to do if we want to see the bigger step change prevention that's required.
In terms of your point about seeing the definition in practice, we haven't really seen it in practice because Welsh Government haven't really used it this time round.
Why is that? Is that acceptable? The words in your submission in response to the budget are pretty strong. It says—I've got it in Welsh in front of me here—that evidence is very scarce that Government has tried to apply the definition across its areas of spend in a systematic way. Is it ignoring the definition that itself, with your help, put in place a year ago?
I think it's maybe parking the definition. So, in terms of the conversations we've had with budgeting officials, they have talked about a number of significant challenges they face this year; they're well rehearsed and we know it's been a really tough year.
Was that what happened in response to the letters that you wrote to the Ministers about preventative spend, in particular, that they came back saying, 'Well, things are a bit challenging so we can't be as preventative as we'd like'?
We didn't get that many responses to the letters, and those that we did get gave much more general examples of how key programmes applied the well-being of future generations Act more generally. So, I think it's something that the commissioner's keen to explore more with individual Ministers. I think she had some more positive and constructive conversations where she was able to sort of speak with Ministers. So, for example, she was quite positive about the conversation with the Minister for Education, and, obviously, that portfolio is quite firmly in the space of primary prevention. So, there are a lot of positive examples there. But I would agree with you, in terms of— . We're disappointed that there hasn't been more proactive use of the definition, given that it is a Welsh Government definition in itself.
The budget improvement plan: I sort of feel like a bit of a broken record with it, referring back to it. But it does have some positive stuff in there about prevention, and it does have some sort of relatively, what we'd say is more transformational stuff, but it's too far down the line in our opinion. So, you might recall that the budget improvement plan is set around this five-year time frame, and the more transformational stuff, and the stuff we think should really be happening now and in the next year, is sort of 2023 plus—that sort of time frame—which, if you think about it, is seven years after the Act came into force. And we would argue that that sort of approach should be happening now.
So, the commissioner's actually planning to write to the First Minister and finance Minister with a set of quite specific recommendations about how we think Government should take this forward this year, because we do feel that it's been a missed opportunity, and, maybe, a year ago, when we published advice for Government, which had six quite strong recommendations on prevention, we didn't put a time frame around those because we accept that it's a big thing to do. So, what we're doing this year is saying, 'We think this is—.' Obviously, with the caveat that we don't know about the spending review for certain, but if it does happen, that should be a good opportunity to sort of almost go back to basics with spend. So, I can talk through the sorts of recommendations we're going to make, if that would be helpful.
Do you find it strange, or does the commissioner find it strange perhaps, that there seems to be more talk of acting in a preventative way in this budget than we've seen before, but it's not actually happening? So, the Government is aware that they need to be seen to be acting preventatively, but they're not doing it. It's all talk and no walk.
I personally wouldn't disagree with you on that, and I doubt that the commissioner would either. I think that there have been some positive decisions.
So, certainly, if you look at this £30 million set out, there are some really good examples of increase in spend. We can point to some really good examples of prevention. So, probably the strongest, we think, is the whole-school approach to supporting emotional resilience in children, which has been jointly funded by health and education, and is seeing an uplift year on year. However, we'd argue that, this year, it's had quite a significant uplift—I think the budget's doubled—but it's still only £5 million, which, when you think about the number of schools in Wales, the mental health crisis, the scale of the health budget, the scale of the education budget, our argument is that decisions like that are really positive, but where is the sort of systematic approach to understanding; why is it only £5 million, why isn't it £15 million? So, we're sort of saying that there are positive things to say, but there is just not that sort of robust, methodical approach to understanding what the key opportunities are.
I agree with you entirely there. I'm not for a second saying there's no preventative spend or preventative budgeting in there; there's lots of it. It's a big budget, and we'd expect some decent sums of money to be put into particular projects. But, in responding to the budget statement this week, I made a very similar point. You've got these packages of money, but, compared with the overall, say, health budget, which is half the entire budget, maybe a couple of per cent seems to be identifiable as preventative spend. So, in that context—we pushed the Minister on this when she was with us before Christmas, as a committee, and I'd like to do the same next week—are we right to keep on pursuing Government to highlight much clearer which elements of its budget could be put under the preventative heading, so we can scrutinise better what is actually happening? Because I'm not seeing it; I'm not seeing that big culture shift. At least if Government gave us that in table form, in as clear a factual way as possible, we could make an assessment.
Yes, that is definitely—. We think that's the right way to go, and that's what we're encouraging Government to do through our conversations with officials, and the commissioner's conversations with Ministers. I suppose the only note of caution I would urge is that what we don't want to happen is a really enormous numbers exercise, where officials spend years and years and years trying to put every penny in the right category, and sort of almost missing the point. So, absolutely, use the definition and have those broader conversations, but it doesn't have to be—. It's almost like the point we're making about the climate emergency. It doesn't have to be all, completely—. I'm not saying it shouldn't be evidence based, obviously it should be, but it's not just about putting the numbers in the right places. It's about having the conversation, particularly between departments, about what the key opportunities are and what the balance of spend looks like. Maybe if I could just mention some of the other positive examples.
You do need to be very brief because we only have five minutes left.
Okay. Fine. I was just going to quickly draw on health, if that's okay, because we have seen an evidence paper that's been given to the Health, Social Care and Sport Committee where they have tried to apply the definition. But, again, it's only in relation to new spend and uplift, and what they did last year was they applied the definition to the whole of NHS spend. And I don't know if you recall, they came up with the figures that 74 per cent of spend was in the acute space, 20 per cent was in the tertiary space, which obviously leaves only 6 per cent for everything else. And that's the sort of conversation we want to be having. So, again, I would think that your line of questioning could explore that as well.
Ocê. Diolch yn fawr iawn.
Okay. Thank you very much.
Thank you. Rhianon.
Yes, we are in the right zone for my line of questioning. I mean, in regard to the fact that you've mentioned, though, there is evidence of primary and secondary preventional spend and the discussion around where's the transformation, I would have assumed that we were going to need consistency in preventative spend before we're going to get transformational, cultural spend. I suppose that's more of a statement.
So, in regard to the balance between bodies of health spend, preventatively, and local government spend, in regard to everything that local government does and has done historically around social care, do you think that that balance is right, and does the budget deliver around that?
I don't think we think the balance is right yet. So, again, there are some positive examples where little bits of money are moving from health into other places. So, the whole-school approach should be an example of that. We found a good example of money from health to housing: wraparound mental health support for people who are homeless or vulnerably housed, and that was £1 million last year. We think that's being kept this year, so there are little nuggets, I would say, evidencing that shift. But in terms of the sort of whole-system strategic approach to understanding, in terms of the role of Government, where money is best spent in terms of preventing problems, we don't think we're seeing that, and it's going to continue to be a priority for the commission in the forthcoming year.
And in a sense, without taking up too much time, do you feel that there is enough leeway in the system to be able to both deal with the acute issues that we have to deal with in the core business that Alun Davies has referred to, as well as the preventative measures that we all want and need and desire?
It's really challenging; we don't pretend anything otherwise. Obviously, in the run-up to the Assembly elections as well—we've all seen the politicisation of the NHS in the recent UK election. Really, really difficult conversations, and we understand the public sentiment around this. But I suppose our perspective is that we don't see it as a choice, really. We don't see it as a stark choice between maintaining existing acute spend versus thinking about that bigger picture of prevention because the money's going to run out sooner or later; we can't keep pouring more and more into demand. So, until we start having that conversation about what the best balance is, which will no doubt require some difficult decisions, we can't see—. And if you read the chief economist's report as part of the budget narrative, it makes for really depressing reading on that front as well, I would say. So, we don't see that Government really has a choice.
Fine. But in the real world and in regard to core working, which is absolutely the business of Government, do you feel, then, that in regard to this budget process, the draft budget, that the longer term preventative spend is in the right mixture? Or have you a different opinion on that?
We don't think it's in the right space yet, and I think that's why we think this year with the spending review is a really good opportunity for them to really seriously consider what that different settlement might look like in the future and what the key opportunities are.
I've just got one question. There's quite a lot that's been covered in the natural flow of things. In our budget making, what risks should we attach to carbon transfer instead of carbon reduction? Because you can make decisions that seem to be marvellous and great for your stats, but in effect, all you've done is transfer the carbon not eliminate it.
I'll hand over to you, if that's okay.
So, yes, it certainly is a risk. An example: the UK Committee on Climate Change has been strongly recommending, just recently, the integration of shipping and aviation emissions into legally binding targets as a result of that at a national level because otherwise they would just be transferred. I think the over-reliance on offsets is a major risk, so, the idea that industries can continue 'business as usual' and then find offsets somewhere else. Wales is blessed with a large natural environment, which will facilitate some offsetting, but I think that approach needs to be treated with extreme caution. I also think that any decisions that essentially transfer risk like that are somewhat against the spirit of the future generations well-being Act, particularly in the sense that the chickens will come home to roost, or whatever the expression is, because investing now and getting ahead in the industries of the future will pay dividends. Wales has an opportunity to invest now and become a global leader in aspects of decarbonisation, which it won't achieve if it transfers decarbonisation elsewhere.
I agree with all that, but in the budget process at the moment and as it's intended to develop, do we see this being addressed in terms of that it will be a risk and is managed?
The carbon impact account that we are proposing essentially helps to mitigate that risk, because it encourages this transparency of what are our direct actions, our direct spending actions, what are they doing and what are they impacting. So, that's the first step, I would say, to avoiding that. And if we continue this approach where actually we only track carbon emissions at the national carbon budget level and we don't know where those have come from, it may be we've done that and the Government have been driving emissions, but we've been fortunate they've been offset or transferred somewhere else.
Ocê, iawn. Diolch yn fawr iawn.
Okay, right. Thank you very much.
Can I thank you for your attendance this morning and the evidence that you've given us? You will be sent a copy of the transcript to check for accuracy and we're very grateful to you for your time this morning. Diolch yn fawr iawn, diolch.
bod y pwyllgor yn penderfynu gwahardd y cyhoedd o weddill y cyfarfod, heblaw eitem 7, a dechrau'r cyfarfod nesaf ar 15 Ionawr 2020 yn unol â Rheol Sefydlog 17.42(vi).
that the committee resolves to exclude the public from the remainder of the meeting, except for item 7, and also the start of the next meeting on 15 January 2020 in accordance with Standing Order 17.42(vi).
Cynigiwyd y cynnig.
The committee will now move into private session. We will be reconvening in public at 1 o'clock this afternoon to take the final evidence session, but we'll now move into private session. So, I propose that in accordance with Standing Order 17.42(vi) the committee resolves to exclude the public from the remainder of this meeting except, of course, for item 7, which is our session with the Office for Budget Responsibility, and also for the start of the meeting next week on 15 January 2020.
Are all Members content?
Derbyniwyd y cynnig.
Daeth rhan gyhoeddus y cyfarfod i ben am 11:32.
The public part of the meeting ended at 11:32.
Ailymgynullodd y pwyllgor yn gyhoeddus am 13:03.
The committee reconvened in public at 13:03.
Croeso yn ôl i'r Pwyllgor Cyllid.
Welcome back to the Finance Committee.
Welcome back to the Finance Committee. And we move to the seventh item on our agenda today, which is further evidence on the Welsh Government's draft budget for 2020-21. And it gives me great pleasure to welcome back Robert Chote, chairman of the Office for Budget Responsibility, and Andy King, who's a member of the budget responsibility committee. Welcome to you both. We have about an hour allocated, so we'll go straight into questions, if that's okay. And I'd just like to kick off by asking you about how you engaged with the Welsh Government when you developed your forecasts and how did you feed into the budget setting process for next year. There's no need to press the buttons, it's all automatic.
Wonderful. Well, thank you very much indeed. It's a great pleasure to be back. Happy new year. Yes, the engagement went very well. As you know, even before the particular new demands and this new publication, we've always, when producing our devolved tax forecasts, ensured that we have as much useful interaction as we can do with the Welsh Government and with experts here, and with people with local knowledge to feed into that as best we can. So, there's an element of more formalisation of that but it's in the spirit as it was beforehand.
As you know, for different elements of the devolved taxes forecast there are different sorts of engagement, particularly in the sense of who is actually cranking the handle of the models that are used to generate the forecast. The forecasts are ones that we own. We make the judgments, we look at the methodologies and approve the methodologies and have to be happy on that basis. But, generally speaking, with income tax we're reliant primarily on HM Revenue and Customs for handle-turning activity, whereas more with the Welsh Revenue Authority and Welsh Government on the other two, so there's a difference there.
Obviously, we've also had other engagement—coming and talking to you, talking to other people—which has been very useful. But obviously, we're very keen to hear if you have any thoughts, as time goes by, as to the nature of the relationship and what we can do for stakeholders more broadly. As you know, there's a review built in that we're going to be looking at this, which obviously—. I don't see anything at the moment that looks broken, that needs obviously fixing, but if you do, then please let us know. I think one of the difficulties, obviously—. I think the initial hope was that we would see how the process operates in normal times, and then reach some conclusions about anything that might need to be different. Alas, normal times have not quite yet come upon us.
Exactly, so this might be a slightly—. There's no reason not to have that review, but it's probably—
Sure. There are lessons that we can learn, I'm sure, but they're not normal times.
It's a stepping stone to actually how things will run when we have a budget timetable where everybody knows where they are a bit more than is currently the case.
Yes, and if we have positive relationships in these times, then surely that holds us in good stead for more, or less—[Inaudible.]
Indeed, and that's certainly, I think, the shared view we have on the Government side as well; that, given the unusual circumstances, things have worked well. And I hope that we've provided the sort of—well, I mean, do tell us in due course whether you think we've provided you with the information that you think you need for your scrutiny function.
Yes. Okay, well tell us a bit about the challenges, then, given that we have this uncertainty around Brexit and we've not had the UK Government's budget. How has that affected the work that you've done and how have you compensated for that?
As you say, it's been an odd timetable, we have ended up—. As you know, we produced our last set of UK forecasts and accompanying devolved tax forecasts back in March of last year. And then, in producing the material that we came out with in December, we're still based on the UK forecasts that were underpinning March. Although, it was then possible to take on new outturn data and some judgments, for example, on what evidence has been suggested about house-price growth et cetera—you can take those things on board.
Where we are now is that we are now just about to embark on the process of producing the forecast to accompany the UK budget on 11 March. We're at the very, very, very early stages of that; we're not near even a first draft or a first iteration of the economic or fiscal forecast there. But I am pleased that the date of 11 March gives us a proper timetableable run in to that, which will ensure adequate full scrutiny of what one would expect to be a fairly interesting budget in terms of policy content.
Clearly, the timing causes you some difficulties. I think it's causing colleagues in Edinburgh rather more difficulties. So, there are different sets of challenges around that, and obviously one issue that we should discuss is what, if anything—. I'm not clearly sure there is anything useful we can additionally say after the twenty-fifth, before we get to 11 March, in terms of there will be very little new information beyond what we've incorporated here, and what we can usefully do at that stage. And then we're through to 11 March.
There is then the further odd challenge that we have a legal requirement under the legislation that underpins the OBR of producing two forecasts in a given financial year. And we have secondary legislation that says it is for the Chancellor to tell us when those forecasts are, and that one of them will accompany the budget. Now, clearly, when the primary and secondary legislation was put together, no-one had anticipated circumstances in which we would be most of the way through producing one forecast and then the budget and the forecast went because of an election. So, we are currently considering and having to discuss what the least painful way of meeting that obligation for a second forecast is, unless the obligation can be taken away from us by legislation, because it was given to us by legislation for this particular instance.
Because again, I'm not sure—for your purposes, and I suspect particularly in Edinburgh, the idea of having another forecast that has moved in any substantive way, three weeks after the one that we produce on the eleventh, is not making anybody's life easy. So, we need to see whether there's some way of ticking that box, and therefore meeting our statutory responsibilities, without making your or anybody else's life unnecessarily difficult and wasting a lot of time and resources.
Can I ask, in your perception, why it is that Scotland is having so much greater difficulty than us in terms of these timings, or at least so much more heat is being generated in Edinburgh than Cardiff on this issue?
Well, I should preface, I haven't spoken to them at length. Clearly, the issue for them, which is a broader budget process thing, is how anxious you are or content you are with going before or after the UK budget. I think there are issues, and Andy may be able to correct me on some of this, about Wales already having a settlement for 2020-21 on the spending side that Scotland doesn't, so there are more moving parts in the Scottish fiscal framework that remain dependent on what comes out on 11 March than is the case in Wales, which means it's less painful for you to go ahead of 11 March than it is in Scotland. Is that—?
Also, we haven't produced the equivalent of this Welsh taxes outlook for Scotland, so in a sense they're one step behind in terms of latest information as well.
Of course, they have the Scottish Fiscal Commission, which has the statutory responsibility that we're fulfilling for you here, but I think it's down to this question of the level of difficulty that it creates of just being one side or the other of the UK. Clearly, you may have decisions depending on if there are tax changes or a very different near-term outlook for capital spending; that creates the possibility of needing to do things with supplementary decisions here too.
One problem that was highlighted to us in our 18 December evidence session with the Welsh Treasury was your need to produce the block grant adjustment figures in advance of your producing the main macro forecast. How great a problem has that been?
I think there are probably two parts to that. The calculations that are required to do a block-grant adjustment you can do with any vintage of numbers, so we have annexed those to this document, and they use somewhat updated England and Northern Ireland numbers for the income tax and the other taxes and somewhat updated Welsh—. But they all run off the UK forecast from back in March. So, in a sense, they're somewhat out of date. It's not a problem producing them, but it's a problem in interpreting them and thinking how they might change on 11 March, when we have an updated—
Does that mean our block grant may be subject to greater than expected revision because of that issue?
Well, it's a source of potential revision. It would depend on how much we revise our forecasts for 2020-21 for the UK-wide taxes. So, what we did do was take on the latest monthly information, which is typically the bigger source of movement for the short-term forecast—not always, but typically. But there will be more months of information. There are big self-assessment income tax payments that come at the end of January, which we will know about for the March forecast but we didn't know about for this forecast. So, they are always likely to be revised, to some extent. I don't think it is a large risk for 2020-21, given the state of economic news since then, but the potential is there.
And over the longer term—as I say, we're in the very early stages yet—if you compare the macro-economic forecasts that we produced back in March for, say, growth, inflation and unemployment rate to the average of independent outside forecasts as of the end of last year, they're pretty close. So, it's not as though there's been a game-changing shift in outside expectations of the medium-term outlook of the economy since March that would make you more worried about the potential disruption and the degree of change that you get in March. But that's not to say, of course—. We'll have to reach our own judgments and, as ever, judgments over medium-term productivity growth and potential GDP growth are always important.
Yes. With the taxes where the Welsh Treasury is driving at least the population of your models on the land transaction tax and a landfill disposal tax, have there been any significant changes and assumptions or methodology because of your involvement?
I wouldn't say that our involvement is massively different for this forecast than it was for those over the previous period. So, when we were producing them for our own purposes as part of our UK-wide forecast, it was the same officials who were turning the handle and providing the information to us. So, there are revisions in this forecast that reflect new bits of information and new bits of analysis, but I think they would have happened whether we were the Welsh Government's independent forecaster or whether we were doing our previous role. So, we had already done a lot of work with the Welsh Government on those methodologies in our previous roles.
Land transactions, both in the UK context, in the Scottish context and the Welsh context—there are alternative methodologies that we've looked at and we've ended up with one that Wales went with first, I think, which works well and it works well given the nature of the data that we're able to get from the revenue authority. But those changes have not had hugely consequential quantitative effects, but they've been useful nonetheless. They haven't been driven by the new responsibilities, as Andy said.
And non-domestic rates that are also devolved to Wales, am I correct in saying you don't have any involvement either in producing or quality assuring those statistics? And if so, why not?
No, that's correct. We have to cover them at a broad level for the UK-wide context, but we've not had that specific role. It's confined to those that have been set out for us in the Wales Act, so we haven't had that same degree of involvement, no.
I just don't understand what the rationale is for you not being involved in those where you're involved in the other devolved taxes. Can you assist me at all in that, or will I have to look elsewhere for the answer?
I think it comes back to when tax devolution, through the commissions and the White Papers and the Acts, was being prepared. It was income tax, property transaction tax and this landfill tax that were being newly devolved at that time, and those were the ones that were specified to have an OBR role, originally reporting to the UK Government rather than to the Welsh Government. So, it may be, in a sense, an accident of history, but that's where the legal requirements upon us are.
And it mirrors the Scottish position.
It does, yes.
I suspect they adopted it because that was what had happened there too first.
And finally from me, how successful have you been in reaching out and engaging organisations and individuals across Wales in respect of your new responsibilities?
I think we've had a couple of good meetings, which the fiscal community—. One hopes that you have a sort of huge, we could guess, vast building and gather together everybody who has a keen interest in this. One shouldn't be overly ambitious about the number of people down the Dog and Duck who are obsessed about all the elements of this. But I think, certainly, we took advice from the Welsh Government and also yourselves on who it would be good to talk to. And you spoke at a tax conference.
I spoke at the tax conference. One of our colleagues spoke at the university. On the day that we came to see you last summer, we then held a series of, essentially, forecast challenge meetings with the Welsh Government that allowed us to spend a lot longer than we would normally looking at these things. So, the methodological tweaks that you see in this book were actually discussed and signed off, really, at that meeting. So, I don't know whether we've seen everyone who has an interest in Welsh taxes, but certainly the two conferences were well attended and were interesting.
Thank you. I find it fascinating reading through the document and trying to—
It's much to your credit.
I said earlier I spent Christmas looking at it. [Laughter.]
I'm interested in—. Sometimes, as a politician reading this, you try to read between lines, don't you? 'What are they getting at here? What are they trying to say here?' because the numbers that I've seen strike me as being quite unremarkable. I don't know if perhaps I'm an optimist or a pessimist, but they don't strike me as being significantly different to what we might have expected. How would you characterise your forecast for the next few years? How would you—if you were going to describe them without using the numbers, how would you describe what you are anticipating seeing over the coming years?
That's a question largely—. Given the nature of the way that we have produced reports, that's a question that primarily applies at the UK level, and, if you're looking at that context, and you look at the sort of growth numbers we have, which, as I said to Mr Reckless, are broadly consistent with the outside average, you're looking at GDP growth of roughly 1.5 per cent a year over the medium term. In a historical context, that is relatively weak. It's relatively weak for a period of economic recovery when you're coming out of a hole, and it reflects primarily the defining puzzle that all economic forecasters have confronted since the financial crisis, which has been the weak growth of productivity, of output per hour worked in the economy, and the implications that you think that has for the underlying potential growth of the economy. So, that's the key driver, particularly of living standards, real earnings growth, et cetera, and that is relatively weak by historical standards.
But the challenge we've confronted throughout the 10 years that we've been doing this job is: what weight do you place upon that period of relatively disappointing performance versus the stronger performance that you saw on average over the decades since the war? You started off in a situation in which you thought maybe this relatively weak performance—it's happened primarily, not precisely, since the financial crisis, so presumably it must be related to that, and therefore, once the impact of the financial crisis recedes into the past, you get back to something more like the performance that you saw in the decades before, when we were used to 2.5 per cent a year growth, roughly speaking. Of course, as the period of weak performance has gone on, it's become harder to say, 'Well, this is down to something specific to do with the financial crisis, and therefore we can assume that there will be a bounce back from that', and so over time we have come more and more to assume that the medium-term outlook is that 1.5 per cent growth is the new normal, as distinct from the 2.5 per cent you would have anticipated beforehand. So, at one level that's how you would define it. It's a weaker medium-term outlook than you would have expected if you were doing this sort of exercise 20, 30 years ago.
The second thing, of course, is that the forecasts that we present there are, as forecasts of this sort typically are, pretty stable. It's 1.5 per cent a year over that period. We are not assuming that there is going to be a recession, a significant downturn. However, history tells you that at some point there will be one of those, and, indeed, history suggests that over any five-year period there's a 1 in 2 chance, roughly, that you'll have some sort of downturn.
So, the underlying picture is a weaker growth performance than you'd anticipated previously, the forecast at face value shows a stable path over that period, but, as our fiscal risks report, which we produce every two years, highlights, you should be operating on the expectation that the most recent economic downturn was not the last we shall ever see. The next one hopefully will not be as severe as the financial crisis related one, the last one, was, although those come along periodically, and so therefore there are risks to either side of that central forecast, and you would worry that you're more likely to see a downturn than it roaring well ahead of those forecasts, and that, I think, is how you would characterise it.
The other striking feature, obviously, with the labour market is the fact that you've had unemployment at a very low levels by historical standards. Employment has performed strongly, but wage growth has been relatively weak. A key question both for your tax forecasts and more generally is to what extent you think you're going to start to see real wages picking up more, productivity growth picking up more. Will the combination of eventually getting to a position when interest rates rise, the fact that unemployment is as low as it is—could this be encouraging productivity growth and therefore helping to give a boost to economic growth as well? So, I think those are the—. Andy, anything you want to add to that big picture?
You used the word 'uncertainty' in part of your analysis. I wonder if you could expand on why you used that word.
Well, history suggests that you do not expect any particular economic forecast to be correct in its entirety, and one of the key defining things that we have tried to do as an institution since we were created is that it's a lot easier for technocrats to admit to the degree of uncertainty that lies outside. We don't have a political reputational cost to committing to a particular prediction and then that turning awry. So, it's easier for us to admit that there are uncertain judgments there and around it.
So, there are always those uncertainties and one of the ways in which we reflect that in the medium-term forecast publication we do is to draw a fan chart of alternative outcomes that are related simply to the size and distribution of errors in past forecasts. So, that gives you some sense of that degree.
But, of course, you haven't done that in these forecasts. There's a linear line, isn't there?
Not in this one; we do in the economic and fiscal outlook. It primarily works better over the large macroeconomic indicators. So, we'd do it over inflation, over growth performance; you can also do it over revenues and spending more easily at relatively aggregated levels. Obviously, with new taxes, with reform taxes, you just don't have the historical information on a stable basis to be able to do that.
Now, there are clearly other uncertainties. As I say, one of them is the productivity. That's the biggest uncertainty over the medium-term outlook. Of course, there's Brexit. We've had a succession of periods of uncertainty of are you going to have a relatively disruptive or non-disruptive exit, what is the steady state trade relationship, migration relationship, et cetera, what choices will the Government have (a) available to it and (b) what will it make in terms of is it more interested in market access versus opportunities for regulatory freedoms, et cetera. So, there are uncertainties around that, but, if Brexit had never come along, we would still be saying that this is an unusually uncertain period given the story about productivity, and that productivity story is not unique to the UK. It's true across most industrial countries—more here than in most—that you've just seen far weaker performance in output per hour worked than in the previous period, and knowing how long that will go on for, whether this is the new normal—we expect some improvement, but less improvement than we used to, when we expected it and it didn't come.
I take the points you made about new taxes and points of reference in order to reach conclusions on forecasts, but wouldn't it—? Speaking as a policy maker, it would be easier for us, potentially, if we had a series of upper or lower forecasts as well as the median forecast to enable us to have richer conversations with Government about the policy choices available to the Government to deal with if, potentially, income from income tax, for argument's sake, is going to be lower than perhaps you would expect, or whether it's going to be higher. Now that gives us, then, the ability to have a far better conversation about different tax policies and how the Government would respond to those challenges than the simple straight line that we have at the moment. Would it be possible for you to begin to examine those potential opportunities?
I've always been wary of ranges, because you've got two point estimates, basically, and you're placing greater significance on those. I think the best value you can do, which we have tried to do in a couple of areas here and which we're trying to do in the UK forecast, is to give a sense of sensitivities. If you are x wrong about—you know, if the performance of employment rates or population or earnings growth in Wales were to differ by x from what you see in the UK, what does that mean in numbers? And I think there are a couple of examples in one here that we've—. I have a £6 million number in my head. We gave an illustrative example of if you have something reverting to its previous behaviour. So, I think, where we can, that's where we can add value better, rather than—as I say, rather than giving one number for people to obsess about, giving them two. They just obsess on whichever—
—the bad news or the good news one, but that sensitivity, if you can give a flavour of that, I entirely agree is helpful.
Can I carry on with your GDP comments there? If I'm straying outside your area, apologies, so please tell me so, but 2.8 per cent was pretty normal for 1997 to 2007 as an average; in fact, some quarters actually were running faster than we are running now, at 1.6 per cent in one quarter. So, if this is a new norm, it's a very poor new norm. You say there's a lack of increase in productivity, but, with borrowing costs low, with return on investment low, shouldn't we be seeing greater investment to improve productivity because, if you're making widgets, you're better off investing and improving productivity in making your widgets than you are in holding on to the money?
Well, one of the explanations that people put forward for a secular stagnation thesis of weaker output is that there are just not the profitable growth-enhancing things to invest in that there were. So, the extreme example of Robert Gordon, who is a United States economist, is a pessimist about long-term growth prospects and about productivity, underlying productivity—his argument is, to simplify dramatically: 'You've had three industrial revolutions and that's your lot'. Technical advance is not showing up in a way that produces those measured improvements. I think there's an interesting issue about whether—we've had some discussion of this in the office, as to whether what appears in the published statistics to be weak productivity growth is actually more of a reflection of the fact that we are not measuring the fact that the capital stock is not, in fact, worth as much as it was in terms of what you can get out of it economically, because it's in the wrong places, and, as a consequence, the wrong thing. So, that might be part of the explanation for weak growth performance after the financial crisis. The puzzle is not, 'Well, why the hell is it so much more difficult for us to—? It's not like employees have lost an arm; why should we getting less out of them for every hour worked?', but, actually, the capital they're working with—if we were measuring it properly and we were depreciating it properly, they've got less effective capital to work with.
Andy, you've thought about this a lot more than I have. Does that—? Have I accurately—?
Indeed. If you think about the period of fiscal consolidation and the big drop in sterling that happened 10 years ago, that changes profit opportunities and therefore requires the capital stock to point in a different direction, if you like. Then Brexit potentially does the same thing, and then you could possibly think about the future, and greening the economy does the same kind of thing. That kind of changing the capital stock is just very difficult for statisticians to measure with an inventory model. It's one in a long list of possible explanations for the productivity puzzle.
One other thing that you might think about in this context is uncertainty. If you are in an uncertain environment and you've got the choice of whether to invest in new capital or take on a few new members of staff who you can then get rid of if you turn out to have made the wrong call, then it's easier to do the staff than it is to invest in the new kit, and that might be one of the things that's holding back investment, certainly at the moment.
Of course, we had a 15 per cent reduction in the value of the pound in 2016, didn't we, when we voted to leave. And also Fukuyama was wrong when he said the end of history—. I can't remember the other American who predicted in 1900 that everything worth inventing had already been invented. Perhaps if you ever meet this Mr Gordon you ought to mention the words 'artificial intelligence' to him, as the fourth industrial revolution. But can I perhaps move on to this question that I ought to be asking?
I think you should get him in here for evidence.
Two of the taxes—land transaction and landfill disposals tax—are dealt with by the Welsh Revenue Authority. What discussions have you had of your predictions with the Welsh Revenue Authority?
Well, obviously, in terms of the modelling process, they are turning the handle, so there will be discussions then in terms of what methodologies—is the methodology appropriate, is the toolkit appropriate, are there things that you need to do to that? And, as Andy said, there are some areas of thinking about that toolkit that has been going on long before we had this, and, with the different methodologies that we've used on land transaction tax—this would be a case in point there—there are different approaches that you can take on that.
The other thing on the substance of how the tax system operates in practice would be compliance. So, again, there might be issues. If you're trying to look at explanations for why land disposals tax generated more—. Our forecasts, you know, things have been turning out pretty much in line with March 2019, but better than March 2018. Part of that could be because of relative compliance effort on the part of the Welsh Revenue Authority plus others. So, that's another area where it's useful to get a sense, in addition to just the nuts and bolts of what the spreadsheet looks like.
Okay. Thank you very much. And, finally from me, what other data sources were used for forecasting tax revenues as opposed to—? I mustn't move into income tax because other people will ask questions on that. So, in terms of forecasting, in trying to get it right—I'm assuming that we're going to have a recession sometime and you could be catastrophically wrong, but whoever was doing it would be in exactly the same position, so that's not a criticism—how confident can we be in these proposals, in these predictions?
Well, there are some that are—. One way of thinking about that is to look at the volatility of how these things have moved in the past, which gives you some sense of how confident you can be of any prediction that's going forward. And a good case in point there would be you would expect a land or a property transactions tax to be more volatile, to swing at the revenues, to swing around a lot more than they would do for a tax that's basically a tax on labour income. Partly because predicting house prices is difficult enough, but more important, quantitatively, is knowing what's going to happen with transactions, both in terms of what your near-term indicators are, but also, you normally have to make some sort of judgment about what is the level of transactions going to tend to, which you would say, 'Well, what's your expected stock of housing, how frequently would you expect that stock to turn over?' And, so, you have those challenges there.
There are also the uncertainties that arise out of the fact that a property transactions tax—. If I'm forecasting the income tax receipts we're going to get from everybody around this table, you're all, hopefully, going to be earning income year after year, and, therefore, that's a basis. Now, if you were trying to predict the amount of housing land transactions tax we would get out, you're not all going to buy and sell houses every year, so that same richness of data is not there. Is the information that you've got, or the judgments that you make about what's going to go on with the housing market as a whole, going to be an accurate reflection of the particular sub-set of properties that are transacted on in a particular period? So, the nature of the economic determinants and the slighter broader determinants would lead you to be—. You need a much larger dart board to try to aim the darts at for land transactions than you would do for the income tax one.
On the landfill, there's more administrative—. It's less economically driven. There are judgments there about (a) what's the quality of your starting data, but then, capacity; alternative ways of disposing of the waste; what's the mix between the different sorts of waste, et cetera. So, you've got a very different set of things that you can get wrong around that, which are less related to an economic forecast and for which there is less data and less analysis available. So, they are three quite difficult animals, different animals, in terms of predicting what their behaviour is going to be.
Yes, it's on this theme. So, how do you actually monitor, and then attempt to improve, I guess, the model, so that it's a more accurate forecast? You were way out, as was Welsh Government, on landfill tax, and it's interesting to read that that maybe because the compliance levels at HMRC were lax. I have to say, in my experience of them, that's a slightly unlikely scenario, I would have thought. The initial estimate was wrong. One could understand that; it's a new system and we just got that wrong.
What's your working conclusion at the moment, and then, how do you tweak the model, and what sort of methodology would you be using in future, then, as you are modelling our tax-raising powers and forecasting other revenue?
Well I think, generally, we have an approach that we take not just on these taxes but across the tax system generally of a set of criteria, which we set out in here, of what are the characteristics of a good model in terms of the toolkit you're using to produce these forecasts. And we review different models at different times, focusing on those where we think the need is greatest but wanting to get to others as well in terms of their accuracy, their transparency—is it a model that is just a black box or can you actually tell why it's giving you a different answer from the one it gave you six months ago—and your ability to use it with the speed you need to do with levels of forecast.
In terms of other judgments that you're looking back at and areas for potential improvement, in many cases, the forecasting challenge is a combination of knowing where you are today and then knowing how things are going to grow or decline thereafter. And normally in the UK income tax context you might feel reasonably confident about the amount of revenue that you got in last year and then the uncertainty is what's going to happen to employment and to earnings growth looking forward, and therefore are you going to be right about how much the initial pot has moved. There's a different set of challenges that come when you don't know where you're starting from. The moves in the case of the land transactions tax is one example, but also the flagging of taxpayers on the income tax side. So, obviously, we saw in Scotland an example: when you first got proper outturn data based on flagged taxpayers, it suggested that the bigger problem was being wrong about where your starting point was, rather than looking further. So that is hopefully something that is resolved—
So you'll be looking at this further and your hope would be that that is, in large, the explanation.
Well, I think there's no reason at the moment to believe that there should be as big a surprise coming for Welsh rates of income tax as there was in the Scottish context, but you can't rule it out. So, in that sense, learning those lessons and applying—not so much applying them, but being wary for the reasons that the Scottish experience has taught you that to be wary will be important. Do you want to add anything?
When we looked at the Scottish experience, you could break down the error into some things that, in hindsight, we can see we should have used other supplementary data sources to help, and we do that now. So that's already incorporated in the Welsh rates forecast. There were some issues with addresses in the survey versus the flagging of the taxpayers, where that could happen again, but my sense is that HMRC have also learned some lessons and are on top of this. The National Audit Office are auditing their processes as well. So, never say never, but that feels like it's in a better place. So, there were some lessons that we have been able to apply and have done, so we would hope not to see a 7 per cent surprise on that side.
And in your general approach to modelling and the forecasting that permits, do you take a precautionary approach? At least in this case you underestimated the revenue, because obviously it's much more disruptive if your forecasts are indicating more robust revenue than in fact actually accrues.
No, we're very clear, we're trying to produce a central forecast. It's our best estimate that it's 50 per cent—
So getting it wrong in this way is as serious as if you'd actually overestimated the revenue and it had been much less.
Yes, as I said, from our point of view, we are trying to produce a central forecast. From a policy maker's point of view, as I said, the—
No policy maker should bet the farm on any particular forecast being correct, and the judgment you have to take—
It's not for me to say. [Laughter.]
And it is therefore for them to decide what level of caution that you feel you need to take. We did have, obviously, in the UK context the Labour Government from 1997 deliberately producing what it said were forecasts based on cautious assumptions about the rate of economic growth. Not cautious enough, as it turned out, in terms of what has happened subsequently. But I think it is much cleaner for us to give you our best judgement or for us to give Governments our best judgment and for them to decide how much you want to, on a central forecast, overachieve your objective in order to give yourself that cushion.
Obviously, in the context of Governments that are operating fiscal rule systems, there's quite an explicit consideration of what margin for error do you have and then, coming back to your point, you consider, 'Well, what are the sensitivities?' and 'Are there many things that could exhaust that margin for error or is it adequate in that sense?' So that's a challenge for the policy maker more than it is a challenge for the forecaster.
On income tax, one of the big questions initially was on identifying who the Welsh taxpayers are and major errors could have serious complications. You've based your models on figures that come from HMRC. How confident are you now? We can see the number of errors going down, but how confident are you now that what you have, in terms of that data from HMRC, gives you a solid basis for making the assumptions and the predictions that you made?
I think what we're probably coming back to is the answer to the last question. HMRC are obviously partly seized of the Scottish experience, have devoted effort to this. There's an opportunity to see where some of the difficulties arose there and you've also got the activities of the National Audit Office helping on the side as well. So, again, it's hard to say quantitatively how confident you are, but work is focused in the right direction there. We wait to see with the outturn to what extent there's a difference between the survey and the other measure. There's obviously the possibility of behavioural responses, which you would be more concerned about if you were in a situation where you thought people were responding to either the reality or the expectation of very different sets of tax rates across the border, which would further complicate you and make you more worried about whether people would try to game the system by pretending to be on one side of the border rather than the other, or when they had a legitimate choice of being on one side of the border or the other if they owned two properties, for example, where they are, and actually people moving. So, in the absence of those sorts of large incentives you might be less anxious about that. Then there are the little technical issues of what do you do with properties that are bisected by the border. But there are 34 of those, so presumably we don't need to worry too much on that side.
Some of the questions basically are all coming round to the same point. You're confident that the model that you have is the most robust model that you could possibly employ at this stage, although it might change, I guess.
Yes, I think so. We've got, yes, the technologies. There's not a glaring gap there. Clearly, the issue is occasionally raised. Would we be in a very different, a much better position if we were able to apply a specific Welsh macroeconomic forecast on top of this? As we've discussed here before, it's not clear that that would necessarily help very much, and the delineation of the Welsh economy in the way you might think of this in the governmental context versus where revenue is delivered from is not a straightforward feed through. So, I don't think—. There are always ways of improving. There's always a necessity to keep these things under review, to scrape off barnacles, to look for new information, to exploit real-time information. So that's been at the UK level a source of a greater ability to see what's going on with earnings, growth, at different parts of the income distribution, and those sorts of things are helpful, but I don't think we see any glaring bits of toolkit that we could have but don't.
Yes. Particularly now that we have a full year of outturn for both of the fully devolved taxes. They are now models that are based on a full year of outturn. So the starting point uncertainties have been taken away from both of those forecasts and both of them were subject to quite big surprises in year 1. The income tax side—. The survey of personal incomes is huge. Real-time information is essentially a census of employees. So, we couldn't really have better information on the pay-as-you-earn side of income tax. So, there is a data point to come with the C-flagged income tax payers and how that marries up with what the self-assessment system flows into the survey of personal incomes. But there is no better way of getting at that at the moment than the way we do.
And that's true for the different segments of different income earners as well. Are you happy that it works as effectively for the different groups?
So, clearly, it does not work as effectively for self-assessment payers as it does for PAYE payers because of the real-time information. But there's no other source that would give you a better picture until we have the C-flagged outturn next summer.
Thank you. With regard, then, to your model, in terms of income tax forecasts and the Welsh Government's own policy-driven model, is there any propensity for any divergence in that forecasting?
We haven't done a kind of decomposition of the Welsh Government's forecast versus our own to see what comes from judgments and what comes from components in the model. I don't think, a priori, there should be big differences—
—because it's the same data source. The one we use is the HMRC one, which is the full raw data that HMRC are allowed to see. The one the Welsh Government uses is what's known as the public-use tape, which is kind of anonymised and slightly aggregated in places. But the Scottish Fiscal Commission also use the public-use tape. We have done more on analysing how the SFC and our own forecasts work, and the modelling hasn't been a source of big difference. What's been a source of difference in those forecasts has been that the way they forecast earnings growth is different to the way we do and therefore, there's a kind of—. It's things you put into the model that are causing differences rather than the model itself.
The cranking of the handle, as you've referred to many times today. So, changes in the forecast of the Welsh income tax revenue for 2020-21 has fallen slightly compared to the March forecast. So, what do you think the key determinants have been behind those differences, and are they due to economic factors? You mentioned modelling. What other determinants are there for that?
So, the largest source of change was the latest outturn data point for the Welsh share of total income tax. So, that boils down to how we projected from a survey year in the past, one year on, and how that compared to the outturn number. So, the outturn was slightly lower. The size of these forecast revisions is, I think, small, relative to, say, the Scottish experience with the first outturn. So, I think these are the kind of tens of millions on a £2 billion forecast that are to be expected. I think larger numbers are probably to be expected at times where either the economy moves more differently or there was a big policy change that needed more uncertain judgments.
You've mentioned, in the Scottish experience, the 7 per cent issue, and you've mentioned that you've put those lessons into learnt behaviour as you move forward. So, is there anything further to what you've already added around the dynamics that may or may not be able to be in-built that you are anticipating now as you move forward with the systems embedding?
So, the thing that we particularly did after reviewing that number was to place more weight on the real-time information from the PAYE income tax system for projecting the past. So, we start with a survey that's a couple of years out of date. We know UK-wide revenue right now, and so it's how you triangulate between them to work out what in that is the Welsh rates component. We put more weight on RTI now. What we then do for the future is we look at what we know about projections for population, which we factor in, what we know about how the income tax system is changing and how that would have a different effect in Wales to the rest of the UK—so, particularly, the per capita cost of moving the personal allowance is higher in Wales because of the income distribution. We do not currently make any assumptions about differences in future rates of earnings growth or future rates of employment growth—history would tell you that those things move pretty much in line, most of the time, but not—
No, we're not planning on changing, but what we are doing, with additional resource that the Welsh Government is paying for in the OBR, is looking more closely at the history of these things to see if there is any refinements we could make to forecast assumptions that would help, perhaps even only just over maybe the first year, where you have a certain amount of information about momentum in earnings growth or something.
Okay. Fine. And finally, then, with regard to landfill tax revenues for 2020-21, again, they've slightly fallen compared to the forecast. So, what changes of note within that calculation of those forecasts have you introduced? Or do you not feel that there is a need, bearing in mind the margins?
So, essentially, there are two main changes there: one is that the outturn, the quarterly numbers, were slightly lower than we expected. Arithmetically, that is because the seasonal pattern differed from the seasonal pattern of the landfill tax over the preceding years and we had used that as the basis for the forecast. What we don't know is whether that then means that the seasonal pattern in Wales will always be like it was last year or whether something happened somewhere that meant less got sent to landfill and more was dealt with in another way.
We did also make once change to a forecast judgment in relation to the pace at which non-local authority waste will decline over time, which is, basically, to use a shorter moving average than the one we had been doing.
And finally, if I may, Chair, with regard to local authority forecasting, how much of an issue is that in terms of the broader ability to be able to forecast, or is it not relevant?
In terms of landfill or—?
In terms of landfill, it's one of the things that the analysts in the Welsh Government are very closely on top of, much more so than in our UK-wide forecast. So, they are looking at local authorities' plans, local authority by local authority.
Generally, then, from your modelling—any relevance at all? I mean, how would you rate it as an issue or a non-issue?
I think, as with many of this type of forecast, the thing that we have to do as forecasters is try and see whether there's any wishful thinking in the plans, and that's the main thing we discussed with the analysts about the landfill side. I don't think we do a great deal of other work with Welsh local authorities.
If you're thinking more broadly about how important a local authority is in the UK-wide forecast et cetera—and that has been an area where it's very difficult to get a firm grip on what local authorities, in aggregate, are doing, and how they are, in particular, responding to either squeezes on their central Government funding or, on some occasions, unexpected ability to raise more tax revenue or better elements there. So, the sorts of judgments we have to make about whether local authorities are, in aggregate, likely to take money out of their reserves, or put money in in order to get from the information we have about the money that local authorities get to a forecast of what they're going to spend, is not straightforward. It's an area where we and the Treasury in London would have a shared interest in getting more information on a more timely and accurate basis on what's going on there. So, that is always a challenge, relative to the other bits, given its size.
Okay, thank you. Well, if there aren't any further questions, we've come to the end of our allocated time slot. So, could I thank you once again for your attendance, both of you, this afternoon? You will be sent, as always, a copy of the transcript to check for accuracy, but your evidence has been very, very valuable and will be an important part of our deliberations. Thank you very much. Diolch yn fawr.
We'll therefore, as a committee, move into private session, as agreed earlier today. Diolch yn fawr. Thank you.
Daeth rhan gyhoeddus y cyfarfod i ben am 14:00.
The public part of the meeting ended at 14:00.