National Assembly for Wales

Peredur, I'd better declare that I'm still a councillor on Monmouthshire County Council, because there is obviously a discussion with Welsh local government later on. 

And I'm also a community councillor in Penyrheol, Trecenydd and Energlyn until the election in May. So, just to note those points for the record. 

We have some papers to note. I propose, if we can, just to note those, unless anybody has got anything further to say about them. That's fine. That's excellent. I'm seeing lots of nodding heads. 

If we move on then, and welcome Richard Hughes and Andy King. I don't know if you want to just state your roles for the record. Andy, maybe, first. 

Good morning. Thank you. I'm Andy King, I lead on fiscal issues on the budget responsibility committee at the Office for Budget Responsibility. 

Thank you very much. And Richard. 

Good morning. I'm Richard Hughes and I'm the chair of the OBR. 

Lovely. Diolch yn fawr ichi am ddod; thank you very much for coming this morning. We'll crack on with some questions. We've got you for, hopefully, three quarters of an hour. We've got a stack of questions for you. Thank you very much for being willing to answer them for us, and for all the work that you've done so far for us as well. I'd like to start by understanding a little bit about the macroeconomic data that you use to model Welsh tax forecasts. I'll throw it out there: how does the OBR use UK macroeconomic data to model Welsh tax forecasts?

Maybe I can start out by talking about how we put together the macro forecast, and then Andy can probably say a bit about how that translates into how we then forecast Welsh taxes. And in doing so, I think you may also be interested, perhaps, in some insights into how the economy has unfolded since we did our last forecasts back in October.

Our last forecast was in late October, alongside the Government's budget, where we were forecasting the economy returning to its pre-pandemic level around the turn of the year. That is broadly what we've seen in the data since then. We had a slightly weaker October, but we just had a gross domestic product number today for November of 0.9 per cent, which was slightly stronger. This was all before omicron arrived in December, which we also weren't able to take account of in our October forecast. But, generally speaking, we were forecasting the macroeconomy reaching its pre-pandemic level around the turn of the year. It looks as though, based on the latest Office for National Statistics data, that's about where we'll be, taking into account the slightly weaker October than we forecast, slightly stronger November than we forecast, but then, what's likely to be whatever effect omicron has on consumption and output in December.

The other variables that are important for putting together our UK-wide macro forecast, especially as they relate to Welsh taxes and Welsh income tax, are the inflation picture and the unemployment picture. On employment, obviously, the number of people in work matters for how much tax we're collecting in income tax. When we were doing our forecast in October, we were forecasting a slight tick-up in unemployment from its current rate, from around the 4 per cent to just above 5 per cent. The latest read on unemployment is still in the low 4 per cents, and so it looks like the labour market picture was even more favourable than even we were thinking back in October. In October, they'd only just closed the furlough scheme, so we were still unsure about how many people who were coming off furlough were going to be going back into employment versus ending up on unemployment rolls. We forecast more of them ending up in unemployment than it looks like, at least immediately, has turned out to be the case. So, the employment picture is looking a bit better than we forecast, even back in October, which itself was an improvement on what we were forecasting back in March.

The final thing that matters for income taxes is obviously inflation, because people are taxed based on their nominal income, and particularly at the moment because the income tax thresholds are frozen, the more inflation you get, the more income tax you get. We were already forecasting inflation reaching around the low 4 per cents next year. We've seen some very strong inflation reads in the last few months. The consensus forecast for inflation next year has already been creeping up from the low 4 per cents to the mid to high 4 per cents. And while that creates a challenge for people's living standards, there are some upside potential benefits there on the income tax side because you're taxing higher nominal incomes and you're also getting more people being dragged into the income tax system because the thresholds have been frozen for the next few years. 

So, those are the main ingredients that go into our forecasting of your most important tax, which is income tax, which is the overall macroeconomic picture, the employment picture and the inflation picture. Maybe Andy can say a bit about what we then do with our UK-wide macro forecast to translate that into estimating what we think the Welsh share of income tax will be. 

Maybe, Andy, you could look at how you refine that model to mitigate some of those risks and things that are coming through. Maybe you could talk that through. 

Yes, certainly. As Richard said, the largest tax we forecast for you is the income tax. We forecast that on a UK-wide basis and then we forecast the share of it that we expect to relate to Welsh taxpayers, and, indeed, then, the share of that that will be subject to Welsh rates rather than reserved to the UK Government. The data sources for that are varied. We start from the HMRC survey of personal incomes, which is a huge survey of customers in touch with HMRC, which is published with a long lag. I think the latest data is 2018-19. We then forecast the past to get to today, which we can do in some detail for the employee earnings because of the real-time information system related to PAYE tax. And since that's about 80 per cent or more of the tax base, that gives us a good handle on what has happened in the intervening years. We also have an outturn estimate for Welsh income tax revenues for 2019-20. So, we get to today by using the available data, which covers much of the tax base but not all of it, whereas UK-wide, the tax data is very timely—more timely than economic data—so there are often moments where we think we know something about the economy via what we see in tax receipts before it's confirmed in the economic data.

I think Mike wanted to come in with a supplementary.

What I was going to ask is: with the freezing of bands, with England having more people on the higher bands, and therefore I would estimate—you can tell me if I'm wrong—more people close to the different higher bands, will freezing the bands have a detrimental effect on Welsh tax compared to tax in England?

Actually, it goes the other way, because there's a higher proportion of taxpayers in Wales that are close to the personal allowance. Because of the shape of earnings distribution, that actually dominates the effect of the number of taxpayers near the higher rate threshold. Where there is a big difference in the other direction is towards the additional rate threshold at £150,000, where nothing has changed. That threshold has been frozen for a very long time, so that was already baked into the forecast. So, actually, it's a modest beneficial effect for the Welsh share of income tax from the freezes.

Thank you.

Great. Okay. With the policy announcements we've had from the UK Government in the autumn budget, what do you think has had the biggest impact on the OBR's forecast models?

Maybe I can start, and again Andy can supplement. I suppose the first thing to say is that, compared to our forecast in March, in our pre-measures, so before taking account of any policies announced in the October budget, forecast for receipts was up considerably. For income tax receipts it was up considerably by about 10 per cent UK-wide, about £20 billion of extra revenue per year, and that was really driven by three factors. One was the better employment picture, so just more people in work in the near term, less frictional unemployment coming out of the pandemic. The second was that over the medium term we reduced our assumption of the long-run scarring effect that the pandemic was going to have on output and therefore on incomes from 3 per cent to 2 per cent, based on the encouraging data that we'd seen, both about the labour supply picture, as well as about the investment picture, and some revised estimates of the impact of the pandemic on productivity. So, there was just more GDP and more real earnings being generated over the forecast period. And then, finally, the higher inflation picture, as we've discussed, meant that more of this income was going to fall into the tax system.

So, even before taking account of the Government's policy package, the income tax outlook was looking better, both for the UK and therefore for Wales. Then, when you layer on top of that the measures that the Government announced in the budget, at the macro level, in the near term, it was a fiscal loosening, because the Government was spending some more money in the next few years in its spending review and then clawing some of that back with its health and social care levy over the medium term. But in the next few years, you had a sort of net fiscal loosening, and that boosted demand and therefore boosted earnings and income tax in the next few years. But I think when you look at other aspects of the policy package and its effects in particular on the Welsh rates of income tax, the national insurance rise and the health and social care levy, which is a reserved tax, eats into some of the income tax available through the Welsh rates of income tax, because it basically has a knock-on effect on earnings and employment. The net effect of those two things is that the Government's policy package boosts receipts for Welsh income tax in the next few years because of that net fiscal loosening coming out of the Government spending review, but then it slightly reduces the take from the Welsh rates of income tax from 2024-25 onwards, because of the effect that next rise, and then the health and social care levy, when it comes in, has on slightly eroding the tax take from Welsh rates of income tax. I think that's right, Andy, but you'll correct me if I'm wrong.

Spot on, yes.

Lovely. And one final question from me, before I move on to Mike. What effects could different approaches to COVID-19 restrictions in Wales have on devolved Welsh tax forecasts?

We don't, for the moment, forecast a separate effect from public health restrictions in Wales compared to the rest of the country. I should say, generally speaking, that we have been very surprised by how uniform the effect of the pandemic has been across the different countries and regions of the UK, by contrast with some other bigger countries like the US, where you've seen different economic effects in different parts of the country. We do seem to be a very integrated economy and a very integrated society, and, as a result, both the virus spreads around very quickly and the economic effects tend to spread around very quickly. And the other thing to say is that you seem to see economic effects from the pandemic one way or the other: you either get them through tighter public health restrictions or you get them through greater voluntary social distancing on the part of people who are just afraid of catching the virus or passing it on to other people, even if public health restrictions are looser. And so, in that sense, we haven't seen a huge difference in the economic or fiscal performance of the different nations and regions of the country, depending on different public health approaches. At the margin, perhaps what it does is move some economic activity from one month into the next, depending on when restrictions are put in place and lifted with a bit of a rebound, or a stronger rebound, when restrictions are lifted, but we have been surprised at how little difference there's actually been between the economic performance of different nations, even after you take account of different public health restrictions.

Okay. Thank you very much. I'll bring Mike in, then, please, thank you.

Wales, as you know, has a higher proportion of its workforce employed in manufacturing, and engages in more manufacturing than England. I don't want to go into Brexit in detail, but the Northern Ireland protocol and changes with our dealings with the European Union, is that likely to have a more adverse effect on the Welsh economy, or will it be very similar to that in England?

It is the case that because manufacturing depends a lot on cross-border supply chains and Europe-wide supply chains and the import of inputs and the export of goods back to Europe, the operation of the trade and co-operation agreement really matters for the efficiency of manufacturing. And we haven't done a differentiated impact of Brexit on the different nations of the country, but it is the case that, when you break the impact down by sector, manufacturing is one of the most exposed to the imposition of any kind of friction at the border, although I should also say that services are completely outwith the trade and co-operation agreement, and so there are also big implications of our departure from the EU for the sort of relatively service-heavy economies of places like London and the south-east of England. So, on balance, it can be difficult to say at this stage whether manufacturing or services will be hardest hit, because some of our service industries depend very much on people being able to operate and sell goods in the EU. But it is however the case that, looking at the UK as a whole, we do expect Brexit to have a long-term impact on the level of potential output in the UK, to reduce it by about 4 per cent. And the data that we've seen so far in terms of trade flows, on which that estimate was based, is more or less in line with that estimate of about a 4 per cent UK-wide reduction in output.

I believe Rhianon might have a supplementary question, or something related to that.

Thank you, Chair. In regard, then, to the Northern Ireland protocol and the uncertainty that both the pandemic and Brexit is having in terms of trade and exports and the 15 per cent trade reduction that's been predicted and the 4 per cent overall long-term loss, I just wanted to explore a little bit, if I may, around the ranges that you're talking about. Is this a prediction that is a mid-term range, a worst outlook, a positive outlook, in terms of your assumptions? I just want to get more of a picture in regard to how certain you are around those predictions, bearing in mind the uncertainty that runs throughout the whole of this and what you've said in terms of the longer-term effects of the trade and co-operation agreement impact and Northern Ireland renegotiation aspects of—. I'm sorry that's not a concise question.

No, no, it's a very good one. So, our forecast for the long-term effect of leaving the EU on the basis of the TCA, we think is pretty central, and when you look at it compared to estimates produced by other independent bodies, academics, other independent economic institutions, it's more or less in the middle of a range of estimates, some of which are higher, some of which are lower. I think one of the—. But there is a great deal of uncertainty surrounding these kinds of estimates, in particular because most of the estimates about the impact of trade on GDP are estimated by looking at the impact of increasing trade to increasing GDP, because most of what we've seen over the last 50 years has been countries doing trade deals and doing more trade as a result of those trade agreements. Brexit is quite unique in that what we're doing is unpicking a free trade agreement and going to something that is less open and that allows for less trade. And it's not necessarily the case that when you run these models forward and run them in reverse you get precisely the same effects, but, in effect, what most of these estimates do is essentially try to run a free trade agreement in reverse and say, 'What happens when you go from a more open trading relationship to a more closed trading relationship?' That is essentially what drove us to the reduction in trade you'd expect to see based on the frictions that you're introducing at the border around trade, and then what happens when you have a reduction in trade, what that implies for GDP, because you're basically giving up some comparative advantage, you're missing out on some trading opportunities—that has the long-running impacts on the economy.

In terms of what we've seen so far, it does give us some confidence that these numbers, based on one year of this trade agreement being in place, look about right. As you mentioned, both the negotiations themselves and the uncertainty around the implementation of the agreement has meant that, in particular, investment has been very flat—has been essentially flat—since the referendum, because businesses have been seemingly reluctant to invest until they understand the precise nature of trading agreements with the EU, especially in areas like manufacturing.

The other effects that we think we've seen in the data that is partly a Brexit effect, partly a pandemic effect, has been the fact that there's been lower net migration into the UK. We think that net migration is about 170,000 lower, as a result of a combination of Brexit and the pandemic over the last few years. Over the medium term, we assume that we'll get about half of that back, but, in net terms, we're still losing about 85,000 fewer net migrants into the UK. And that also has an effect on the economy, because there are just fewer people working in the UK, fewer people paying tax. And so, on top of the effect that you have from lower trade, you also have an effect of lower immigration of people.

Mike.

Thank you.

The final question from me: do you expect the Welsh rate of income tax to be affected by a divergence in Welsh and UK bases over the medium term?

Andy, do you want to have a go at that?

So, what's factored into the forecast is a divergence due to relative population growth rates. So, the projections that are in the forecast, which date from a couple of years ago, have slower population growth or slower growth of the adult population in Wales than in the UK. So, we factor that in, as mentioned earlier, also factor in the convergence that comes via the tax threshold freezes. But there are lots of other things that could cause divergence or convergence that are currently not—or essentially that we forecast to be flat, which could go either way.

So, we'll continue this discussion this time next year.

Yes, indeed. There were new population projections out yesterday—no, two days ago—that we need to look through. They have different consequences, but we need to understand the sources of those. But the big question is whether relative productivity—. So, productivity is, of course, lower in levels terms in Wales, and there have been some periods of divergence and periods of convergence, and those will drive differences in the relative growth rates, which, of course, is what matters for the budget here. 

Thank you very much.

Thanks, Mike, and thanks, Andy. Peter.

Thank you, Chair. Good morning, both. Just a final question on the WRIT. I know that you've reported that there are uncertainties around the input data of the WRIT forecast. I just wondered if you could elaborate on some of those uncertainties around the survey of personal incomes, and give us, perhaps, some further insight into that.

I wouldn't want to overstate them. The picture has improved considerably over the past few years. So, the survey of personal incomes, the sample size is huge—it's almost 800,000—but, of course, it's smaller in Wales, so the sampling variability in that particular survey is larger in terms of Welsh tax revenues than UK-wide. But what we do have now is the 2019-20 outturn estimate from HMRC, which is, of course, a census, if you like, of Welsh taxpayers. So, there's an outturn that we can calibrate to, and in fact, unlike the experience in Scotland—I know it was a large difference, a large discrepancy, between the survey and the outturn—that wasn't the case for the first Welsh outturn, which was encouraging. And, as I say, we have real-time information from the PAYE system, which is the largest component of WRIT revenues, and that's available monthly and HMRC are able to break that down in great detail. And that has actually been the source of something that was mentioned earlier on, our surprise at just how uniform the COVID shock has been across the country—across the nations, not the country.

So, the data is better than if you'd asked me this a few years ago. The big gap is on self-employment, self-assessment, which is a smaller part of the tax base, but somewhere where we are essentially blind until the outturn data are available and they are lagged.

So, I get from that, then, that you're pretty confident that the outturn data will mitigate against these uncertainties for the future.

They are in a much better—. We're in a much better position now that we have an outturn to calibrate to, and then real-time information data to take you forward another couple of years, yes. So, it's a better place.

Okay. Thanks for that. I've got a couple of questions on land transfer tax, if I may. I notice that receipts from land transfer tax have been upgraded from an average of between £51 million to £47 million between this current year and, I think, 2025-26. I wondered if you could give us some of the reasons why you believe that residential and commercial land transaction tax receipts are significantly higher than previously forecast. And what assumptions have been made in modelling those forecasts?

Maybe I can kick off, and I'm sure that Andy will want to add some things as well. We have been surprised by the strength of the housing market, and I think nearly everybody is, even housing experts, both in the UK and—. And to some extent, these effects have been magnified in Wales compared to the rest of the UK. It seems to be the case that more of the savings that people built up during lockdowns when they couldn't consume, but they were either still working or their incomes were being supported by Government through the furlough scheme and other forms of Government support—more of those savings went into housing, either in the form of upgrades to housing or people using them as down payments for going to make a housing purchase.

The second thing that has happened is that the sort of race for space has led to the average house transaction to be of higher value than we've seen in the recent past, because people were looking to upgrade the size of their houses because they were spending more time in them and wanted more space for themselves and their families. And also the volume of transactions was very muted during lockdowns, but then picked up quickly as soon as the economy reopened, and so we've seen some big peaks in transaction levels once the economy reopened and people were able to go out and look for and purchase housing. So, the volume of transactions has also picked up sharply over the course of this year, although it's fair to say that transactions have actually been slightly depressed in Wales compared to the rest of the UK, although prices have been higher in Wales compared to what we've seen in the UK. And some of that is driven by, as I said, the sort of savings effect and the race for space. I think part of it has also been generated by the tax reliefs and opportunities offered, both by the UK Government and by the Welsh Government. So, that's what's driven the uptick in land transaction tax receipts in this forecast compared to our last one. I don't know whether Andy wants to add anything more about the specifics on the Welsh forecast.

No. I think that's right on the housing market. You know, it's very much a price story where we have had to rip up our previous forecast and write a new one after the outturn—[Interruption.]

Oh, dear.

A fire alarm. Fire alarm test—a test in London. That's obviously uncertain; housing market forecasts always are. The bigger uncertainty is around the commercial receipts, which have really outperformed by a very large margin, where forecasting is typically more difficult. We are assuming that roughly two thirds of the surprise, relative to what our forecasts and models would predict this year, persists into the future, though other assumptions are possible. I'm sure we will come back and talk to you again about large revisions, large surprises. But we took the view that we've been surprised on the upside a couple of times in this forecast, and it was time to make a more material revision on the back of another year of a strong performance.

Thanks for that, and I can see, then, the rationale for adding the house price inflation uplift for Wales; I can see why you might have done that. How does the level of house building affect your predictions? Because, clearly, if there aren't the houses being built in the future, how do you forecast what's happening? I mean, sometimes houses aren't being built anywhere near like we'd like or want. How do you square that one?

So, transactions in new builds are a smaller proportion of the total transactions that drive these taxes than the buying and selling of existing houses. So, the way we think about it is, at the UK level, we look at a kind of long-run ratio of transactions to the stock of housing, and the stock of housing takes into account new builds, but new builds add a very small fraction to the overall stock of housing each year. And that ratio anchors our UK-wide forecast, which in turn anchors the Welsh forecast. There have been big swings around that long-term average over past decades, with the financial crisis causing it to fall very sharply, and it is now back closer to that historical average, which is why transactions neither grow strongly or fall strongly in the forecast. Again, the fact that it does swing around quite significantly in the past tells you that this is another forecast judgment, around which there is a lot of uncertainty.

Thanks for that. Thanks, Peredur.

Just quickly on house price inflation: do you look at it on a Welsh basis compared to other regions of England and Scotland, or are we lumped in with the midlands or—? Is there a distinct figure there that you use, or a distinct model, and whether or not that is split down, then, over the whole of maybe the counties in Wales, so that we see if the market is hotting up in certain parts rather than others?

So, the way we do it is, we use the ONS version of the house price data. Most of our modelling is at the UK level. Then, we look at Wales in aggregate relative to the UK, and where there is a divergence, as the case is at the moment, then we factor that in, and the judgment we make is whether that divergence will continue and for how long. So, currently, we assume that things come back together over the space of a year or so. So, there is more momentum in Welsh house prices than UK-wide, so that's factored into the forecast. We don't then forecast house prices at a more disaggregated level, because what we then do is use the tax data that will tell us how the true composition of property transactions relates to the statistical measures of house prices. And, essentially, the statistical measures are trying to abstract from changes in the distribution of prices that are transacting, and the tax data is obviously the total opposite—you need to take that into account. So, the point Richard made about transactions being higher average price at the moment has pushed up tax receipts over and above what you would expect from the statistical measures of house price inflation. We assume that that will taper away, that that is a temporary pandemic effect. Again, another source of uncertainty in the forecast.

Thank you. Rhianon.

Thank you, Chair. In regard to the landfill disposals tax receipts, the £11 million upgrade is pretty significant, so what has driven the strong outturn data in the initial portion of 2021-22 in your opinions?

So, I think, unusually, the landfill forecast is a source of relatively large surprises and also uncertainty. I don't have a good handle on why the tax receipts have been so much stronger than expected in the first half of the year. It could be some rebound from the depressed year before, it could be some disruption in other ways of disposing, particularly trade routes. But we don't have a good handle on what has driven it, which is why, essentially, the forecast assumes that roughly half the strength we've seen in the current year will persist in future years, which is a common forecasting judgment where, in the absence of information, and there are two extremes—it could be all surprise, all one-off, and it could be all persistent—the average of those should be a robust judgment until more information is available. In the forecast, there's also more incineration use assumed, which has offset that slightly, which is why you have a spike in receipts, a spike in revenues this year that doesn't persist.

Thank you. So, in that regard, you've mentioned incineration. What is the assumption rationale for this additionality in use of incineration for 2022-23? What is it predicated on? Why are you assuming that?

So, analysts in the Welsh Government compile information for us from all the landfill operators and all the local authorities to underpin this assumption.

Thank you.

One final question from me: the OBR noted that you're presenting a detailed investigation of the effects of differences between Welsh and UK tax bases on its forecast in 2022. What work does this investigation involve and how will it inform your forecast modelling, going forward?

So, this is something we've been hoping to do for a little while, and the pandemic has diverted us. But the analysis that you can see in chapter 2 of our 'Welsh taxes outlook', that looks at all the different reasons why income tax per head in Wales is lower than in the UK. If we repeat that analysis for each year over the past and look into what explains both the difference and changes in that difference, then we may find things that we can predict. So, at the moment, as I say, we factor in the effect of relative population growth and the differential effects of policy measures, and, in between that, we assume that all other aspects of tax per head relativities will be constant in the forecast. So, that's the plan. Our hope is that we'll be able to present emerging conclusions some time in the summer and then publish results ahead of autumn forecasts, the pandemic and other shocks permitting. 

Thank you very much. I'm going to do another Columbo—just one more thing. What was the most surprising thing that you saw in the Welsh budget that you weren't expecting or that you had to then readjust your forecasts for?

Maybe I can say what the most surprising thing we've seen in the UK economy generally is, and if Andy's got any surprises about the Welsh budget he can supplement. The thing we've been most consistently surprised by over the course of the pandemic is how adaptable the economy has proven to be to the pandemic and to lockdown conditions. I think what we've seen over the course of several waves of the pandemic is the economy getting better and better at finding ways of staying open, selling people goods, keeping people employed and in their jobs, and people finding ways of buying what they want, be it online or other ways. So, I think it is the case that we are economically getting used to living with the virus, and if it turns out we do have to live with future variants of the virus, that's encouraging news about our ability to adapt to it, and that's been the case for the whole of the UK and I think you've also seen it in Wales. In terms of whether there have been any Welsh-specific surprises—Andy, anything surprise you from what you've seen?

Nothing jumped out at me. I'm a big fan of the chief economist's report, which is where I get lots of the information that we use in the Welsh tax forecasts. 

Rhianon has her hand up. Bear with me, hang on a second, Rhianon. There we are—try again.

Thank you very much. In regard to comments that you made at the beginning of the session, I think that there is no devolved nation-based impacts model around Brexit and the pandemic productivity impacts. Is there any plan for that in the future?

As Andy mentioned, there is, insofar as we can improve our understanding of the differences between the Welsh tax forecasts and the rest of the UK tax forecasts. We're unfortunately quite limited by what economic data you can actually get about the nature of the Welsh economy. Even basic numbers like gross domestic product and gross value added come out with a very long lag, and so it's hard to use them as the basis for producing forecasts, but you can do it to improve your understanding of recent history. So, we're somewhat constrained in our ability to do a Welsh-specific forecast of what's happening economically, and the same also applies to trade because all of our goods end up ultimately being recorded when they go through a port somewhere, and you don't know whether those goods are coming from Wales when they arrive at Dover or whether they're coming from the rest of England. We just know what the UK-wide picture is for trade.

I think, as we've alluded to, the biggest return we can get now is to get a better grip on the tax base for Wales's No. 1 source of revenue, which is income tax, and that's going to be a priority for us in the year to come. 

Okay. Thank you very much.

Thank you for your time this morning, Andy and Richard. As always, it's been very interesting talking to you and you've answered our questions fully. Thank you so much for your time.

We'll now go into a technical break for 10 minutes, whilst we get our next witnesses in. But thank you again, and I'm sure we'll continue this discussion at some future point in the year. Thank you very much.

Hi. I'm David Phillips. I'm an associate director at the Institute for Fiscal Studies, and I work on devolved and local government finance.

Wonderful.

I'll move into a question, and whoever wants to come in first, then they can do. A number of economic indicators show improved forecasts compared to earlier last year, and we were just talking to the OBR, and they were quite surprised with some of that. What does the current economic outlook mean for Welsh Government going into 2022-23, and what does it enable it to deliver that it may not have been able to deliver had forecasts remained less optimistic? So, basically, what can the Welsh Government—? Going into 2022-23, what can it mean for that delivery? David, yes.

Hi. So, I think there are couple of points there. I’ll say a few things, and I’m sure Ed—. I can see Ed as well. I just got in there just a bit quicker. So, I think the first thing I would say is that, on the revenue side, the fact that economic growth is set to be higher won’t necessarily have a big impact on the Welsh budget because what it would mean is that the Welsh revenues are higher, but because economic performance across the UK as a whole is essentially better, also the block grant adjustments will be higher as well, so there will be no net positive effect on the Welsh revenues, except to the extent that the Welsh economy would be expected to perform even more strongly compared to the UK economy. If actually there's more upturn in the rest of the UK, that might actually mean less revenue for the Welsh Government. That’s the first thing I would say.

On the economy itself and what that might mean, first of all, I think it’s really a stronger labour market, particularly for young adults, than was expected, and that’s likely to mean fewer concerns about scarring effects on workers, although there are problems of skills and labour shortages being reported, which mean that, I think, training and helping people into work is still an important policy focus, or should be a policy focus for the Welsh Government. And, I think, also, despite overall positive labour market news, some older workers seem to have dropped out of the labour market earlier than we would have expected, and this may be a bigger issue for Wales, given its older, less healthy population. So, actually, if things are looking brighter at the younger age groups, perhaps that's not so much the case at older age groups.

I think I’d also say that one of the implications of the strong economic outlook, whilst it doesn’t mean more revenues from the Welsh taxes because of the block grant adjustments issue I’ve just talked about, the fact the economy has performed more strongly, recovered more strongly and it’s expected to be less scarred in the long term has allowed the UK Government to increase spending by more than planned and still meet its fiscal targets by more than it previously expected. So, I think that has probably also been an implication: higher spend by the UK Government means more coming through the Barnett formula for Wales than you might have expected.

Okay. Ed.

Yes. Obviously, as David mentioned, labour, the employment market is one of those areas that is showing better signs than had been feared more recently. Unemployment had peaked at 5.2 per cent towards the end of last year, but that was down from the 6.5 per cent peak that had been forecast by the OBR previously. And, actually, the point on labour, the performance of the Welsh employment market is actually doing pretty well compared with the rest of the UK, and of course that's important when it comes to the devolved tax revenues. Wales has recorded a lower unemployment rate than the UK as a whole, on average, every single month since September 2019. That's the longest sustained period on record, although as David notes, the economic activity rates of some age cohorts is still an issue, and the economic activity rate is still 2 per cent below the UK average. But, in general, the labour market is a relatively good news story, or certainly compared with the previous forecast.

There are other areas. On economic output, the OBR revised down their judgment on the extent to which the pandemic has done lasting damage to the economy, so that's from 3 per cent to 2 per cent. Government borrowing is also revised down owing to stronger tax receipts. And in the last session you heard from the OBR about inflation. That of course does have some short-term positive effect on the tax take as higher earnings and more expensive products feed into the tax take, but of course that’s a risk in terms of the future that adds on to the potential for higher consumer prices, higher input cost for Government and public sector organisations, and so on and so forth. So, there are quite a large number of areas that have changed since the last forecast, the March 2021 forecast, but key to all of this, of course, is that the Chancellor has used that flexibility against fiscal targets to increase UK department spending, which of course feeds through the Barnett formula into the Welsh block grant.

We've heard about the new social care levy coming in now. How much of an impact will that have on Welsh Government's budget for 2022-23?

I believe, over the three-year period, it's on average £600 million a year that it's contributed to the Welsh budget. Obviously, the UK Government has opted to allocate a large proportion of the levy's funding towards healthcare, towards the NHS, rather than towards social care. I imagine that something similar is happening here in the budget as well, given the short-term pressures that the NHS is facing because of the pandemic-related backlog in elective care.

The one thing I would say is that it was beneficial for Wales that the UK Government went ahead and raised taxes, and used the UK tax base to raise this revenue rather than having the Welsh Government rely on its own tax base to raise the revenue using the devolved tax powers instead, simply because we do get then a population share of spending at a UK level, whereas we do raise less than our population share when it comes to the major payroll taxes here in Wales.

Okay. So, have you looked at all, with regard to the levy—? Obviously the money might well go into the NHS, but then the tax bill or the salary bill will be going up as well, because obviously those people are paying national insurance. So, have you done any analysis on what the balance would be? If the money goes in to pay, potentially, salaries, then it flows back to the Treasury through the levy. So, do we know what—? Have you looked at that at all? Maybe David, or—. David's got his—

I was going to say that in England, when the UK Government announced the expected revenues, it actually announced them as net revenues after accounting for the fact that there would be higher bills from the public sector. What it said it would do is that departments would be compensated for the extra costs they would pay on the employer side from the higher levy. Now, there's been a debate in England about whether that will cover not only the direct employment cost of the public sector, but also outsourced services, which is particularly important for local government with things like social care. I think Cian will know a lot better, or Ed will know a lot better, the situation in Wales. But that's how it's been handled in England.

Do we have any thoughts on that, Ed or Cian?

Just to add, in our projections of the spending pressures faced by local authorities that we produced back in December, we did incorporate some assumption about the increased costs for outsourced social care providers as a result of this increase to employer contributions. Unfortunately, I don't have the exact number in front of me, but if I direct you to the report that we published at the beginning of December, there is a figure there for social care in particular.

Okay. Diolch. The chief economist's report suggests that growth in living standards is forecast to be particularly sluggish. What are the key pressures facing households and how are these likely to manifest in 2022-23? And how can the Welsh Government support lower income households particularly affected by these issues, and to what extent does the draft budget address these matters? Cian, or—. Could we unmute Ed as well, just so that he can come in if he needs to? That's fine. Cian, I think, wanted to go first.

Yes, I'm happy to begin. I think there are two elements to this squeeze on household finances. First of all, you've got the long-term forecast for real household incomes, which is relatively poor. Between 2021 and 2027, real incomes are set to grow by, I think, around 1 per cent a year in real terms, on average. That's considerably below the past average of 2.6 per cent. And, of course, that comes on the back of a decade of weak earnings growth as well. And then, secondly, you've got the short-term pressures that are being caused by rising inflation and, in particular, the rise in energy costs. That's going to be felt particularly acutely at the bottom end of the income distribution, because we know that poorer households spend a larger share of their income on energy costs than their richer counterparts. We also know from the Welsh Government's housing conditions survey, for instance, that if you look at the social rented sector, nearly half of those properties are fitted with prepayment meters, so they will already be on a variable tariff that's already at that price cap.

In terms of what this budget does, I think topping up the discretionary assistance fund by £7 million is a welcome move. I don't think that it's commensurate with the scale of support that might be required over the coming months, to be honest. To put it in context, the Welsh Government announced £37 million for its winter fuel support scheme just a couple of months ago, and arguably the pressures that people are going to face as a result of rising energy bills are going to be just as acutely felt in a couple of months' time if the energy price cap is increased further. And then you've got some other things in the budget, like the expansion of free school meals and free childcare. Those are very welcome additions, of course, but they probably won't be implemented in time to address the short-term challenges that households are likely to face. 

Now, I should probably just stress that there is some intersection here with reserved responsibilities, of course, but I do think that there are some policy areas where the Welsh Government can take action. Maybe we can discuss this later, but I would say that the reform of council tax would be an example of that.

If I might come in as well. Some colleagues of ours at the IFS looked at how inflation might vary across the income distribution and, as Cian was saying, because poorer households spend more on fuel, inflation is expected to be higher for that group. So, for the poorest 10 per cent of households, inflation is expected to rise to about 6.7 per cent by April, compared to 5.3 per cent for the richest tenth of households. In that context, it's worth recognising of course that benefit rates went up or are set to go up in line with inflation as of September, which was 3.1 per cent. So, benefit rates have gone up by just half the rate of inflation, and even less than that for the poorest tenth of households.

As Cian was saying, I think it's fair to say that the Welsh Government has fewer levers than either the Northern Ireland Executive, which at least in principle all benefits are notionally devolved to, and the Scottish Government, which has the power to create new benefits. It used that to create pandemic payments, for example. As Cian said, there is scope to increase the discretionary assistance fund further, although of course a major expansion might be difficult, given the way that eligibility is assessed. It's not really a broad-base scheme, it's a case-by-case scheme. One thing I was wondering is whether it could be possible to set up something like Northern Ireland's high-street voucher scheme, which was a pre-paid card that could be spent in bricks and mortar retail, leisure and hospitality venues. That could be an energy card scheme or it could still actually be a high-street voucher scheme and people could spend that and then save some of the money and spend that on energy bills. And perhaps that could also not only help households meet some of the rising costs of energy, but actually provide a bit of a boost to bricks-and-mortar businesses in Wales as well, because, as money will be spent in bricks and mortar, not online, that could be of some benefit. 

Okay, diolch yn fawr. I'll bring Rhianon in, if I may, now with some questions. 

Thank you very much—some interesting ideas there. In regard to the predicted day-to-day budget, that is projected to be nearly £3 billion lower than if spending had been linked in line with economic growth. So, in regard to where we stand today, the new fiscal rules announced at the autumn budget and spending review are predicated on, in a sense, increasing the tax to GDP ratio to a very, very high level; I think it's been stated higher than since the 1950s. So, my question would be: what impact in real terms will these rules have on future Welsh Governments—Welsh Government budgets, sorry? Who'd like to answer that?

David.

Sorry—

It's the GDP ratio.

So, I was going to say—. So, I think the fiscal rules that have been put in place, it's worth noting at the moment there is significant headroom against those fiscal rules. So, against the current budget balance rule, there's around £22 billion-worth of headroom against that rule, given current forecasts, and that might suggest that the Government could actually substantially increase spending or cut taxes and still meet the rules yet, if those forecasts turn out to be accurate. But based on past forecast accuracy, there's still a 30 to 40 per cent chance that that rule will be missed, given how difficult it is to predict things three years out. And if you were to have such a large increase in spending or cut in tax, you'd end up then missing the other major rule, the debt rule. So, it wouldn't surprise me if there were some further giveaways down the line if these rules look like they'll be met—so, higher spending or cuts in taxation—but I think at this stage it's hard to say that's a shoe-in because of the difficulty in forecasting in the years ahead. 

One of the things the OBR argues about these kinds of forward-looking rules—. So, the rules are forward-looking in the sense that the target is always in three years' time, so every year it's always three years' time, so the targets get pushed back and back. And one benefit of that is you don't have to be making really sharp adjustments when you approach a target year. So, if you fixed a target year of, say, 2024 and a big shock happened just before, you either need to throw your rules out of the window or make a big adjustment immediately. By having a rolling rule, you've given yourself some flexibility to respond.

But the flip side is that the target never actually arrives, so there's a risk of the fiscal situation just slipping, and the OBR has said that what's happened in the past, actually, is that when good news comes up—when revenues are strong or spending is lower than expected—the Chancellor banks some of it but then spends some of that. When bad news arises, he just tends to accommodate that and allowing borrowing to rise. So, there's a tendency for the fiscal situation to deteriorate over time when there's an asymmetric impact of or asymmetric response to good and bad news.

So, what I think—. The reason I say this—it's a slightly convoluted conversation—is that I think, for the Welsh budget, it is more likely than not that there will be further either increases in spending or cuts in taxation down the line. It's not a shoe-in, however, but I think we also need to be aware that these fiscal rules could end up not being particularly constraining, and that could lead to problems further down the line, beyond the spending review period. 

Okay. I'd like to go into more depth but we don't have time, but that's very interesting.

The autumn budget and spending review was the first since 2017 to finally include multi-year information, but the IFS have outlined that some key decisions remain to be taken. So, can you extrapolate on the UK decisions that may be taken in the coming years, and how that would impact on future Welsh Government budgets also?

Maybe if Ed wants to come in on this; I don't know. 

Was that a question about the IFS, sorry, or—?

Yes. So, the IFS have outlined that key decisions still remain. They still haven't been taken. I'm sorry that I'm asking you to look into the future, and into that crystal ball, around those key decisions. Perhaps you could outline a little more— 

[Inaudible.] It might well be David then; sorry, Ed. [Inaudible.]

What do you think needs to be—? What decisions are not being placed?

Yes. So, I think I'd say there are some decisions that clearly matter a lot in the short term, and particularly for Wales, that we're still waiting for. So, for example, we still don't have much information on what the UK shared prosperity fund is going to look like and the allocations for that. I think that is going to be very important for Wales. What the UK Government has said is that it would at least match, initially, the sort of funding that Wales received under the EU schemes. There has been some debate about whether it's keeping to that promise or not, because the allocations in the years of the spending review look lower than the EU allocations. I think some of that is misunderstanding how the two schemes work. The EU scheme always worked on when funding was allocated, not when it was spent. So, EU funding is still being spent over the next three years, and the UK funding is then scaling up to make sure the total amount being spent matches what was spent under the EU scheme. 

And I will say that I think that, actually, in the longer term, there is a bit of risk to Wales that, if in the short term it's matched, that might not carry forward in the long term, because one of things—. With the EU scheme, there is this kind of cliff edge that benefited west Wales and the Valleys and Cornwall, which—it's quite hard to justify on a really strong principle basis why some areas like that get so much more than areas just a little bit richer like, say, South Yorkshire and Lincolnshire. So, I think, over time, there's a bit of a risk that, actually, funding could be switched out of Wales as the system changes. There might be transitional protection, and then—

Okay. I'm not going to disagree with what you're saying, David, but we know that the £36 million that we've had to date is not comparable with the £376 million that we were predicted to have had. So, I'm not going to get down that rabbit warren; I would just say that Wales needs to have what it was meant to have in that regard. 

Shall I move on to the next question? Wales Fiscal Analysis has estimated the Welsh Government's core budget for day-to day spending, excluding COVID-19 funding, in 2021-22, is going to increase by £2.9 billion by 2024-25 compared to the 2021-22 baseline, with the largest increases frontloaded for 2022-23. So, what are the implications of the three-year settlement, which everybody has been asking for, and how future years may look in comparison? I don't know who would like to take that. 

I can take that. Yes, the £2.9 billion, that was an estimate that my colleagues came up with in our budget outlook report that was published in advance of the draft budget, using UK departmental allocations, the latest block grant transparency data, devolved tax forecasts and so on to estimate the Welsh Government's core budget for day-to-day spending for the next few years. And yes, in that report, we estimated that, compared to the non-COVID 2021-22 baseline, core spending would grow by £2 billion next year, £2.9 billion by 2024-25. And, actually, with the publication of the draft budget, that estimate aligns very closely with the publication of the Government's draft budget. There's a very slight difference under the bonnet, if you like. We projected slightly higher draw downs from the Wales reserve, and slightly more funding would be kept unallocated, but the overall size of the change is aligned with that £2.9 billion figure. And, of course, as we mentioned, so far the three-year prognosis of that means that that's a much better fiscal outlook than we were expecting before September, with also the two announcements last autumn, the size of the budget was increased by £1.6 billion in 2022-23, £1.1 billion in 2024-25, compared with previous plans—really quite significant changes within the course of a couple of months.

And the Welsh Government, they describe the settlement as, quote, 'less bleak', but this is probably an understatement. Previous plans have been very, very difficult and now the Welsh Government is not only able to meet many of its real spending pressures, but it's actually able to expand some services, like the free school meals offer.

So, the latter part is an important part to the question—it's the future years in regards to comparisons for 2022-23, because the overall picture isn't as rosy. What's your view on that?

Well, I think the—. Over the three-year period, I think, there's—. For the first time in several years, we now have the security of the multi-year plan from the spending review, and so I think that—. Of course there's uncertainty—we don't know the future shape of the pandemic, we don't know the extent to which the economy will continue to recover. So, as we look into the out years, absolutely, there's going to be uncertainty, but I think, on the face of it, all of us, whatever political background, whatever, the Government, the opposition, legislature, Executive—. This is a much rosier picture for the next couple of years than it could have been, obviously with the huge caveat of potential economic risks, inflation risks, cost-of-living risks, going into the next periods.

Thank you.

If I may on that very quickly, I think it makes sense to have the funding front-loaded given that there's the end of the COVID top-ups and given that COVID pressures are likely to be larger in 2022-23 than in subsequent years. But of course one of the risks then is that, if there are more significant scarring effects, whether on health or on mental health or education from COVID, it might be tighter than would like in subsequent years. And I think, as Ed was saying, whilst this is actually quite a lot more rosy than was expected just a few months ago—. The previous plans were almost unbelievably—. Unbelievably, the Government was planning to spend less post COVID than it had been planning to spend before COVID had happened. That, I think, was almost nonsensical. But whilst it's a lot rosier, that doesn't mean that there won't be difficult choices for the Welsh Government, because areas like health and social care will take up a rising proportion of the budget. That might mean some difficult choices in certain areas. And that might mean difficult choices in certain areas around the capital budget because, whilst that is going to be relatively higher than it was before the pandemic, perhaps it's not as big an increase as might have been expected given that the economy will be 2 per cent smaller in the long run and the capital plans are linked to GDP.

Thank you, David. So, to what extent does the draft budget pass consequentials that are linked to the NHS directly to health? And what is the impact of health spend on the remaining Welsh budget for 2022-23?

Yes, so the NHS England consequentials are a large part of the boost to the current year budget, amounting to about £900 million or more than £900 million for 2022-23, and it grows to about £1.45 billion by 2024-25. And the vast majority, but not quite all, of the NHS consequentials have been passed on. I think it'll be—about £1.55 billion would be the total consequential. So, it's almost there, not quite. But the big change here is that very large increases in the NHS budget do not result in a squeeze of other spending in the budget and this is really unusual from recent experience, because spending outside the NHS will also increase substantially next year. So, we've got a very large increase in NHS spending. We've also got, for example, local government budgets 8 per cent up in nominal terms next year. All resource allocations to the main expenditure groups are increasing substantially in real terms next year. And this is very, very different from the austerity budgets that we're all very familiar with from past years.

Thank you, Ed. And we do face an uncertain future, despite the current situation that you've outlined to us, and we don't know the full impacts of omicron or the longer term effects of the pandemic or Brexit or any renegotiation around trade agreements. So, there will be very difficult choices to be made. What are the implications of the Welsh Government's capital budget over this now dedicated spending review period, and what issues do you think will present?

I'm happy to begin on that. It's on the capital side where we expect the outlook to be a bit more challenging, essentially. The capital allocation for the Welsh Government will be falling in real terms over the three years, and we think that there are quite a few areas that will demand significant additional capital spending as well during that period. So, to give one example, health spending. UK capital investment in health is fairly low by international standards. Even back in 2017-18, the NHS Wales maintenance backlog was estimated at about £560 million. We thought that as we recovered from the pandemic there would be a need for significant additional investment in infrastructure, facilities, equipment, just to increase capacity to deal with the backlog, but actually there is no increase in the NHS capital budget in the draft budget itself, and that's perhaps indicative of the general squeeze on the Welsh Government's overall capital allocations in the next three years, as well as perhaps its decision to prioritise other areas, like climate change, which will also demand additional funding.

I think Mike has got a supplementary there. Mike.

Very briefly. I believe—you can tell me if I'm wrong—that you can use revenue to support capital, and you can use revenue to carry out maintenance, so you don't have to use capital. It's also my understanding, from my experience in local government, and I'm sure Peter is going to say the same thing, that revenue was what we really cared the most about, because that was about dealing with the day-to-day running. So, if they took £100 million off our revenue and put it into capital, that would be a worse situation, wouldn't it?

I think you're right that there is flexibility to shift money from resource budgets to capital. There isn't flexibility to do it the other way around. So, if the Welsh Government did feel that, actually, capital was more of a priority, it could shift some of the resource funding to capital if it wanted to. That's definitely true. The only other point I would make is that whilst the capital budget will be falling somewhat in real terms, I think—and Cian can correct me if I'm wrong—it still is substantially higher than it was during the 2010s, and it's still at a level that's pretty high historically.

That's correct, and certainly at a UK level as well. Net public sector investment is running at around 3 per cent of GDP, which is high by historic standards. Of course, that's in the context of the fairly cheap borrowing, as well, that we've seen over the past couple of years.

Great. I think Peter wanted to come in. I'm going to bring Peter in anyway with his next questions. I think, Rhianon, you're finished with yours, yes? Great. Thanks. Peter.

Thank you. Just following on from that last point, then, to make up for that shortfall in capital going forward, there could be a way that—. It could be quite easily done. The Welsh Government could pass on more revenue to public services so they can actually use their own borrowing powers and service capital. They could enhance the capital programmes via the use of more revenue. So, that would be a lever, especially in these better times, for the Welsh Government to influence the capital position. Would that be right?

Again, maybe Cian can correct me if I'm wrong, but I think it's local government that has capital borrowing powers at least, and with the local government resource funding going up, one might expect that, given prudential principles, local government might think, 'Well, actually, our resource budget is now higher; we can therefore more sustainably afford slightly higher levels of debt and borrowing for capital', and therefore local government might be able to borrow more for capital. I think that's the story you're telling. I think that is probably true. The thing that might constrain that is if local government is seeing an increase now, but it's concerned about subsequent years and worries about, 'Well, actually, will we be able to service this debt in future years if the funding situation isn't so robust in future years?'

Thanks, David. I recognise that any borrowing is spread over 25 years, so you've got to be able to budget revenue-wise to accommodate that. I wasn't sure what the position might be for the likes of a health board to borrow money. I wasn't clear on that. So, thanks for that.

Anyway, I've got a set of questions myself now, which I need to go through, with the aim to understand a little bit more about tax policy. I know, Ed, you were clearly watching the programme—. Perhaps it is a programme. You were watching the meeting earlier, and you mentioned the OBR, and I was just wondering what your views might be on the way the OBR is forecasting for us. Do you believe it's accurate and good for Wales?

I was watching the previous panel. I was very interested in their evidence. I think the Welsh taxes outlook report, which the OBR produce as part of their work on devolved tax, has developed into a really useful, interesting, quite comprehensive analysis on the make-up of income tax. I think where I would be somewhat critical, given, of course, we're developing, and it's a period in which we want to look at what's working, what can be done even better—I think that the most important area, as the committee knows, in the forecast, is not really the absolute number for income tax in Wales and in England and Northern Ireland, it's the relative difference in the forecasts of growth between the Welsh tax base and the tax base in England and Northern Ireland. Because the latter sets the comparator for the block grant adjustments, the amount that is taken off the Welsh block grant to account for the money foregone by the UK Treasury.

I think in this area, the report is a little weaker. There's a great deal of information in the report explaining the difference between the previous projection in March 2020-21 and where the economy and fiscal outlook has changed, which changed the absolute value of income tax forecast. What there's less information on is why there is divergence, or lack of divergence, between the Welsh base and the England and Northern Ireland tax base. And that's really important, because actually, a major component of this £2.9 billion boost to day-to-day spending at the end of this period—£185 million of that is to do with the improved outlook for devolved revenues. So, it's actually not a marginal amount of money; that's close to what a penny increase in income tax would generate for the budget. It's quite a lot of money, and there's not a lot of information about what is driving that positive differential to the Welsh tax base. And this is the big difference between Wales and Scotland on this front: we have the advantage in Wales of the OBR both doing the projections for Wales and for the England and Northern Ireland tax base, which means that we have equality in terms of the forecasting. So, an error on one side is hopefully likely to be offset by an equal error on the other side.

In Scotland, the devolved tax revenues are worked out by the Scottish Fiscal Commission, so there's potential for that mismatch in forecasting and errors to creep in. However, the advantage of having that fiscal commission approach is that they've developed a really granular bottom-up basis for estimating income tax revenues. And that's in comparison to a much more top-down approach that is adopted by the OBR. So, I think this is a learning process. Nobody is going to get it completely comprehensively, every piece of information right on day one. This is a new journey for Wales. In future, it'd be really good to see why there are these differences. Rhianon Passmore raised this in the previous session about productivity gaps and the really, really important differential in the employment markets between England and Wales. We really want to see a little bit more drilling down into that, because it's not small change in the forecasting differential as a result.

Thanks, Ed. That's a really helpful input, to build on what we had this morning. Thank you for that. I'll push on with a few other shortish questions. We know the Welsh Government has committed not to increase Welsh rates of income tax for as long as the economic impact of the pandemic lasts. What do you understand from this statement in terms of possible timescales, and what are the risks and benefits of this approach?

If I may, I think it's perfectly reasonable for the Welsh Government to decide not to change income tax rates. It doesn't mean devolution was pointless. It's still got a financial stake in the revenues, so it does better when the revenues move faster, and indeed it has made a gain financially, as Ed was saying. On your specific question, to me, it's not clear how to define that sort of criteria, 'As long as the economic impact of the pandemic lasts.' Well, in one sense, the economy is expected to be smaller permanently than it was prior to the pandemic, so do we say that the impact of the pandemic lasts forever, it's an indefinite impact? On the other hand, the OBR forecasts the economy to return to its pre-pandemic size this quarter, and, actually, the data today from the ONS suggests it actually returned to that size in November. Does that mean the impact is over? So, I think, actually, it's quite hard to say what is meant by this. I think, really, it's just sort of a political signal, 'Not for now.' But I think it might have served that purpose and now we need, potentially, a more precise definition, rather than one that can be interpreted in many different ways, if you want to give some certainty to taxpayers. 

I'm sure a lot of people might think that that is a forecast over the three-year period, whereas, actually, it could alter at any time, in theory. Let's hope that isn't the case for the good of the public. Thank you, David. That was good. 

Wales Fiscal Analysis has suggested that all devolved taxes will have a positive effect on the Welsh budget over the coming years, as revenues grow faster than corresponding forecasts for block grant adjustments. I wondered if you could provide further detail on the scale and impact of this on the Welsh Government's budget, particularly in this forthcoming year. 

Is Cian able to take that?

I think Ed briefly mentioned it in his previous statement. I don't have the figures in front of me. I think it was in the region of £190 million, which was the positive impact of the devolved taxes in 2024-25. I don't have the details in front of me to go into the exact detail and the exact reasons behind that.

The major increases, of course, are land transaction tax and the Welsh rates of income tax. I mentioned in the last answer the positive estimates on that: £185 million by the end of the period. Land transaction tax—again, as was raised in the previous session by the OBR—is driven very much by price increases, the recovery of the housing market very rapidly after the start of the pandemic and, of course, policy changes that the Welsh Government has made with respect to land transaction tax. On the Welsh rates of income tax, we're less clear as to the reasons for that divergence, and that's one of the reasons that I think it would be really helpful in future years for the devolved tax report of the OBR to go into a little more granular detail on what's driving differential in the forecasts. 

Just building on that land transaction tax position, obviously, we know that the Welsh Government are doing a consultation and a review—on elements of it, anyway. I just wondered what your views might be on—. Is this the relevant vehicle? Will it actually achieve what it's expected to?

If I can come in quickly on that. I think the consultation is to be welcomed. We know that the impact of second home ownership is fairly concentrated geographically in Wales, so I think that it's sensible to ensure that tax policy has sufficient flexibility to accommodate different needs and policy objectives in different parts of Wales. I understand that the Welsh Government also consulted on local taxes and planning reforms, and I do think it's important to consider the whole suite of devolved and local tax levers when deciding on policy. One of the disadvantages of using the higher rates of LTT to disincentivise second home ownership is that only a small fraction of the properties actually go on the market every year. So, in that sense, it seems to me that a recurrent tax, maybe paid annually or monthly, like the council tax premium, if it was properly designed, would be a more effective measure to achieve that policy aim. But I think it's entirely appropriate that the Welsh Government considers all its fiscal and policy levers before deciding how to progress on that.

Thanks for that. We look forward to the results of that consultation. Moving on to my last couple of questions, if I may, they're around the council tax reduction scheme. We know it's remaining at around £244 million, I think, in the draft budget, but the budget also notes the complexity of how it will be managed, especially integrating universal credit, as that's been rolled out. I just wonder whether you think the system and the current funding of council tax reduction schemes provide an adequate support for those who require it in this forthcoming year, and perhaps more broadly, how the council tax system might be improved and the first steps the Welsh Government will need to take towards that position.

Yes. You're right to point out that I think the £244 million allocation has been the same for nearly a decade, I believe. And it's a bit counterintuitive because, obviously, bills have been rising during that time, but the amount spent on the scheme hasn't and the reason for that is that the caseload up until the beginning of the pandemic had been in decline. I would refer you to a piece of work by Policy in Practice on some of the reasons for that, and they go into more detail about the interaction with universal credit. I think one of the reasons is that most people don't have to apply to local councils for housing benefit anymore; instead, they apply on the UK Government's website for universal credit. So, the application process for housing support and CTRS has become a bit more detached over time.

In terms of the level of support provided, it is effectively targeted at the very poorest households—that's true—however, the distributional impact of council tax, even if you account for the CTRS scheme, is still regressive with respect to income. So, poorer households will still be spending a larger share of their incomes after housing costs on council tax, even after accounting for this scheme.

My own view on a wider reform is that I think meaningful reform of the current band structure would be required to make council tax fairer, specifically perhaps moving to a more proportional system, ideally by getting rid of the bands altogether and adopting a continuous valuation scale. But you could achieve a similar result by just adding additional bands on the top and the bottom ends of the band structure. But I'm aware that David has done a lot of work on this and I imagine he might have a few opinions on reform.

Thanks. If I may, Peter, I will come in for just a short additional response—thanks, Cian. On the council tax reduction scheme, I think one thing I would mention is that the scheme in Wales is relatively more generous than that in England, where many councils require that even the poorest working-age people pay 10, 20 even sometimes 50 per cent of the council tax bill. So, the scheme in Wales is more generous there. There is a potential range of reforms that could be done and expanding it could be one way to support low-income households, and, of course, encouraging take-up, as Cian said. Take-up might have fallen because it's no longer linked to housing benefit, which is often an even bigger source of income for people, and we do know that the more people get in benefits, the more likely it is they are to claim them because of the costs in finding out. So, I think that's an important point.

On council tax, I very much agree with what Cian was saying. We did a report for the Welsh Government in 2020 looking at options for council tax reform. I think there are three areas. One is revaluation; council tax needs to be revalued. It's not as out of date in Wales, but it is almost 20 years out of date now and it needs to be revalued and a regular cycle of revaluations put into place. It should be reformed to make it less regressive than it currently is. That doesn't necessarily mean making the overall tax system more progressive; you could, for example, make council tax less regressive and then change income tax rates, if you wanted to just shift the burden from income onto property, which probably might be more efficient.

And another thing sometimes less talked about is the single person discount. The way it operates at the moment means that, effectively, it's a subsidy for single people to live in bigger houses than they otherwise would. So, I think that that should be reformed to remove that subsidy and rather than basing it on the band you live in, maybe a flat rate amount as a discount, or to abolish it completely. So, I think there are lots of potential reforms there and I think the IFS is very pleased that it's on the agenda in Wales and to some extent Scotland, in the way that it isn't in England.

Yes. An element that we have to be careful of, though, is actually ability to pay, because, I think of a county like my own where you've got a lot of, you know, people who are cash poor but asset rich, so the revaluation, actually, with the way that house prices have gone up but salaries haven't, makes it more regressive for them.

Well, I think, on that, the important thing to realise is that a revaluation itself is not about reflecting the absolute levels of property prices; it's about the relative levels of property prices. So, say property prices had doubled everywhere, that wouldn't mean bills would double at revaluation. Actually, bills would be the same, because relative property prices wouldn't have changed. It's about the relative values. Now, of course, there could be some asset-rich, cash-poor households living in properties that see a higher bill. So, alongside council tax support for the sort of asset poor and cash poor, what we suggest, actually, is some sort of deferral scheme for the asset rich, cash poor. So, rather than having to pay their increase in bills straight away, what they can do is they can kind of defer those bills and potentially pay, you know, when they sell the property. Schemes like that operate in Ireland, America, Canada. We have one in the UK for social care costs as well.

Thank you. Thank you, Chair.

No problem. I'll bring Mike in now, but we might overrun slightly, just because I want to give Mike enough time. But, hopefully, we'll have your indulgence for about five extra minutes at the end. Thanks, Mike.

Before I go onto my area of questioning, can I agree with everything David has said, apart from the 30 per cent reduction? I think it could be a block that nobody gets that in band D and above, so people in lower value properties would still get the 30 per cent reduction. They're more likely to be cash poor, but that's just a personal view that I wanted to put out on the record.

Moving on to Welsh Government spending, they've decided to over-programme the capital programme, which Peter and I have done for very many years because we've always seen capital slippage. Do you think it's a good idea to over-programme it?

In terms of the new fiscal strategy that they've adopted, their intention is to maximise the available funding, using the Wales reserve to manage the in-year financial position without holding unallocated DELs and, therefore, any draw-downs would be included in the supplementary budget. From this perspective, it does make sense to do this to maximise the available funding, to reduce the unallocated spending. If this was the ongoing strategy, it would be useful to have more regular updates on the funding contained in the Wales reserve, if that's going to be a key element in this strategy.

In terms of borrowing as a whole, the costs of borrowing are so very, very low—a £7.6 million interest payment in 2024-25. You know, even with very modest growth in borrowing, interest is only 0.03 per cent of the resource budget each year, without including the principal repayment. On the capital side, on the borrowing side, there's still a lot of flexibility here and, yes, I think the approach that they're adopting this year makes sense.

Thank you. Of course, the Welsh Government is still paying 15 per cent interest on Welsh Development Agency borrowing from the 1980s.

The next question is: we often get—the Government get and the Senedd get—additional money in-year, and then it's got to be spent in-year. Apart from Treasury rules, which are opaque, do you see any reason why carrying it on into the next year would not be a good idea?

So, if I might come in on that one briefly. I and colleagues at Strathclyde and Stirling universities looked at how fiscal frameworks might be reviewed post COVID, and we touched upon borrowing powers—kind of the previous question—but also what should happen if there are late changes in budgets. We focused on late cuts in budgets, which I think have been a particular problem, and found that, actually, the cuts should be able to be deferred. I think, in principle at least, there are benefits of allowing deferral for late additions into budgets too.

However, I did want to make one point about this and how I think we need to be a little bit careful on this point, and I think that's because such flexibilities to transfer funding into the subsequent year don't exist for Whitehall departments. And what that can end up meaning is that if Welsh Government can pass on late money into the subsequent year, and in England that cannot happen, Wales could end up getting more funding overall, and we actually saw that happen during the COVID crisis. So, what happened in 2020 is that in order to make sure there was no chance of the NHS in England running out of funding, UK Government announced quite late in the year extra money for the English NHS. They allowed the Welsh Government to take that money forward into 2021-22. In the end, in England, that money wasn't needed, but the English NHS couldn't take that money forward into 2021-22. Instead, there was a bit of a top-up announced to the 2021-22 budget, which then Wales got the Barnett consequentials for. So, the Welsh Government got the carry forwards and then the new Barnett consequentials because the English NHS couldn't carry forward the funding. Now, I think that's a particularly unusual circumstance. You wouldn't expect to see money announced late in the day and then not being spent, or certainly not significant amounts of money being announced late in the day and not being spent in England in more normal circumstances. So, I think, in more normal circumstances, what the Minister suggests is probably a sensible idea, but I think we do need to bear in mind that sometimes, as well as constraints on the Welsh Government side, there can end up actually being potential unfairnesses to England given the way that the system operates in England. Of course, you could argue that, actually, they should change the laws in England to allow carry-forwards in England in those circumstances. 

And Ed.

Just briefly, that very final point by David, I'd agree with that. The other point here is I'm not very sympathetic, to be honest, because if the UK Government is making these decisions for its own departments, the Welsh Government is dependent on a very late decision from the UK Government. This is not a neutral provider of funds here. So, absolutely the Treasury should allow its own departments to roll over funding. That's their own decision for their own Government. In the Welsh case, I think, I'm very sympathetic with the Minister's position on this and the position in other parts of the UK, that if the UK Government is making very late decisions on consequentials, then these funds should be rolled forward into future years.

Can I just say I don't think that Wales should be treated as another Westminster Government department? It's a devolved nation, but I think they're treating it exactly the same, and I've written about it previously. The Treasury do tend to act like that, but the Treasury don't really accept devolution in some cases.

My next question is: the Wales fiscal analysis estimated COVID-related pressures could average £530 million a year over the next three years, so do you think that the draft budget addresses those pressures sufficiently?

I'm happy to take that. So, I think the resources required to clear the NHS backlog are probably one of the biggest sources of COVID pressures that will be felt in future years. The allocation that's been made in the draft budget is on a par with the estimate that we produced a couple of months ago now. Now, the caveat I would add there is that our projections were made before the emergence of the omicron variant. Obviously, decisions have been made to prioritise the booster roll-out over the past weeks, because of the recent staff shortages and the surging COVID cases. All of those things are likely to have delayed progress on reducing that backlog.

That being said, I don't think it's unreasonable to assume that, if more funding will be required to deal with health pressures on a UK level, the UK Government may well respond by topping up its own spending plans. We've seen that happen previously, the UK Government topping up its spending plans, particularly to fund additional health spending, and, as David mentioned, there is some leeway against the fiscal rules to do that as well.

In terms of other areas of pressures, our projections of local government pressures seem to imply that councils should be able to meet their core demand pressures as well as pandemic-related pressures with fairly modest council tax increases over the next three years. Now, I should point out that our analysis is done on a Wales level. So, obviously, the individual position of councils may well differ from that, but our view was that council tax increases of around 2.5 per cent a year over the next three years might be sufficient. Now, that's a huge step change from what we've seen over, certainly, the past five years, where I think the average council tax increase has been around 5 per cent, if not higher, per year.

I guess the only other area to keep an eye on would be school catch-up funding. I know that there was a £60 million allocation in the budget over three years. That is less than what the estimates published by the Education Policy Institute suggested might be required to compensate for the lost learning time as a result of the pandemic, but then again I should point out that the same is true in England as well, where the UK Government have so far not allocated—. The amount that they've allocated for this in England falls short of the estimates there as well. But that might be something to keep an eye on. 

Can I ask David a question? You talked about England and Wales being treated differently. In England, you know when they wrote off all the debts of health boards a few years ago, I didn't see that coming through in the Welsh budget. Did I miss it, or did it actually come through?

I'm not sure what happened on that, so I would need to go and look. I think the area where that would be covered—. If there was funding provided to write those debts off, it would be in the block grant transparency reports put out by the Treasury. But I've not looked into that, I'm afraid. 

And my final question: the Welsh Government has made a number of decisions on business rates. How do you think that's going to affect the amount of money the Welsh Government have?

I've got a couple of points on this. I don't know if I can then maybe pass on to Cian or Ed. So, I think the first thing to mention is that the Welsh Government's measures, actually, next year mirror those made by the UK Government for England. Both are freezing the multiplier, which will permanently reduce revenues, and both are providing a 50 per cent reduction in rates for the retail, hospitality and leisure sectors, subject to a cap of £110,000 per business. 

Now, the Welsh Government says the latter measure is costing it £20 million more than it's receiving via the Barnett formula as a result of the English policy. Now, this might be because more properties in England are occupied by bigger businesses that are subject to the cap, but I've not been able to verify this, and, actually, the figures published by the UK Government don't break down the Barnett consequentials by measure, and the figure actually looks suspiciously like the total Barnett consequential for business rates. So, part of me is wondering if they're comparing the cost of this to the total Barnett consequential rather than the specific Barnett consequential here. So, actually looking at the short-term net cost of these measures, I'm not sure you've got a good figure on that.

Now, in the long run, I expect the freeze in the multiplier, which, as I said, has a permanent effect on revenues, to cost less than the funding received by the Welsh Government. Given the lower average value of properties in Wales, it means that it costs less to freeze business rates for a year than it does in England—than a population-based share of the English funding provides to the Welsh Government. So, in the long run I expect the net effect on the Welsh budget from the English changes and the Welsh changes combined to be a bit positive, although of course money spent on freezing business rates is money that could have been spent on other service areas, and, in the longer run, I'd probably expect the biggest beneficiaries of this one-year freeze in rates to be not the occupiers of businesses or properties, but to be the landlords, because there's very good evidence that in the long run lower rates get reflected in higher rent. 

Yes. I keep on saying that. That's me finished, Chair.

Thank you very much. 

Director of finance for Hywel Dda University Health Board. Good morning.

Lovely. Anthony Hunt.

Bore da. I'm Anthony Hunt, leader of Torfaen council.

There we are, lovely. And Dave.

Bore da. Dave Street, representing Association of Directors of Social Services Cymru.

Lovely. Great. Thank you. Thank you so much for making time this morning to come and speak to us. I’ll crack on. We’ve got some questions for you, as you’d imagine, and, as we go through things, some questions will more related to your specific areas and some general ones. My first question: the Welsh Government says its draft budget prioritises funding for health and social care and local authorities, who continue to stand at the forefront of the pandemic. Is it clear from the draft budget allocations? Is this clear? Start with Huw, maybe.

Diolch yn fawr. Yes, I think if I can distinguish broadly between, I guess, the national prevention work that’s delivered locally and then our local response, the funding certainty is very much welcomed in terms of continuation of test, trace, protect, the vaccination programme and personal protective equipment funding for as long as that is nationally determined to be necessary—three areas that, of course, have been of fundamental importance to our pandemic planning and response. But at some point over the planning cycle we will move from a pandemic response into an endemic situation, and we're therefore planning with a degree of uncertainty, with significant operational uncertainty. I think, at this point in time, we’re working on modelling anticipated scenarios and anticipated demand that we’ll see coming through the system, and that, clearly, has a huge impact on clinical and operational decisions that we have to take. So, absolutely, that certainty on the national response requirement is really important. But there will be a degree of significant uncertainty for us as we think about our operational responses going into the planning cycle. It’s good to see the situation with omicron rates reducing, or we have indications of the rates reducing, but there is still significant uncertainty.

Okay. We'll maybe go to Dave Street.

Thank you, Chair. Yes, certainly, from a social care point of view, I think I would mirror Huw’s comments. The settlement is hugely encouraging for us, but we do move into uncertain times—there’s no doubt around that. We have had our challenges, as you know, through the pandemic, certainly from a staffing perspective, and some of those challenges remain with us and are perhaps increasingly acute. The reference in the settlement to the aspirations around a real living wage are extremely important for us, and certainly give us a good base position around where we want to go in terms of rewarding those individuals who really performed so heroically through the pandemic.

In terms of moving forward, we are all maintaining pretty significant waiting lists for social care services. Some of those waiting lists are made worse by our current staffing difficulties, and we’re having to watch those very carefully. We’re not sure what’s around the corner, in terms of new demands for services. We’re aware of significant issues—potential issues anyway—around long COVID. We’re not absolutely clear how they will make their way in terms of social care demand. And, of course, perhaps a group that we wouldn’t want to lose in this as well has been the impact of the pandemic on unpaid carers, particularly. As we've found those difficulties in maintaining mainstream and statutory services, increasingly we have become reliant on those unpaid carers, and they have carried that strain for a significant period of time. We will need to move our way back through and make sure they get the support they require. Thank you, Chair.

Anthony.

The short answer to your question is 'yes'. I believe it's a settlement that does reflect the prioritisation of local services and a valuing of those services too. But, as I'll expand on later, I think it's a good settlement for a reason, the reason being the huge pressure that local services are under, especially in a post-pandemic respect and a post-austerity respect, and also it reflects the fact that we have shared priorities with Welsh Government, things that can't be delivered without the work of local services. So, I'd say 'yes', but it's a good settlement for a reason.

Excellent, okay. I'll stay with you for my next question and maybe work backwards through the three of you, because it's a question for all. How will a multi-year settlement assist the organisations you represent in planning, and to what extent will this be affected by having only global figures for future funding, and not indicative allocations for individual organisations?

I think it will help hugely. It's something that we've called for for a number of years, and I fully realise that the Welsh Government had their hands tied in previous years because they didn't have the information from above their heads, from Treasury. But it does make a huge difference to how we can think and how we can plan and how we can work for the long term, which is a shared demand on us and something that we want to do as well. The kind of decisions that we can make looking to the long term, and not just as far as the end of our noses, are hugely transformed by the ability to plan on a multi-year basis. So, that's especially welcome. 

And then maybe Dave—do you have anything to add?

I would agree with you completely. It's something we've sought for some time, and perhaps an area it will particularly help us with is that whole joint working agenda with the health boards. That's something that we are keen to push on with, and are pushing on with, but has been constrained in the past by the perhaps lack of clarity around potential financial settlements. So, extremely welcome.

Huw.

Yes, Chair. Yes, I absolutely welcome multi-year settlements. It aligns with our planning requirement for health boards in any case, but I have to recognise that, while next year's settlement is a significant uplift on our baseline allocation—we've got a 2.8 per cent uplift on baseline allocation and funding going into recovery—actually, when you look at the funding settlements in years 2 and 3, that's 1.5 per cent and 0.75 per cent. There will be some real challenges for us as we get later on, certainly, in the planning cycle; I'm not saying the first year will be easy. But there are a number of long-term issues that we're trying to address here, and I think having that certainty will help us begin to address those.

So, if I just briefly outline some of those challenges for health and how this settlement then indicatively supports us there. Firstly, on the demand side, in unscheduled care we're looking particularly at real challenges with acuity growing in our patients. Just to give an indication from Hywel Dda here, acuity is scored from one to five, five being the most serious, and the proportion of patients at level four and five has grown from 19 per cent in December 2019 to 25 per cent in December 2020 and 28 per cent in December 2021. So, we're seeing a significant increase in the acuity of our patients, not just in hospital, but also in the community. Discharging patients with packages of care has been a real challenge for us throughout the pandemic. We've got 1,100 beds in Hywel Dda, and at any time, any point in time, there are 10 to 15 per cent of those who are ready to discharge but for the want of packages available for them or a community response. So, that has a huge burden on us. 

Now, this funding settlement, multi-year, with the support into social care, I think will begin to address that challenge. And then, obviously, demands in terms of diagnostics, cancer, planned care recovery and mental health are all very, very challenging for us, and require that kind of multi-year response for us to undertake.

On the supply side, that's equally challenging, particularly in workforce. Dave already alluded to the workforce challenge, and that's certainly a big worry for us. Clearly, when I mention workforce, I do need to pay tribute to the huge efforts that colleagues have made across health and social care over the last two years, but that toll is a heavy toll that's been taken on our staff. At the moment in Hywel Dda, we've got about 1,000 vacancies, which is almost 10 per cent of our workforce, and that's split disproportionately amongst medical and dental staff, where we've got 300 vacancies for medical staff and dental staff, and then 500 vacancies for registered nurses. You're talking significant chunks of our staff that are running with large vacancies, which leads to a big agency bill.

The response to that is very welcome. We've seen money going into training and development, an increase of about 15 per cent, which builds year on year on the last three years. And that's welcome, but it's not going to have an immediate impact to address our workforce challenges. But, of course, as we look into the next few years, it's particularly welcome to see the investment in the medical school in Bangor and the nursing school in Aberystwyth, which disperses some of the training requirement and means that people can train closer to home. So, I just wanted to allude to some of those demand challenges we've got and supply challenges and emphasise that this is a long-term problem. That three-year funding package starts to give us certainty that we can address those and make some inroads. 

Have they missed any priorities or is there anything that has been missed in this process that you might have wanted to have seen? Carry on, Huw.

Diolch. I guess the biggest challenge, which is a challenge in the whole budget, is capital. That's a worry for me. It's a significant worry for us in our health board, but I know that's a consistent issue across Wales. Backlog maintenance—for us, we're looking at £100 million. We've got a big ask to modernise our estate, support moving care into the community and deliver our strategic programme, 'A Healthier Mid and West Wales'. The capital bill for us, looking forward to the next 10 years, is in the order of £1.2 billion to £1.5 billion. So, there is a significant ask there, and the capital availability in the budget is therefore a concern. And I'm sure we will get into talking about how that could impact service transformation, but I think it inhibits our ability to transform services and, of course, inhibits our ability to decarbonise our system as well. So, that's a big worry.

A couple of other things just to allude to: on the revenue side, we're going through a crisis in energy costs. I'm sure panel members will be aware of that from their own constituents, but, we're looking at a bill for us upwards of £3.5 million to £4 million for the next couple of years, just for Hywel Dda, in terms of that increase in energy costs. And of course one way to address that would have been decarbonisation measures, which are hampered by the availability of capital. And the other area, probably, is recognising the increase in nursing costs that would be required, were the nurses available, to deal with that additional acuity and maintain safe staffing in line with the requirement of the Act. And that bill for us is looking like £1.3 million. So, there are some significant issues and challenges for us to still manage through. 

Of course, lastly, we've had two years where we haven't delivered savings. I'm sure we'll come on to talk about savings and the impact that has on the service, but there is a degree of catch-up that will be necessary in the system as well. 

Maybe I'll come to Dave next, but as a supplementary to that, are there any priorities that have been missed, do you think, in this budget, but also how involved have you been in the consultation with the Government, and did they listen to any ideas when you were raising these points with them? So maybe, Dave, you could address that point. Could we unmute Dave, please? Thanks. 

Certainly, as far as ADSS Cymru is concerned, we have been lobbying very significantly throughout the financial year in terms of ongoing settlements. And, as I said previously, we're very pleased with the settlement provided for the current year. I think Huw's previous comments around future years are equally valid for local government. There's some uncertainty there. I, again, would concur with his view on capital, perhaps for a slightly different reason. Social care is primarily reliant on the independent sector for much of its provision, certainly in terms of residential care for older people and children, and indeed domiciliary care. It has been our intention and our desire to do some rebalancing around that, but really that rebalancing aspiration is held back by the lack of capital investment that we are able to make in those areas. So, consequently, we will continue with that reliance on the independent sector. There are the broader inflationary costs—yes, fuel—but the actual inflationary pressures that we are all experiencing and going to continue to experience are a concern for us. 

Perhaps the most significant issue is the uncertainty over the Welsh Government hardship fund, going into the next financial year. We have been hugely reliant on that. It has been a massive, massive help in stopping social care going into a crisis. So, as we begin to see that hardship money move away and we begin to lose that, it does raise some concerns going into future years. But, as I said right at the start, really, certainly, as far as the settlement is concerned for the current year, it's positive from a social care point of view, and there's a feeling that social care has been listened to.  

Anthony, do you have anything to add or anything specifically from your point of view on whether the Government have listened or not listened to that engagement that you had with them? 

I certainly think the outcome and the process of the budget show that we have been listened to and we have been consulted. I think the 9.4 per cent increase comes after a period of a sustained consultation engagement with local government, and that's very welcome. And that reflects, I think, the working relationship that we've built up over the last two years in dealing with things. I agree with the points that have been made before about capital. I think more than not recognising, it does recognise concerns are there and are worthy of mentioning. There's the huge challenge in social care, the huge pressure on those services, not just because of the pandemic but because of systemic issues in those services before. There's the issue of inflation, which, of course, affects us with everything that we do. There's the uncertainty around pay, going forwards. I think that's reflected in the settlement, but that's something that does need drawing out.

There are things like the ongoing uncertainty that has been mentioned in areas like leisure, certainly in a post hardship fund world and how we deal with those. There are the remaining scars after a decade of austerity that need taking into account. Local government funds are still down 17 per cent in real terms over the last decade. And I think the lack of options that are there for us as councils as we try to explore savings. Many of the usual targets that we'd have to save on in order to protect areas like social care and schools from cuts just can't be cut back during a pandemic, and I think some back office functions have really shown how important they are in the last two years. So, I think that the Welsh Government can be commended for recognising those pressures, but that doesn't mean that it's an easy budget to set, because there are pressures that are really there and are really close and present as we try and set local budgets. 

Thank you very much for your answers. I'll move on to Peter now. Peter. 

Thank you, and good to see you all. It's a good session already. I wanted to try and understand the impact of the Welsh Government's additional funding for COVID-19 during 2021-22, and whether the additional resources met the additional costs of responding to the pandemic. Did it cover the loss of income arising from the pandemic? I don't know who wants to have a go at that. I know Anthony will, but I'm sure it affects everybody the same. 

Who wants to go first? Anthony's been mentioned, so there we are. 

Yes, happy to go first. As Peter will know, the pressures in terms of lost income and extra costs have been huge during the pandemic, but I think both the fund itself and the way that it's been approached have been very welcome—£661 million in 2020-21 and £368 million so far this year that's really helped keep services going in the face of the storm. That's been very welcome. And so, it's been a success story. Certainly, speaking to colleagues across the border, it's something that I think has worked well in Wales and that we can be thankful for. Again, it has not made things easy for us, but I think it has made things manageable. I think that's the short way of putting it.  

Thanks, Anthony. Do colleagues—

Huw or Dave to start off. Dave first. There we are. 

Thank you. I think it's a very similar position for social care. I think perhaps our income is an issue, but not as big an issue as it is for other parts of local government. It's been those increased costs that we've faced as a result of the pandemic, and increased demand. I've already referenced the hardship fund, which was extremely important to us, but there's been other grant funding made available as well. And, I think, if you look at the end-of-year positions, in most local authority social services departments, in 2020-21, they ended up in a fairly positive position, and I think that really is the best illustration of all that those costs were met. 

Huw. 

Thank you, and thanks for the question. I guess the situation in health is somewhat different, in that we've got fewer organisations, so we've got a close line into Government, and we've been working very effectively with colleagues in Welsh Government across different peer groups. But if I just mention the finance peer group, we've been meeting, certainly since the beginning of the pandemic, with colleagues in the finance team in the civil service, virtually every week. That's relaxed a little bit more recently, but certainly, that allowed us to plan quite dynamically, deploy and redeploy resources as was necessary, and make decisions quite quickly, without compromising, clearly, our professional responsibilities to our boards.

But directly for us in Hywel Dda, there's an additional £53 million that's been spent in Hywel Dda last year that's directly related to the pandemic—£8 million for test, trace and protect, £9 million for vaccination, and £3 million for personal protective equipment, and the rest then was for our local operational response, which covered things like lost income—clearly, with fewer people coming on holiday to west Wales, there was a loss of income—and covered things like new ways of working that allowed people to be cared for at home with things like homecare drugs, which are more expensive than our usual way of deploying that. So, a number of areas that have been supported there throughout the year, and that closeness just allowed us to flex quite quickly, which was very helpful.

Thanks for that. Obviously, I can't ignore my recent background as a local government leader, so I understand what Dave and Anthony said. Certainly, I felt that myself during the period I was holding the levers, if you like. Anthony, I'm going to come to a bit of a question; my supplementary might just catch you a tad, but I think I need to be asking it. We know the WLGA have said that reserves in some councils are likely to become critical going forward, and I absolutely can see that in some areas, yet the audit office report said that whilst there was a £1 billion of reserves in the local government sector, it's increased by an additional £450 million since 2021. We're trying to square that circle. But what is that saying? That some authorities are struggling to compound any reserves and others are piling it on—what is that saying to us? I've got a personal view on that, but I won't share that here. 

I think it shows the benefit of having that hardship fund there. I think if you'd have asked what the position would be 18 months ago, we would have been a lot more pessimistic than what's maybe happened, and the hardship fund allowed local authorities to get through this without reserves being drained even further. But I guess our treasurers would say to us that the reserves are there for a reason. They're still low in terms of—. I think ours in Torfaen is eight and a half days of operating costs, and so they need to be there given the increasing uncertainty as we come out of the pandemic. 

I think others can recognise that level of reserves you'd hold, the level of reserves Conwy would hold, but then you contrast that to levels in certain authorities that might be moving toward £130 million, £140 million, and have constantly been so for a long time, and I think that does raise some concerns that we have to explore out in due course. But, thanks for that. 

I'll move on to the next question. I want to explore the financial position of your organisations, and how sustainable it is. To what extent will the draft budget allocations of 2022-23 impact on this? How will that improve your sustainability? Is it looking dark going forward, or is it looking bright?

Who wants to go first? David? Go for it, Huw. There we are. 

Happy to come in, thank you. The situation you mentioned there with reserves in local authorities, I guess every organisation has its own context and own situation and that's certainly true of health boards as well. And I've given an answer, I think, on some of the challenges we're seeing in health generally, but if I just give you some contextual position for Hywel Dda: committee members will be aware that we are an organisation that has been in deficit for a very long time, and that has been a challenge for us and remains a challenge for us.

A couple of things I just want to go into there. Firstly, the new funding formula from Welsh Government. That came out a couple of years ago, but the impact of that clearly has been masked by the pandemic. As we've now been able to track through the analysis of that, we've been able to understand where our deficit sits in terms of a county level, which is not an area we've been able to get to before, and seen that it's broadly in the south of our region, between sir Benfro and sir Gâr. And there are two significant drivers to that for us. We have four district general hospitals, all of which are relatively small, compared with the rest of Wales, and our bed base is therefore relatively larger than the rest of Wales per head of weighted population. Now, that has a double-whammy impact on us because of using premium agency staff to fund some of that excess that we've got. And we've also got that impact on duplicated rotas.

So, the funding that we're looking at getting now, in my view, helps us stabilise, and that is the critical thing—if you can stabilise that position. But there is a challenge for us in terms of a strategic direction for Hywel Dda, of which capital is a significant enabler. And you may be aware of our plans to build a new hospital between St Clears and Narberth, and re-purpose Glangwili and Llwynhelyg. Now that is a part of creating a more sustainable structure in the future, but capital is a constraining factor in that. So, I think some of the structural challenges we've got in the west need to be resolved. I don't think they will be directly resolved by this budget itself.

Dave, do you want to come in next?

Yes, thank you very much. [Inaudible.]

There you are, you're fine; cool.

Thank you very much. Yes, I think there are still challenges going ahead. As I said, the settlement for this year is very welcome. I think your point on balance is well made. I think a lot of that, from a local government point of view, is very much that much of that grant funding came in the latter part of 2021-22. So, that will roll forward in future years. 

There's uncertainty in terms of levels of settlement, as Anthony alluded to at the start of the meeting, but perhaps the biggest area that we've got concern about from a social care point of view is really staffing costs. In terms of this budget, there's a very welcome emphasis on payment of the real living wage. We've suffered quite badly in losing staff to the hospitality and retail sectors, and hopefully the payment of the real living wage will stop that drain of our staff out.

However, if we're going to want to reverse the flow and actually bring people back into social care from retail, from hospitality, then, to be honest, the real living wage isn't going to do it. We have to be much more ambitious than that. We probably need to be moving into the region of somewhere in the region of £12 an hour. That isn't something local government is going to be able to do on its own—it's going to require significant investment from Welsh Government. And we fully accept that the costs attached to that are significant and will require some very difficult choices. However, we can't sit back and simply let this flow of people to continue unabated and we have to be realistic in terms of just how helpful the real living wage is going to be in stopping that flow.

Anthony, is there anything you wanted to add?

I very much agree with what Dave just said about the moral and pragmatic imperative of really solving the social care situation and the cost that will be attached to that. It's not right that we're losing out in pay terms to retail and hospitality when it's the welfare of some of our most vulnerable residents that we're talking about and their care needs. And so, anything that we can do together to try and address that in the long term is welcome.

Back to the issue of financial sustainability, I really think this budget gives us a platform to start to build greater sustainability alongside the approach to the hardship fund, and it's a welcome one. I think it requires us both taking long-term decisions and not taking short-term options, but the opportunity, I think, for the first time, is there to rebuild it. Obviously, with the reserves question and with financial sustainability, we're always trying to balance the views and demands of treasurers and auditors on one hand, and the views and demands of people who want to look to services on the other hand, and it's always a balancing act, isn't it? But I think we've got the opportunity to get that right, especially with the multi-years aspect of this settlement, and I look forward to exploring those and making sure that we do have both sustainable organisations financially, but also ones that deliver on the policy priorities that we share.

I think Rhianon might have a comment to make on a question. Oh, hang on. There we are.

Sorry, I unmuted it at the same time as somebody else. Very briefly, if the Chair will indulge this. In regard to Dave Street's comments about a £12 real living wage and then the total restructuring of salaries and pay scales around that, is there anything else in the immediate horizon outside of that that you think would have an important uplift to resilience and capacity and bring employees back from retail that you can think of?

There's an awful lot of work going on in that territory. We're doing much to publicise the workforce. We've tried to piggyback on the good publicity that carers and NHS staff certainly had through the first wave of the pandemic, doing an awful lot of work with Social Care Wales in terms of national and regional recruitment campaigns. So, we're doing all we can. We're trying to expedite the recruitment process. We're trying to make it less bureaucratic. We're trying to make it more accessible for people who perhaps don't want to fill in 20-page application forms online, which is what the rest of us have to do. We're trying to do all those things. But fundamentally, money talks. That's the reality here. And whereas we can do all of those things and try and make social care perhaps more of a career choice for people than it's been traditionally, that people can come and join us as care assistants in a care home and have aspirations to move their career through that social care family, all of that is really, really important and is being dealt with and promoted and pushed, but ultimately it does come down to—. The most important aspect is what and how are people going to be rewarded. And as I said, a real living wage is a great foundation for us to move forward on. It's something we've aspired to for a significant period of time. But in order to reverse that flow, in order to get people who have gone to hospitality and gone to retail to actually come back, then we have to be realistic that money talks, fundamentally.

I think, Chair—. Dave, that's a fantastic input, and I think absolutely fundamental is to try to create parity of esteem between the social care sector and the health sector, and making it a desirable career that can entice people in and create a resilient service going forward. So, I absolutely agree with you, and that requires a massive policy change in direction, which is above your own organisation. It has to come from the Government. So, yes, thanks for that.

My last question—and I think I know the answers to this—is just to ask whether any of you think, given the current direction of the pandemic, that the funding for the three years to 2024-25 will provide the resources that are likely to be needed to respond to the pandemic, since all three of you say that continued COVID-19 support will be needed for a number years to support services. So, have you got enough to cover your COVID pressures, going forward?

We'll go to Dave first on this one.

I think the simple answer is: we simply don't know. We would hope that that would be the case. If I was pushed, I think it's unlikely. I think there are ongoing costs attached to the pandemic that we've yet to see. We know we've got significant waiting lists. That is the case across Wales. That is purely, in the first instance, driven by a lack of capacity in terms of workforce. That hopefully will correct itself, but that will come with a cost. I think, perhaps, the bit I'm as worried about as anything else is the potential for the consequences of long COVID and what exactly will that mean. We know that perhaps our NHS colleagues may be a little better sighted on that, but we're really not clear at the moment in terms of people who've got long-lasting consequences of having COVID, to what degree they will be calling on the social care services moving forward. And if that is significant—and I think I saw a figure this week that around 20 per cent of people potentially had long COVID consequences—if a proportion of those people come in to local care services, that is going to push our cost in that area quite significantly, at a time, obviously, when we still have the normal demographic pressures anyway. We are still an ageing population and so we would have had those pressures regardless of COVID; I suspect COVID is going to make that even worse.

I think we've got pressures there, but we've got pressures on time as well. So, if I could ask that we keep responses a little bit briefer, if we can, but if we briefly go to Huw, and then to Anthony, and then we'll move on to Mike Hedges's questions.

Chair, I will certainly take the hint; thank you. We are at some point going to move from a pandemic to an endemic phase, and clearly that will change the nature of our response, but actually it's not going to be as easy as we might think to take out some of the costs that we've been incurring over the last two years. We're seeing some of these costs now becoming embedded in the system, and there is a risk for us as we go into the next phase now, in how do we take some of the decisions that will have clinical and operational consequences that are necessary to balance the budget going forward.

But coming back to Dave's point there, there's clearly a big issue as it's not a pandemic issue itself, but it's a post-pandemic issue, in terms of waiting lists and the impact on waiting lists, but latent demand: demand that we've not yet seen in our waiting list, which is hidden, which may well come through, and long COVID is one example of that. Mental health, I think, is another example, and the well-being of our staff is another issue. So, I think there are some responses to the pandemic that will be longer term, which are the consequences that we now have to deal with.

Anthony, anything further to add?

Yes. I've given up time to second guess this pandemic. Certainly this settlement gives the opportunity to plan, but if things do turn out worse—. I'm naturally an optimist, so I'm hopeful that this is the last wave that we'll have to encounter in the same way. But I hope we can continue the spirit of dialogue and engagement that's seen us through the last two years, if things do turn out worse. Certainly, I'm looking to build a COVID recovery fund, not just to respond locally in Torfaen, not just to respond to the pressures of the pandemic, but also to try and help our communities to rebuild and get greater resilience, both in terms of health and finances, because that's been shown over the last two years to have a real impact on how our communities can weather the storm of things like pandemics. So, I think that it gives us a chance. I'd hope that we can continue the dialogue, depending on how things pan out from here.

Thank you very much. I'll go on to Mike.

Diolch, Gadeirydd. I'd like to ask firstly about workforce capacity and the extent to which the draft budget allocations are likely to address them.

If we go to Huw first.

Yes, thank you. And a couple of things that I'd just like to mention in response: the biggest single issue we've got is the vacancy and the gaps we've got in our current workforce. That's a challenge, and I've alluded to the kind of quantum we're looking at in our health board, which is fairly representative. The other concern I've got is whether people make different career choices post pandemic, and in health, we've got the McCloud judgment, which is changing the way people may think about their pension settlements towards the end of their careers. That could well lead to an acceleration of people deciding to retire—a particular issue amongst registrants, amongst medical staff and amongst GPs—which could lead to an issue with the sustainability of that sector, or a number of practices.

The other concern I think I've got is the impact that the living wage will have on the inflationary pressures we see coming through the care home system. So, for our packages of care that we fund, it will inevitably have some inflationary pressures. We've modelled some of the anticipated impact of that into our position, but we are taking some actions to deal with some of those gaps—some immediate actions in terms of overseas recruitment for registered nurses. That investment that's going into long-term training, I think, will be absolutely critical to address that long-term sustainability of our workforce, and that's a very welcome part of the funding package.

Lovely. Anthony.

Workforce issues—there are both immediate and more systemic issues there that we need to face up to, and it's not just about money in some respects. In areas like social care, but also areas like teaching, HGV drivers, refuse staff, public health staff, there's a real recruitment and retention issue there that I think we need to try and address, and there's a pressure going forward. There is, of course, also the pressure about pay. I think it's pertinent to say that local government staff, alongside many staff in public services have endured over a decade of real-terms pay cuts, and so that's going to have to end, partly because it's driving the issues that I just spoke about in terms of recruitment and retention we need to try and work on there. Obviously, there are those issues with workforce and capacity, because we're the sum total of the efforts of those who work in our services. The settlement gives us a chance to start to address some of those, but I think there are both systemic and immediate pressures in winter, for example, in social care, that we've got to get to grips with.

Dave, anything further to add that hasn't been covered before?

I've touched on the care issue several times, and I won't do that again. We are experiencing pressure, however, in terms of qualified social workers as well. Like Huw referenced, we are seeing people make alternative career choices in light of the pressure they've been under over the last two years, and that's something we're very mindful of, particularly in children's services. Those pressures will be particularly acute, moving forward. Thank you.

Mike, please.

Can you provide an update on the cost of the workforce action plan for social care that you've talked about? I think it's probably for Dave and Anthony.

I think if we just ask Dave to answer this one, because it's social services, or social care.

I'll give that a go. Certainly, from an ADSS Cymru point of view, if we had aspirations to move to a minimum cost of £12 an hour, depending how that's implemented and its impact on differentials and management costs et cetera, it would probably cost somewhere in the region of between £330 million and £500 million—so, you know, a very weighty cost, moving forward. But, as I said, there's a lot of devil in that detail, if you like. That costing needs to pulled apart, but it is a significant investment in our workforce.

Could you move on to the next question, Mike?

Can you explore whether the increase in budget provides the additional resources necessary for 2022-23 to maintain the service delivery? And, more importantly, I think—perhaps this is aimed at Huw Thomas—what are you doing to drive down fixed costs? I know local government's been really good at it—and I don't want Anthony to tell me all the things they've done, but reducing energy costs is one, reducing the size of the estate by getting rid of obsolete buildings, reducing rates. I'm never going to go through all of them, but there is a lot of things you can do on fixed costs. What have health done about it, because it doesn't seem to showing on anything I've ever read?

There we are. Huw.

Thank you. If I look at the first part of your question first in terms of maintaining service delivery there, services will have to change. I'll come back to that point about having had two years now where services have changed as a result of the pandemic, and further costs have been embedded into the system. Some of those costs would have to come out. So, there are choices that we will now have to take as a result of that.

The second part of your question, there are a number of strands to it, and I'll just try and pull together some of those strands. Firstly, if I directly address the capital estate issue. We've had the opposite happening over the last two, years where we've needed to expand facilities and use further facilities because of issues like social distancing. So, actually, we've gone against, perhaps, the thrust of your question there. And that social distancing issue is one that I think needs some considered debate and discussion, because that has a big impact, especially on sites like we have in west Wales, which are quite aged, quite old and it's difficult to maintain social distancing without some considerable cost in place. And, of course, social distancing is something that is important not just in a pandemic, but to deal with infection prevention and control issues that we deal with on an ongoing basis.

But there are examples I can give you of where we have decarbonised. The decarbonisation fund that we were able to bid into last year, into Welsh Government, has allowed us to put in a solar farm in St David's Park in Carmarthen, and a ground-source heat pump in Cardigan Integrated Care Centre, which supports us with decarbonising, but it requires capital to be put in in the first place.

I think there are some other areas, then, that I can go into in terms of staffing and the staffing model and the mix that we've got, but, fundamentally, the challenge that we're trying to deal with here is managing our demand and to use that as a way of supporting at least not seeing an increase in the need for our estate, and see how we can manage our bed base better as a result. 

Mike, do you want to ask your next question to Anthony, maybe, or are you interested in hearing responses from the others?

No, I think I know that the answer from the others is 'yes'. What I would say on social distancing to Huw Thomas is that the best way to have social distancing is to have people working from home. There's no reason why finance staff, personnel and human resources staff can't be working from home, but that's something for you as an organisation to think about, as an idea to you.

Regarding the WLGA, you've said that you will incur significant unfunded costs if councils are required to maintain the free-school-meal voucher system. I think, as somebody who really wants them to maintain the free-school-meal voucher system, how much is it going to cost and why can't you find it within the resources you've just been allocated?

To Anthony, yes.

That needs to be viewed in the context of the evidence document that we've given. I think it's a hypothetical statement, really, of what will need to happen to schemes if they're required to continue without funding being baselined, or continuing the hardship fund. Of course, we all want to expand the free-school-meal system to benefit all primary school children, as contained in the agreement document between Welsh Government and Plaid Cymru. I'm really positive about that as a policy ambition, but it does come with costs, both in terms of capital and improving facilities within schools, and, of course, in terms of revenue. We've made a number of improvements to the free-school-meal system across the pandemic. We were one of the first authorities that started paying families directly when children weren't in school, and that doesn't come without a cost, even if it is a policy objective that we share.

I think that one of the things that we really do need to start getting people discussing is the capital costs of expanding free school meals, because the kitchen capacity and the hall capacity are based on a certain number. If everybody is going to be partaking, there are going to have to be things done. Have you had these discussions with Welsh Government about that?

Yes, we've had very encouraging discussions over the last couple of months. I know colleagues have spoken with colleagues in Welsh Government about this, and it seems like there is a pragmatic plan that's being made to see how we get there.

Fine.

Lovely. We'll go on to the final set of questions, from Rhianon, and I beg your indulgence to go over by about five minutes or so, just because we're running a little bit behind time. Rhianon. There we are.

Thank you very much. In regard to your assessment of the savings that you're required to make, I'd like a comment around that—that would be very useful. And also, in regard to the highest priority attached from Welsh Government to NHS treatment delay, do you feel that that is reflected in the draft budget? Two separate questions there, if you could do them briefly in one.

There we are. Shall we start with Dave Street?

Certainly. From a social care point of view, in terms of the year we're about to move into, there will be no savings requirements as far as we can see. The settlement will be sufficient for us moving forward in the current year. As we've already touched on a couple of times, obviously the potential uplifts for the two years after that are going to be more challenging and dependent on what they come out as, and indeed how those pressures that I referred to previously come about. We may well be into the territory of savings, but in terms of quantifying those at the moment, that really isn't possible. 

Anthony.

Well, we've been looking at savings ahead of the draft budget. We've identified about £1.5 million of savings this year within Torfaen that are not requiring any service diminution, and therefore we're keen to take them anyway because we believe they're genuine efficiencies, and that will allow us to reinvest that money. We're very keen to get—I know it's a cliché—further up the stream to deal with more in terms of early intervention and prevention, and I believe this settlement will give us a chance to do that, to make what I would call genuine savings as opposed to cuts and look to move that forward. I think local government has got a good record of delivering savings—I think about £1.1 billion from 2014 to now, up to 2021. So, what we can do to reprioritise the money that we spend is something that we continue to focus on. And it's good to be able to have that conversation about reinvestment as opposed to just trying to meet a decreasing bottom line all the time.

Huw, I think there was a specific question in there around the NHS that you might want to address.

Indeed, thank you. If I just address the first part. Clearly, we've had two years where we've not really been able to deliver much in the way of recurrent ongoing savings, and while the sustainability funding from Welsh Government addresses a part of that, it doesn't fully address it. So, there is a degree of catch-up that we will need to go through for the next year.

But to come back to, I guess, the opportunities, the funding going into social care, I think, will really help. I mentioned earlier the delayed discharges that we've got in our system. Clearly, seeing that being eroded will make a big difference to our premium agency staff that we've got in our patch. So, I see that making quite a big contribution to the savings we can generate in health. And the investment that we've seen as well coming into digital, I think, really will help through the digital priorities investment fund. And there are four areas there that I think will make a real difference to us. Firstly, expanding the use of the Welsh clinical portal, which essentially makes sure that the digital health and care record is available more broadly and available for patients and the public and for clinical staff. I think that will be transformational. I think that will really help us become more efficient and effective. Improved services for efficiency—things like electronic prescribing—I think will, again, be a transformational investment for us. The roll-out of Office 365, Microsoft, I think, coming back to the earlier question, has enabled us to work from home, and I see that being an embedded part of the system and there will be benefits from that as well. Developing a more open infrastructure and using the cloud more effectively are things that deliver real digital efficiencies and will be hugely beneficial.

The last point, which links in to investment in value-based healthcare that we've seen coming through, is the national data repository, using data more intelligently across our system to drive different business decisions. I think that will be an important indicator of where we can go at for future opportunities. But that investment in value-based healthcare, which is about £20 million across Wales, will really help us focus on measuring the outcomes that matter to patients and put those at the heart of our resource allocation. Coming back to Anthony's point, that helps us then give the evidence base to shift investment upstream into that prevention space and avoid the more expensive interventions that need to be made separately. 

The integration fund as well is something that we've not mentioned up until now but is worthy of mention. It just places us with some certainty in the way in which we can now work across health and local authorities, and I think that gives us a new way into collaboration.

One of the challenges we’ll probably have is, clearly, time—time to plan for some of the improvements that we need to make, and management capacity, as we’re still dealing with a pandemic and need to plan for a post-pandemic, more savings-constrained environment. So, that’s an indication, I guess, of where we are on savings.

In terms of your second question, on dealing with backlog, I guess I’d go back to my previous answer: there is a significant backlog in the system at the moment, and the challenges to address that are probably as much workforce as they are financial—more workforce than financial. We’ve got constraints across the system. So, our sites are constrained, and, very much welcome, in Hywel Dda there’s been investment of £20 million into a modular solution down in Prince Philip, which will give us greater space and give us greater opportunity to get through more patients, because the space will become less of a constraint for us. But workforce remains a concern in that space. And also the independent sector is itself constrained. So, it’s not as if we can go out to the private sector and seek support there either. We will, but not to the extent that we need to.

And the latent demand is the other issue, and that’s a concern that, at the moment, is in the unquantifiable space for us, and that’s a concern for me. So, I hope that gives an indication. I think one of the important things for us to think about is not just dealing with the backlog, but recognising we will have a backlog for some time. How do we make sure that patients waiting are kept safe, are kept well, and are supported through that journey? And I think that comes back to the investment in social care—I think there’s a part to play there; unpaid carers—there’s a part to play there; and how do we support with digital interventions for patients, to make sure we’re continually monitoring and supporting.

Thank you, Huw. I think that was a very holistic overview, in terms of the transformational times that we are in, and also the digital aspect to this also. So, thank you.

Dave Street mentioned the £500 million, potentially, needed in terms of workforce capacity sustainability across local government social care, and also the very significant capital investment we need to rebalance public sector service models. So, in regards to dealing with the pandemic and, obviously, the workforce challenges that we’ve already gone into, with the need to transform our services, do you believe that the allocations in the draft budget, which are considerable around social care and health, strike an appropriate balance? Do you believe that it will really, essentially, in a nut shell, be able to transform services? I don’t know if social care wants to take that first, or Huw.

I think Dave.

Thanks. I think they are. I think that Huw made a really important point earlier around the integration funding had been available, the integrated care fund particularly. So, this isn’t a journey that’s new; it’s a journey that we’ve been on for some time. It's probably—. In some areas, it speeded up because of the pandemic, and in other areas it slowed down because of the pandemic, depending on what the service requirements were. Integration in its own right is great from a service delivery point of view and in terms of people receiving the service. It doesn’t necessarily pull the cost base down particularly significantly.

Peter talked a little earlier around the whole issue of parity of esteem between NHS and certainly social care staff. If we are going to push on with that agenda, that is going to take more than 12 months to deliver. It’s going to take a significant period of time, because it’s very much about the public perception of carers, which we can work on as well. So, I think there’s little doubt that the settlement puts us in a strong place to meet those commitments around things like the real living wage. That begins to take us on a journey that we want to be on, but it is a long-term journey, with a substantial cost attached to it.

Shall we go to Huw as well?

Chair, thank you. I guess I’ve alluded to transformation that we can do of our services. I think I want to talk a little bit more broadly, if I may, about population health, because I think this is an area that we really need to think about our role, as health boards and pan-system, to think about population health. Your point about additional funding—I think we do need to think about the totality of our current funding, and how do we use that and deploy that in the most effective way.

So, I think there are two opportunities for us. I mentioned value-based healthcare already, where we'll put the outcomes for patients at the heart of our decision making, but the second bit I think is the foundational economy, and I think that's an equally important agenda for us across the public sector to be thinking about. In some ways it's about embedding the Well-being of Future Generations (Wales) Act 2015 in the way in which we work day to day, but I think it's very powerful. It's not just about buying local. I think there's far more to it than that. It's about, certainly, the goods and services that we buy, but it's also about the way in which we recruit locally, and how do we become much more targeted to support our most deprived communities to give them opportunities to work in our system. We've got 102 apprentices in Hywel Dda at the moment, and we're supporting another 200 staff to go from being healthcare support workers into nurses. That addresses, yes, some of our nursing challenges, but it also gives opportunities to people who wouldn't have otherwise had those opportunities to come into the health board. So, I think that's important. 

The next thing is how do we use our estate more effectively as public assets. Solar farming in St David's Park is one example. And then, lastly, how do we use our intellectual assets to draw in funding into our communities. So, we've developed the TriTech Institute, which brings together research and development and clinical engineering in Hywel Dda. That's based in Llanelli. It's brought in about £300,000 or £400,000 of additional R&D spend into that part of the world, a part of the world that really needs investment, and that's been commercial investment that's come in. 

So, I just wanted to briefly emphasise that it's more than service transformation. I think this is about transforming the way in which we think about our public expenditure, to be a value creator for our local communities. I think that then starts to—in a small way, admittedly, perhaps—address some of the social determinants of health and move us upstream, in Anthony's words, in our thinking. But the constraint is, of course, capital, which itself is a big economic driver. That is a challenge. 

That brings me on, very nicely, into my last questions, which I'll combine, because I think we're running out of time. So, in a sense you've already all alluded to this, and you can give a simple answer if you wish. How critical is capital funding for transforming services, bearing in mind the draft budget, which, yes, is unprecedented in this area, but is it enough to create the transformation of services that we are needing, particularly around the public service model recalibration for social care? Is it enough to deliver the sustainability of workforce and stability and resilience of organisations? I don't know who wishes to answer that first. 

If we go to Anthony first. And I suppose the follow-up from Rhianon there is: if it doesn't, then why doesn't it? It's—. Sorry, Anthony.

Very neat. 

Capital investment is vital. We've just opened a centre called Tŷ Glas y Dorlan in Cwmbran to try and deal with some of the aspects of delayed discharges, for example, and the need for flexible care for people who don't need to be in hospital yet can't return to their homes. The more capital investment we have, the more we can help transform services, especially in the environment we find ourselves trying to transform within. That balance you have described between recovery and transformation is vital. So, the more capital funding we can have to help us do that, the better, in social care and more generally as well. 

We'll go to Huw and then on to Dave.

Chair, thank you. I think I'll pick up three points there if I may in response. Capital is fundamental for service transformation, but actually we're starting with a baseline here where we have significant backlog maintenance. So, before even we get into service transformation, there is a degree to which we need capital to keep the lights switched on, to maintain safe sites, to maintain equipment that's safe, to make sure that we're using modern digital equipment. Now, we've made some investments in the last two years, so the digital side has been less of a challenge for us. But certainly on our estate, that is a worry and an issue.

Moving on into transformation, for us, I've already spoken about moving care into the community. We need those integrated care centres, we need the support in the community, but we also have that big proposal for a new hospital. That comes with a very—[Inaudible.]—and would be transformational, but clearly comes with big challenges. But the last point I think is that, when we're building, the economy benefits. So, it's important for economic transformation as well. So, this isn't just a health and social care issue, it's a broader economic issue, and the opportunity that we're missing by not investing. 

And Dave, finally, I think you get the last word because I think we've rapidly run out of time. So, don't worry about—.

I'll be quick. I think we have some choices, don't we, as far as social care is concerned. At the moment, in Wales, we are extremely reliant on the independent sector as far as adult services are concerned, and almost totally reliant on the private sector as far as children's services are concerned. If we want to maintain that, then we're just looking at those maintenance costs that Huw referenced. If we want to rebalance that market and bring some of those key services back within the public sector in Wales, then there's going to be a significant capital cost attached to that. There are some risks in doing that. We have to be very careful that we don't throw the baby out with the bath water. We can't go down the route of 'public sector good, private sector bad'. The reality is much more complex than that. But if we feel there is a role for the public sector to a greater degree in providing those key social care services, then that has to be backed up with capital funding. Thank you, Chair. 

Lovely.