Finance Committee

So, we'll move on.

We'll move on then to item 3, which is our substantive item for the morning. It’s the scrutiny of the second supplementary budget for 2024-25, and it’s an evidence session with the Cabinet Secretary. Could you introduce yourself and your officials for the record, please?

Diolch yn fawr, Cadeirydd. Mark Drakeford ydw i, Ysgrifennydd y Cabinet dros gyllid. A gyda fi y bore yma mae Andrew Jeffreys a Sharon Bounds, a dwi'n gwybod bod y pwyllgor wedi cwrdd â nhw i gyd o'r blaen.

Excellent. Thank you very much to you.

And thank you for the written evidence and the documentation that we’ve had prior to this meeting. We’re going to go through some of that this morning, in the next hour or so. I’d just like to start by looking at the overall changes and expenditure set out in the second supplementary budget.

Can you summarise for us the process you’ve gone through for this, for the additional allocations and then to identify any underspends leading up to the supplementary budget? So, how have you come to present this supplementary budget?

Well, thank you very much, Chair. So, this second supplementary budget doesn’t change, in essence, from all supplementary budgets. They are essentially regularising parts of a process where we make sure that expenditures that have been identified, and revenues that have come into the Government since the previous budget, are codified, brought together and made visible for everybody.

While it’s no different in character from any other supplementary budget, it is different just in terms of scale, because there is more money to report to you in this second supplementary budget than would normally be the case. There is £629 million of revenue reflected in the second supplementary budget, and there is £257 million-worth of capital. So, it’s getting on for £1 billion. And so, in scale, it is different, although the purpose is the same.

Underspends, Chair, you mentioned. Underspends are one of the many moving parts that lie behind the second supplementary budget. There are a number of things that change over the period that are not in our own hands. They are the supplementary estimates procedure of the UK Government—that is reflected in the second supp—there are changes to the block grant adjustment; there are changes to devolved tax forecasts. All of those things happen over the year. They are all reflected in here. And, then, there is a series of decisions that the Welsh Government makes itself.

At this point in the year, underspends are one of the things that preoccupy me, because we’re in the business, now, of trying to land a very large budget as close to the postage stamp as we possibly can. And, therefore, money that isn’t being spent, and gets handed back, as they say, to the centre, at this point in the year, becomes particularly critical to manage. So, there is a process for that: every month, there is a report on how expenditure profiles across the Welsh Government are developing. In the first half of the year, it’s a monitoring exercise. You watch what’s happening, make sure there’s nothing unexpected happening. But, in the last quarter of the year, you really are watching very carefully to make sure that nothing unexpected is happening, because unexpected movements of money close to the end of the year are much harder to accommodate.

So, I have a monthly meeting, my officials meet with their counterparts in the department, they produce a monthly monitoring report, I meet with them. And, at this point in the year, and for a few months now, I have been reporting that to the Cabinet as a whole. Once I have it and I've met, I report it to them, because I need my colleagues' help to manage the budget, to make sure that I am sighted on anything that they know about, and that, collectively, we're able to manage underspends in a way that doesn't lead us into difficulties in that final reconciliation.

Mike, do you want to come in on that?

You can always clear underspend, can't you? You can give it to local government, for example. It goes onto their books, not yours, so, it actually gets the money out of the Welsh Government.

Mike Hedges is right, Chair—there are some ways in which you can pass money on quite late in the year. There are not that many of them. I have made a decision of that sort in February, where we made the decision to allocate £50 million out to Transport for Wales, or the transport main expenditure group, and to higher education. Now, those are two places you can pass money late, as you can, in some parts, to local government, but you can't do that everywhere across our system.

But you can do it in further education, can't you? And you can do it to housing associations. So, there are quite a large number of places you can do it. Whether you think it's a good way of spending money, that's your decision, but the ability to get it out of the door is possible, up until—I was going to say the last day, but that's probably a slight exaggeration, but—the last few days. What we don't want to do is what happened in the past, and we're giving money back to the Treasury.

Mike, that's the balancing act. I am very keen that we take money into next year in the Wales reserve for us to be able to manage next year. There is no central reserve in the budget that was passed earlier this week. So, the only reserve that I will have next year to manage unforeseen incidents is the Wales reserve, so, I want to make sure that that's healthy. But I don't want to be in a position where I can't put money in the Wales reserve because it's already so full that there's no more room in it and money ends up being handed back. Those are the moving parts you're managing at the end of the year, and underspends are a more critical part of that calculation, at this point, than they would be earlier.

Sam.

Thanks, Chair, and thank you for your opening response to the Chair, Cabinet Secretary, in particular around your—. Because what struck me about the supplementary budget was the scale—not necessarily the complication of it, but the scale of it. I was wondering how much confidence you have that the reasons behind that scale aren't because of, necessarily, poor planning from yourself and your officials. Without getting into Donald Rumsfeld territory of 'known unknowns', and all that sort of jazz, how much of what's happened and what we're seeing here has been outside of your control and hasn't necessarily been issues or areas that you would have expected or been able to plan for in a way you ordinarily would be able to?

Well, Chair, the vast bulk of the nearly £1 billion that we are allocating through the supplementary budget was as a result of the autumn budget. So, we've been preoccupied this week with the £1.6 billion additional that came through the budget for next year, but there were very significant in-year allocations through that budget, primarily for pay, but not exclusively for pay. So, if you were looking for the one reason why the sums in this supplementary budget are larger than would normally be the case, it's the autumn budget, and the money that came to Wales as a result, that lies behind these figures.

Thank you.

Taking that on from what Sam was saying, you obviously manage the budget and manage the MEGs, and your colleagues in the Cabinet. Has any of the—? And you've been monitoring more closely, obviously, towards the end of the financial year, to make sure. Have any of those underspends been a bit of a surprise, or something where you've thought, 'Oh, actually, we thought our planning was pretty good on this, and something's thrown it out'? Have any of those aspects caused you a bit of a headache?

Well, actually, in my experience, Chair, this has been a year where that has been less of an issue. I have been a finance Minister in previous years when I was taken by surprise sometimes by sums of money that got handed back late in the day. But I think the reason why it's not been such an issue this year is, of course, that this has been the year when colleagues have been managing the consequences of decisions last year, which were all about reducing budgets. So, everybody this year has been managing a much tighter budget than might have been the case in the past, so, the scope for underspends emerging, I think, has been much less this year.

So, are there any learnings, then, from—? Obviously, you've mentioned that there's more money now in this, and we've gone through this in detail in the Senedd over the last couple of days. What are you going to learn from the way you've managed, effectively, a budget that was very constrained to one that is a little bit more plentiful, if you like? What discipline will be moved forward into next year?

Well, there will be a number of ways in which we will do that, Chair. I think I've said in front of this committee previously that I have a small anxiety ticking away in the back of my mind as to whether or not the system will absorb the amount of additional capital we've been able to allocate this year, because systems where your tap is turned on quickly can sometimes struggle to be able to find ways—. Because it's not just the money, is it? As we all know, there are all sorts of other constraints, in the construction industry—

And it's making rash decisions rather than thought-out decisions as well, I suppose.

Well, I will be very keen to make sure that people are not making decisions just to get rid of the money. But what that means, I think, is—. I said to you earlier that the monthly monitoring system, in the first half of the year, historically, is watching the unfolding story. I think that that's going to be something we will need to manage earlier in the process. I will be looking for any early signs that plans to spend the money are not getting off the ground, or where there are new constraints that hadn't been anticipated. Because the earlier in the year I have a sense of whether there is going to be money, the more time we have, collectively as a Cabinet, to find other, proper purposes for that money, rather than last-minute purposes designed just to manage the money rather than to pursue the purposes we would want to pursue. So, I think it would be moving that level of scrutiny earlier in the process. There will be other things we will do, and Andrew will say something about that.

Yes. So, one very concrete difference between next year and this year already is that we've not overprogrammed on capital next year. That's something that we did this year and last year, partly because of how tight budgets were. We overallocated the capital budget above the actual departmental expenditure limit that we'd been set. So, we've not had to do that next year, so, that means that the capital position that we're managing next year is quite—the starting point for that is quite—different from what it has been in the current financial year. So, yes, managing a budget in a year where you're not starting from a position where there are massive pressures already built in, that process is a bit different in practice than in a year like we've been in, which has been—. We knew, when we started, that all the budgets were incredibly tight and there were very, very big pressures across the board.

And I suppose part of what you're starting to look at now is the spending review, and that aspect will aid in some of this work as well, I'd imagine. Could you give us an update of where you're at with that?

So, the Wales spending review has moved on since I was last in front of the committee. It does remain intimately connected with the UK Government's spending review, the results of which we will know on 11 June. But, in preparation for that, and to make sure that we can carry on this work—. And I should say, Chair, I may have been guilty myself sometimes of describing the Wales spending review to you as though it was an event—it's something that happened and it would be over and there'd be a report at the end of it. Actually, that's not how I'm thinking of it. I want the longer term approach to spending to be a continuous feature of the way in which we think about our budgets from now on. If we have, as the UK Government has promised, three years of revenue, four years of capital, and every two years a spending review to push that into the future—if all that works out, we will, from now on, have those longer term horizons, and I want the Welsh Government's approach to budgeting to match that. So, the spending review is as much about setting up that culture as it is about having an event that starts and finishes.

But the position we're in at the moment is I have met, I think, now almost all my colleagues; I think there are one or two I'm still to meet. We have been making sure that, with their help, we've been identifying people beyond the Senedd who we need to draw into that conversation. We've been exploring the revenue-raising part of the Welsh Government's budget as well as the spending part. And I am very keen that the Welsh spending review focuses on those cross-cutting issues that are not the responsibility of a single Cabinet colleague.

I think you asked me a question earlier on about learning from the experience of all of this and one of the things that I've felt that I've learnt is—. You know, we're a small Government, we live very nearby to one another; we're not like Whitehall, where colleagues don't see each other from one end of the week to the next because they're out at the Elephant and Castle, or wherever they have been exiled. Here we're all, you know, physically very close, and that ought to give us an advantage in that cross-Government way of doing things. Nevertheless, it does remain a struggle to make sure that you find the time and the resource of energy and so on to attend to the things that are not just exclusively your responsibility. Because those things crowd in on you every day. You know, when you come in, it's the things that are on your desk that tend to push themselves to the front, and the things where you have to make a contribution to everybody else—it's harder to give them the priority, despite the fact that we should have some advantages in that way. I think the spending review is a way to try to, you know, give those cross-cutting aspects of the Welsh Government's life more prominence amongst our colleagues. So, we've been talking to them about that.

Just following on from that—and it sounds very interesting—you need to put civil service resource into it as well; is there enough there to—? Is the civil service, then, able to help to manage that sort of process or to help support a different way of thinking and to change a juggernaut? You know, it's—.

Well, the process is being managed by the Welsh Treasury, but in the same way as Ministers are being drawn in to interrogate expenditure areas for which they are not now directly responsible, we've taken the same approach with our civil service colleagues as well. So, we are augmenting the Treasury team with colleagues from across the Welsh Government, but always, if you're a person who is, you know, relatively senior in the housing field and you're helping with this, you will not be looking at housing budgets, you will be looking at, say, education budgets, to bring that fresh perspective and that sense that you're not, you know, directly connected to the outcomes of those decisions.

So, it's by mobilising help across the Welsh Government and some external—. You know, I don't want this to be entirely internally driven. We do need people who come from outside and see things that we don't see because we're too close to them or, you know, have become too familiar with them and so on.

You talked about the link, effectively, between the UK spending review and the Welsh one, and the process. How are those—? Are you involved in conversations with UK Treasury, and how close is that relationship now?

Yes, we are, Chair. So, the Finance: Interministerial Standing Committee was in Cardiff this time last week. The Chief Secretary did make a report on the progress of the UK spending review. He was at pains to point out that things are still at a formative stage and there's still lots of opportunity to be engaged in it and to influence it. There's to be another FISC in London in May, which will have a focus on this, and there was an agreement in principle—I wouldn't go further—that we may have an additional virtual meeting of FISC, if it's needed, to make sure that devolved Governments have the opportunities we need to feed into and hear about the UK exercise.

Thank you very much. Finally from me, we've previously made recommendations about the information publicly available in relation to the block grant and the consequentials. From your perspective, how have you found preparing this supplementary budget to previous years? How satisfied are you with the information that you are receiving from the Treasury? And how helpful has that information received been in determining how this budget is going look at year end?

I think we can genuinely say that things have been better this year in terms of the information flow from the UK Government. We had a great deal of information in October that, in previous years, we wouldn't have had until much closer to the end of the financial year. This too was discussed at the FISC last week, and I think this was a common theme amongst my colleagues. We all felt that we had had a better level of engagement, a better level of opportunity. I think the Scottish Minister raised the point of how can we embed this in the process so that it isn't vulnerable to changes of personnel—a different Chief Secretary or whatever. And the current Chief Secretary did offer to do a piece of work to codify the way in which information has flown this year so that it becomes more like a rulebook for the future, rather than just a—

And that would surely help any future finance Minister here to be able to plan.

Absolutely. So, I think that was generally welcomed by my colleagues as well, and we'll return to that in a future FISC.

And you were chairing the FISC this time.

I chaired the FISC this time, which is a helpful place to be. But when you're chairing things, you're constrained in some ways, in contributing, because you want to make sure that your colleagues have all the opportunities they need. So, the Chief Secretary will chair the next one in London.

Yes. On that note, I'll pass over to Mike Hedges.

Can you describe how the block grant has changed during the year and what are the reasons for the change?

So, there has been a change to the block grant, as there always is. The most recent change has been as a result of the UK Government's decision to change stamp duty land tax, as they would call it, for England and for Northern Ireland. So, they raised some of the rates, which means they take in more money, and therefore the block grant adjustment goes up because we have to—. The block grant adjustment depends upon the relationship between the way money is raised in England and Northern Ireland and how we raise money here, so there was a net increase of £20 million or so to the block grant adjustment. The good news from our point of view is that that is well offset by increases in the tax forecast from our taxes. So, although the block grant adjustment has gone up, the anticipated income in Wales, from landfill disposals tax and land transaction tax, has gone up by well past £20 million. So, in the round, we continue to benefit from the way that taxes are managed here in Wales. I think it's an £88 million increase in the Office for Budget Responsibility's forecast for the amount of money we will raise, and that offsets the £20 million increase in the block grant.

So, that nets to about £60-something million.

Yes.

It's on the positive side. Has there been any change due to the estimated amount of income tax—and that would've been about three years ago, wouldn't it—and the actual amount?

Yes, Chair. And again we are positive beneficiaries of that. I'm relying on memory now because, as well as the in-year changes, there are adjustments for the actual—. You know, the figures in the budget are a combination of estimates and then reconciliations from previous years for what actually happened. The good news from our point of view is that I think the estimates, the gain we will get from the estimates, is around £280 million, and there was about £50 million-odd that came our way as a result of the reconciliation. So, it's around £320 million extra that you will see in next year's budget as a result of those two different forces.

And it's bound to be even better the following year, isn't it, because we had big increases in salaries last year, and therefore the income tax. And we didn't get the benefit of that in-year.

We are expecting further positive impacts on the Welsh budget. It's partly for the reason—one of the big reasons is the one that Mike has mentioned. In a way that is perhaps—. I don't know how I'd describe it, but one of the other reasons is because fiscal drag has a more positive impact in Wales than it does in England, and that's because we have more people at the bottom end of earnings. So, it's not a great reason why this should happen, but because of the decision to freeze tax allowances, we have more people at the bottom end of the income stream being drawn into tax, comparatively, compared to England. That's partly as well what is driving these positive figures for Wales.

Just on that point, with the national insurance contributions for employers, one of our witnesses, I think, for the budget suggested that that could impact on pay rises in subsequent years. So, that would have a bearing, then, on the tax take, because the increases in overall salaries would be, potentially, less. So, is there some thinking into the mechanics behind that? Is that modelled through at all?

Andrew will know.

Yes, so the OBR's forecast at the time of the UK budget in October for income tax will have adjusted—did adjust—for the expected negative impact of the employer NICs increase on future salaries. Yes, so that's definitely—

So, that will feed into, then, that—

That will feed into both the block grant adjustment in terms of the growth in the comparable England and Northern Ireland tax base and in terms of our receipts in terms of the Welsh rates of income tax. I guess the interesting question is what's the differential impact there, if any, and how does that affect our—

And is that something that you're monitoring and trying to get your heads around it to understand it?

Yes. It's really difficult, because there are so many different things going on in the forecast at the same time. But, yes, that's definitely an important factor in looking forward over the next few years.

Okay. Thank you.

I'm hoping to have two yeses on these questions. You've allocated £264 million for pay in this budget; can you confirm that the pay deals are being fully funded by the Treasury, and can you also confirm that local authorities will have the amount of money going to teachers?

Well, the answer to the second one is straightforwardly 'yes'. The answer to the first one is also 'yes', only it's not just money from the Treasury, it's money that we had—. We made a forecast in our own budget for pay, and then we had extra money on top of that. The combination of the two means that the answer to the first question is 'yes'.

Okay. And you've made a smaller allocation associated with superannuation, or SCAPE—superannuation contributions adjusted for past experience—as it's described in this budget, than in the first supplementary budget. Is that fully meeting the impact on pensions, or is there some gap somewhere?

There is no gap.

Thank you. I've finished.

I'll bring Sam in, then. There we are. Thank you.

That's the way to ask questions.

I'll learn from the best, Mike. Thank you, Chair. Sadly, mine are probably less 'yes' and 'no' responses, Cabinet Secretary. I wanted to look at some more specific points within the transfers. There's this category described as the First Minister's priorities within this supplementary budget. Perhaps you could just describe how the funding for this category has been decided.

So, I was keen that the second supplementary budget reflected the work that the First Minister did over the summer and into the autumn, with her listening exercise and the four themes that were identified as a result of that. So, I think, truthfully, that quite a number of the expenditures that you see here would have been expended in any case, and you would have just found them identified in the portfolio areas where they fell. But given the prominence that there has been on the First Minister's priorities, and in order for people to be able to understand how money was mobilised to meet them, I thought it would be sensible to identify them in the way that they are in the documentation. So, to give you an example, obviously, iechyd da, a healthier Wales is the first of the First Minister's key priorities, and we have provided more money for waiting times and we've provided more money to support women's health, and that is reflected in the supplementary budget.

I would have anticipated that we would have always wanted to provide more money to support the health service, but now you can see it aligned with the First Minister's priorities. And you can see that against all four of them in the second one—the jobs and green growth; there is more money provided to accelerate the planning system. Now, that's been a theme across our border as well; it's been the theme of successive Governments—that we need to invest in the planning system so that applications can flow through it more quickly and so on. There's money in this budget to do that, and that follows through all four of the themes.

Thank you, Cabinet Secretary. And my follow-up question to that is that you felt that that was a cleaner way of describing those movements rather than within those traditional MEGs.

Yes, it's just visibility and trying to make the decisions that lie behind it visible to people who've got an interest in that.

Yes. And has any of it been complicated within this financial year, being unusual politically—I think that's three First Ministers within a financial year? Has that added to the complication of the budget planning within this financial year, do you think?

I don't think that turnover in First Ministers has complicated it. I think the current First Minister was very keen, as a result of the work she did over the summer, to have a small number of very clear priorities that she would pursue through the year, and that is more reflected in the way we've reported the second supplementary budget than would have been the case otherwise. So, I don't think it's because of the turnover; I think it's because of the approach the First Minister has taken.

Yes. And—

Just on that, sorry, just to explore that a little bit further, I suppose—not necessarily the changeover of First Ministers, but a real churn of Cabinet Secretaries and Ministers—does that have more of a bearing on departmental managing of budgets and priorities, and obviously different people have different priorities as to what they want to achieve? So, has that had more of a bearing on maybe some of the challenges when managing budgets?

I don't think myself the challenge comes because new Ministers have radically different priorities to their predecessors. There is a programme for government—that has not changed; all my colleagues are focused on pursuing that and delivering that. It is inevitably the case that when people—even the very experienced people—are taking up new responsibilities, they need some time to get to grips with them, and when there are people who are new to Government, then they've got even more things to get to grips with. They've got very experienced teams, generally, at the civil service level, behind them, and I have done my best, having been around the track a few times before, to always be available to my colleagues where they want to check anything or to explore something or make sure they've understood something, and I hope it's one of the things that I've been able to offer my colleagues who have maybe slightly less experience than some others.

Thanks, Chair. And to build on that a little further, Cabinet Secretary, you described the First Minister's responsibilities as they are, one of which essentially is to seek to improve waiting times, as I'm sure we all would see as a priority and would agree with that. And you described also, rightfully, your experience, and, I guess, the respect that your colleagues would have for you in your role. How was your role in challenging and ensuring that those allocations provide value for money and are likely to deliver on the objectives that have been set?

Well, Chair, I do think that is one of the things that I am there to do, and not just with waiting times, but with all proposals for expenditure. I would always have expected, at an official level, that my team would have been involved in any of those discussions, and when there are significant sums of money involved, that I would be directly involved, and there's £50 million being provided for waiting times work this year.

That sum of money was the result of some very detailed work that was done by officials in the health department, working with local health boards. Every local health board had to provide its own plan; it had to show exactly how much activity it was able to undertake—additional activity and how that additional activity would be secured: some of it from within the health service, some of it from outside the health service. There had to be very specific input figures: how much will that cost; and very specific output figures: what would that money buy in terms of additional treatments and additional investigations and so on. And I absolutely sat down with the health Minister and his team, when all that information came in, to test some of those assumptions and to check that there weren't radical variations between health boards in the amount of money they were asking for for the same sorts of activities.

Now, since then, Jeremy Miles, as the health Secretary, has a weekly update on all of those things. He is monitoring it at a level of detail that I think is important to me, because—. I said to you I would have anticipated in any year needing to provide some additional assistance to the health service, and I anticipate that I will be offering some additional help next year to carry on the work that's been done this year. Well, the level of confidence I will have in that will depend an awful lot on how the £50 million this year has worked out in practice. So, that's why Jeremy's weekly monitoring is so important. If the health service can demonstrate that the £50 million has delivered the activity and the outcomes that it said it would, that will give me confidence in providing money next year. If the £50 million hasn't delivered, then there will be a different level of scrutiny on any proposals for next year.

I suppose the only and final thing to say is that there is another strand in this, because, of course, Julie James, in her delivery capacity, is also part of that oversight mechanism to make sure that the money provided this year is actually delivering.

As part of all of that, what strikes me from my background is that data is really important in all of that. Are you investing any extra into good data collection, accurate data collection, data being able to talk to each other so that it gives you a better way of monitoring and in nearly real time to be able to actually see what you're trying to see? So, yes, if Jeremy Miles is watching it on a weekly basis, is it giving him the information he needs?

As it happened, I had a discussion with Jeremy about this yesterday, and I do think he feels that he has got a grip of that information, and at a level of detail that genuinely allows him to see where things are happening in a way that was anticipated and promised and where there are places where more questions need to be asked. So, I think he—. Taxing as it is, because there is a huge amount of data, and it's every week, and you maybe wouldn't always expect a Minister to be grappling with that, I think he is, and I think he feels he's got what he needs.

But are you investing in people within the civil service who are data experts to be able to help to analyse what's going on, to take some of that burden away from a Minister to be able to understand it?

Well, those will be decisions that Jeremy would have made within his own MEG, so I can't answer confidently that he has. I didn't get any impression from him yesterday that he thought he was having to do things that would be better done by other people. He was just very keen to have that grip himself.

Yes, it's data handling and data analysis, I think, that are key. You've said that you're a small enough Cabinet to be able to talk to each other. Getting data to talk across MEGs as well, and across departments, is a real key to making that work in my humble opinion. Sorry, Mike.

If you spend more money, you’re bound to do more, but does the cost per intervention go up? So, you may give, let’s say, £50 million, and if every £50 million was providing a certain number of interventions, the additional £50 million doesn’t produce £50 million more interventions, it produces sort of 80 per cent of £50 million, and we’ve seen that in the past, haven’t we? As additional money has gone into health, the cost per intervention has gone up dramatically.

Well, Chair, it’s why I have been keen to make any additional allocations earlier in the year than has been possible in previous years. Now, in recent times, budgets have been very hard to squeeze extra money out of, and finance Ministers wouldn’t have had that confidence to be able to do that till quite late in the year, because you’re just not sure whether you are going to be able to do that. So, the decision gets later and later, and the later in the year you provide the money, the more the unit cost goes up—you’re trying to spend that money at the most difficult time of the year. The money arrives in the winter, and when you are shopping in the private sector, then the costs definitely go up when it is a seller’s market.

So, my aim this year, and we've succeeded to a certain extent, and my aim next year, and I hope to do better next year, is to provide the money earlier in the year, partly because the health service, stretched as it is, is better able to do more in the summer months than the winter months, and also because I think you get more outcome for your money if you’ve got a longer period over which to plan and spend it.

Thank you, Chair. I’m just briefly sticking with some of the health spending before I move on to other items. One of the items described in the budget narrative talks to a £35 million pressure, including a £15 million shortfall in funding from the immigration health surcharge. I’m just perhaps trying to understand how much that was able to be anticipated and why that additional pressure has occurred.

So, the way that the immigration health surcharge works, Chair, is that at the start of the year, the Home Office provides us with an estimate of how much they expect that money to be. That’s a combination of the unit cost—how much it costs somebody—and how many people you expect to arrive. So, at the start of this year, the Home Office said to us we should expect to have £150 million. It comes in two tranches. Halfway through the year, you get the first tranche, and we were given £75 million—half of what we were expecting, but there were warnings provided at the same time that the amount of money raised might not reach £150 million, because there were fewer people coming into the country paying that surcharge than the Home Office had originally anticipated. And those warnings turned out to be true, because in the second tranche, we got £52 million rather than £75 million. So, there’s the gap between what the Home Office thought we would get at the start of the year and what we actually have got at the end of it. So, we then have to find a way of plugging that gap, because we planned on the basis that we’d get the £150 million.

Is that just a Barnettised version of the UK numbers coming through the Home Office calculations, rather than the numbers coming to Wales?

Yes, 5.87 per cent, I believe.

Okay. So, it’s not considering people using necessarily the Welsh NHS; it would be UK-wide numbers.

No. It's that share; there's that fixed percentage that we get, wherever people actually go.

Which we can imagine would be more positive. I won't interrogate that too much further.

Moving on to perhaps just two more brief areas, if I may, Chair—the first one higher education. Of course, we’re aware of the pressures that universities have experienced, and you’ve allocated an extra £18.5 million recently to support them. I just wonder what your comfort level is, as Cabinet Secretary, as to the difference (a) that may make, and then (b) as to where the responsibility lies in terms of your role as Welsh Government to support that sector.

So, Chair, I think I said earlier on that the supplementary estimates in February, the amount of extra money that came to it, or the variation in the figure that came to Wales, was more modest than it has been in previous years. It was £35 million and it was additional. That is what gave me the ability to make up the last £50 million allocation across the Welsh Government between transport, and that's where the £18.1 million for higher education comes from—the fact that we had extra money at the end of the year. Capital is what we were able to provide. I know that I've talked in front of this committee before about the way that I have tried to use capital with my colleagues in a way that allows them to get revenue savings, and that's how I expect universities to use this money. They will want to use it in things that reduce their running costs in energy and so on. Almost all of them, I think, have got significant challenges in relation to modernising student accommodation. It costs a lot to run, and capital can be invested in a way that reduces those running costs for the future. So, that's the bargain here. Medr will actually allocate the money on to different institutions for different purposes, but that's how I would expect to see universities use it: to use it in a way that reduces their revenue pressures.

And then—. Sorry, Chair, briefly. The second part of my question is really about how—. And perhaps it's not necessarily for this item here today, but I guess it's treating in our minds the independence of universities versus the role of Welsh Government to either intervene or to involve itself, and I guess that that, then, has a financial consideration. I'm just wondering, from your perspective and your role, how you see that balance, and do you think that might shift over time?

Well, there's no doubt that the higher education sector in Wales and across the United Kingdom is feeling pressures. They're driven by some things that are not under our control in terms of the significant reduction in overseas students coming into the UK system, and the reduction in 18-year-olds in the population is beginning now to have a genuine impact on universities' ability to recruit.

The higher education sector in Wales is generously funded in comparison with other parts of the United Kingdom. I don't mean that they are generously funded, because public services, after austerity—. I don't think there is anything that's generously funded. But if you look, in comparison to other parts of the United Kingdom, we invest 18 per cent higher per student than Scotland, 22 per cent higher per student than in Northern Ireland, and, in comparison with England, if you take into account the maintenance grants provided for disadvantaged students in Wales, which are not available in England, then we invest almost twice as much per head as is invested in England. Now, not all of that goes to the institution. So, just to be clear, I'm including there the money that goes to those disadvantaged students as well, but it's all money that's going into the higher education sphere. So, I don't think that the difficulties—and they're real, and my colleagues will be working alongside universities to try to find ways through these difficulties—can fairly be said to be rooted in the underfunding of the system in Wales, compared to what's available elsewhere.

Just going back to what you were saying about you making capital allocations, how does that interplay with the overprogramming that was done at the beginning? How does that reconcile itself?

Well, we are managing the overprogramming this year. As you heard Andrew say, we made a deliberate decision not to overprogramme for next year. There are a range of ways in which we are dealing with the overprogramming that has allowed us to make this further capital investment. So, I look, first of all, to see whether we get any extra capital during the year, and we have; I look at the level of borrowing that we are undertaking, to see if I have to adjust that; and I look to see how my colleagues are managing their budgets. There are a series of ways. I can, if I need to, turn revenue into capital in order to manage overprogramming. By the different techniques that we have, and there are about half a dozen of them, we manage overprogramming, and we were confident at the time that this extra money was allocated that we had the headroom to do that.

Okay. Thank you.

Thank you, Chair. I'm conscious of time, so I'm just going to move briefly on to some of the allocations towards Transport for Wales. There have been some quite significant movements: an extra £147 million of capital funding to TfW in relation to the core Valleys lines, and another fiscal allocation of £62 million for depreciation. I’m conscious that a year before, if I remember rightly, it was £125 million to deal with some lower than expected ticket sales. I guess there are a couple of questions there. The first is: are you confident that the planning within that department from a financial perspective is accurate, is it strong, with quite significant movements that you're having to support? And then, secondly, are you confident that you're not just throwing bad money after bad money here because of the scale of funding you're having to move around within quite a short time period?

So, I think that figure of £147 million is artificially higher this year than I would expect it to be in a normal year, for two reasons. One is that there was expenditure that we had originally expected to be incurred last year, but which in the end wasn't, so it had to be provided for in this year. And I've also provided £33.9 million of that as expenditure that has been drawn forward from next year into this year, because I had the money to cover it this year. That will reduce the pressure on that core Valleys lines budget for next year. So there is about £100 million that is genuinely to do with overruns and overspends and so on, as the core Valleys lines continue to be that major investment that we are making in—and I don't use the word lightly, because I don't like the word—transforming the way in which rail travel in south Wales will be available in the future. But it is artificially inflated by those two factors.

I guess, even at £100 million, again going back to the question about your level of confidence as the Cabinet Secretary for finance that those estimates are being accurately determined, how does that sit with you?

Well, cost inflation in the core Valleys lines has been very real and beyond what was originally anticipated. But it's a programme we must complete; you can't leave a railway halfway between two of its stops. So we're absolutely obligated to do that. But what we are seeing now, I think, are some of the real advantages that we are getting as a result of a modernised railway and the modernised rolling stock that's running on it. The farebox for Transport for Wales Rail is considerably above where they anticipated it, because, as more people are using a service, which is a better standard of service and a more reliable service, they are seeing the advantages of it. So, I would expect to see that reflected next year. There still will be pressures in the core Valleys lines, because there still is work to be completed and the costs involved are higher than would originally have been expected.

Can I—? Sorry. You've answered the—

Sorry, the depreciation cost is just the actual cost that they are reporting to us. You've got a major asset, an ageing asset, and it isn't worth as much.

I guess my wider point, Cabinet Secretary, is the £125 million you had to provide for TfW last year because of, as you said, lower than expected ticket sales—I appreciate that that is changing now, which is a positive thing, of course. The additional moneys for the capital works, which I understand are inflation linked—some of that could have been anticipated, some of it couldn't have been. Do you have any general concern around the department in terms of the financial planning? That's the question.

No. It's a department we work with closely, because, as you see, this year and last year there have been quite significant amounts of money that we've had to move around to meet those costs. So, it's not a department that we don't have a close relationship with to try to manage all these pressures and these costs. But in managing them—and I have meetings directly with those officials—it's not because I think they are not up to the job, if that is the question that Sam Rowlands is asking me, you know, 'Is it just poor capacity and poor planning and things like that?' I think it is more that this is a major undertaking. The condition of the asset when it was transferred to Wales was not as good as it should have been, but we continue to be in discussions with the UK Government about recognising some of that—so, we're managing these costs ourselves rather than, as I think they maybe should be, on a more shared basis—and then there's just the impact of the pandemic and cost inflation immediately after it. So, I watch it closely. We, as a team of officials, watch it closely. But I don't think the problems are because there's a group of people managing it who are not up to the job.

Thank you, Chair.

Thank you. Just a couple of questions from me to come to an end. There is the local government MEG and there are significant transfers to capital reserves within that MEG to do with the social housing grant. And the budget narrative says it's because of a requirement due to a change of accounting treatment. Could you just elaborate on that? Does it have any bearing on any changes to how that social housing grant might be administered?

I will have a go. Sharon will correct me and give you the proper accountancy view of it. The way we have accounted for money provided for social housing in the past has been, if we provide £100 million this year, the £100 million appears in our accounts this year. Audit Wales's view is that, although the money leaves our accounts this year, it doesn't get spent in this year by the housing associations, and that, instead of accounting for £100 million this year, we ought to account for that money over a larger number of years as the money actually gets spent by the recipients. That's the accountancy change here. There's no difference to the amount of money available for housing associations. There's no difference in the impact that that will have—

And there are no plans to change the process or anything of how that grant is managed.

No, it's just how you score, as I have learnt to say, how you score the money over—. Instead of scoring it in the year the money leaves us, it's being scored in the year that the money is actually spent by the recipients. It means we're £75 million on paper better off this year, but that will unwind over the years it will be spent.

It'll trail through when it's spent. Fine, okay. It was just to clarify that, rather than it being a change of policy or a change of something else that was having a knock-on effect. That's fine.

The supplementary budget notes the issue at Natural Resources Wales in regard to historic non-compliance with off-payroll working requirements. Can you outline how those allocations made address that issue and the additional allocations likely to have to be made in the future?

Again, Chair, I'll give you a layperson's account of this and, luckily, there are other people who can help you more than I can. A dispute arose between NRW and His Majesty's Revenue and Customs over some of the payments that were made. HMRC believed that they were owed a sum of money by NRW and, while the dispute was going on over that money, HMRC were adding interest to that sum all the time. So, we stepped in to provide cash so that that could be lodged with HMRC, and, when the money is lodged with them, they stop charging interest. So, we did that just to stop the bill going up in that way. But, when that money was provided and lodged, technically it had not left our accounts. So, in 2023-24, there's a cash sum of money that will appear in the accounts, but it doesn't score against us. Now, we are expecting, although it is not yet completely resolved, that that dispute will be settled before the end of this financial year. Therefore, we need to provide actual cover in the budget for that, so that's why you now see a sum—

So, it's not a paper cover, it's actual money.

Yes, because the money will not just leave us—. Well, sorry, it won't just be lodged with HMRC, it will be swallowed up by HMRC. So, we will have had to have provided real money, rather than just cash cover. So, that's why you see it twice over two years.

And merging some of the budget expenditure lines within NRW, does that create an issue of trying to follow this through, or is there another reason for those?

No. It has no bearing on following that issue through. They were two separate BELs for income that NRW received from its work in windfarms and its work in forestry. So, they're both income streams, they're both relatively modest. I'm a bit against the proliferation of BELs—I think we can make our accounts a little bit more streamlined without losing transparency. Therefore, we've just combined those two incomes into one.

Just to tidy things up.

They will be reported by NRW separately—you'll still be able to see how much they got through their windfarms and how much they got through their forestry.

A couple of final questions; I realise the time. You've made allocations of £25 million revenue to the economy, energy and planning MEG, as a contingency to ensure sufficient provision within the MEG. What does that mean and why is the contingency needed?

There is an ongoing and confidential legal case in which the department is involved. That case has not yet completed, but I wanted to make provision, should it be an adverse judgment, that the department would have the resources it would need to cover it. I don't think I can say any more than that.

Because of that, we'll leave it at that then, on that one.

And then, the final question today now: in regard to the central services and administration MEG, you've made specific allocations of £25 million revenue for in-year pressures, including a contribution for the initial 2024-25 pay award. Is that in addition to the allocations made for pay and for SCAPE, and can you explain what that £25 million will do?

Yes, Chair. So, it does two essential things. It does complete the pay bill—so, we've fully covered that—and it will allow for some demand-led pressures in that budget. I think the CSA MEG is sometimes misunderstood. Of course it covers civil servants and things, but it covers a lot of other things as well, including, for example, tribunal costs. So, tribunals are demand led—cases come in, they have to be dealt with, and you have to pay for them. The £25 million will allow for those costs to be covered as well. I had to reduce the CSA MEG for the current financial year because I was reducing all other budgets. I've tried to follow the same principle this year as I followed in the past—that, when other parts of the public sector were having to deal with reductions in their budget, I did not treat the Welsh Government any more generously than I treated everybody else. And, in this year, where there's a bit more money for other parts of the public sector, I provided a little bit more money for the Welsh Government's running costs as well.

Okay. Thank you very much. That brings us to the end of the session today. Thank you very much for your time. Obviously, there'll be a transcript for you to check for accuracy. Thanks for coming in. We'll, obviously, be reporting on this, and we'll be debating it fairly soon, so we'll turn around our report fairly quickly, hopefully.

Felly, o dan Reol Sefydlog 17.42, dwi'n cynnig bod y pwyllgor yn penderfynu gwahardd y cyhoedd o weddill y cyfarfod hwn, a’r cyfarfodydd ar 12 Mawrth a 27 Mawrth hefyd. Ydy pawb yn fodlon? Gwych. Diolch yn fawr.