Finance Committee

We have a number of papers to note. Happy to note the questions, or rather the papers? There we are. Great. Thank you very much.

We'll now move on to our first substantive item. Again, apologies to our witnesses for the delay, and thanks for their patience with us this morning. Before we start, if I could ask them both to introduce themselves for the record. So, shall we start with Tom as you are on my screen? So, Tom, do you want to just introduce yourself for the record?

Yes. Thank you very much. I'm Tom Josephs. I'm on the budget responsibility committee at the OBR, and I lead on our fiscal forecasting and policy analysis. I also lead on our analysis of the devolved taxes—the Welsh devolved taxes.

Thank you very much. We have got David as well. If you'd introduce yourself for the record, please.

Good morning. I'm David Miles. I'm also a member of the budget responsibility committee at the Office for Budget Responsibility, and I take the lead on economic analysis for fiscal and economic issues.

Fantastic. Well, thank you both very much for coming. As I mentioned earlier, we've had apologies from Richard Hughes. Part of that, obviously, is—. Before we begin with questions this morning, it would be remiss of us not to acknowledge the premature publication of the OBR's key details relating to last Wednesday's autumn budget. I understand that a full investigation into this matter is being undertaken and that's what Richard has been involved with. However, I'd like to start by asking if you've got any brief remarks, just about the significance of that incident on Wednesday. Would you like to just put something on the record? Maybe if I come to Tom, just to say a few words about that.

Yes. Thank you, Chair. So, Richard Hughes has asked me to put on record his apologies for not being able to attend this session. As you mentioned, our report was accessed earlier on budget day than it should have been. That is clearly a very serious issue, and one for which we have apologised to the Chancellor, the Government, and to the UK Parliament. We launched an investigation immediately into how this happened. That report will be published today, so you'll understand that we're not able to make any comment further on that until that report is published. Thank you.

Okay. Well, thank you very much for that. I note those comments, and thank you for that. So, we will probably have about half an hour with you this morning, due to the issues that we've had. I'd like to start by asking about the main drivers behind the changes in your central UK forecast for the economy and public finances from the March forecast, and how these feed through into the Welsh devolved taxes.

David, do you want to start on the main change to the economy forecast?

Yes, maybe I could do that. One of the factors behind the changes in our outlook, relative to March, is a judgment that we made after pretty careful analysis, right through the summer, on what was the likely underlying rate of productivity growth in the UK. In the light of recent history, but also looking back at the history of productivity growth over a much longer period, we took the view that the likely underlying rate of productivity growth—not the measure that you just get by taking what's happened to GDP in the latest quarter divided by how many people are working, because that's subject to lots of fluctuations, cyclical fluctuations, huge fluctuations around the COVID period, but also after the big energy price increases—. The question we set ourselves was, 'What's the underlying fundamental rate of growth?', which is the important number for longer term projections into the future. To cut a long story short, having looked at a lot of evidence of different sorts, we took the view that we'd need to make it a more central and realistic forecast by downgrading somewhat that judgment. And that has quite a material impact on the economic outlook. It had a material impact on the fiscal outlook, and it meant that we reduced our rate of growth, likely best estimate of the rate of growth in the UK economy, down from about 1.8 per cent a year on average over the next five years to about 1.5 per cent. The effect of that on the level of GDP obviously builds up over time, you get 0.3 per cent lower growth on average each year, and that has quite a substantial impact on, particularly, tax revenue. It was offset by a series of other factors, so it didn't knock quite as big a hole in the fiscal position as it would in isolation from some other slightly more helpful factors on the fiscal side, and they included somewhat higher inflation. It sounds a bit strange to say that that's helpful, but, because there's an ongoing freeze in the thresholds, it means that there's slightly more revenue generated to the Government.

That was also a factor as a result of the rate of likely increasing wages, because wage settlements have turned out to be rather stronger over the last six months than we thought back in March. That's also helpful, at least fiscally, because it brings in some more revenue. So, there were quite a lot of moving parts here. Another one was that interest costs on UK Government debt had turned out to be somewhat higher than back in the time of the March forecast. That's obviously unhelpful for the UK Government, because it increases quite materially, really, the interest cost of the outstanding stock of debt. So, there were a lot of moving parts. Probably the single most important one in terms of an economic judgment was a somewhat lower rate of growth on average in GDP over the next several years than we thought back in the spring.

Does changing things—? Let me start again. Two parts to this. Changing the way you measure things between March and now, it begs the question, 'Why?' Why change the measure, if you like? And then, if you were measuring the same as you were in March, would that then put you back where you thought you might be in the projection from March?

Productivity is a pretty difficult thing to project forward into the future, so we're trying to look at the underlying rate. There have been times in the past when the OBR—before I joined the OBR—has made some pretty big changes in its assessment. One of them came in 2017 after some really rather poor and weak growth in output numbers for the UK even several years after the financial crisis. So, this is the latest of several downgrades—and they've generally been, unfortunately, downgrades—in the rate of growth of productivity.

Why now? A perfectly reasonable question: 'Why do it now?' I think the main reason was that the really enormous effect of COVID on measured productivity, which made the measured level extraordinarily volatile—GDP fell by 10 per cent in 2020 after COVID arrived and then bounced back quite strongly the next year—that really had virtually nothing to do with the underlying growth of productivity, but had an effect on the measured numbers for many quarters after the arrival of COVID in early 2020.

There was another big shock in 2022, which was the enormous increase in energy prices after the Russian invasion of Ukraine. That also had an impact on the UK economy. It triggered very high inflation, disruption in labour markets, and major disruption for companies that faced enormous increases, particularly in energy prices. So, it didn't make sense, really, until we thought that what you might call the dust had settled after those two enormous shocks, shocks that had an enormous temporary impact, but probably had a much lesser impact on the longer run rate of growth—. Until we'd seen the dust settle from those on measured productivity, it was really too soon to judge what had happened to the underlying rate. I think, by early 2023, when the energy price shock had to a large extent unwound and you were then three years on from COVID, after about the middle of 2023, it was more reliable to look at the statistics from then on until today, the last two years, if you will—the middle of 2023 to the middle of 2025—to see whether there'd been a bounce back and whether something we'd hoped would happen after those shocks, a strong recovery in productivity growth, looked like it was happening. To some extent it did. There's been some growth in productivity over the last two years, but it really wasn't as strong a bounce back as we'd thought. And now that the dust has settled, as I say, after those huge shocks, it seemed the time to take a sober look as to whether we'd been somewhat too optimistic on productivity growth, and I think we had.

Okay, thank you. You published your fourth analysis of fiscal risks and sustainability in July. While that analysis is at a UK level, what implications could those risks that you highlighted there have for Wales in the medium to long term? I don't know—. Tom, or is it David?

I don't know, Tom, do you want to go first, or should I say a few things?

Do you want to go first?

Okay. I think some of the long-term risks are likely to affect the whole of the UK, really, and the fiscal position right throughout the UK. Not all the risks are unambiguously to the downside. So, just following on from what I was just saying about productivity, I think we're now taking a realistic central forecast of productivity growth, a bit lower than we had before. But, around that, I think there are risks on either side. So, we've taken a view, for example, on something that may turn out to be extremely material over the next five, 10 years and beyond, which is the impact of artificial intelligence—enormous breakthroughs there in the last few years, difficult yet to be sure what that might do to productivity. Some people are very optimistic about that, and, if they turn out to be right, and I hope they are, then we'd be upgrading our forecast on GDP growth in the UK, and that would roll out right across the UK; it would have as much impact on Wales as in other places. It would be very good for revenue and the fiscal situation, including the devolved taxes that come through for Wales. So, there's one risk that I think is symmetric, but could turn out to be too pessimistic now, or too optimistic, on productivity growth.

I think some other risks are perhaps more clearly somewhat on the downside, and some of them are near-ish term risks. Perhaps Tom will pick up the story on welfare spending and whether or not the rate of growth of sickness and disability benefits will continue to be growing as fast as it has been, or whether it will level off. I think our forecast now, it is that growth levels off. That may turn out to be too pessimistic, and I'm sure Tom will talk about pressures on local authorities' spending, which then affects the fiscal position for central Government as well.

I think two other risks—. One is what needs to happen to other elements of Government spending in order to comply with its target of increasing defence spending to 3.5 per cent of GDP. The story in the last 50, 60 years since the end of the second world war is that defence spending on average could come down a lot, and that made room for other types of spending that have grown a lot—health, education spending. Clearly, that's different now, and quite how you make room for a target to increase defence spending to 3.5 per cent of GDP—. It will, undoubtedly, cause issues.

Just finally, one of the difficult things to project for the UK that has a very big impact is what happens to demographics. Will the fertility rate stay as low as it has become in the UK, right across the UK, something like a fertility rate of 1.4, well beneath the 2.1 number that has a neutral impact on the population of the UK? To what extent will it be offset by something that is more of a policy choice for the Government, which is the levels of net immigration, which, so far, over recent years has more than offset the relatively low rate of births of children on average to women over their life, and has seen the UK population rise quite strongly?

Shall I just—? Sorry, Chair.

If you want to come in briefly and then I'll bring Sam in, then. I'm just conscious about time as well.

Okay. Well, I was going to just say a bit about the risks around the forecast of Welsh income tax specifically. Shall I do that now?

Yes, please, yes.

So, in terms of the forecast for Welsh income tax, as you know, we base that on the UK-wide forecast for income tax, and then we forecast the Welsh share of that. And in this forecast, because of some of the factors that David was describing earlier, in particular our view that inflation will be higher and nominal earnings will be higher, and the interaction of that with the frozen personal tax thresholds, that generates an increase in our forecast for both UK-wide and Welsh income tax revenues over the forecast period. It's also the case that the interaction of earnings and frozen tax thresholds actually generates relatively more revenues in Wales compared to the rest of the UK, which reflects the relative earnings distribution in Wales versus the rest of the UK, essentially because Wales has a higher proportion of earners at lower earning levels. That means that the impact of what we call fiscal drag, of people being pushed into paying tax, or pushed into higher tax bands, is relatively stronger in Wales, compared to the rest of the UK.

That drives a positive increase in our estimate of the Welsh net tax position over the forecast, that being the difference between Welsh tax revenues and the block grant adjustment that will be made, and therefore, essentially, reflects Welsh spending power. There is, though, significant risk around that. The earnings and inflation forecast, as David said, is a central forecast. So, if it's either higher or lower, then that will have significant impact, potentially, on those revenues. With the personal tax thresholds frozen, there's quite a high gearing, if you like, between inflation earnings and tax revenues. In fact, what's happened in the past is that previous Governments froze personal tax thresholds at the start of the 2020s, and we then had the big spike in inflation. Therefore, those freezes generated a lot more revenue than the Government was expecting when it first announced them.

Thank you. I'll bring Sam Rowlands in now, please. Diolch, Sam.

Diolch, Chair, and, gentlemen, thank you for your time today. Perhaps I'll throw a couple of questions at you, just for the sake of time to get through these. Tom, you've just described there some of the forecasts around tax revenue, and then some of the perhaps challenges sometimes in using UK-level data to create a Welsh forecast. I wonder whether you could describe any areas you feel might be a gap in UK and Welsh data where, if those gaps were filled, it would help to forecast those devolved Welsh taxes, and particularly around income tax, and perhaps also the issues around some of the ONS economic outputs, some of the data that's specific to Wales, where there are challenges with that and where there are opportunities to improve that, so we as Members of the Senedd could do a better job, perhaps, of scrutinising the Government if that data was made more readily available. Thanks.

Sure. Thanks. So, in terms of the Welsh income tax forecast, it is the case that we base it on the UK-wide forecast and then we make estimates of the Welsh share of that, and there is—we've discussed at previous hearings—a lag between the actual outturn on Welsh income tax receipts, which does mean that we have to base the forecast on data from a couple of years ago. However, we do now do a lot with HMRC and with our colleagues in the Welsh Government to make use of more up-to-date data that allows us to refine our view of the outturn, and we feel this does give us a much stronger view on where we are now as the basis for the forecast. So, we make use of HMRC's much more up-to-date real-time information, and we've developed use of that, actually this time, in this forecast, by making use of some distributional data within that, which allows us to look more closely at the distribution of income by the different bands within the Welsh tax structure. So, that's been a helpful advance.

We have also in this forecast been able to expand the analysis that I was just talking about around the net tax position. So, we've been able to provide more detail on that in our report, which I hope is helpful to the committee, in that it is, really, the measure of the impact of devolved taxes on Welsh budget spending power, and being able to provide more transparency on that is something we've put a lot of focus on and we're aiming to build that up more in the future.

On the ONS issue, I think that part of this relates to the fact that the ONS have made a decision to focus in on ensuring the quality of some of their key economic statistics, where we all know they have been having some issues in the past, most notably on the labour market side. I mean, that is something that we at the OBR have very much supported, because that is a really important data source for us, and it is very important in our construction of the economic forecast that David was talking about, and also the income tax forecast at the UK level. I am not aware, currently, of any issues in terms of the areas where the ONS has said that they will be having to deprioritise, I guess, in order to allow them to focus on those areas, that would have implications for our forecast of Welsh taxes. But I could—. I mean, maybe we could take a closer look at that and get back to the committee. If we think there are any issues there, we could certainly do a note, if that would be helpful.

Yes. Thanks, Tom. Thanks, Chair. Nothing else from my side, unless you want to pick anything up, Chair.

Okay. Thank you. I think it would be interesting to understand. If you do find any gaps, if you could let the committee know, then that would be useful. I'll bring Mike Hedges in at this point. Diolch.

You talked earlier about productivity, and I think that many of us believe productivity is one of the key items in improving our economy. How sensitive is your modelling to productivity growth? You know from the last technological revolution that technical drawing, typing and wage calculations had huge productivity growth driven by technology.

It is sensitive. I mean, our downgrade meant that instead of 1.8 per cent GDP growth every year for the next five years or so, we think a more central estimate of 1.5 per cent, so that knocks, over five years, over 1 per cent off the level of GDP. That's £35 billion. And if you take £35 billion out of GDP, you probably reduce Government receipts by about half that, so it's £16 billion or £17 billion. So, it's really quite material.

I'm not a pessimist, though, about the future, in the sense that I think there is uncertainty on either side of our forecast, and some things could turn out to be driving productivity growth much higher than we've now projected as our central estimate. I mentioned AI, which has the potential to increase productivity, not just in historically the areas where productivity increases have been strongest—like in manufacturing and industrial production—but in services, or in the provision of healthcare, or the provision of education, where AI might transform in many ways, over a period of five or 10 years or more, the situation. So, does it matter? Yes, it has a big impact. Sustained periods of lower productivity do a lot of damage to the standard of living and to the fiscal situation. On the flip side, sustained periods of higher productivity can transform the real standards of living in the economy.

If I may say one thing very briefly, if we look back at long periods in British history, there was a period—. After the very rapid growth in productivity in the UK from the industrial revolution, there was a really dramatic slowdown in productivity growth between 1880 and almost the end of the century, and people at that time—economists at that time, and other commentators—were saying, 'Productivity growth is now going to be zero in the UK because all the things worth discovering have been discovered.' You know, 'We've done the steam engine and there have been transformations in productivity in agriculture and industrial production; there is nothing left to discover, and productivity growth will be zero.' Between the end of the nineteenth century and the beginning of the first world war, there was a boom in productivity. So, that's just an indication of how difficult it is to forecast this thing, but it really does make a huge difference over the long term.

There was a huge boom in productivity in the 1980s, driven by technology, and AI has great opportunities, and we're all just guessing how important that will be in driving productivity.

The next question I've got for you is on land transaction tax. You've made forecasts on land transaction tax. Is that based on increased volume or increased prices? The problem in Wales is that one big sale of a shopping centre, for example, distorts land transaction tax dramatically.

I can answer that. Thank you. In terms of residential property tax receipts in Wales, we have seen stronger growth in receipts this year, and therefore the forecast is slightly higher across the whole of the medium term because of that. But that strength is offset in the medium term because we have also reduced our assumption around the growth of property transactions. That is a UK-wide change in our assumption, not specific to Wales, and that reflects some analysis we've done on the average rate at which houses have been turned over, sold, in the past, and also reflects the impact that we think stamp duty increases over time are likely to have on the turnover transaction rate, as it becomes essentially more expensive to undertake a property transaction. Therefore, overall, the forecast is relatively unchanged, because those two things broadly offset.

Every time we do this forecast, we look at what has happened to house price growth and transactions in Wales compared to the rest of the UK, and see whether there is any evidence that we should make different assumptions for Wales compared to the rest of the UK. We did that again this time, and couldn't see any evidence that would suggest we should do that, because broadly, if you look over the past, they do move broadly together.

On commercial receipts, you are right that they can be affected by just single, very big transactions. So, when we know that that has happened in the outturn data, we will take account of that in doing the forecast. But it does mean that the forecast, if you like, is a central forecast and there are likely to be spikes in either direction reflecting if a big transaction happens or doesn't happen in a particular year.

I'll just end with a comment: land transactions are volatile.

Yes.

As we come to the end of the session, have you noticed any divergence between England and Wales since landfill disposals tax rates diverged from those of England in April? Just probably in a word, 'yes' or 'no', I suppose.

So, the short answer is 'no'. We did have a look at this and, no, we've not seen any noticeable change as a result of that policy change.

But I suppose it is still early days in that sense as well.

Yes, and the UK Government made a change to the policy in England in this budget as well, which will lead to a divergence in rates. So, we will have to see if that has an effect.

Okay. That's something that this committee is always interested in understanding, where you've got taxes that are slightly different across borders and seeing what that is like. Okay. Well, thank you very much. I'm sorry that we've had to do a bit of a whistle-stop tour through that, but that half an hour really is helpful and we do appreciate you making the time and also your patience this morning as we had technical issues.

There will be a transcript available for you to check for accuracy, and if you could supply us with that information as and when you have it as well, Tom, that would be very helpful. So, we'll take a very short break now and reset the room for the next session with the Cabinet Secretary.

Thank you very much to you both. Thank you.

Thank you.

Thank you. Diolch yn fawr.

Welcome back to this session of the Finance Committee.

We now move on to item 4, our second session with the Cabinet Secretary on the Welsh Government's draft budget for 2026-27.

We are online with the Cabinet Secretary

and his officials. Are you able to introduce yourself and your officials for the record, please, Cabinet Secretary?

Thank you very much, Chair. Mark Drakeford, Cabinet Secretary for finance. I have Jodye Kershaw with me, who's been leading on the budget on the Government side, and Andrew Jeffreys, director of the Treasury.

Thank you very much. Welcome this morning, and apologies that we're starting a little late. There will be a record available for you to check for accuracy at the end.

If we can start, I'd like to clarify a few things with you to start this morning, just to clarify any changes in funding available to the Welsh Government and the possible impact of tax revenues and policies as a result of the UK autumn budget that we heard last week. Can you confirm the overall changes to the available funding to the Welsh Government for 2026-27 as a result of the budget last week, and can you quantify how much of it is due to additional funding, how much of it is due to changes in forecasts, block grant adjustments and calculations or any other changes? So, that's a catch-all, basically, of everything that happened last Wednesday, so if you're able to outline for us what those changes are.

Chair, I did anticipate that you might have been interested in last week's budget, so I do have those figures available for you. The Welsh Government received an additional £186 million of revenue funding and £14 million of general capital funding for 2026-27 as a result of the UK autumn budget.

Of that additional £186 million of revenue, around 60 per cent comes because of the UK Government's decision to introduce a transitional relief scheme to accompany revaluation of non-domestic rates in England. We also have a revaluation exercise here in Wales that kicks in from the start of April next year. I plan to have discussions with other parties, including Sam Rowlands tomorrow, I think, to talk about the advice I have received over the weekend as to the case for a transitional relief scheme here in Wales and how such a scheme might operate. As soon as I've had a chance to have those conversations, I'll do my best to confirm what I intend to do as quickly as possible.

In terms of the devolved taxes issue, the OBR forecast for revenues from the devolved taxes next year is £49 million higher than in the draft budget, and that's mainly due to increases in Welsh rate of income tax revenues. We lose £13 million of that because of new block grant adjustment figures for next year. The block grant adjustment is £13 million higher than in the draft budget, and that is mainly due to increases in forecasts for stamp duty land tax in England. That, therefore, means that the rounded overall positive net impact of devolved taxes is £37 million higher than at the time of the draft budget.

Going back to the non-domestic rates and the revaluation aspect there, there's £186 million and 60 per cent of that is for NDR revaluation. Are you anticipating having to use the full amount of that 60 per cent next year to do a scheme, or are you hoping to be able to release some of that funding into general revenue?

Well, Chair, it's never my starting point that we should simply replicate in Wales what has happened in England. The position in England is a good deal more complicated than it is in Wales because of previous decisions that they made at the time of their last revaluation. There are still properties in England that aren't paying full non-domestic rates as a result of the revaluation three years ago. We are in a different position here in Wales. My starting point is always to try to design a scheme that meets the needs of Welsh businesses. There are choices to be made in that, the level of help and the scope of help, and I'll discuss all that tomorrow with colleagues from other parties. I think probably this morning I shouldn't anticipate too much the outcome of those discussions.

But you're confident that you have the Welsh data that you need to be able to understand the impact in Wales.

Yes. The Valuation Office Agency have now more or less fully completed the revaluation exercise, we have the data from that. We have the data from the revaluation transitional relief scheme that we implemented in Wales three years ago. So we're well placed, I think, in relation to having the data we need to make a sensible decision.

Thank you very much for that. You stated in the draft budget that you would set landfill disposals tax and non-domestic rates following the UK budget. We've talked about non-domestic rates just now, and you will set the landfill disposals tax. Will you consider changes to any other devolved tax policies and how will those changes impact on tax revenues going forward? Are you considering anything else between now and the final budget?

I will continue to consider landfill disposals tax, because the Chancellor did make changes in the budget to the lower rate in England. As you know, landfill disposal sites are generally quite close to the border and there's always an anxiety about waste tourism if it is significantly cheaper for people sending things to landfill to come to Wales rather than England. I'll be looking at that. The Chancellor didn't make changes to stamp duty land tax in England and I'm therefore not in the position that I was anxious about when I last appeared in front of the committee that we may need to take rapid action to protect the Welsh position. I'll continue to consider what we should do there, but I can do it in slightly slower time and I'll make sure that we've resolved it in time for the final budget.

Thank you. The OBR, in the session before this session, said that they hadn't seen any noticeable divergence across the border since the change happened in April to landfill disposals tax. Does that make you less nervous about the divergence across borders?

We took action this time last year to change our own arrangements for landfill disposals tax to protect ourselves against some of the anxieties that I've just expressed, so I'm glad that the OBR find that those decisions were effective. But there is a change in the UK budget—not the big changes that the UK Government had previously consulted on, but a significant change to the lower rate and an indication from the Chancellor that she intends to continue to narrow the gap between the lower and the higher rate. I do want to make sure that I've had advice on that and had a chance to consider it and make any decisions we need to make to protect the Welsh position.

Thank you very much. The UK budget did include a property income tax starting in April 2027 and a commitment to work with devolved Governments to set rates in line with the fiscal framework. What's your understanding of the process for agreeing this?

I will first of all say that I welcome the change. It is a shift towards taxing income from wealth rather than income from work. I think that's to be welcomed. I imagine this to be a two-stage process—this is how I'm currently understanding it. There will need to be a further set of discussions with the UK Government as to exactly the proposal that was outlined in the budget, how they see that operating. We understand that those changes will be reflected in the finance Bill in front of the House of Commons, and because the change is to the Government of Wales Act 2006, that will require a legislative consent motion. This is why I think of it in two stages. First of all, in bilateral discussions, we will clarify the proposal and the operational consequences of the proposal with the UK Government, and the Senedd will then have a chance to vote on whether or not this is devolution that the Senedd wishes to accept. So it'll be a two-stage process in that way.

Is there a case to be made that the Welsh Government should be legislating rather than using an LCM to do that?

I don't think that is possible, Chair. I think this is a change to the Government of Wales Act. I don't think we have power to do that unilaterally, but it is an offer of further fiscal devolution by the UK Government. Once we've clarified exactly the nature of the offer, then the Senedd will have an opportunity to decide whether or not it's an offer it wishes to take up.

Andrew, did you want to come in?

We've only had very preliminary discussions at official level about exactly how this would work, and there haven't been any ministerial discussions yet. The first we heard about this was on Wednesday when it was announced by the Chancellor. As the Cabinet Secretary said, the legislation around income tax and what's devolved and what's not devolved is UK parliamentary legislation, and so we would expect that change to be enacted in the forthcoming finance Bill. But, yes, the details are a bit limited at the moment, and we do need to get a bit further into it with the UK Government.

Have you had any indication of timescale on that? I'll bring Sam in just after this.

Well, the finance Bill tends to be a very rapid legislative process. I think the intention is that this comes into effect from the tax year beginning April 2027—so, not next financial year, but the year after. But we would expect the legislation to come forward, I guess, possibly even before Christmas, but certainly in the next month or two.

Okay. Thank you. Sam, did you want to come in on that?

Thank you, Chair. You asked the question that I was going to ask. No problem.

Oh, right. Okay. Thank you. With the OBR recently forecasting that inflation and wage growth are both higher than estimated in the March forecasts, and the announcement of the national living wage increases from next April, how does that impact on the assumptions that you made in the draft budget around pay and non-pay inflation for public service providers as well?

Well, Chair, you and committee members will be aware of the fact that, in order to pass a final budget, the Government is involved in discussions with other parties about how we might deploy not just the additional resource that came in the budget, but the unallocated resource that was there at the draft budget as well. I am not going to make any decisions that pre-empt those conversations, because I have to work as hard as I can to make sure that there is a final budget that can be passed by the Senedd. So, I accept what you said about the change in the forecasts, and I can give you an illustrative figure of what that would mean if we were simply to follow it, because the OBR's forecast for pay growth next year is higher than it was in March. If you increase the pay forecast by 1 per cent for public sector pay, then that will cost close to £150 million over and above what is already provided for in the draft budget. So, you can see that that will be a very hefty inroad into the £186 million, and we've already said that some of that £186 million is likely to be needed for a transitional NDR scheme. So, the scale is significant. I will need to discuss that with other parties, and I'm not going to make any pre-emptive decisions in advance of that.

Okay. Thank you. But the assumptions that you made at the time were based on the figures at the time, I suppose, weren't they? Therefore, in those discussions with other parties, you'd have to take those into account to see where you'd land on a final budget.

You absolutely would, Chair. Just to say, on the OBR forecasts, we were using a rounded figure of 2 per cent as an inflation uplift. The OBR now puts the GDP deflator figure at 2.2 per cent. So, the change there, while it is material, is not hugely out of line with the figure that we use for the draft budget. The pay forecast is a bit more significant, in the way that I explained.

Okay. Thank you very much.

So, if we now move on to look at recent progress with reforming devolved financing, the UK autumn budget announced total and annual limits on capital borrowing, and the Wales reserve would increase by 10 per cent for 2026-27, and then increased annually thereafter in line with inflation. That's something that this committee has taken a great interest in, and those discussions that you've had within FISC and bilaterals in the past, and understanding what that means. In those discussions, could you tell me where the 10 per cent figure came from and, obviously, do you welcome it? I'm sure that you do, but it does leave us still short of where we would aspirationally have wanted to be. And would you like to see, whilst welcoming inflation growth in that number, actually having larger than inflation to get us to where, over time, we would need to be if inflation had been applied to that initial figure?

Well, Chair, I would have made the case for a higher than 10 per cent uplift. I think what that 10 per cent uplift does, though, is put us in the same position as Scotland. Scotland had already resolved this issue back in 2023-24, and the 10 per cent figure takes us to where the Scottish position is currently. I think that is why the UK Government settled on the 10 per cent figure. It is always anxious—that's my experience of dealing with the Treasury—in offering anything to Wales, in that it thinks other people would then say, 'Oh, well, that's a better deal than we've got', and then you get a competitive bidding process. I think that's the reason why the 10 per cent figure is there, even though I would have argued for higher.

But I do think that the biggest gain, and the really important gain, is the agreement that, from now on, that figure will be increased every year in line with inflation. The Scottish figure is uprated every year by the GDP deflator, and we would expect that to happen here in Wales. That's the major gain, because it stops the problem from recurring, because we've had a year-on-year erosion of the real value of the figures in the 2016 agreement. We've got an inroad into the existing gap and we've got a guarantee that the gap won't get bigger in future. So, in that sense, I definitely do welcome the fact that we've got some movement on this for the first time in nearly a decade.

I think it is to be welcomed. It'll be interesting to see how it works in practice and to be able to see the difference that it can make to those borrowing powers.

You mentioned that joint work looking at ways of improving the operation of the Barnett formula will be presented at the next meeting of the FISC in Belfast early next year. What's that report likely to cover, and what are the realistic outcomes, given you told Plenary the other day that devolved Governments will not agree to discussions on the replacement of Barnett? So, where is the potential movement?

Thank you, Chair. My own assessment is that the fact that there is no appetite amongst other devolved Governments for a replacement for Barnett means that they are a bit more willing to take an interest in making the current system work better. So, I think there is some appetite in that. I don't want to sound immodest about this, but I think this argument has been led by Wales. We have been the part of the United Kingdom making the case for improvements to Barnett. The paper that goes to FISC will have to be agreed by all four nations. There is sometimes a debate on the floor of the Senedd that makes it sound as though these are things that can be resolved bilaterally between Wales and the UK Government. They are absolutely not. You have to have agreement from everybody, and the paper that goes to FISC will have to reflect that.

I've been making the case for Barnett reform in four different areas. I do think that we need to shine a light on how the comparability factor works. That's what drives the Barnett formula: if you have proper comparability between UK spend for England and what happens in Wales. All members of the committee will be very familiar with the Oxford to Cambridge rail line and the complete obscurity, it seems to me, as to how comparability factors have operated there. I want FISC to look at the statement of funding policy to make sure that it is properly honoured in the way that these decisions are made. We have rehearsed that many times in relation to the national insurance decision. I want us to look at the way in which Barnett has been bypassed in the past—the Northern Ireland bung, as we remember it, when Mrs May needed the support of DUP Members of the House of Commons and Northern Ireland got a large sum of money with no consequential funding for England, Wales or Scotland. So, I want us to look at the way Barnett has been bypassed in the past. And then I want to look at the way in which we can have a greater degree of independence in dealing with any disputes that arise over how Barnett decisions have been interpreted.

Those are the four things that I have been advocating in those discussions. As I say, they all have to be navigated with colleagues across the United Kingdom, and other Governments will have other ideas that they will want to bring to the table when we meet in the new year.

And in that meeting, and in developing that paper, I assume—and you’ll correct me if I am incorrect—that is going to be a Treasury paper bringing that forward, or is that going to be four separate papers from the four nations bringing it together, and then it becoming a discussion? How do the mechanics of it work, I suppose? Are your officials working with other devolved nations to lobby the Treasury? It's more about how it's done in the background, if you like.

The aim of FISC is to come forward with an agreed paper and, for that reason, there are lots of discussions that go on between officials involving the Treasury, but also involving the Scottish Government and the Northern Ireland Executive. That’s the way the FISC works. It tries to identify the issues that need to be addressed and give a commission to officials as to the scope of a paper that might come forward. We discussed that in Edinburgh earlier in the autumn. Officials will now be working to that remit and a paper will come forward, which should be a joint paper. That’s the way the system is meant to work. That’s how I hope it will work in this instance.

So, there are Welsh voices in that aspect, is what I am saying. It’s not going to be a fait accompli by the Treasury, in the way the Treasury tends to work as judge, jury and executioner. This is more of a collaborative way forward. Andrew, did you want to come in on that side?

Yes, as the Cabinet Secretary says, the aspiration is to have an agreed four-Government scope. So, the scope for the work would be agreed by all four Governments and then a paper agreed by all four Governments. But you can imagine that there are challenges, particularly on an issue of this nature, in getting a kind of proposition that all four Governments can recognise as the right one, if that makes sense. So, yes, I wouldn't underestimate the challenges in getting a genuine four-Government paper in front of the FISC, and sometimes we do end up having to kind of compromise a bit on that. We've had in the past, sometimes, devolved Government papers and a Treasury paper. That's when you start to know you're getting into trouble, I guess, when you can't agree a paper for Ministers to consider.

Thank you very much. Finally from me, before I move on to Mike Hedges, we've received evidence from witnesses regarding the impact of the lack of Welsh-specific data to inform the monitoring processes in Wales, and concerns that the ONS may be reducing its focus on subnational statistics to focus on improving the quality of UK-wide economic statistics. How has the Welsh Government been engaging with the ONS to ensure that you get the required information that you need to be able to help shape the budget, and have you raised any concerns with the ONS about this?

Chair, I discussed all of this recently with our own chief statistical officer. I welcome the fact that there is going to be an effort to improve the quality of UK-wide economic statistics. We've suffered in Wales from the deterioration in the quality of those statistics—the fact that they no longer are official statistics and so on. So, I do welcome the fact that they're going to put renewed effort into correcting the difficulties that have been experienced over the last couple of years. But, from the Welsh Government's point of view, that really cannot be at the expense of subnational data. There are some very important things that the ONS provides that are specific to Wales.

Of course, it's not the only source of information for us. We have Welsh Government data, our own ability to produce information that shines a light on these issues. So, what I agreed with the chief statistician was that the Permanent Secretary will write to the ONS on our behalf emphasising the importance of subnational data, including the extensive and important use we make of the annual population survey in Wales. There is to be a meeting that brings the four nations together, an inter-administration committee, where the chief statisticians and the national statistician come together. That is meeting in January and this matter—the ONS prioritisation exercise—will be discussed there. So, there's a series of ways in which we are raising the concerns, concerns raised with you by other witnesses, and concerns that we share in the Welsh Government.

And we have a contract, effectively, with the ONS; the Welsh Government does contribute towards the cost of producing that data. So, we've got a legitimate claim to be able to have a conversation or have our voice heard in that round, to make sure that we get value for money from the money that we spend on that as well. Good, thank you. I will now bring Mike Hedges in with a line of questioning. Diolch, Mike.

Diolch, Cadeirydd. In June, you told Plenary you were planning a 'business as usual' budget, which has been interpreted by some as a roll-over budget. It's a direction that I tend to agree with, and might well become common for the year before elections. But how would you calculate the rate of inflation for different service provisions? We know that local government faces very severe inflationary pressures, and I'll just give three of them: special needs education, social care and homelessness. We know that those pressures are there. How do you put those in? Because just rolling it forward, while it work for Natural Resources Wales and the environment, it won't work for places like local government.

I thank Mike Hedges for that question, Chair, and I know that you've received evidence from other witnesses about the differential rates at which inflation makes an impact on their budgets. I expect that to be an important part of the conversation that I will have with other parties as we come to form a final budget. I think I said on the floor of the Senedd when introducing the draft budget that I was particularly alert to the special circumstances of local government because of the legislative constraints they are under in setting their own budgets. I've had a series of meetings since the draft budget was laid with the Cabinet Secretary for local government and with leaders of the WLGA; I met the WLGA and council leaders last week alongside the Cabinet Secretary.

So, we are very alert to the points that Mike Hedges has made, alert to the evidence that you have received, and we'll be navigating that with others in order to make sure that, when we lay the final budget, some of those concerns have been taken into account.

And I'll just say: for local government, see health. That's the other one where they have substantial pressures. I'm sure we're going to have this debate in another place, anyway; I don't see that much progress is likely to be made on this, but I'm glad I've got those points over. But, perhaps far more importantly, how might the need to agree a final budget potentially impact on the timing of laying your proposals?

I don't expect it to have an impact on that, Chair. I remain committed to laying the final budget on 20 January, and the final vote on the floor of the Senedd on the twenty-seventh.

But you can—. If the January vote is not of agreement, you can bring back an amended version at another date, can't you?

I think, within the rules, I could bring back an amended version every day for voting on the floor of the Senedd. The outer limit, Mike, as you will be very well aware, is the legal constraints of local government. You reach a point in the middle of March where they have to set a budget, and if we haven't been able to agree a budget here they will then have to set a budget at 75 per cent of the current year's provision. So, look, I'm very keen that we reach an early agreement across the Senedd. It is not good for our public services for uncertainty to be prolonged. I remain committed to that January date, because I think that is the right thing for those organisations that rely on the decisions this Senedd makes.

Well, actually, local government can set a budget, but what it really has to set is its tax rate, and it can use reserves as a short-term fix. So, if it's only got 75 per cent coming in, it can use, as I say, reserves as a short-term fix, can't it, assuming there'll be a budget at some stage. Though that is a gamble, I think it's one that local authorities may well have to take.

And the point that was being made to me last week, Chair, very much in this area, is that our local authorities in Wales are very differently placed in relation to the quantum of reserves that they are able to access. But Mike's point is—. I've agreed with him before on the floor of the Senedd when he's made it—reserves are an important part of what local authorities can mobilise, and they can make different decisions between allocated and unallocated reserves. But, different local authorities, for historic reasons, are in a very different position.

Thank you. I'll just end with that earmarked reserves can be unearmarked by a decision of a council. But, moving on to productivity, which is, really, what everybody's hoping to see improving, I think that AI gives huge opportunities for productivity, certainly in health. I'm not going to ask you to speak about the health budget, because you'll say, 'Speak to the health Minister', but it does give opportunities, doesn't it, artificial intelligence? Have you been having conversations with your colleagues, asking them to consider how artificial intelligence can be used to improve productivity and thus reduce financial demand?

Well, absolutely, we do have those conversations, Chair, and I agree with Mike: there is enormous potential here. And it's not just potential; we are seeing this actually happening in our public services already. Some colleagues will be aware of the work that's been done in Neath Port Talbot Council to use artificial intelligence to help with the real-time recording of meetings that social workers have, for example, when they are meeting with a family. When I was a probation officer—a very long time ago, I know, but—what you did was you went out, you saw somebody, then you returned to the office and you had to spend time recording the outcome of the conversations that you'd had. Now, in Neath Port Talbot, using artificial intelligence, they have real-time recording, and I think they reckon that it's freed up about seven and a half hours of a social worker's time over a week. Well, that's an enormous gain, isn't it, in productivity, and the ability of social workers to do the things that only social workers can do. And that use of 'magic notes', I think it's called in local authorities, there are parallel examples in the health service as well where doctors will have to spend less of their time writing follow-up letters and dictating them and having them typed up and things, because artificial intelligence will do this for them.

Thank you for that. We will almost certainly come back to that at a future stage as well.

The Federation of Small Businesses said it's important that the link between the annual budgets and the contribution to the longer term goals for productivity is clear. How does the draft budget do this?

Well, I agree very much with that sentiment, Chair. I think there are a number of ways in which the budget does link the annual provisions against the long-term background. The Well-being of Future Generations Act 2015 is the biggest lens that we apply to the budget as a whole. So, that is always urging us to look at the implications of our decisions, not only in the here and now, but on future generations as well. That is one of the ways in which we respond to what the Federation of Small Businesses has said to you.

Then there are some more specific ways. So, we have an infrastructure investment plan. That is a plan that is not for just one year, but over a 10-year horizon. It has £3 billion associated with it [correction: associated with it next year]. So, that's the big picture, but, alongside our final budget on 20 January, we will publish the pipeline of those projects. So, that will link the short-term issues of the final budget with the long-term investment plan that we have already published.

And then, Chair, I think the other thing that will be different this year is that all the decisions in this year's budget are taking place against the background of the Welsh spending review. Now, you're not going to see the immediate impacts of the spending review writ large in this budget, but the Welsh spending review is absolutely designed to do what Mike Hedges said the Federation of Small Businesses had said to you: it's there to make sure that year-on-year decisions are linked to ambitions that go on over the medium- and longer term horizon.

Oh, hang on a second. There we are. Start again, Mike. Thank you.

Continuing on productivity, there are two questions. One is on the use of capital to improve productivity—you bringing in a better quality, newer MRI scanner, for example, and then you can improve productivity because of that. And also we have good and bad productivity, don't we? I mean, just a simple productivity: if every school class was increased by 10 per cent, you'd have a 10 per cent improvement of productivity in education. That would not be good for education, but, on your numbers coming through, it would actually show that teachers are 10 per cent more productive. So, I think that there needs to be a discussion, and now is not the place for it, on good and bad productivity—and when we say 'productivity', productivity producing either a better or the same outcome.

Well, Chair, I completely agree with those points, and I think what Mike is doing there is pointing to the fact that we need a more nuanced discussion of what we mean by productivity. I remember the Senedd voting to reduce productivity in one of our public services, and I would have said, 'Quite right too,' because—again, Mike Hedges will remember this, I know—there was a time when social care agencies, domiciliary care agencies, were trying to introduce 15-minute visits by domiciliary care workers. The Senedd voted in legislation to prevent that from happening. Now, that was because we did not believe that a domiciliary care visit could safely be discharged in a 15-minute window. So, we have a minimum 30-minute visit here in Wales. As in Mike's case about having 45 children in the class instead of 25 children in the class, you could argue that a 15-minute visit doubles your productivity, but we didn't agree with that. You need a more nuanced discussion of what you mean by productivity gains, because, as Mike said, there are good gains, but there are things you wouldn't want to see as well.

Can we unmute Mike? There we are. Thank you.

We haven't got time to discuss this in detail at the moment, but would you consider bringing a report or a statement to the Senedd on productivity—where we are, how we're improving it, how capital can help it, and also, going back to the example you used and the example I used, how there is good and bad productivity?

Well, I'm certainly happy to consider such a statement, Chair, because I could give you very good examples of where investment has improved productivity. If we think of Transport for Wales and the enormous investment that has been made there in the core Valleys lines, we now know that punctuality on Transport for Wales is running at 91 per cent of services arriving within three minutes of the scheduled time, and we know that rail journeys are up by 20 per cent year on year. And costs are down because the new rolling stock is more efficient, it doesn't break down as often, and it has better environmental standards, reducing the amount of fuel that you need. There's an example of very good productivity returns on public investment, but it's a more complicated story than that, and I'm very happy to consider whether a statement would help to just move the debate on a bit from the headlines that we sometimes conduct it in, because it does deserve a look into the greater complexities of what we mean by productivity gain, particularly in public services.

Thank you. If you are looking at a statement like that, Cabinet Secretary, I'd be interested in the underlying data that sits behind it, because unless you have good data, then it's very difficult to make those nuanced decisions, and understanding how that data is collected and analysed, because that makes a huge difference. Andrew, did you want to come in on that? As I've talked about data, you might be able to illuminate some of that for me.

It is a real challenge in measuring productivity in the public sector. As the committee might be aware, the ministerial advisory group on health recommended a little while ago that the Welsh Government should produce proper data on productivity in the health service, and there has been a lot of work going on on that in recent months. We've made some good progress with that and should be in a position to publish something on that in line with the deadline set by the MAG. I think it was for the end of this financial year, to be producing those estimates and, crucially, to be able to see over time how productivity is changing in the health service and start to get into questions about, 'Okay, so if it's improving, why is it improving?', or, 'If it's not improving, why isn't it improving?' At the moment, we're not really in a position to be able to have that debate informed by robust data on how productivity is evolving in that key sector. So, that will be a step forward, I think, once we get to that point.

Yes, because over the relatively long term, we've heard that productivity is a persistent challenge. We heard that in evidence, and what was interesting in parts of that evidence was: where do we benchmark against? I think that I asked the question of one of the professors that gave us the evidence, or comments: is it always good to be benchmarking against the south-east of England, or the city, rather than maybe somewhere more comparable, like either the west midlands or the north-east, where we have similar demographics, and whether or not we should be striving to catch up with those areas first before maybe moving on. So, I don't know if you've got any thoughts on that, Cabinet Secretary.

Well, just to say this, Chair, really, that I heard some of that evidence and was a bit puzzled by it, really, because the figures that I've been given previously, and you will know that the chief economist's report, which I know is no longer called that, so whatever we now call it, focused on productivity last year, and there's more that he says about it this year. And I think what is being pointed at there is that, yes, there are long-term challenges in productivity in Wales, and some of those are very hard to ameliorate, because there are large parts of the Welsh economy where productivity gains are quite hard to make. We've got a large tourism sector; there are only so many plates you can collect in a night in a restaurant. So, there are inherent productivity challenges in some parts of the Welsh economy where we have quite large components of the economy.

But if you actually look at what has happened in the last 12 months of productivity gain, when you look at the 13 regions and nations, Wales was at the very top end of that table. I think only one part of the United Kingdom had a greater growth in productivity in the last 12 months. And if you look at it over the longer haul, going back to 2009, when the challenges in productivity in the UK economy began to emerge, between 2009 and 2023, Welsh productivity, measured as gross value added per hour worked, has grown by 14.1 per cent, and over the UK as a whole, it's grown by 10.5 per cent. So, I don't think, myself, I would accept the characterisation that you've been offered by some witnesses, that we've seen no signs of conversion between Wales and the UK average. I think we have, and without having the figures in front of me, I would be surprised if that convergence wasn't driven by convergence between those parts of the United Kingdom that look more like Wales—your point, Chair—than with London and the south-east.

It just goes to show how difficult it is to get a handle on this, and there are many versions of the truth, I suppose. So, it's getting a good baseline to be able to work that through and to understand what you're measuring against, and it goes back to Andrew's point earlier about health and health productivity as well. So, I think there's more to be discussed in this area, and I'm glad we're having some of that discussion today. But I'll bring Sam Rowlands in at this point. Diolch, Sam.

Thank you, Chair. Yes, trying to explain truth; I guess that's the main job of politicians, isn't it, one way or another? And Cabinet Secretary, let me welcome also the work done by yourself and your team in terms of the capital borrowing and the Welsh reserve movement. I think it's a good step, and we may be opposite political parties, but we certainly agree that that is a very helpful shift. So, thank you to you and your team for your work on that.

So, we'll stick on the issue of productivity, in particular in the public sector. We've kicked this around a little bit, but the Institute for Fiscal Studies told us that

'improving public sector productivity and outcomes needs to be a key part of improving the overall productivity story for Wales.'

It strikes me sometimes that when we talk about public sector productivity, we can quite easily jump into quite complex places like AI or algorithms. I wonder whether you would accept that there are opportunities for some quite simple adjustments, and a quick example: a local opticians told me recently that when they refer patients through to the hospital, they have to write a physical letter to a GP. The GP has to have a physical letter sent through to the hospital for a referral process; they're not even using e-mail. And I just wonder whether we sometimes jump to some quite complex options for improving productivity when there are actually some quite simple solutions. And how can the budget, do you think, support that shift to some quite simple solutions?

Well, I agree, Chair, with what Sam Rowlands has said about automation of routine tasks. The point I was making about the work that's been done in Neath Port Talbot already, and we are seeing in the health service; surely with the new opportunities we have, it will mean that people are not spending their time physically writing letters that could be generated in real time as clinicians are carrying out their work.

The budget helps in these smaller ways in a number of its dimensions. I'll maybe give another one: productivity can be enhanced by skills development and innovation. I was looking at an example just the other day, Chair. When I was the health Minister, a long time ago, new treatments became available for wet macular degeneration. They involve injections that people suffering from this condition have to have into the eye. In those days, if you had these injections, in Cardiff, they were carried out in a theatre in Heath hospital with an anaesthetist, a consultant and nurses and so on. Today, wet macular degeneration treatment is provided on an out-patient basis and carried out by a specialist nurse. The gains in productivity are just enormous, and they're built on investment in the skills of the staff to do it, some investment in the infrastructure—you need clinics where this can be done—and in innovation, as well, you know, new clinical ways of doing things. So, I think that's a good example of the point that Sam Rowlands made, that, sometimes, looking at those more specific and practical measures that you can take is just as important as looking at the big societal shifts of things like artificial intelligence.

Thanks, Cabinet Secretary. I remember in a previous life, we used to have a scheme with Welsh Government, I think called the invest-to-save scheme, which was Welsh Government making a capital fund available to generate a revenue improvement in the future, essentially. Does that scheme still exist, and if not, is there a reason why that no longer exists? Would it be something you might consider in a future budget to help drive productivity?

I'm absolutely interested in the way in which capital investment can drive revenue savings and can improve productivity. Sam Rowlands is absolutely right. When I was last finance Minister, I spent a lot of my time on invest-to-save schemes, miles and miles of corridor lighting in the health service, reducing those bills. At the moment, our invest-to-save scheme is concentrated in particular functions of the Welsh Government. We're using it in children's services and on looked-after children, particularly, and there are some environmental schemes as well, where we've focused our invest-to-save scheme.

I've had recent discussions with Andrew and others about whether we should do more to provide help on invest-to-save on some other aspects of public services, but the principle is one that I think continues to have driven a series of my discussions with my Cabinet colleagues. I've said to all of them, when they can bring forward capital schemes that demonstrate that they get a revenue benefit as a result of them, then I'm always likely to attach a higher priority to those sorts of investments.

Thanks, Chair. I think you referred to conversations with the leader of the WLGA, which sound positive, there. I think one of the positives I saw with those schemes in the past was the fact that they came from the ground up, as it were, so it was often those people at the front line who would see an opportunity for savings to take place and would put a bid in, initially through a local authority, I guess, and it would come through to the Welsh Government. I expect you to support that approach from those front-line workers and services to see this opportunity for savings and, therefore, probably productivity gains. Therefore, if initiatives like this were accelerated in the future, you could see further productivity gains and efficiency savings, is that fair?

That is very fair, Chair. What the literature says, I think, about what are the components that drive productivity gains in public services, ideas from the workforce and citizen feedback, both of those are themes in what the literature tells you can help to drive productivity gains. If you listen carefully to what the people who use services and the people who are providing those services at the front line tell you about them, there often are—to go back to Sam Rowlands's very first point, Chair—some of those simpler changes that can be made that can result in significant improvements to the service and its productivity.

Thanks, Cabinet Secretary. Just a final point around productivity, to come off the back of some of Mike Hedges's questioning there. We all want to see those productivity improvements in businesses across Wales, specifically in the retail, hospitality and leisure sectors. I know that you commented earlier that there are sometimes some challenges in some of those visitor-led areas, but do you think the draft budget encourages productivity in those retail, hospitality and leisure sectors, specifically around the concerns that the Welsh Retail Consortium and the Federation of Small Businesses have highlighted in terms of changes to business rates? Do you think the budget helps to address some of their concerns?

It does so in a new way for the first time. There are many ways in which the budget attempts to help those sectors—in skills, in investment and in innovation. The thing that is different in this year's budget, and I think I did see that it was the subject of some of the evidence that you took as a committee, is the use of a differential multiplier. We've not had this power up until this year. My intention is to introduce a differential multiplier, a lower multiplier, for high-street retail.

I know that others have made the case for using that power more widely for hospitality and leisure as well. I think there are two reasons why I'm not going to propose doing that for next year. The first is that I think you can differentiate these sectors. High-street retail faces a structural challenge from online retail. High-street retailers operate in relatively large premises on the high street itself, and business rates reflect that, whereas online retailers operate from smaller premises with different sorts of overheads. The playing field has become more skewed over recent years, and I want to try to have a more level playing field that helps shops on the high street to be able to thrive.

The challenges facing hospitality and leisure I don't think are structural in the same sense. They are cyclical and they are the result of large-scale impacts from COVID. That ought to rectify itself over time and ought to be reflected in revaluation. The way to make the playing field level there is through the three-year revaluation exercise. That doesn't help the structural challenge faced by high-street retail, which is why I've made a particular effort to support them in the budget.

I think the second and subsidiary reason is that this is a new power and we're using it for the first time. I want to make sure that the machinery works, and I want to attend to some of the points that I think the Chair of the committee and Mike Hedges made earlier: that if you're making policy changes in productivity areas, you need to make sure that you've got the data to back up what you're doing to see whether this is an effective policy or not. I think starting modestly and targeting your relief on a particular sector will allow us to gather that data and see whether this is an effective policy intervention. If it is, the case for doing it more widely may strengthen, but I don't think you can do it in the very first instance.

Thanks, Cabinet Secretary. On the first point around the challenge facing retail on the high street, I think that is fair. I think what they also say is that they are well supported by hospitality and leisure on the high street. So, if we see hospitality and leisure not doing well on the high street, that will have a significant knock-on effect on retail's ability to continue, because people come to the high street, often, for a cup of coffee or for a meal of some sort, and then, perhaps, use the shop. Would you acknowledge that relationship between the two, and that it's not, perhaps, as straightforward as isolating one part of the high street versus others?

I absolutely do understand. I think that the future of the high street will be in having a more differentiated set of reasons to bring people to the high street. But two thirds of hospitality businesses in Wales, the sector itself says, pay no business rates at all already, because they are covered completely by the small business rate relief scheme that we have in Wales. I think it's 80 percent of hospitality businesses that benefit from some form of non-domestic rates relief from existing schemes.

This is not a choice between helping one sector and another sector going without help. The hospitality sector already receives very significant help from existing schemes. I think that there is more we can do to support retail, because, as I say, of the structural challenges that high-street shops have faced compared to other ways in which people now do their shopping.

Mike, did you want to come in on this point?

Very briefly. We also know that a number of high-street retailers—some of the very big ones, but also some individual shops, including a jewellers in Llandeilo—have an online presence as well. So it's not just physical versus online. It's about making sure that those who have a physical presence also have a good online presence. And the jewellers in Llandeilo, the weekend before last, was sending jewellery out to Australia.

It's an exotic picture that Mike paints of his weekend activities, Chair, but I understand, of course, the point that he makes.

You've thrown me slightly there, but I appreciated the input. I just want to move on to a key part of the budget that you've outlined, Cabinet Secretary. You said that there'll be a strong emphasis on investment in prevention in this next budget. Just, perhaps, a quick response: do you ever find it difficult to define what that might mean, when we talk about prevention? I guess that anybody could argue that anything is prevention, at the end of the day.

We did rehearse before, here, what a slippery concept prevention is. There has been some very good work done by the future generations commissioner's office. You will know that they've published a typology of prevention, with four levels of prevention: primary, secondary, tertiary and acute. That's the lens that we apply to the budget when we are trying to move things in the direction of preventative spend. But at the borders between those four levels, there are any number, I think, of border disputes as to whether or not this is primary prevention, secondary prevention, and so on. So, it has always been a slippery concept, but the work of the future generations commissioner, I think, is genuinely helpful to us.

Thank you. As I said, you've outlined that prevention is a key part of this budget. Can you briefly describe to us how the budget reflects the prioritisation of prevention?

I'll try to do it as briefly as I can, Chair. I'll give you one example for each of the four levels. In primary prevention, the budget continues to invest in Flying Start and the move to universal Flying Start childcare for all two-year-olds here in Wales. We know that investment in early years pays off more than any other investment in terms of children's life chances and the chances that they will avoid difficulties that otherwise might occur. So, there's an example of primary prevention.

In terms of secondary prevention, I think that screening services are a good example of that border zone. We have moved, since 2018, to progressively lower the age at which people are entitled to bowel cancer screening. We've now managed to get to 50 as the starting age. We know that the investment that we have made, and go on making, in that programme pays off in prevention. If your bowel cancer is detected through the screening service, I think 86 per cent of cancers that are detected that way are amenable to treatment. If bowel cancer is discovered as part of an emergency, then only 50 per cent of them are amenable to treatment. I think that's a very good example of preventative spend. It's not primary, because it isn't universal, but it is universal to the age groups where bowel cancer is most likely to occur.

Then, tertiary level of prevention, there are the coal tip safety investments we are now making. That is a problem that has already occurred, it's focused in particular areas, it's not primary or secondary prevention, but it certainly is preventative in the sense of all the work we have done, which started alongside a Conservative Secretary of State for Wales, to map coal tips, to analyse them according to the degree of risk they pose, and now to invest large sums of money in remediating them so they no longer pose a risk. I think that's another example of the way this budget responds to the future generations commissioner's typology of prevention.

Thank you, Cabinet Secretary. You've briefly described some preventative measures around screening, for example for bowel cancer. Other parts of the UK are looking at other screening programmes, particularly around lung disease and perhaps lung screening more broadly, and prostate screening as well for men. I appreciate this may be out of your scope as Cabinet Secretary for finance, but would you expect your colleagues around the Cabinet table to look at expanding screening programmes such as those I've described to support that preventative programme in the future?

The policy of the Welsh Government—I can comment on it in general—is that we follow the advice of the UK National Screening Committee, just as we follow the advice of the Joint Committee on Vaccination and Immunisation when it comes to vaccination and immunisation. I remember when I was the health Minister, I believed that the committee should have gone further in one of its screening programmes, but I stuck to the basic principle that you can't pick and choose. If you've got an expert committee, and it gives you advice, you must follow it when you agree with it, but you must also follow it when you don't agree with it. Otherwise, I think you're on a very slippery slope. The Welsh Government has accepted the advice in relation to lung cancer screening. Some pilots have happened in Wales, and I know we're in a better position now to make that service more universally available. There's been a lot of debate, as Members will know, about prostate cancer screening over recent days, but the advice of the committee was clear. It'll be considered by my colleague Jeremy Miles, but our starting point would be that we follow the advice of the expert panels that are there to guide us in these sometimes contested areas.

Thanks, Cabinet Secretary. Perhaps, Chair, I could have one more question. I appreciate time is flying.

Yes, certainly.

Continuing with this theme of preventative measures, you have rejected, of course, hypothecating funding in this area—and I can understand why and would broadly support that—but in terms of how you measure the effectiveness of preventative spending, could I understand how you do that? How do you make sure best value for money is being taken from that spend? How do you measure the impact of anything that you may consider being a preventative investment?

I'm not persuaded by the arguments in favour of ring fencing. We've already discussed how difficult it can be to identify what is genuinely preventative spend. My own experience, when I was the health Minister, of the mental health ring fence—Sam is too young to remember this, of course—is that, during that time, we discussed exhaustively on the floor of the Senedd whether the mental health ring fence was working, what was included within it, whether money was escaping from it, and so on. What we didn't talk about was mental health services. We talked about the ring fence all the time. If we were to move to ring fencing in preventative spend, we would spent all our time talking about the ring fence—whether it was effective, what was included, whether people were trying to manipulate it, and so on. And we would lose the focus on the second part of Sam's question, which I think is much more important, which is how we how we can measure the impact. Well, I'd offer two suggestions there. I myself am very much in favour of benchmarking. I think you should look at services not just in Wales, but elsewhere, and you should aim to be in the top quartile of those services. If you can show that the service you're providing measures up to what others are doing and is in the top part of that spectrum, I think you've got a very powerful way of demonstrating the effectiveness of what you're doing. So, I myself believe benchmarking is a more powerful tool than ring-fencing.

And then, in a more specific way, of course, we do provide an enormous amount of data. I think of the three things that I offered you a moment ago. I can tell you—I'm not going to do it now because of time—exactly how many children are now benefiting from Flying Start, how many offers are made, the percentage of offers that are taken up, the number of extra places that are coming onstream. We collect and we publish an enormous amount of data there.

We publish data all the time in relation to our screening programmes. I can tell you the percentage of people who take up bowel cancer screening, and I can tell you that men are very poor taking up the offer compared to women, and so on, because all that data is available. And I could do the same for a whole series of measures that we identify as having a preventative impact in the Welsh budget.

Thanks, Chair.

Thanks, Sam, and thank you for that. Just moving on to the area of cost of living and poverty, and what the impact of this draft budget is on those aspects, with a couple of questions before we come to a close, part of the evidence that we had from the Women's Equality Network was noting the absence of gender data relating to the uptake of the discretionary assistance fund. So, it's a more general question: how do you, as the Cabinet Secretary, looking across the portfolios, ensure that allocations take account of gender impacts when they're coming to setting their departmental budgets?

Well, Chair, I was interested in what the Women's Equality Network said to you there. We take very seriously the advice we get from the equality network. I was reflecting on what they said to you about the discretionary assistance fund, because I've always taken a particular interest in the fund having been involved in its original establishment. I think the question I asked myself was a bit linked to some of the discussions we've already had about productivity and how we use the resources we have. There were 250,000 awards made from the discretionary assistance fund last year, and if we did want a gender analysis of it, we would have to collect that data 250,000 times. I think the question in my mind is: would we get sufficient insight, new insight, as a result of all that activity? Is the effort commensurate with the reward? I think I could tell you now that we know that women disproportionately carry the burden of poverty in Wales, and that they are disproportionately affected by the sort of household debts that drive applications to the DAF. So, I suppose my question would be: we could do it, but would we learn anything that would be commensurate with the effort that we would have to make?

More generally then, across the Welsh Government, of course, we are using evidence from our own equality evidence units. We are committed to embedding gender budgeting. We published what we've learned from the first trials at the draft budget, and we are considering now how we take gender budgeting further in the work we will do in the future. Jodye is here and can give you more on that, if you would like it now, Chair, or we could probably provide it to you beyond today's meeting.

I'm conscious of the time, and I know you have an appointment after this meeting, so I'd like to concentrate on a couple of questions. If Jodye could write to us with that, as we're obviously on a very tight schedule on reporting, that information as background information would be very useful in particular, anyway.

Three more questions from me very quickly in the last five minutes now. The Bevan Foundation described the need for long-term action around social housing as vital, and I think we'd all agree with that. How have you then balanced that priority with allocating funds across portfolios?

The Welsh Government's commitment to 20,000 new homes for social rent was a major commitment in the programme for government. We have front-loaded investment in social housing because you can't begin to achieve a target of that sort if you only start in the second half of a Senedd term. There's £2 billion of investment in social housing, which is the greatest ever amount of investment, and that has grown strongly over this Senedd term—a 42 per cent increase in social housing grant, and that is a very considerable increase. There are further increases in the budget for this year because we are confident now that we will reach that 20,000 target in 2026, and that has only been achieved because, as you asked in the question, Chair, of how do you balance these things, we've placed a higher priority on social housing as opposed to affordable housing in this term than ever before.

As you're aware, this committee did a report on financial transactions capital. How has that been used within the social housing question that I just asked, and is there a plan of using it more strategically, going forward?

I want to thank the committee for that report, which was a very useful report, and we continue to work on some of the recommendations in it. We are looking at ways in which we can use FTC alongside conventional capital to increase the capacity of social landlords to be able to borrow money for investment in the sector—so, combined grants, low-cost loans and equity as well, alongside Government guarantees. I think the committee's report was about how we use FTC, or partly about how we use FTC, to leverage private and institutional finance for housing delivery, and we continue to use FTC in this area, but now, with that slightly wider remit, using it not just as investment in its own right, but to lever in other forms of investment into this area.

Thank you very much, and I'm glad that the work of this committee was helpful in some of that as well. Two fairly quick questions to finish. You published the interim strategic integrated impact assessment alongside the detailed draft budget, with a final version to accompany the final budget. What limitations does this have in terms of demonstrating how you've made decisions?

Well, Chair, I think the two-stage process is an improvement in the process rather than a limitation. It allowed us to produce a strategic integrated impact assessment of everything that we had done up to the draft budget position, but we will now publish the full and final integrated assessment to take account of the changes that will be made at the final budget, and, as we've discussed, there are some significant sums of money that I hope we will be able to allocate in order to get that budget agreed, and you'll now have a strategic integrated impact assessment that will reflect the whole of that, while we were able to provide a very significant amount of information at the draft budget stage as well. So, I think this is one of the advantages of the way we've been able to do the budget this year, rather than a limitation.

And finally from me, and it's more about timetabling and looking at the final budget, you did make a commitment in committee earlier, at the beginning of this process, that if there were significant changes in the budget by the time it comes to the final budget, you'd make time to come and discuss those with this committee. Looking at laying the budget on 20 January, and then potentially the vote on 27 January, how are you factoring in, potentially, any discussions with this committee with regard to any decisions that you make, and is that actually going to be possible?

Well, Chair, that offer remains good. I'm very happy to come back to the committee in the period. I know it's a narrow window, but we've known about it for a while, so I remain committed to coming to the committee. The committee would want to hear from me in that week, and my office, I know, is ready to talk to the clerks to find a time when that could be practically possible for you and for me. But I'm still very happy to do it, if it's useful for you.

Okay, we'll have to see if we're able to do that and what we're able to timetable, but I think it would be interesting to hear how those negotiations with other parties have gone, as well, because part of that will be the way that that final budget will be laid.

That brings us to time. Thank you very much for your time this morning—well, it's just turned into this afternoon—Cabinet Secretary, and your officials. There will be a transcript available for you to be able to check for accuracy.

So, in accordance with Standing Order 17.42(ix), I proposes that the committee resolves to exclude the public from the remainder of this meeting and from the meeting on 11 December. Is everyone content? Yes. Thank you.