Cynulliad Cenedlaethol Cymru

As I said earlier, we're going to be talking about the second supplementary budget this morning, to understand some of the unallocated resource, the fiscal levers and national insurance contributions in the first instance. Could you talk us through how you've prioritised allocations made in this supplementary budget, and how satisfied you are with the anticipated year-end position? 

Well, Chair, diolch yn fawr. As members of the committee are very familiar, supplementary budgets are essentially a tidying-up exercise, bringing together decisions already made and already announced, and making it easier for them to be seen in the aggregate. They deal both with spending and finance aspects. It regularises the final adjustments to budget allocations before the next financial year.

In that sense, supplementary budgets have no separate priorities of their own; they reflect the priorities of the Government in the wider programme for government sense. Where there are major allocations, then, before they are made, I report those to the Cabinet for Cabinet discussion and decision making. In that sense, they reflect the priorities of the Cabinet as a whole. So, the largest revenue allocation reflected in the budget is £200 million for the health service, and that absolutely reflects the priority attached by the current Labour Government to funding the health service. Probably the largest capital investments reflected in the second supplementary budget are £60 million for education, and again that reflects the priority attached by the Government to the education service. So, there are no separate priorities that supplementary budgets have; they continue to reflect the priorities of the Government as a whole.

We are, as ever, managing the budget to the very end. There are relatively modest amounts of money unallocated in both revenue and capital. We’ve still got a month to go. We’ve seen the volatility of the weather; you could still have a storm in the middle of this month that would cost money and would need to be covered. We see the volatility of the international circumstances. But I am satisfied that the Government will, as we have, year in and year out, spend right up to the top of our spending limits, while having enough in reserves, even to the last week of the financial year, should anything unexpected or unforeseen become a call on the budget at that point.

What’s given you the biggest headache in producing the second supplementary?

Well, I guess every finance Minister in the history of devolution has needed to keep a close eye on the health service and on the health main expenditure group. There are things that happen right to the very end, and we’ll be managing those right to the end as well.

In the second supplementary budget, a different sort of issue—a technical issue, but one that absorbed a number of meetings that we had at the time—was the issue of needing to cover Transport for Wales costs for hybridisation of the least—. Is it the 231 class of train that they have? So, they want to make sure that those trains can be used in the future—not diesel only, as they were built, but for the new electrified lines. That means there is work that needs to be done; there are costs involved in that. And there was a relatively technical set of considerations about which year to take that bill in—whether to take it in this year or to take it in next year. And the decision turned around an issue of the interest rate, which is not a decision we make, but is made at a UK level. My concern as the finance Minister was to pay the bill when the bill would be lowest, and in the financial year where we were best able to absorb it. And the debate as to whether that would be this year or next year continued right up until the point where the decision had to be made. At that point, the decision was to pay the bill in this year, because next year the interest rates could have been higher and we’d have ended up paying more. And by paying the bill this year, it creates headroom in next year’s budget for TfW, and there will be other things that they will be managing.

So, there’s a relatively technical, not in the headline sort of issue, but in terms of managing the second supplementary budget, it took quite a lot of time and quite a lot of fine‑tuned decision making.

Thank you for that, and it gives us a flavour of some of those decisions. And obviously, the supplementary budget shows that there’s £42.2 million and £30.2 million in unallocated fiscal and capital, and you mentioned some of that earlier. So, how does that help manage the Wales reserve, because all the funds have been drawn down from the Wales reserve? So, if you could talk us through that element as well.

So, what you always aim to do is to make sure that, at the end of the year, there is sufficient headroom in the Wales reserve that, if you have unspent capital or revenue, it’s not lost to the Welsh Government, but that it can be put into the reserve and can be made available for future years. At these levels, I'm very confident that there is room in the Wales reserve, because we've had unfettered access to the Wales reserve this year, so we've drawn more out of it than we would have in other circumstances. There is undoubtedly room in the Wales reserve that if we end the year with capital and revenue underspends of the sort you see here, they'll be in the Wales reserve and they'll be available to the next Government.

Okay, fine, thank you. And the UK budget for 2025 announced changes to the borrowing and draw-down limits, and you mentioned that just now, but that was only a temporary waiver of the rules. Why have the Treasury been so reluctant to allow us to have that unfettered access? And are you hopeful that, for future years, that will happen, and will it be discussed, maybe,  at the Finance: Interministerial Standing Committee in a couple of weeks' time?

So, Chair, the decision on the unfettered access to the Wales reserve again for next year was part of a slightly wider discussion with the Treasury Ministers about the fiscal framework. So, you know that borrowing limits have been raised. Why were they raised to the level they were? Well, the explanation by UK Ministers is that that brought us broadly into line with the Scottish position.

And thinking of your question: what are the things that play around in the mind of the Treasury insofar as we can understand it? That's always in their mind. They're always been worried, it seems to me, to concede, as they would put it, anything to Wales that then puts them under pressure from Scotland or Northern Ireland to do the same for them. So, that's always one of the things they're thinking about: 'Oh, if we do this for them, then we'll be asked to do it for other people as well.' So, that worries them.

In my experience of the Treasury, it is an organisation dedicated to controlling public expenditure. It doesn't like to cede any of that control to anybody else. So, we're asking them here to lift some of the controls they have and to let us manage it. And it's against the grain for them—it's not the way they think. 

And here are two other slightly more benign explanations, really. One is that these things matter a great deal to us, but the Chief Secretary to the Treasury is managing a most enormous number of these sorts of things across the whole of Whitehall, Scotland, Northern Ireland. And I think sometimes it's just bandwidth—they just haven't got the time and the capacity to attend to some things that we worry about. It's so low down the list of things they have to worry about that they end up making a decision at the last minute. And I think unfettered access to the reserve, in some ways, was a quick decision to make, rather than a sort of altering of the whole system.

And then finally, I think, in a way, you could argue that we are victims of our own success, because we have managed within the constraints of the fiscal framework. We have managed to do the things we need to do within the borrowing constraints we currently have, within managing the tightness of the Wales reserve. And from the point of view of the Treasury, I guess sometimes that looks like—

Well, if you're managing, you don't need to change anything, other than when it's causing you issues.

Yes, indeed: 'Why do you need more, because you seem to manage all right within what you've got.' Now, that's to misunderstand the case. The case is about managing better, not that we can't manage at all. But the fact that we've never needed to go to the Treasury reserve, because we were managing our own reserve, I think sometimes looks to them as though there isn't a problem here that needs to be solved.

Yes, okay. Thank you for that. And finally, then, from me, before I bring others into the conversation: the committee recommended the need for you to continue to press for full funding from the UK Government to close that funding shortfall, as a result of national insurance contributions in the public sector. Have you got anywhere with that, or could you update us on those ongoing conversations? And what advice would you give your successor in trying to have those conversations with the Treasury and pushing forward on the fairness aspect of what was promised and, maybe, underdelivered?

To the first part of your question, Chair, no, we've made no progress on that issue. By and large, it's not an issue that I have to lead on when we're in FISC meetings, because Scotland and Northern Ireland were even more badly affected by that decision than Wales was. Other colleagues often go first on that issue and then I represent the Welsh case as part of that overall conversation. But we've got nowhere with it, and in the view of the Treasury, that's a decision that's made—past, gone, move on. 

In terms of advice to any successor, first of all, pick your battles, because you could be arguing with the Treasury all day long about lots of different things, and if you do that, I think your energy is spread too thinly. If there are things you want to get done with the Treasury, you need to focus on those things, and I'm afraid that sometimes means you've got to leave some other things for another day. Look forwards, not backwards. Sometimes you have to recognise that that's a battle you haven't won, and you can keep going over it, if you like, but probably there comes a point where you have to recognise that you're not going to make progress on it, so it’s better to look forward, I think, and think of the things that are coming that you can make a difference to.

And then, finally, I would suggest to anybody that their efforts will be most successfully directed overall to reform of the way the Barnett formula currently operates. There will be a paper at FISC on that. And if you can succeed in improving the operation of the system, then you will have a better rule book, and that better rule book will either avoid some of the problems we've seen, or will solve them in a way that doesn't make them individual issues. It's better to get the system to work better, and then some of these individual issues won't arise or can be better navigated. So, I would put my effort into improving the system rather than fighting it battle by battle.

Rhianon, did you want to come in on that point?

Yes, briefly, Chair. It mentions that you've got an upcoming FISC, Cabinet Secretary, I think, on 19 March, and it mentions some of the issues that you'll be raising, but I was interested to hear what you said about battles that are past and those that you can influence in the future. Obviously, I'm presuming that this is your, potentially, last FISC meeting. Would there be any usefulness in terms of raising that Barnett formula issue at this current point with FISC?

Thank you to Rhianon. There will be an item on the FISC agenda that is about making the Barnett system work better. It will have a paper that will certainly be produced in the names of Scotland, Northern Ireland and Wales, and you never know, because conversations are still going on, it might be a paper that the Treasury will endorse as well, because there have been a lot of meetings recently between officials trying to get to a position where it's a paper that everybody will sign up to. We're not at that point yet, but as a minimum, it is a paper that will be agreed between Wales, Scotland and Northern Ireland, and with a fair wind, we might get the Treasury to agree to it as well. I don't expect it to resolve every single issue, but I expect it to make progress and to create a path to resolving the issues that remain for further discussion.

Because there are tensions with—. Scotland do fairly well out of Barnett, whereas we have our own tensions with it. So, getting unanimity, or at least agreement, between the three devolved nations helps in putting that unified voice, I suppose.

I've had no success in persuading others to have a discussion on replacing Barnett, and that's because other people maybe do reasonably well out of it, whereas we think that a needs-based formula would be fairer to everybody. But there is agreement among Scotland, Northern Ireland and Wales that the current system can be made to work better. And that doesn't necessarily mean that it spends more money in one place or the other, but that we would all have a better understanding of it. It would be a system that would be more transparent, where not all the decisions would lie entirely in the hands of the Treasury, as they do now, and so on. So, that's what the discussion will be about—making the current system work better for everybody. 

Sam. 

I was intrigued by the Institute for Fiscal Studies report a couple of weeks ago, which seemed to show that Wales benefits about 25 per cent extra compared to spend in England. I've similarly considered the Barnett formula and have called for those reviews as well. I just wonder if that's still as accurate a line to take as it once was. Holtham suggested that our needs basis in 2010 was about 117 per cent against English spend. We seem to be getting 125 per cent, according to the IFS. So, do you think it's fair for us to just reflect a little bit on some of the funding we do actually receive already?

Because of the agreement we have through the fiscal framework, the system does recognise differential need in different parts of the United Kingdom. That's why Wales gets a higher proportion of spend, because our needs are greater. But the system is partial. It doesn't take into account everything. If you look at Gerry Holtham's recent report on Northern Ireland, which built on the work that he did here, what he showed in the Northern Irish context is that there are things that ought now to be counted in that basket of things that are compared that aren't counted the other side of leaving the European Union. And when he applied that in the Northern Irish context, he said their comparability factor was higher than the one that was being used.

I think a similar exercise in Wales might well show that while the system as it currently is does have some recognition of differential need, it's not a thoroughgoing one. It doesn't take everything it ought to into account, and we will be better off if we could all agree on a more root-and-branch look at it all. We're not going to get that. That's the truth of the matter, no matter how much we make the case. There are others for whom the current system works well enough that they're not interested in looking and getting the drains up on it. But that doesn't mean that they're not interested in making the current system work better, and that's where our efforts have been concentrated. 

Thank you very much. I'll bring Mike in. 

One comment. Of course, if you went to a population-based formula, we'd do much, much worse than we do at the moment. And whilst Barnett gets criticised a lot, it actually does provide money to Wales, over and above what we'd get if we were in Cheshire. I think this, quite often, seems to be being missed. 

I was very glad, when I was negotiating the fiscal framework, that one of the things that our Scottish colleagues said to me—because they'd gone the year earlier—was, 'Don't do what we did and allow population to be part of your discussions', and we didn't. And I think we've always been glad of that. 

Two hundred million pounds of revenue has been allocated to the health and social care main expenditure group to support front-line NHS services. But how much of that is going to be taken up by health board overspends?

Of the £200 million—the £200 million is made up of three main blocks—about £140 million of it was recognising health board overspends. They have since come down, but, at the time it was made, £140 million of it was for that purpose. Then, the other £70 million recognised two other risks: the Welsh risk pool, which I think we've discussed here previously, which said it was going to have to pay out more this year than it had anticipated, because some court cases had moved more quickly and more expensively; and because of the resolution of a long-standing dispute over 'Agenda for Change' staff who were banded at band 2 by some health boards, but were operating at band 3 level of duties. There was inconsistent application of the national pay band descriptors, and we're having to regularise that this year. So, £70 million, also, was for those purposes. 

So, how much of that £200 million is going to be providing additional health provision?

We made an allocation at the start of the year, which was in the first supplementary budget, of £120 million, and that is the money that has been used to bring down waiting times and waiting lists in this financial year. That money, I think, has—. I think you asked me, Chair, at the meeting we had on the first supplementary budget what monitoring mechanisms I had as the finance Minister on how that money would be used. Six months and more later, I feel very confident now that that money has done what we wanted it to do.

The health Minister said to me that it would buy 200,000 additional out-patient appointments and, as of February, 165,000 of those had already been booked and delivered. He said to me that it would accelerate the number of cataract operations done in Wales and, by January, nearly 32,000 had been carried out, compared to 17,000 the year before. So, on Mike's question about where the treatment money has come from, it's not so much in the £200 million, it was in the £120 million that we discussed back at the first supplementary.

I want to talk about the student loans fund. To be quite honest with you, if this was run by a private body, it would be called a Ponzi, and the people running it would be arrested under fraud. It doesn't work, by any stretch of the imagination. The budget documentation shows an increased allocation of £2.6 billion in non-fiscal resource to the student loans ring-fenced budget in the education MEG, noting it leads to changing the student loans valuation model. Can you expand on it? How are you going to explain to the education professionals who see an extra £2.6 million in there and no money for schools? Because that's what they're going to say: 'You've got this money, why aren't you giving it to schools?'

In a way, the answer to the final part of the question is very easy, although quite difficult to get people to understand, because this is non-cash cover. This is not money that we can spend. So, if people say, 'Why aren't you spending that on schools?', the answer is, 'It's not that sort of money.' It is a very large sum of money, but it's not money that comes to the Welsh Government that we can choose to use it for those other sorts of purposes. I've heard Mike's analysis of the student loans fund before. You could argue, I think those who are responsible for it would argue, that some of the changes go some way to answering the criticisms that he has made of it. The reason we have that figure is because there is a new model. The new model has been agreed by all four nations. It's been phased in from 2024-25 and is in full operation in the current financial year.

There are four new components in it, and essentially what it does—. Andrew will explain it to you in more technical ways, but essentially what it does is it recognises that the anticipated repayment levels have been lower than the previous model assumed, will go on being lower into the future and, therefore, the Treasury has to provide this higher level of non-cash cover to recognise the fact that the scheme isn't operating as the original model had anticipated. So, I think, from now on, there will be much smaller changes year by year because the scheme is now on a more honest basis, if I put it that way. Yes, there is a very large sum of money, which the Treasury has provided on that non-cash cover basis, but it has done the same for England, Scotland and Northern Ireland as well. This is not a Welsh issue in that sense. I think it was £11 billion or £12 billion in the English case that the Treasury had to provide, and similar sums in Scotland and Northern Ireland.

Of course, you've got the cliff edge of student loans, haven't you, when it starts getting written off. People have not paid any of it back. What is it, 30 years, that you've got to pay it back? If you haven't paid it back then, it gets written off. The first 30 years becomes up towards the end of this decade.

I think the first student loans started being offered in 1990; I think that was the first year. So, you will have people, I think, now having their loans written off.

And will we also then have—. It wasn't a problem to start with. It was £1,000; it wasn't a large sum of money. Paying back £3,000 for a degree was not a huge problem. Some of us opposed it in principle, but it wasn't a huge problem. Now the student loans are substantial—bigger than a lot of people's mortgages. And I just wonder: has the Treasury said it will continue to underwrite it? Because, if the Treasury stops underwriting it, the whole system eventually implodes.

Well, provided our scheme doesn't cost more than schemes elsewhere in the United Kingdom, the Treasury will continue to cover it. I think the thing for us to watch in the coming months is whether our system is more generous than systems elsewhere, and when it starts to cost us real money as well. Because the Treasury will say, 'Well, you know, if this person was living elsewhere in the United Kingdom, they would not be getting the level of support they get in Wales, and you've gone above the cover, the level of cover that we offer you. We're not—.' I think it is true to say that there was a period when Treasury oversight of the student loan model was relatively relaxed, with a lot of latitude in the way that they interpreted it. Whereas, in more recent years, the Treasury has taken closer oversight of this policy issue. They have tightened up the rules, the rules are clearer, the rules are tighter, and we will have to be more careful, therefore, that the scheme that we have doesn't lead to costs directly on our own revenue budget. It's partly why the Minister issued her letter on 21 January, as a call for evidence from the sector about the future of student support in Wales. And you will see that, in the paper she published on 21 January, she specifically drew out some of these issues regarding the cost of our current student loan arrangements. They've been affordable up until now, but we've got to watch carefully that they don't become more difficult.

Mike, do you want to continue? Sam wants to come in as well, so—

Just very briefly. Will you get—will you ask, or will the First Minister ask—the Cabinet Secretary for Education to explain why this apparent large sum of money going into education is not really going into education and is not available for schools et cetera? Because that is where we're going to have problems. And we've all had dealings with the NAHT, who have a total lack of understanding of education funding, and it's important that that is made absolutely clear to them, that this is not money that's being stolen off schools; it is something entirely different.

Yes. I agree with that.

Sam, did you want to—?

It's essentially just a provisioning tool, isn't it? So, it's provisioning against future risk. Am I right?

So, it might be worth just a little bit of explanation. There are three different components of funding for the student finance system that it's worth separating out. So, there's the annual loan outlay that goes to Welsh students. So, each year, new students or existing students borrow money and there is a funding line in annually managed expenditure that covers that loan outlay. Then there's what we call a 'stock charge', which is the one we're talking about here, which is, effectively, changes in the value of the existing loan book. So, there's that stock of loans already made, which has a value based on how much is expected to be repaid, and that value is adjusted each year based on changes in things like gross domestic product, which affect future earnings and those kinds of things.

What's happening this year is that there's a big, one-off change in that stock value based on applying the new model, which, basically, says that future earnings are likely to be lower than the previous model that we used suggested. So, that means you have to write down the value of the student loan book quite significantly in light of that—so, that's the £2.5 billion that we're talking about. So, that is, effectively, a financial transaction. It's not real money in that sense.

And then there's a third element, which is what you might think of as the annual write-off of the loan outlay. Loans are made each year, and an assumption is made about how much of those loans won't be repaid in the future. That's called the resource accounting and budgeting charge, and that's estimated each year, based on a model. That model is also linked to the model that values the overall stock. So, that's part of that non-cash budget as well. So, yes, the Treasury will cover those costs, provided they're what they call 'comparable'. As the Cabinet Secretary has said, they judge that comparability based on what it would cost to apply the English arrangements in Wales. As long as our system comes within that overall cost, then they will cover it. If it goes above that cost, then the rules suggest that that would need to be taken off our resource departmental expenditure limit budget. So, that would start to impact the budget and the real money that we've got to spend on things like schools and other things like that. So, we're not in that position yet, but there is a risk that we'll get into that position in the future. Is that helpful?

Yes. I'm just going back to my risk-management days—it's exactly what a bank would do in terms of a loan book: review the risks constantly and look at the value of that loan book and the likelihood of those defaults in the future, set provision against those. It's exactly the same thing happening here. Essentially, as you explained, the risk of those student loans not being paid back has increased, essentially, so therefore the value of those loans has lessened. So, it makes sense to me. I guess what we need to keep in our minds is the impact on services here in Wales and the responsibility of Welsh Government. As Mike pointed out, I suppose, it's not a like-for-like swap when it comes to those financial lines.

Before I bring Rhianon in with a set of questions, I suppose it goes one step further than that. What's driving this is that graduates aren't being paid what they thought they were going to be paid; they're being paid less. So, a degree education isn't giving you the income that they thought you were going to get, which means that it's an issue with the economy and the economy not performing as well and therefore that has a knock-on effect on salaries.

I think when Mark and I graduated—Mark graduated a few years before me—about 5 per cent of the population went to university to get degrees. Now we're over 40 per cent. It should come as a surprise to nobody that the average wages of graduates, because there are so many more of them, have come down.

And that's what's driving the formula, basically.

And then you get less repayment.

Thank you. Thank you very much—very interesting discussion there. Rhianon, you've got a set of some questions. 

Thank you, Chair. Moving to matters more capital, £60.5 million of general capital has been allocated to the education main expenditure group for essential capital repairs, maintenance to buildings across education sectors, and that's been very welcome. How have you determined that as an allocation, and how would that address the asset maintenance huge backlog?

Well, Chair, one of the jobs you do as the finance Secretary is in-year management to see whether, as the year goes on, there is any additional capital that you could make available, either because you've had new capital come into the system because of fiscal events at the UK level, or because there are underspends in plans that were approved at the final budget stage. I knew from very early on in the year that the Cabinet Secretary for Education and the Minister for Further and Higher Education were both very keen to see whether there was any additional capital that could be provided to the system. In very broad terms, there are two sorts here. For schools, it's money that goes directly to schools for relatively minor day in, day out repairs. It's not for building new schools and things like that. It's for the sort of stock of maintenance to which Rhianon referred. In further and higher education, the Minister was keen to be able to do more of the sort of spend-to-save work that we've done with the sector over the last year or two, where we are able to help them to organise their capital estate in a way that reduces the revenue that they need.

As finance Minister, I've always been clear with my colleagues that I put a special priority on capital spend that reduces the need for revenue. So, those were cases being made early on in the year. I would like to have been able to help earlier than I was able to, but, this year, a bit to my surprise at least, capital underspends were slower in being identified than I had anticipated. I thought, because there's a big injection of capital in this year, £365 million additional in capital, that I'd begin to see signs of not all that money being able to be spent as planned early on in the year, but that didn't happen. So, it was January before I was able to make a first allocation to those MEGs, and I've been able to make another one just before the supplementary budget as well. So, it's a matter of in-year management—that's how you get to the figure, and it's a bit of science and it's a bit of judgment as well, because—. You know, how much headroom have you got? Where should you apply it? These were decisions that will have gone to the Cabinet, because they're significant decisions, and all my Cabinet colleagues would have liked more money to spend, but the Cabinet agreed that education would be the priority for it.

In terms of Rhianon's question about what does this do to the backlog, well, we shouldn't forget that, in the last decade, 20 per cent of all school and college buildings in Wales have benefited from the twenty-first century schools and colleges programme, which is extraordinary compared to what has happened elsewhere. So, in that sense, there's a lot of our estate that is very modern and in a very good state of repair, and, since 2018, we've invested over £300 million in the running maintenance of other buildings. So, the extra £60 million, particularly in the schools context, continues to make an inroad into any backlogs.

Rhianon.

I'm going to move to the transport MEG. So, £72.2 million of capital was allocated into that to meet additionality associated with the rolling stock on our rail network, which is around decarbonisation for the Transport for Wales train fleet. Can we shed some light on the need for what is a very large allocation, and was that anticipated?

So, Chair, this is the issue I referred to in an earlier answer, about making the fleet capable of running on electrified lines as well as on diesel. It was anticipated. We knew that there would be this bill. The debate has been about in which year to take the bill. By taking it early, I think we've paid less than we would have otherwise, and Transport for Wales is able to realise the benefits of hybridisation, as it's called, because there are very real carbon gains from running trains on the electrified line rather than on a diesel basis. The hybridised trains are more reliable as well, so you get a service benefit as well.

Thanks. It would be remiss of me to not touch upon this: bearing in mind the lack of capital allocation to Wales for a considerable amount of time, how much do you think that has impacted on the infrastructure across Wales? That's before I move to my last question.

Look, I don't think it's contestable on the facts that, for a long period, and particularly a period when interest rates were very low indeed, the UK Government chose not to invest in the conditions of economic success, and we were starved of capital. That £365 million extra is more than we got extra in the 10 years combined before that. I think that does show you the level of capital starvation we've experienced in Wales, and that does lead to backlogs and it does lead to opportunities missed.

Thank you, Cabinet Secretary. And finally, you mentioned £70 million has been surrendered to reserves from the economy, energy and planning MEG following an exceptional property sale. Obviously, that interests us as the Finance Committee. Could you expand on this? How did Welsh Government ensure it received best market value? I'm struggling to get myself heard above a very loud dog, so apologies if you didn't hear that. 

We can hear you fine, Rhianon. Thank you.

We can. Thank you. So, this was a capital receipt in the economy portfolio because of the completion of the sale of the former Hynix building and plot 6 and 7 at the Celtic Lakes development in Newport. It was sold to Vantage Data Centers. This is a relationship that has developed in recent years—a very important one in Newport, and very important at a UK level because of the chips that are manufactured there. So, the money comes in in one lump. You can't allow MEGs just to keep windfalls of that size. The amount was overseen by the independent valuers that the Welsh Government used to make sure that we are getting proper market value for it, and £70 million, very handily from my point of view, was then returned to the centre as a result of that sale.

Diolch yn fawr. Okay, I'll bring Sam in with some final questions. 

Thank you, Chair. Just perhaps a couple more points on those capital points that Rhianon raised there. I heard your point around perhaps wanting to have early identification of potential underspends. Do you think, with that higher capital allocation, has that perhaps shown a slight weakness or something within the system that hadn't allowed you to have that intelligence earlier on? And have you put some changes in place that will allow that intelligence to flow through to you more quickly, so you can make those decisions a little earlier on?

Actually, Sam—sorry if I misled anybody—it wasn't that we didn't have the intelligence, it's that I expected the intelligence to tell me that there was a larger amount of capital underspend. In fact, it wasn't showing that. But it wasn't a lack of intelligence, it was that the ability to move capital didn't happen until a bit later in the year than I had expected myself. Others may have had a different view of that, but I myself was expecting to see in the monthly monitoring a bit of capital underspend coming in a bit earlier than it did. But it wasn't a lack of intelligence, it was that the intelligence wasn't showing what I thought it would.

So, you're comfortable that the processes and systems that are in place to inform you as the ultimate decision maker on these points are robust enough to give you the information you need.

I think they are. There's a monthly monitoring system. It monitors conventional capital, financial transaction capital, the revenue at the level of each MEG. It's interrogated, and in time, Sharon oversees it all and kicks the tyres on it all, and then it gets reported to Ministers. And in the second half of the year, I've been reporting it monthly to Cabinet as well.

And the allocations you've made, you're going to be able to get that spent by the end of the financial year so that it's not returned or—

Well, that's another very important consideration that I haven't mentioned, which is that some parts of Welsh Government find it easier to use capital than others. And education—one of the reasons why the education MEG has seen the benefit is that it is better able than some other parts of the system to deploy the capital if you're able to find it for them.

Because there's the issue of getting it late. You've got to get it out—. Sam has reminded us in the past that when he was a council leader, getting something late and then making last-minute decisions rather than thought-out decisions—. So, it's interrogating that aspect.

Yes, you'd always be grateful for the capital, no matter when it comes, I guess.

But you'd like it early, wouldn't you? And I wanted to give it early, but I was later than I had hoped.

And then just on that final point the Chair touched on about any risk of money being handed back to Treasury, there are a couple of lines in your report that do identify, in particular here, £10 million of general capital ring-fenced funding being returned to HM Treasury—it says it will be reprofiled in the future to support the Holyhead breakwater. That's in the economy, energy and planning MEG. Perhaps you would want to explain to the layperson what that really means.

So, we had money from the UK Government as part of a tripartite deal, really, to invest in the Holy—

Head.

Holyhead—sorry, I was going to say 'Holywell'. The Holyhead breakwater. In the end, that money wasn't able to be spent in the year that we expected it, so we hand it back and we get it back the following year.

Yes, so it's not necessarily money lost, it's just money not spent within—

It's not money lost, it's just reprofiled. Technically, we give the money back and then we get it back in the next year.

Yes, thank you for that. So, just moving on to the Welsh Tax Acts etc. (Power to Modify) Act 2022, there are draft regulations laid to extend the expiry date of the power provided by section 1 of the Welsh tax Acts to the maximum permitted, in April 2031. Could you explain why that has been laid?

Well, Chair, I think of this as just orderly government, really. So, the powers that we have in the Welsh tax Acts can only be extended once, and then they have an expiry date five years beyond that. Amendments, when the Bill was in front of the Senedd, also put reporting requirements into the operation of it all. I think it is sensible for this Senedd to take the decision to extend those powers for the one five-year period for which they are available while we can do it. An incoming Government otherwise would find themselves having to make some very rapid decisions in this area, because of the reporting issues, just at a point when, in my experience, and I think I've been here for the start of every Senedd term since 2003—. Those early months are inevitably months when Governments are being established, when new priorities are being found, when people's minds are on big things. I think we can just ensure orderly government by extending those powers now.

Now, at any point, an incoming Government can decide to do something different. So, it doesn't have to allow those powers to stay there for the whole five years. If they've got the bandwidth to attend to this issue early on, they can put a new system in place at any point that they like. But by passing regulations in this Senedd, we can remove the time pressure that would force this issue to the top of that Government's thinking very early on, in a way that I think would not be helpful and would not be orderly. So, we make the decision now to extend it if we do, if the Senedd does, and then a new Government has the time it needs to make longer term arrangements in a less pressurised, more orderly sort of way.

Thank you for that response. But, of course, the current timeline is until September 2027, so there is a bit of time for a future—

But the reporting requirements are September 2026.

Sure, okay.

So, it's not—. If it was 2027 for everything, then I think the case would be weaker, but, actually, it's a year earlier than that.

Yes. And there are a number of other measures, Cabinet Secretary, that you've chosen not to take, things like how the budget has been planned for next year, because you've used the language of, 'That's up to the next Government to do that.' Is there any particular reason why this—? Whilst I recognise the timescale, perhaps, is there a particular issue around this and a potential future Government that is causing you anxiety to get this done sooner rather than later?

No, actually, Sam, I don't think it is, because extending the time frame now doesn't prevent an incoming Government from doing anything it wants. It just means that it would be less urgent for it to attend to this when there will be so many other things it will be thinking about.

Yes. And, of course, in the review of the Welsh tax Acts, it was noted that the power hasn't been used, but you still feel that there is a need for this power to be made available.

Yes, I do. The power is there to allow the Welsh Government to respond to changes in circumstances over which the Welsh Government itself has no control. And broadly, there are four of them, I remember, we rehearsed at the time. There are circumstances in which the UK Government could enter into an international agreement, which could have an impact on the Welsh budget. There's avoidance activity that you find out about and becomes newly apparent. There are changes to taxes that are devolved to Wales, and there are court decisions that happen in the year as well. The reason for needing the power is that if we're not able to act quickly, the block grant adjustment could quite quickly kick in in a way that's adverse to Wales.

We haven't used the powers, but we came quite close to thinking about using them in 2024, when the UK Government decided to repeal the multiple dwellings relief in England. At that point, because we've got a different system, the block grant adjustment begins to take money away from us because of the comparison between the money we're raising and the money that's being raised in England. So, the reason for having this fallback power is simply to protect the resources available to Wales, where you can't go through the relatively drawn-out process of primary legislation to respond to them.

Just on that point, Cabinet Secretary, I guess in a perfect world, primary legislation would ordinarily be the best way of dealing with these types of issues, but, as you've pointed out, there's a need at times for that quicker response. What are your thoughts on the feasibility of getting that balance right between having the primary legislation with the full consultation and everything that goes alongside that and the full levels of scrutiny versus this much more flexible approach? Do you feel that it's about right at the moment?

Well, I've seen and we've debated here in the past, Chair, the case for an annual tax Bill, but when we have only two relatively modest taxes, I'm not sure that that's a proportionate way of responding to our responsibilities. If our fiscal responsibilities grow, then I think the case for an annual tax Bill will become more compelling. We hope to have a vacant land tax available to us in Wales before too long, and every time you get a bit more tax authority, then the case for the annual Bill strengthens.

We've also rehearsed the case for an as-and-when tax Bill, so not annually, not a slightly straitjacket approach, but a tax Bill as and when one is needed, or the hybrid approach we have now. For now, I think the hybrid approach probably remains the best one, where you do use primary legislation for predictable things and for the things that are under your control, but where there is a fallback mechanism that allows the Government to respond quickly when events happen that are not in the control of the Senedd, but would have an adverse impact on the budget available to the Senedd, and that is then regularised by the Senedd after the decision is made. And the Senedd could overturn the decision, it doesn't have to approve it. It gets a vote on whether or not to approve the actions of the Welsh Government.

I think the debate in the next Senedd will be how long a time should elapse between the Welsh Government using its powers and the Senedd approval process, and whether that approval process should be the regulation-making process or whether it should be by a primary piece of activity. I think those are debates probably that lie beyond this Senedd. For now, the hybrid approach, I think, serves us best.

I guess it would be down to the Government of the day to justify its approach, and then, in the words I'm sure I've heard you use before, to win the argument and to satisfy the Senedd of which approach it does take.

Finally on this broader issue, you've announced recently that the Welsh and UK Governments have reached agreement on a joint consultation to take place on the devolution of powers to introduce a vacant land tax, but the timing of that is with the Treasury. I wonder if you could expand on what the process entails in order to gain the necessary powers, and if you have any indication from the Treasury as to what sort of timescale we're looking at.

Well, Chair, it's not been a happy story, has it? It was a 2014 Wales Act. That's a Conservative UK Government Act that set up the mechanism through which powers to create new taxes could be drawn down to Wales through Orders in Council. At the level of the idea, I think that was a commendable thing to do, but making it happen in practice has been absolutely tortuous, really. We came quite close early on, when a man called Archie Norman was the Chief Secretary to the Treasury, but his departure really ended any meaningful dialogue with his successors until the election of a new Government.

It’s a very long-drawn‑out process. I’m sure it can be streamlined and made to work better—and ought to be made to work better—but the point where you get to a joint consultation is a pivotal moment in that process, because it really is the moment when the UK Government moves from asking the question, 'Will this go ahead?' to 'How will it go ahead?'

I think the Secretary of State for Wales said in the House of Commons that the UK Government had made the decision that powers to create a vacant land tax would be devolved to Wales. We’ve got an agreement on the consultation. The consultation will be launched, I think, very quickly after the Senedd elections. It’ll be a short and technical consultation, and then, hopefully, we’re on the home straight so that this power can be devolved to Wales, and the Senedd can then decide whether or not it wishes to use it.

Thank you, Chair. If I can just ask a broader question on the second supplementary budget as a whole. Of course, the date and time of the reporting on it is just a date in the year, and we’re heading very close now towards the end of this financial year. Is there anything you think the committee should be aware of that is likely to come out in the coming weeks before the end of this financial year—whether it’s some one‑off allocations that may appear, which may be of interest to this committee?

We continue to manage risks, as we always have done, right to the end of the year. Should any of those risks materialise, then of course I’ll report any decisions I need to make. They may not, Chair. You’ll remember that we discussed this time last year a big risk that was being managed right to the end of the financial year of a court case, an arbitration case, in which, had the arbitration gone against the Welsh Government, I was holding a contingency of around £50 million that we might have had to have paid. In the end, the court found in favour of the Welsh Government’s position, and that money wasn’t needed. But we were managing the risk of it right up until the end, because there was a risk that the judgment would have been handed down before the end of the financial year and, in accounting terms, we might have had to make provision for the judgment in our accounts in the year in which the judgment was made. So, we were watching that very, very carefully indeed, right up to the end. There’s nothing at that level of magnitude, but there are still risks that are being managed. If we have to act on them, I’ll make sure I write to the committee to let you know.

Thanks, Chair.

Diolch yn fawr. That brings us to the end of the session.