Cabinet Sub-Committee on Cost of Living meeting: 21 September 2022

• Rt. Hon. Mark Drakeford MS (Chair)
• Rebecca Evans MS
• Lesley Griffiths MS
• Jane Hutt MS
• Mick Antoniw MS

Apologies

• Vaughan Gething MS

Officials

• Andrew Goodall, Permanent Secretary
• Des Clifford, Director Office of the First Minister
• Will Whiteley, Deputy Director Cabinet Division
• Jane Runeckles, Special Adviser
• Alex Bevan, Special Adviser
• Kate Edmonds, Special Adviser
• Andrew Johnson, Special Adviser
• Jo-Anne Daniels, Director General Education, Social Justice and Welsh Language
• Reg Kilpatrick, Director General, COVID-19 recovery and Local Government
• Jo Salway, Director Social Partnership and Fair Work
• Claire Bennett, Director Communities and Tackling Poverty
• Andrew Jeffreys, Director Treasury
• Toby Mason, Head of Strategic Communications
• Jonathan Price, Chief Economist
• Catrin Sully, Cabinet Office
• Tom Smithson, Deputy Director COVID recovery and Local Government Group
• Christopher W Morgan, Head of Cabinet Secretariat
• Damian Roche, Cabinet Secretariat (Minutes)

1.1 Croesawodd y Prif Weinidog pawb i’r cyfarfod cyntaf o’r Pwyllgor Cabinet ar Gostau Byw. The First Minister welcomed attendees to the first meeting of the Cabinet Committee on Cost of Living.

1.2 The purpose of the committee was set out in the Terms of Reference and its aim was to provide strategic direction to the Welsh Government’s ongoing response to the Cost of Living crisis, engaging widely with social partners, businesses and the UK government to address the crisis in a Welsh context.

2.1 The First Minister invited the Chief Economist to provide the latest economic outlook, which would be a regular item on the forward work programme.

2.2 It was reported that the Bank of England had under-predicted recent steep inflationary rises, but these had been caused by a global crisis that could not have been foreseen and were driven by non-economic factors.

2.3 The Consumer Prices Index (CPI) had risen by 9.9% in the 12 months to August 2022, down from a peak of 10.1% in July; CPI including owner occupiers’ housing costs (CPIH) rose by 8.6% in the 12 months to August 2022, down from 8.8% in July.

2.4 The Energy Price Guarantee (EPG) announced by the UK Government was likely to have a dampening effect on inflation, potentially keeping inflation to around 10%, but there was concern from the Bank of England that inflation could become entrenched.

2.5 It was inevitable that the greatest impacts from higher inflation would be felt more keenly by the lowest income households, who spent proportionately more of their income on energy and food.

2.6 However, there was some slightly more positive news on energy and food, other than gas prices, as the price of Brent crude oil per barrel had fallen from its July high of $120 to around $93 a barrel. In addition, the FAO Global Food Price Index had seen a small decline over the previous few months, although food was still putting upward pressure on CPI in the UK.

2.7 The committee considered the fiscal implications of the EPG, which were difficult to predict as they were dependant on the price of gas, which was currently unstable due to the war in Ukraine. 

2.8 It was noted that the EPG could cost anywhere between £100bn – £200bn over the next two years, but if the price per therm, which had already halved from its peak to 330p, halved again, the EPG could become cost neutral. However, the cost per therm for energy was still very high compared to pre-2021 levels.

2.9 It was evident that pressures on pay were continuing, with public sector pay having only risen 2.2% year on year. The private sector had fared slightly better, with pay increasing 6.2% on average. In real terms however, with CPIH inflation at 8.8%, wages were falling across the piece and this was unlikely to be sustainable.

2.10 As a result of the reduction in living standards, growth was likely to be very weak, with a recession very possible. There was also the potential for unemployment to increase, although that was at a very low baseline of 3.6% in the most recent period.

2.11 Overall, economists were predicting an extended period of lacklustre, low growth. The EPG and any further fiscal interventions from the UK government might ameliorate this, but major improvements to the economy were unlikely as a result of any announcements later that week.

2.12 There were additional risks to the economy from potential fiscal choices by the UK Government, including any further increase in interest rates, depreciation of sterling and potential downgrades by the ratings agencies. There was also an emerging issue of sickness related inactivity in the workforce, some potentially as a result of long Covid.

2.13 Research by the Resolution Foundation had shown the EPG would have the biggest impact for households across the income spectrum, but potential UK Government policies such as raising the NI threshold and cancelling the Health and Social Care Levy would disproportionately benefit the richest households and were regressive in nature, whereas the cost of living payments were the most progressive of the interventions to date.

2.14 The Committee considered some international comparisons and noted the UK needed growth, but also a reduction in inequality between the rich and poor to be more in line with some European and Commonwealth countries.

2.15 It was reported the UK fiscal outlook had worsened significantly since the OBRs last forecast in March, which predicted headroom of approximately £30 billion. It was unlikely that current fiscal rules would be met and they may well be done away with entirely by the current UK government.

2.16 In terms of the Welsh fiscal outlook, Wales was likely to be £4 billion a year worse off as a result of inflationary pressures, which was a considerable decline in forecast Budgets for 2023-24 and 2024-25.

2.17 In thanking the Chief Economist for the report, the committee noted that income inequality in the UK was high because market income inequality was high and the UK undertook less cash redistribution than many other countries.

3.1 The Minister for Finance and Local Government provided an overview of the current Welsh Government financial situation.

3.2 Internal analysis was pointing to our 2023-24 settlement being worth £1.5 billion less than originally expected due to inflationary pressures. The Welsh Government budget could be 3-4% lower in real terms in 2023/24 than in the current year – a bigger reduction than any year during the period of austerity.

3.3 There were several areas where the Welsh Government would look to support its ambitions with any consequential funding arising from the Chancellor’s Statement due later that week.

3.4 It was suggested a clear narrative was developed around the pressure on budgets in coming years.

3.5 The committee would maintain a close watch on announcements made by the UK government later that week.

4.1 The First Minister referred to the forward work programme which provided the Committee with an overview of the structure of meetings, attendees, and governance mechanisms.

4.2 It was noted that social partners and other external attendees would be invited on a regular basis.

4.3 Ministers were encouraged to include the cost of living throughout work programmes and meeting agendas across their portfolios, given the truly cross-cutting nature of the work and its objective to help people in Wales through the crisis.

4.4 Trade and Credit Unions would be important contributors and it would be vital to ensure a coherent narrative and approach to the work was adopted across government. 

4.5 It would be essential to highlight the preventative and early intervention work being delivered by the Welsh Government in this area, and the work of the various Senedd committees on cost of living, fuel poverty and energy would be important elements to include.

4.6 It was suggested that further work could be done to investigate the potential for a social tariff to address water poverty.

4.7 Cabinet noted the paper.

5.1 The committee noted the urgency around informing people about the Budgetary impact, as £4 billion was a very significant reduction in real terms. 

5.2 It was noted the ‘Claim What’s Yours’ campaign, which had been well received to date, would be adapted to focus and clarify what the Welsh Government and its partners were delivering for people in Wales. 

5.3 Focus groups would meet shortly and communications leads across Welsh Government had been tasked to bring the work strands together.

5.4 It was suggested that engagement with social partners was stepped up across the board, particularly with Trade Unions.

5.5 Cabinet noted the paper.

6.1 The First Minister referred to the draft Terms of Reference.

6.2 The Cabinet Committee agreed the draft Terms of Reference on a working basis.