Wales: Devolution

Thursday 19th July 2012 Lords Chamber

Motion to Take Note

11:42

Moved by

[Baroness Randerson]

That this House takes note of the progress being made by the Commission on Devolution in Wales chaired by Paul Silk.

[Baroness Randerson]

My Lords, first, I declare an interest as I am in receipt of a pension from the National Assembly for Wales. I am also a member of the advisory board of the Wales Governance Centre, to which I will refer later.

Since I entered this House 18 months ago, noble Lords have devoted many hours to Scottish constitutional issues. In putting down this Motion for debate today, I am hoping to start to redress the balance and shine a little light on Welsh constitutional issues. We recently had an excellent debate on the Government’s Green Paper on electoral systems, which demonstrated that we have plenty to say. In the 1990s, as a Liberal Democrat, I was a supporter and campaigner for a full Parliament for Wales, rather than the little fledgling we were given in 1999. However, I am a pragmatist and long ago accepted that the Assembly we were given, fashioned like a county council as a corporate body, was the best that the then Secretary of State for Wales could persuade his party to accept. In my view, something is better than nothing.

We then set about building the Assembly into a proper legislature. First, the Liberal Democrat-Labour partnership Government established the Richard commission, which produced a radical and far-sighted set of recommendations, which I regret were not pursued by the then Secretary of State. Instead of a giant leap forward, we were consigned to a series of short hops. One such short hop, in 2006, saw the second Government of Wales Act, which introduced primary legislative powers—but only so long as MPs gave their permission on a one-by-one basis. Hence, the infamous legislative competence order was born and with it a great deal of resentment between the two institutions. It complicated an already very complex system.

It is worth noting that there is a fundamental difference in how the original Government of Wales Act and the Scotland Act were written. The Scotland Act gave power to the Scottish Parliament over wide areas of public policy, with specific and narrow exceptions. By contrast, in Wales, the Assembly was given much more narrow and specific powers, which were added to in a haphazard and lopsided way as and when the Assembly asked for them, an issue I will return to later. The second stage envisaged in the Government of Wales Act 2006—full legislative powers—was pressed for throughout the third Assembly. However, there was little progress prior to the coalition coming to power in 2010.

The history I have outlined so far will tell you that the people of Wales have got used to looking over their shoulder with envy at the powers enjoyed by the Scottish Parliament. Just as resentment was building, rescue arrived in the perhaps unlikely form of the coalition. A number of key developments followed pretty quickly after the coalition came to power. There are four pieces on the chess board at the moment and, just as in the game of chess, the movement of one piece has a knock-on effect on all the others.

A referendum was held on legislative powers, which was won resoundingly. Intergovernment talks have started on the Barnett formula, which has been a growing source of acrimony for the past 12 years. Recently the Secretary of State issued a Green Paper on electoral arrangements for Wales which proposes some significant and, to me, very welcome changes. The Silk commission set up in October 2011 is a long-burning fuse looking at two key aspects. Part one deals with financial accountability. The Assembly has always lacked some credibility because, uniquely in the UK, it has no responsibility for raising the money it spends. Even a parish council has more financial credibility than the Assembly. The Welsh Assembly is probably the only body in the world able to pass laws and spend money while having no power or responsibility over tax. Indeed, only last week the Wales Governance Centre, the Institute for Welsh Affairs and Tomorrow’s Wales came together to produce a joint submission to the Silk commission in which they emphasise this anomaly. They labelled it,

“an aberration from international and British norms”,

and expressed the view that such powers were needed in order to increase the accountability of Welsh government.

The commission, chaired by Paul Silk, formerly a clerk to the National Assembly and, indeed, formerly a clerk to Parliament, in the other place, is modelled on Scotland’s Calman commission, but, significantly, it has even greater credibility because unlike Calman, all four main political parties are represented on it. So far it has taken evidence on financial accountability and we expect its report on this aspect early next year. It has had more than 40 submissions, the majority in favour of some element of fiscal powers for the Assembly. Of course, the big question is exactly which taxes should the Assembly be allowed to levy. In a country with such a long border with England there are practical problems to be addressed in order to ensure that devolution of tax-varying powers does not lead to increased tax avoidance.

The foundations for the commission’s discussions were laid by the Holtham commission, which was established by the Welsh Government in 2007. That looked at the Barnett formula as well as tax-raising powers. In contrast, the Silk commission is looking only at taxation, discussions on the Barnett formula being held between Governments. While that is understandable, as the Barnett formula does not affect only Wales, it makes the situation more complex and I believe that it will be essential to reform the Barnett formula before we can have satisfactory devolution of any significant tax-varying powers. Discussions between the two Governments seem to be progressing and I wonder whether my noble friend the Minister, when he replies to this debate, can give us an update on progress. I am particularly interested in the concept of the introduction of a Barnett floor, which would ensure that when public expenditure begins to rise again, Wales will not be subject to the Barnett squeeze suffered from so badly so far.

I believe that it is more or less inevitable that the final recommendations of the commission will include some which are dependent on Barnett reform for their implementation. Indeed, a large number of the responses to its consultation concentrate on this issue. It is a happy coincidence that this week has seen the publication of the ICM poll commissioned by the Silk commission which gave a strong, if a bit confused, endorsement for proposals for the Assembly to be granted tax-varying powers. Some 64% favoured powers to set income tax and 80% agreed with borrowing powers. My view is that borrowing powers are a vital first stage that can be implemented quickly and easily. The Northern Ireland Executive has used its borrowing powers for infrastructure and public service investment. There has been significant development in the borrowing powers of the Scottish Parliament. Wales needs this freedom as well if there are ever to be major infrastructure projects, such as the badly needed improvements to the M4. I accept that the Treasury has to place limits on such borrowing, but if Wales were to be given similar powers—similar limits to those applied in Scotland and Northern Ireland—we would be looking at something in the order of a cumulative limit to borrowing over a period of 10 years of just over £1 billion. I am pretty certain that the Treasury can cope with that.

It is of course easy to agree in principle that some taxation powers should be devolved, but the difficult decision comes in agreeing exactly which taxes and to what extent. The two most commonly cited proposals are for part of income tax and for corporation tax to be devolved. Corporation tax has the advantage of ensuring that the Welsh Government would benefit from higher tax revenues as a reward for pursuing successful economic policies. More prosperous businesses mean more tax revenue. The Welsh economy desperately needs stimulation. I am a strong devolutionist, but I fully recognise that the Welsh economy has suffered badly in the years since devolution. It would be useful for the Welsh Government to be able to attract new business with the incentive, for example, of a slightly lower rate of corporation tax.

The Silk commission is looking at the devolution of some powers over income tax, following the Scottish model and as recommended by the Holtham commission, which said that half of income tax should be allocated to Wales but with the ability to vary it by 3p from the English rate. But without a fairer funding formula, this could lead to a further drop in income, which would be simply unacceptable. Therefore, in my view, the devolution of a proportion of income must be predicated on a reform of Barnett running alongside it.

If not income tax, what other taxes could successfully be devolved? Maybe stamp duty, to help lower the cost of homes in Wales. As waste management and recycling are both largely devolved, both the landfill tax and aggregates levy, if devolved to Wales, would enable the Welsh Government to take a more strategic approach to environmental issues. There should be a greater freedom to reform the local government rating system, domestic and non-domestic. The complexity of Welsh devolution is such that both business support and local government are devolved, but the Assembly does not have the powers to change the rating system beyond some control over the multiplier.

Another possible candidate is the devolution of our passenger duty. There is really no reason why the Assembly should not be allowed to create a new tax—maybe a green tax—to stimulate environmental efficiency. Clearly, this is a complex area and there must be detailed analysis by tax experts before decisions are made. It is clear to me, however, that control over some tax levers would encourage the Welsh Government to be more strategic in their thinking, and to concentrate on the economic growth that Wales so badly needs. It would increase democratic accountability.

Finally, and briefly, I will anticipate the second stage of the Silk commission and look at the issue of powers more generally. I have just cited an example of complex powers over local government finance. There are many more such anomalies, where a gap in powers makes it difficult for the Welsh Government to wield the powers they do have as effectively as they should. Basically, the Government of Wales Act is chaotic and becomes more so by the year as additional powers are tacked on like sticking plaster. In my view, the Act needs to be entirely rewritten on the Scottish model, which I referred to earlier in my speech.

There is, in addition, a pretty long list of additional powers that the Assembly could justifiably claim should be devolved to Wales. Powers to deal with energy consents for projects over 50 megawatts would be particularly welcomed in a country which is home to so many large wind farms. Policing is a strong contender, because the police nowadays work so closely with local authorities, and local government is devolved. The gradual development of a body of Welsh law makes it logical that there should be a separate Welsh jurisdiction. We are already, de facto, half way there, and that is important to recognise. Some aspects of broadcasting, such as S4C, could sensibly be overseen by the Assembly and there is a host of more minor powers that would tidy up the settlement, such as reforming the electoral arrangements for local government.

I am very pleased indeed to see the list of distinguished speakers planning to take part here today. I have already referred to the noble Lord, Lord Richard, and his report. I am pleased to see him in the Chamber. I look forward to hearing all your Lordships’ views. I regard this as our opportunity to make our voice heard in this consultation and I ask the Minister when he speaks to suggest how we can most effectively put the points made in this debate on record for consideration by the Silk commission.

11:55

[Lord Roberts of Conwy]

My Lords, I congratulate my noble friend on securing this debate, which enables us, as she suggested, to have an input into the Silk commission’s deliberations.

My comments today will be very preliminary and tentative, because I hope that we shall have a further chance to debate the Silk report when it is published and before the Government make up their mind on the proposals. However, even as things stand, it is not difficult to make an informed guess about the recommendations of the first part of the Silk commission’s inquiry on taxation and accountability in Wales; and, indeed, perhaps about the eventual outcome after public reaction to its proposals and the Government’s consideration of it all. I say this with some confidence, because we know what happened to Scotland after the Calman inquiry and the subsequent Bill that came before this House. Unlike Scotland, Wales does not have a Parliament of its own, but it has a National Assembly and Government, and we can reasonably assume that developments in Wales will very likely follow a similar pathway to the one in Scotland.

The commission may well recommend that the revenue produced by certain UK taxes in Wales should be assigned to the Welsh Assembly Government and a corresponding deduction made from the block grant. I see no insuperable difficulty with this, although there may be some argument about the level of the taxes concerned and the power to change them. I first encountered this idea of assigning the product of taxation in a report produced by my noble friend Lord Steel of Aikwood when he presided over the Scottish Parliament, which takes us back a bit.

I also remember the conclusion of that report: namely, that even if the Scottish product of all the UK taxes he listed in his report—and it was a page full of transfers—was transferred to Scottish coffers, Scotland would still need a subsidy from the UK Treasury to maintain the level of spending that it was accustomed to. That is likely to be the position in Wales as well. To my mind, the real problems arise over powers to vary rates of tax of one sort or another and if power is given to raise new taxes unique to Wales, as allowed in the recently passed Scotland Act, although it is a power not yet used in Scotland.

With regard to the power to vary taxes, we have seen the argument arise over the desire to vary corporation tax in different parts of the UK, particularly in the face of the low rate of 12.5% in the Republic of Ireland. The rate is regarded as an all-important factor in attracting inward investors, and of course we all want inward investors in all parts of the UK. The UK Government’s view is that it would not be right to allow one UK country or region a more favourable rate of corporation tax than another. I do not see them changing their mind on this.

I am more perturbed by the possibility of new or increased rates of taxes being imposed on businesses and individuals in Wales. We have a Labour Government in Wales, with more of the flavour of old Labour than the new. They are convinced of the supreme importance of the state and of the primacy of its needs and requirements. Their views are not mine. Suffice it to say: by their deeds shall ye know them. As the noble Baroness has just said, their record in developing the Welsh economy over the past 13 years is not one to be proud of. They have seen Wales fall as a favoured destination for inward investment from being second only to Scotland to being the lowest bar one among the UK regions. That, I dare say, was due to the abolition of the Welsh Development Agency. Let us face it, Wales is one of the poorest regions in the European Union and one of the least able to bear additional taxation. Extra taxes would drive out businesses and individuals—of that we can be certain. If the Government were to lower taxes to incentivise people it would be a different matter, but that is most unlikely.

If the National Assembly and its Government do not have taxation powers, how can they be held accountable to the electorate? Arguably, that could be achieved through the National Audit Office, the Public Accounts Committee and all the other parliamentary mechanisms here, but I do not think that they have ever been applied. That is a dilemma that is being left to the Silk commission, and I do not envy its task of deciding how that accountability can be created. Even within a democracy, there must be safeguards against the deleterious, deeply damaging and mistaken use of powers. The trouble is that it often takes time for the abuse and hurt to be felt and realised by the electorate.

This possibly explains the somewhat conflicting views expressed to the ICM poll, which was commissioned by the Silk commission and published this week. We are told that 64% of those questioned thought that income tax levels should be determined in Wales. However, as the Guardian put it on Monday,

“other answers muddied the waters”.

It went on:

“Asked which level of government should have the most influence over taxes that Welsh people pay, the results seem to contradict the bottom-line conclusion, with … 53% saying it should be Westminster. The Welsh government was … second with 35%”.

There we have it.

I agree in principle that borrowing powers, which are already available to the Scottish Parliament and the Northern Ireland Assembly, should be granted to the Welsh National Assembly and its Government but under strict Treasury control, bearing in mind the UK deficit that the coalition Government inherited and which has got us into so much trouble. The ultimate safeguard—we must never allow this to go—must be the overriding power of this Parliament. I sincerely hope that it will be preserved for use in extreme circumstances if things go very badly wrong in Wales.

There are many other issues to consider: the transfer of business-rate setting to the Assembly, which has similarities to the transfer of corporation tax in that it can advantage or disadvantage an area, depending on the rate imposed. However, the key question is whether the product of any tax transfers is additional to the block grant or a substitute for some part of it. I suspect that most transfers will be substitutes.

There is also the issue raised by the Welsh Government in their evidence to the commission in the event of a transfer of power to vary income tax. They suggest that there should be a referendum. Incidentally, it is not a power that the Welsh Government have actually asked for. Much to my surprise, I see that the Welsh Conservatives, in their evidence, which is reproduced on page 7 of the excellent Library note, say that,

“consideration should be given to the devolution of some aspects of income tax, because this could make the … Assembly more accountable to the people it represents … There is considerable merit in exploring this policy”.

Wonders never cease.

12:07

[Lord Anderson of Swansea]

My Lords, I congratulate the noble Baroness, Lady Randerson, on choosing this debate. For me, the real problem is channelling more resources to Wales, and the issues of accountability and the irresponsibility which comes from spending without actually raising the taxes are secondary. The issue of more resources for Wales is important and bristles with problems, so I am sad to see the lack of interest in Wales in the Silk commission. For example, the first public event in Wales, in Swansea in March, was attended by but 11 people.

I am not surprised at the findings of the ICM poll, published this month, in which those polled agreed that, in principle, greater tax powers should be given to Wales. Sadly—or perhaps surprisingly—the most enthusiasm for the transfer of tax powers came from those who do not pay taxes. More than 76% of the unemployed thought that there should be a transfer of tax powers, and Paul Silk himself commented that it is clear from the poll that there is a limited understanding of taxation issues among the public as a whole. This begs the question: how much weight we should then attach to the findings of that poll? The most important finding is on page 13. It states that,

“the public subscribe to the view that in an age of austerity, public spending in Wales must not exceed revenue raised in Wales ... the Welsh public would prefer fiscal transfers from the rest of the UK than higher taxes in Wales”.

Surprise, surprise. This sounds very sensible indeed.

I should like to raise one or two preliminary considerations, if I may. In a unitary system of government, and a small country, the problems of differential taxation are great, and the situation would be made easier in a federal system. There is, for example, the frequently raised problem of air passenger duty. How would it help Cardiff Airport if this were transferred? It would be taken into consideration in the block grant. If the air passenger duty were higher in Wales than England, Wales would lose business. If it were lower, let us imagine the cries from Bristol because of the incentive for people to go to Cardiff. Surely the problem is poor access to Cardiff Airport. Therefore, I welcome the proposed new railway station there, which was announced this week.

Our concern should really be justice within the UK; hence the debate on the Barnett formula. There is an overwhelming case for the distribution of resources to be based on need but, realistically, that will not happen before the Scottish referendum. What do we know about need within the UK? Fascinating figures on regional unemployment were published by the European Union on 4 July. There were two important conclusions. The first was that some regions in England are worse off than Wales; and Scotland is better placed than Wales. So we should beware of interregional conflict. In 2011, for example, the unemployment rate in Wales was 8.6%; in Scotland, it was 7.9%; in the West Midlands, it was 9%; in Yorkshire and Humberside, it was 9.4%; and in the north-east, it was 10.8%.

The second conclusion from these regional statistics relate to the divisions within Wales and, indeed, the widening gap. For example, in west Wales and the valleys the unemployment rate in 2010 was 9.2%, but in 2011 it was 9.9%. In east Wales, however, the figure decreased from 7.8% to 6.5%. Surely this widening gap should be addressed. It should be a major concern of the Welsh Assembly Government and of this House. In passing, I should say that I welcome this week’s announcement of the extension of the electrification of rail as far as Swansea and the valleys. Without that, the regional gap would be further widened.

That obviously leads to a debate about the definition of devolution. Although that debate is not for today, one still might ask why devolution should stop at the National Assembly level. Proper devolution should be extended to the lowest practical tier of government—in other words, subsidiarity. Currently, our local authorities are weakened. I therefore welcome the debate about city regions promoted by the task force report published on 11 July.

On taxation generally, I am not surprised that the Welsh Affairs Committee in the other place, in its January report, reached no conclusions. We should recognise the danger of Wales losing out in interregional competition and falling into the trap of seeking differences for their own sake, such as the variation of income tax or the so-called nudge taxes, such as the 5p we pay in Welsh supermarkets for plastic bags. But the more successful these nudge taxes are in altering behaviour, the less revenue is raised. Thus it is done for social and not revenue reasons.

If we follow the Holtham recommendations, and the Welsh Assembly Government were to introduce new taxes on goods or activities that are currently not taxed at the UK level, it could be a serious disincentive to inward investment at a time of increased competition. Obviously, much of the debate centres on devolving borrowing powers, which I am certainly not against in principle. The trouble with borrowing, however, is that it has to be repaid. One sees the problem, for example, with the PFI scheme and the property bubbles in Ireland and Spain. Clear limits have to be set by the UK Treasury, as the noble Baroness readily acknowledges, otherwise the problem can get out of control, as happened in Spain with the degree of devolution of borrowing powers to the autonomia and the difficulty of the Spanish federal Government in dealing with their fiscal crisis.

Where is the domestic revenue stream in Wales to repay? How can we provide flexibility in the context of block grant variations? To what extent will the problem be met at the UK level by the new government guarantee scheme announced this week to underwrite private sector investment? Perhaps the Minister could say how relevant this scheme is to Wales, and what effect it might have on the current debate.

The starting point of the debate is surely that in Wales we are relatively poor, in the UK context. There is a shortfall between the UK taxes raised in Wales and the UK public spending in Wales of around £15 billion, roughly equal to the total Welsh Government expenditure. Taxes raised in Wales would be raised from a weaker tax base, as Wales generates 70% of the UK average GVA. Therefore, a penny on income tax raises 30% less in Wales, and Wales would lose if, for instance, 10% of income tax were raised here.

If some of the tax raised were taken off the block grant, there would be a worse outcome for us than under the Barnett formula. The devolved borrowing powers could therefore be a distraction from the primary question of how much capital investment we need. What is our fair share of UK capital investment, and where is the continuous income stream to pay for the borrowing? Perhaps we could use the Severn Bridge tolls? In passing, I must say that the Severn Bridge toll is a major tax on Wales, and a major disincentive for inward investment. Perhaps the best way of helping Wales at the moment—certainly south Wales—would be to abolish the toll, or at least make it cover maintenance costs only.

I agree with Geraint Davies, my own MP for Swansea West, in his submission to Silk, that there may be a case for tinkering at the edges, or for experiments such as our plastic bag tax, but that to concentrate on these may well divert attention from the main issue; that is, that our interests are best served not by flirting with ingenious new tax devices, but by claiming more and ensuring that Wales obtains a fair share of the national cake based on our needs, which certainly does not happen currently under the Barnett formula.

12:17

[Lord Maclennan of Rogart]

My Lords, I congratulate my noble friend on initiating this discussion. I hope that the House will forgive the intrusion of someone from the north, rather than the west, of the United Kingdom. I promise that I shall be brief.

I can see that the problem of asymmetric devolution has not made life easier for Wales. It is my hope that the work of the Silk commission will feed the discussion as to what tax arrangements are most suitable for the whole of the United Kingdom. We do not live in a homogeneous, single, unitary state. There are substantial variations in need, which have been alluded to by the noble Lord, Lord Anderson, and others who have spoken in the debate. However, it seems to me that our approach, nationally—by that I mean as part of the United Kingdom—is somewhat too fractured. It would be appropriate to pull together the thinking of Holtham, Calman, Silk, and all the other inquiries that are going on into these matters, with a view to taking the step that has been alluded to as the desirable end point by my noble friend of some form of federation for the country. I say “some form” because it is quite clear that the United States form has built imbalance into the prosperity of the different states. However, that need not be the case, as is made abundantly clear by the experience of the Federal German Republic.

Looking at what is happening in Scotland is not necessarily the right way to approach what is to be done in Wales, because the Scottish situation is far from stable. The degree of satisfaction that may arise from the Scotland Act is yet to be determined. It is certainly my view that equitability as between the different nations and regions of this country should be a prime concern and one should not simply address the local difficulties as though they were unique.

It is time to ask some questions of the Government regarding the Silk inquiry, and my noble friend Lady Randerson has done just that. In particular, I should like my noble and learned friend Lord Wallace to indicate when he replies to the debate what the state of the discussion is between the two Governments as regards borrowing. Is it confined to borrowing from the Treasury or does it also encompass the possibility of private borrowing for public intentions? The urgency of that issue seems to have been recognised by virtually all those who have given evidence to the Silk inquiry and it seems that that could be done without seriously upsetting the British economy.

What has been interesting is the extent to which there is an express desire within Wales for greater control over taxation, although I noticed what the noble Lord, Lord Anderson, had to say about the down side. However, that could be rectified by making sure that the distribution of public—United Kingdom—funds takes more account of need than is the case with the Barnett formula. I hope that the Government will give some indication as to how they would wish to progress. The postponement of decisions on Barnett is definitely damaging to the coherence of our United Kingdom.

If economic success leads to an increase in the Welsh budget, it should not follow that there should be an immediate reduction in central government funding. These matters fluctuate in the short term and it is important that the infrastructure of the economy should be underpinned and that problems such as the greater rurality of Wales are taken into account and a more equitable solution is produced.

I urge the Government to take note of the inquiry in another place, chaired by Mr Graham Allen, into the possibility of a convention on a constitution for the whole United Kingdom. There is much merit in that. Evidence from the Silk inquiry and of those who have been giving such careful consideration to these matters as they affect Wales should be fed into such a convention. However, it should not be expected to deliberate and come up with immediate results but rather, in the manner of the Scottish convention, take its time to come up with a solution that will satisfy the different parts of the United Kingdom, I know that that goes beyond the ambit of this debate.

[Lord Wills]

I am grateful to the noble Lord for giving way. He makes an important point. Can he clarify his thinking about this constitutional convention? Should it be literally along the lines of the Scottish constitutional convention or should it have a more demographically representative element and therefore be much more akin to a deliberative assembly, the conclusions of which would not be binding? Which sort of model does he think would be preferable in this case?

[Lord Maclennan of Rogart]

I would hope that we can learn from the experience of the Scottish convention: that it should not be confined to certain political parties; that it should be representative of varying and discrete interests; and that it should be deliberative. The serious groundwork being done by Silk—and earlier by Holtham, Calman, and so forth—should be borne in mind and taken into account. This should not be led by politicians who have come to it with a defined end point; but rather, it should emerge as something like a national consensus following a national debate.

12:30

[Lord Wigley]

My Lords, I welcome today’s debate and thank the noble Baroness, Lady Randerson, for facilitating it. However, I have no doubt that we will return to this subject when the Silk commission produces its report, which is expected in November. In addressing these matters today, I am conscious that Mr Ron Davies once famously stated that devolution is a process and not an event. Where are we in that ongoing process? We can now fairly assert that the National Assembly for Wales is here to stay. Fewer than 20% of respondents, in a whole series of polls, say that they would prefer to revert to the bad old days best typified when we had Mr John Redwood as a governor-general.

The two-to-one majority vote last year for primary law-making powers has given the Assembly the law-making tools in those areas devolved to it. The model, however, as the noble Baroness said, is nothing like as transparent as in Scotland, where all functions not reserved to Westminster come under the Scottish Parliament. Wales should operate on a similar basis. At some stage we are going to have to come back to that. There is also a case, as the noble Baroness asserted, for other portfolios to be devolved, most notably those of police and prisons. There is wide support for this within those services, and also for devolution of broadcasting, major energy projects and the courts.

How far should the process go? My party, Plaid Cymru, believes that ultimately Wales should have its own independent voice within the European Union, and for the present political union of these islands to be replaced with a new relationship. It should be more like a social union, with a more confederal link between Wales, Scotland and England. I expressed my own emphasis in my maiden speech in this Chamber. I want to see Wales as a nation taking all the decisions that can meaningfully be taken on an all-Wales level, and to have an effective voice in other decisions that have to be taken on a wider scale. There are models of government short of independence that may warrant consideration. These include federal, quasi-federal and confederal structures. As was noted by the noble Lord, Lord Maclennan, a moment ago, I believe that when we debate the future of this Chamber, it would be a missed opportunity not to consider the possibility of it becoming a federal Chamber, particularly if devolution for Wales, Scotland and Northern Ireland moves towards the devolution-max model that apparently is very widely supported in Scotland.

With regard to the appropriate fiscal powers, these will depend on the level of devolution that obtains. As the process moves forward, so too must the financial powers that correspond to the constitutional powers. So, at this point in time, I suppose that we can do two things. First, we can lay down the principles that should apply, and secondly, we can lay out the fiscal powers that are appropriate to our current position on the devolution pathway.

Plaid Cymru, in its evidence to the Silk commission part 1 study, highlighted four core principles:

“Fiscal devolution is part of an evolving process by which Wales will become more economically and democratically self-sufficient;

“The Welsh Government currently has accountability over its expenditure without responsibility for its income. There are no direct linkages between taxes paid in Wales and decisions taken by the Welsh Government; decisions taken do not impact its revenue. By creating linkages, the people of Wales would be empowered over decisions that affect their wellbeing;

“The economy of Wales is underperforming. We want to see a more prosperous and more equal society. Fiscal powers provide levers towards achieving these goals; and

“The workings of government should be transparent, but current fiscal arrangements are opaque. Fiscal devolution would create greater clarity in terms of responsibility. This would enable more effective scrutiny”.

I would add that I find it astounding that our National Assembly should have less tax-varying power than does my own local Llanwnda Community Council. I do not understand why Westminster did not insist at the very outset of devolution that tax-varying powers should be part of the settlement.

All but two of the countries within the OECD that have devolved legislatures require those regional bodies to raise at least 20% of their budget from their own taxes, which in Wales would be equivalent to some £3 billion a year. One cannot begin to address the question of what tax-varying powers should be devolved without at least reviewing the inadequacy of the Barnett formula in its application to Wales. The Holtham commission showed that Wales was being underfunded by up to £400 million a year if the settlement was supposed to allow the Assembly to maintain public services at a level comparable with England. Updating the Holtham figures to the 2010-11 situation shows a widening gap, with a shortfall of up to £540 million. The Secretary of State for Wales, Mrs Gillan, said in the Assembly on 23 May that:

“The Barnett formula is coming to the end of its life and needs to be looked at”.

Silk is not directed to review Barnett, but I cannot see how it can reach conclusions without knowing the Government’s intentions with regard to replacing Barnett, hopefully with a needs-based formula.

Putting in a Barnett floor, as some have advocated, to limit the effects of the Barnett squeeze, is nothing like enough. To a large extent it is like closing the door after the horse has bolted. At a time of expenditure cuts it achieves next to nothing, and unless there is some backdating mechanism to take account of what has happened since 1999, which would generate the sum of £8 billion—the amount we have lost out on because of the Barnett squeeze over the period—the problems facing us now will not be answered. We need to replace Barnett with a needs-based formula, and we need to do it immediately. If the Government wait until after the Silk commission reports in November before indicating their intentions concerning Barnett, they will totally undermine the Silk commission and leave Wales suspended in mid-air with no inkling of where we are going. The problem is that the finance needs of Wales are distorted by viewing the Barnett settlement through the Scottish prism, but that is what happens all the time.

What are the taxes which, within our current limited autonomy, might be raised by the Assembly? If we are to aim at, say, 20% of the Welsh budget being funded by taxes raised in Wales—some £3 billion a year—that can come from one of only three major sources of taxation: from income tax, of which some £5 billion is raised annually in Wales; from VAT, which generates £3.5 billion a year; and from national insurance contributions, which raise a similar sum. Ignoring council tax and non-domestic rates, all other central taxes raised in Wales amount to some £4.5 billion. The EU rules make it difficult to devolve VAT in a meaningful way, and national insurance is directly associated with non-devolved responsibilities around social security, so my party’s evidence to the Silk commission advocated that 50% of the income tax take in Wales should come to the Assembly. In this we prefer the Holtham model to the Calman lock-step model, which makes it difficult to do more than maintain the status quo.

My party also favours devolving other smaller taxes such as stamp duty, aggregate levies, landfill taxes and airport passenger duty. I personally believe that we should look at alcohol and tobacco duties, and at oil duty. The argument that is always put forward is that of cross-border distortion, but I think that it can be overstated. There is considerable variation in taxes between the regions of other countries. One thinks of the huge difference in taxes between Zurich and Zug in Switzerland, with just a lake between the two that people can cross. In the United States, the greatest level of tax discrepancy is between two adjacent states, New Hampshire and Vermont, with no insurmountable problems. My party also believes that income arising from the Crown estates in Wales should also come to the Assembly, although that is not a massive sum, and we believe that we should have the same powers as Scotland to introduce new taxes. With regard to corporation tax, we would like the £800 million to come to the Assembly, but we accept that because of European rules, there are restrictions on our scope to make this a meaningful devolved tax. Personally, I believe that the tool we should be using should be that of providing greater investment allowances to trigger economic growth. At the moment they are available in the enterprise zone in Deeside. They should be more widely available in order to ensure that there is an incentive for those investing in Wales.

Finally, with regard to borrowing powers, there is an overwhelming case for the Assembly to have these powers. Local authorities have them, the Northern Ireland Executive have them and, under the forthcoming Scotland Act, Scotland will have them. Why on earth does Wales not have them? My belief is that we need much more than the £1 billion referred to by the noble Baroness; it would be nearer £4 billion or £5 billion. This should be brought forward immediately, and it could be done through the use of the Welsh Development Agency Act which allows such powers. It is not being used now because the Treasury insists that it should be offset against the departmental expenditure limit figure for Wales.

What is the attitude of the people of Wales towards such a change? As we have heard, 64% believe that income tax should be determined in Wales, two-thirds believe that the Welsh Government should have the right to change the level of tobacco and alcohol taxes in their budget, and when it comes to allowing borrowing, a staggering 80% support it. What are we waiting for? Can we be assured that, when Silk reports in November, the UK Government will immediately press ahead with its recommendations? That will create better and more transparent government, which is a big demand. Democratic answerability needs it and the Welsh public want it, so let us get on with it.

12:38

[Lord Howarth of Newport]

My Lords, I welcomed the establishment of the Silk commission, but the terms of reference given to it by the Secretary of State are in some respects ill judged. The commission is tasked to consider issues of accountability but not of fairness. The block grant and the Barnett formula, along with the system and structure of democratic representation in Wales, are off limits. The commission is required to consider fiscal matters before it considers constitutional matters when the nature of political and legislative devolution should, I think, determine the appropriate fiscal devolution.

The Barnett formula provides nearly 50% of public expenditure resources in Wales. It is comprehensively discredited. This was stressed in the Welsh Government’s response to the Silk commission consultation, and a while ago a Select Committee of your Lordships’ House provided a comprehensive and devastating analysis of the inadequacies of the Barnett formula. The funding provided by the Treasury to Wales is computed on the basis of changes to spending in England in policy areas that are devolved to Wales and the extent to which they are devolved to Wales, and on the size of the population relative to that of England. So resources provided to Wales follow political decisions and events that occur in England. Notoriously, the Barnett formula is not a needs-based formula, in contrast to the principles on which resources are allocated to local government, social security spending and health spending. The Barnett formula is bizarre and unjust, and it makes a mockery of the principle of devolution. The effect of per capita funding under the formula has been what the noble Baroness referred to as the Barnett squeeze. Wales receives less than if it were an English region. GDP per capita in Wales in 2007 was 77% of the UK average, but Wales received only 8% above the UK average. Holtham, which examined these matters pretty definitively, found that Wales had relative need of 115 per capita on a scale in which England was 100. Wales is poorer on all the significant indices: unemployment, child poverty, social security claims, disability, housing, education, health and mortality.

Poor people in Wales, including unemployed under-25 year-olds in the Alway and Ringland estates in Newport, whom the Prime Minister thinks ought, in due course, to cease to have housing benefit, are subsiding Scots living in wealthy suburbs. Holtham told us that Wales, which has less than 6% of the population of England, is short-changed by a figure in the order of £300 million. I cannot overstate the importance of this issue to Wales. There is no statutory basis for the Barnett formula, which is opaque in its process and has no independent audit—it is a disgrace.

The Government have hitherto set their face against change to the Barnett formula. Why? For reasons of political cowardice? The Conservative Party had nothing to lose in 2010, when it was set on finding every means possible to reduce the deficit, by tackling the problem of the overpayment of some £4 billion to £5 billion to Scotland under the Barnett formula, but mysteriously it did not do so. Was it because Liberal Democrats representing Scottish constituencies held it to ransom or is it simply a product of intellectual indolence in the Treasury?

[Lord Forsyth of Drumlean]

I agree with almost everything the noble Lord says, but in fairness he ought to deal with the point that the Select Committee report was to the previous Labour Government, who were equally unwilling to address this issue.

[Lord Howarth of Newport]

The noble Lord has, as so often, a telling point. I do not disagree with him at all. I am pleased that discussions are now taking place between the Government of the United Kingdom and the Government of Wales. I hope that they will be fruitful, because for Wales reform of the Barnett formula is more important and urgent than any fiscal devolution. At a very minimum, as the noble Baroness said, there should be a floor in the block grant so that it does not fall below the level that would be provided under the English needs formulae. Of course, we need a properly developed needs-based formula for the block grant.

The coalition is obsessed with cutting public expenditure, deflating an already depressed economy. These issues are hugely important for Wales.

It is right in principle that if legislative powers are devolved, then tax-raising powers ought also to be devolved, including a power to vary levels of taxation. This satisfies the principle of accountability and will make for more responsibility and better value for money. It is appropriate that a Government elected by the people of Wales should have discretion to use resources as they judge appropriate for the benefit of the people of Wales. As the noble Lord, Lord Forsyth, suggested too, these considerations ought to have been brought to bear at the very outset of the process of devolution.

What, however, would happen in practice if tax-raising powers were devolved? Wales needs more public expenditure or, at any rate, a less drastic reduction in public expenditure. It needs that if it is ultimately to be able to reduce the disproportionate size of the public sector in Wales. It needs to be able to invest in education and infrastructure and in a strategy to support the development of new leading private enterprise sectors in Wales. What Wales does not need is more and extra taxes laid upon people and businesses. I do not think anybody in Wales ought to nurse the illusion that the block grant would rise to compensate for tax cuts that might be introduced under fiscal devolution in Wales.

So, which taxes ought to be considered? Income tax is perhaps the prime candidate, but the power to raise or lower income tax by 3p in the pound would be a poisoned chalice. The Government of Wales have not sought that power. No doubt they would not refuse it if it were thrust upon them, but would they use it? I think it no more likely that the Government of Wales would than the Government of Scotland.

Then there is corporation tax, but there are problems defining Welsh companies. Holtham found that the only realistic way in which one might be able to devolve powers in relation to corporation tax in Wales was by reference to the number of people employed by Welsh businesses, but we do not want to create an incentive for Welsh employers to reduce the number of people that they employ. There is a broader principle. Competition between the territories of the United Kingdom to offer a lower rate of corporation tax might well not be in the interests of the United Kingdom as a whole.

I will not run over the whole litany of alternative taxes that noble Lords have already mentioned, but if there is to be fiscal devolution then choices have to be made from among the options of business rates, council tax on second homes, stamp duty land tax, capital gains tax on land and property, landfill, aggregates levy, air passenger duty, and so forth. If we examine the scope to use such devolved powers, we again run up against the problem that tax increases would be damaging to business and prosperity in Wales. The Welsh Local Government Association is right to insist that there needs to be a rigorous examination of the merits of devolving any one of these.

Borrowing powers seems a much simpler issue, whether for capital or to offset the volatility of revenue that would be consequent on Wales setting its own tax levels, but this is also excluded from the terms of reference of Silk. It was not, however, excluded from Silk’s consultation, nor from the responses. It is more attractive, but would Welsh Government bonds be underwritten by the Government of the United Kingdom? Is it realistic to suppose that there can be Keynesianism in one small country called Wales? How can fiscal devolution be a reality within a meaningful macroeconomic strategy for the United Kingdom?

The terms of reference of the Silk commission are very restricted on constitutional matters. I simply say that the constitutional matter that is most pressing and important for the people of Wales is the representation of the people of Wales in the Parliament of the United Kingdom. The coalition has legislated to reduce the number of Westminster constituencies for Wales by 25%. The voice and the votes of the people of Wales are to be very substantially reduced, as is the quality of the representation of the people of Wales because of the absurd exigencies of the redrawing of the boundaries. Therefore, I hope that Welsh Liberal Democrat MPs will not hesitate to vote down the proposals to reduce the number of constituencies.

I hope also that people in Wales will consider the issue of an elected second Chamber because if there are to be Senators for one vast Welsh constituency, wandering round undermining the work of Assembly Members and Welsh Members of Parliament without any accountability, and they are to be Members of a second Chamber that is going to be much more assertive in fiscal matters, then they will find that this reform is travelling in the very opposite direction of the devolution that they want.

The proper considerations are how to improve the accountability of the Welsh Government; how to provide funding commensurate with the responsibilities that are devolved, having first defined those; how to ensure a fairness of distribution of money across the United Kingdom; and how to strengthen, not weaken, the coherence of representative government across the United Kingdom. Is there any resting point for devolution? These are issues for everyone, not just for the people of Wales.

11:30

[Lord Roberts of Llandudno]

My Lords, I thank my noble friend Lady Randerson for introducing this debate. Secondly, how refreshing to hear from the Labour Benches a call from the noble Lord, Lord Howarth, to change the Barnett formula. The Labour Government were there for 13 years, and they did nothing at all about this revision, so I hope that his voice will carry in the chambers of the Labour party.

I also suggest that in Wales it is not revolution; it is evolution. We tackle things thoroughly. We might not always be as incautious as others want us to be. Some 120 years ago Cymru Rydd, Wales of Tomorrow, had people such as Lloyd George and Tom Ellis at the helm. They dreamt their dream, and that dream was home rule for Wales. That did not come immediately, and even today it has not come to the extent that some of them would have liked. I know that the noble Lord, Lord Wigley, and my noble friend Lord Thomas were there on the night when the referendum result came in from Carmarthen in 1997. There I was in the BBC studio in Bangor and we were losing, until all of a sudden the voice from Carmarthen said that we were to have our Assembly. The dream of those people 120 years previously had been realised.

There has been gradual development over the years. The distinguished Huw T Edwards, the first chairman of the Council for Wales and Monmouthshire, who was originally from Penmaenmawr but latterly of Flintshire, contributed so much. What a debt we owe to the first Secretary of State for Wales, Jim Griffiths. Things have happened gradually, but they have been made to happen by people who knew where they were going. There were times when the waters were rather still, but then we had Welsh disestablishment.

Over the years we have had legislation dealing with courts, development, language, education and broadcasting—all of these came in time. We owe those who fought for them—and I am sorry that I was not always on their side—a great deal for their efforts over a century to ensure that Wales remains an independent country with its own culture and its own contribution to make. I would love to mention them all. I heard a sermon on Sunday that spoke of “a mighty cloud of witnesses”. In the history of Wales we have had just such a mighty cloud, and some of them are in this Chamber today. We owe them and others a tremendous debt.

We must always search for the best and the most acceptable way forward. As I said, I well remember the first referendum, held on 1 March 1979. Four voted against for every one who voted for. Even though we had headquarters ready in Cardiff, we did not need to occupy them until the results came in 1997. I pay tribute to the Labour Government at that time who, early on in their programme, kept their promise of a referendum on devolution in Wales. A few months ago we had another referendum that approved full Assembly powers for the 20 devolved areas appertaining to the Welsh Government, and so the evolution continues. The Silk commission, deciding on future responsibility, is the next step forward—indeed, not just a step but a milestone on the road. The full answer will not come at once, but we will move ahead if we have tolerance and retain our dreams and aspirations.

I shall mention three areas that will have to be kept in our sights as we move forward, because they have financial as well as cultural implications. Last year there was an agreement between the BBC, S4C and the DCMS about the funding for television broadcasting in Wales. The time might come when the Welsh Assembly says, “We ourselves want to be responsible for broadcasting in Wales”. We have to keep the door open so that no financial agreements can strangle any move on the part of the Assembly Government to move in that direction.

The second area is water. I am sorry that my great friend Richard Livsey, Lord Livsey of Talgarth, is not with us. He dreamt a dream about water supplies in Wales. I remember debates in 2006 in the Welsh Government about how we wanted more authority over water in Wales. We have plenty of water in Wales at present but England does not need it today, although it might tomorrow. We have to decide who is going to regulate, distribute and charge for water in Wales. No new agreement must restrict the ability to discuss with our neighbours on every side of the border what we are going to do and how we are going to act in any situation.

The Silk commission notes cross-border agreements, which is the third area. This might be essential for us, especially in north and mid-Wales. Over the years I have dealt a lot with hospitals and medical centres on both sides of the border. We appreciate Alder Hey Hospital in Liverpool, which treats children’s ailments; the Walton Centre, again in Liverpool, which deals with neurological complaints; the Christie Hospital in Manchester; and the orthopaedic hospital in Oswestry—and all of them are on the other side of the border. There are financial implications, and nothing that we do must hinder the co-operation that has been a lifesaver for so many decades. There is much more to be said.

Governments change. People even change their minds. They think in different ways. We mature in different ways. We must always be ready to follow our dreams and think what the sensible way is to move ahead at that particular time. I thank my noble friend Lady Randerson for introducing this debate. I hope—indeed, I am sure—that it will not be the last that we hear of the Silk report in this Chamber.

12:57

[Lord Elystan-Morgan]

My Lords, I start with an apology. I am desperately anxious to catch an early train that will get me back to mid-Wales by this evening. I have asked the noble Baroness, Lady Randerson, for her permission and she has graciously granted it. I hope that the House will accept my apology. I, too, warmly congratulate the noble Baroness on having secured this debate.

It is essential not only that there should be a commission of this nature looking at the situation as it now exists and reporting in two parts—the second part, if I remember rightly, by the middle of 2013—but that the monitoring process should be a permanent process and not a temporary act. Devolution, after all, in my submission, is a progressive process and endeavour, and one should never regard it as something that is limited to a single act or collection of acts and frozen in time. I hope, therefore, that thought will be given to having some sort of monitoring body of this nature that will continue to monitor and survey the situation from time to time.

I take the point that has been raised by the noble Lord, Lord Howarth, and the noble Baroness, Lady Randerson, about the sequence of the two parts of the report. Logically, it would have been much better the other way around: first, ascertain what powers the Welsh Assembly should have and, secondly, decide exactly how they should be paid for and who should be accountable in that regard. However, that is not the end of the world. I make the point, though, that whatever the report might say about powers, it will be wholly essential to look at the situation post-October 2014 when the Scots, in their referendum, will come to a decision about independence and possibly one or two other matters. Whatever the Scottish nation decides or does not decide will certainly having a knock-on effect and a substantial impact on Wales.

I turn to the question of powers. The first matter I will mention is of a cosmetic nature, which is that the Assembly should be referred to as a parliament, and should no longer be called “the Assembly”, because, with the referendum in March last year, the last vestiges of that sort of subsidiary body disappeared. We have a full, legislative, home rule parliament. Remembering Gertrude Stein’s line that,

“a rose is a rose is a rose”,

we should say that a parliament is a parliament is a parliament. It would be nonsense to call it anything else.

On the question of the totality of powers that have been devolved to Wales, as more than one contributor to this debate commented, the situation is completely impossible for those who practise the great vocation of the law. In Scotland or Northern Ireland, there is a complete block transfer of each subject heading, subject to some very specific and easily ascertainable exceptions. In the case of Wales, I do not know what the exact figure is, but I would guess that, by now, there are more than 700 different pieces of legislation that have to be traced, all of them like needles in haystacks. Although of course I accept that tracing them is a monumental task—I am sure that the Minister, who will be replying to this debate, will accept that—it is one that has to be tackled some day, by way of consolidation. In carrying it out one will discover various odd bits and pieces that one has assumed have been devolved but in fact have not been. It will at one and the same time be a very important and significant tidying-up exercise.

I turn for a moment to the question of finances. I believe that it is not merely one question, but, essentially, two. The first is, what powers should a Welsh parliament have over finances? The second, and perhaps even more important, question is, should it use all or any of them? It is my respectful submission that there is no earthly reason why those powers should not belong to the Welsh parliament immediately. When the debates about the establishment of the Assembly took place at the end of the 1990s, a great deal of evidence was tendered on the fiscal powers granted to some regional parliaments, and how, in western Europe, it was almost inevitably the rule that they were never used. Dozens of bodies, in fact, have those powers, but for one reason or another have decided not to use them. I am not an economist but I am a Cardiganshire man, and in Cardiganshire we are very careful about any decisions that concern money. I can well imagine that there are various pros and cons: there are possibilities and pitfalls. All I would wish would be that those powers should be in the hands of a Welsh parliament, and that we, the Welsh people, should determine whether we want to use all or any of them.

With regard to the Barnett formula, it is central to the whole situation. Whether the actual loss would be £300 million or £550 million, as the noble Lord, Lord Wigley, has calculated—and I have every reason to believe that his calculation is a valid and proper one—there is no doubt but that a vast treasure of finances has been lost to Wales over the years. If there is an adjustment that would on the face of it justify a docking of the block grant to make up for it, I would argue very strongly that one should, at the same time, take into account what one would call the proper, restituted claim of Wales in this regard. Those who belong to the great vocation of the law will know that in civil law the adage is restitutio in integrum—restitution in full. That would mean that the money that Wales has had squeezed out of it in the past 13 or 14 years should be taken fully into account.

I turn now to opinion polls. We have had scripture quoted by the noble Lords, Lord Roberts of Conwy and Lord Roberts of Llandudno. I will add the advice from the psalmist:

“Put not your trust in princes”.

I am talking about the princes of the 21st century, the pollsters, who tell us exactly what we think, or should think or wish, in relation to everything on earth. Polls can change. There has been reference to the ill fated vote of 1979. I had the responsibility of being the president of the campaign for a yes vote. I remember that, some nine months before the vote itself, the two voices were almost equal. Then, of course, as far as the yes campaign was concerned, it went steadily downhill.

I very much welcome the Silk commission. It could be a path to a more wholesome and more complete Wales. Let us hope that it will not be a silk road—that institution of massive length in ages past.

13:07

[Lord Rowlands]

My Lords, I had the privilege of serving on an earlier commission, the one chaired by the noble Lord, Lord Richard. The report that we produced paved the way, first of all, for the transfer of legislative competence and, secondly, for the full legislative powers that were then endorsed in a referendum. I am afraid that I disagree with the noble Baroness, Lady Randerson, on her strictures about the gradual processes by which we have pursued devolution. One significant and fundamental benefit has arisen from the way in which we have processed devolution, which is that we have begun to build consensus. The noble Lord, Lord Roberts of Llandudno, reminded us of just how fragile the referendum vote was. We were bitterly divided in Wales on the issue of devolution. The gradual nature of the approach that has been taken has therefore been very important in the process of building consensus. There is, now, a growing consensus around the devolution settlement.

I am also therefore grateful for the thoughtful way in which we are approaching the issue of fiscal devolution. Although I understand the point made by noble Lords that we should first of all decide on powers and then look at fiscal devolution, we have reached a rather constitutionally illogical position. We remember the great cry of the American colonies:

“No taxation without representation”.

We have representation without taxation. There are very few legislative bodies in the world that have full legislative power but do not have any form of tax powers. There is a compelling constitutional logic in place that some kind of tax power should accompany legislative power.

The questions that arise the moment that we say that are: what and how? The Holtham report, which is very useful, is based on some interesting principles and made some observations that we would be foolish to ignore. The first, which I will quote directly from paragraph 2.9 of the report, is that,

“tax devolution that leads to tax competition may undermine a tax base and lead to too-low levels of tax for the union as a whole”.

I cannot believe that any one of us wishes to produce an arrangement that would lead to that kind of consequence. The second issue—I was particularly struck by those passages in the Holtham report that deal with the relationship between the English and Welsh economies—is that the economy of Wales is highly integrated with that of England. I was startled by the figures that the report produced: 48% of the population of Wales lives within 25 miles of the border with England, while 90% of our population lives within 50 miles of that border. There is a corresponding, very large, population on the other side of the border—something like 30%. That is in very stark contrast to the situation around the border between England and Scotland. Our border overlap is some 30%; the English-Scottish overlap is 5%. When one says that one does not want asymmetry but conformity or some sort of symmetry, one has to recognise the very different arrangements and situations that apply. Clearly, if one embarked on some tax variations, that border issue would become extremely important. We have therefore to be very careful in the way in which we handle that situation.

Nevertheless, Holtham concluded that,

“small differences in basic rates of income tax (up to around three pence) … could be sustained … without being likely to induce significant migration or changes to labour supply”.

I have, however, a different niggling question about income tax-varying powers. It is not about migration; it is about the impact on communities where incomes are below the national average, which was certainly the case with those that I represented. What would be the effect not only on families but on communities’ purchasing power if you added 3p to the existing basic rate of income tax? The noble Lord, Lord Wigley, mentioned the experiences with regional taxation in the United States. I have read quite a bit about those and know that some of them are very regressive. You have to be very careful, because regional taxes can be regressive. We must be extremely vigilant in this respect.

Before I buy either the Holtham line or the 3p line, I want a meaningful impact assessment to be made. What would be the impact of such a change on the internal purchasing power of, for example, the Merthyr and Rhymney communities of adding 2p or 3p to the basic rate? I could not say yes to the granting of such powers unless I knew what impact I was making.

We all know of Chancellors who have brought in Budgets that have had unintended fiscal consequences. I was a passionate fan of the 10p band, which benefited the constituents whom I represented. I therefore regretted it bitterly when the previous Administration abolished that band. It has left us going from 0% to 20%. If we were to add another 3% to that, one would be left to ask where marginal tax rate issues kick in. We saw a Budget in March that had unintended consequences. The Chancellor completely miscalculated the impact of abolishing, on grounds of simplification, age-related allowances. We should not embark on this kind of change without a full impact assessment. If I were to make any recommendation to the Silk commission, it would be to let us have such an impact assessment so that we can make a judgment on what taxes it would be meaningful, reasonable and sustainable to devolve.

However, as many other noble Lords have said, the fundamental issue is not tax but the Barnett formula. Politicians can vie over this—it has been said that the previous Administration ducked the issue and it will be interesting to see whether this Administration do so, too—but it is not the politicians who drew it to our attention but a very powerful recommendation of the Holtham report. Holtham argued:

“Even if our proposals for tax devolution were implemented in full, the block grant would still account for around 85 per cent of the total resources … Ensuring that Barnett is replaced by a system that sets the block grant by reference to Welsh relative needs therefore should be a priority for Wales”.

I think that most of us would endorse that conclusion, and we sincerely hope that the noble and learned Lord, Lord Wallace, whom I have known for many years and who is not a man to duck an issue, will not duck this one, too.

13:14

[Lord Thomas of Gresford]

My Lords, in the last Welsh Assembly election in 2011, Peter Hain, the shadow Secretary for Wales, introduced the Welsh Labour Party manifesto with a call to the voters to vote for Carwyn Jones and Welsh Labour, which was fair enough, but then added:

“'But it is also an opportunity to send a message to the Tory-led Government in Whitehall: that Wales is being treated unfairly and their deep and savage cuts are hurting but not working”.

On 17 April this year, in the build-up to the local elections in Wales, for which the Welsh Government are responsible, Carwyn Jones told a public meeting in Newport:

“Vote Labour on the 3rd of May to tell Cameron and Clegg that their brutal cuts have been rejected in Wales”.

Peter Hain at the same meeting urged voters to make 3 May,

“a referendum on this unfair and disastrous budget”.

He was not of course referring to the budget of the Labour Assembly Government, a budget that was passed only with the assistance of Liberal Democrat Assembly Members. He was fairly and squarely passing the buck for the underperformance of the Welsh economy, referred to by the noble Lord, Lord Roberts of Conwy, and the noble Lord, Lord Wigley.

Labour has indeed adopted my very useful family motto, “Ar Bwy Mae’r Bai?”—“Who can we blame?” Blaming Westminster for all the ills and inequalities in Wales is only too easy. It illustrates that the Welsh Government in Cardiff escape accountability for their spending decisions. They do not want the Welsh voter to ask the questions that almost every elected body in the world has to face: “How have you spent my money? What have you done to my taxes?” Those are the questions that I would ask of the Gresford Community Council about its precept, which forms part of my council tax.

Those of us who have campaigned for devolution for all our political lives hoped to see a Welsh Government who had fiscal responsibility for both the raising and the spending of people’s money within the policy areas devolved to them—I fought on that basis in 1964, which seems rather a long time ago. That has not happened; we got the Barnett formula. As the noble Lord, Lord Rowlands, has just admitted, Labour ducked its reform.

The fundamental weakness of the Silk commission is that the Secretary of State announced when setting it up:

“The Commission will not consider … the Holtham Commission’s proposals for funding reform in Wales, including Welsh Ministers’ existing borrowing powers”.—[Official Report, Commons, 11/10/11; col. 28WS.]

Those powers were to be dealt with in a different way. I fail to see how the Silk commission can fulfil its remit to,

“examine issues of fiscal devolution and accountability in Wales and … focus on building consensus”—[Official Report, Commons, 19/7/11; col. 115WS.]

without an examination of the present system and the Holtham proposals for reforming it. How can it be possible to build a consensus in which powers to raise funds by taxation of the people or of businesses in Wales are introduced to increase accountability without reform of the Barnett formula?

Everybody agrees that Barnett is inequitable, even the noble Lord, Lord Barnett. There is consensus, from the Richard commission, to which I gave evidence in 2004, to the Steel commission and the Calman commission in Scotland. The House of Lords commission on the Barnett formula of the noble Lord, Lord Richard, of which the noble Lord was a member, said that Barnett was “arbitrary and unfair” and the Holtham commission of 2010 said that it lacked any objective justification. Holtham’s conclusion was that the Barnett “squeeze”,

“has caused the funding of devolved activities in Wales to fall below what Wales would receive were its budget determined by the various formulae that the UK Government uses to allocate resources to comparable functions in England”.

It is a formula based on crude population percentages and it takes no account of need. Noble Lords have already referred to the figures. On the basis of need, Wales should get 117% of English per capita spending and currently gets only 112%—a deficit of £400 million. Scotland should get 105%, but gets 120%. Perhaps the reason that Barnett remains is that Scotland drags its feet—like the Cardis, Scots know the value of money, and they are getting an extra £4 billion out of it. That £4 billion might fire the English to vote for Scottish independence, if they ever had a chance to do so.

A needs formula for Wales would take into account the higher levels of deprivation, the lower levels of economic prosperity, a much higher degree of rurality and the quality of public health. In addition, Barnett does not fulfil the requirements for accountability. There is no link at all between the spending decisions made by the devolved Government and the revenue that is raised and handed over to them by the United Kingdom Government. How then do you build accountability into the system, which is the declared purpose of the Silk commission?

Holtham pointed out that there are only three areas of tax that raise significant revenue: VAT, national insurance and income tax. VAT is ruled out because Europe does not permit varying rates of VAT within the borders of a member country. Gresford roads would also be choked by smugglers heading across the border to Chester, some eight miles away, as they used to be choked by people struggling over the border for a drink in the dim and distant days when our part of Wales was dry. I can tell the noble Lord, Lord Rowlands, that I know all about border issues. Increases in national insurance would impact on jobs and, in any event, as it is linked to welfare, it is not a devolved matter. The Welsh Government should be funded primarily by income tax and corporation tax. There are difficulties, of course, but they have to be worked out. The revenues from those taxes would increase as the Welsh Government succeeded in boosting jobs and industry. As my noble friend Lady Randerson—who must be congratulated on introducing this debate—said, it would be the reward for the Government pursuing successful job creation and business-friendly policies. If the Assembly Government failed and the revenues decreased, the answer would lie in the ballot box. It does not currently. As the Labour Government said, “Send a message to Westminster”.

Another safeguard would be continued equalisation funding. I agree with Holtham that United Kingdom income tax should be reduced in Wales by 50% and the Assembly given the responsibility of voting annually to raise the remaining taxes, with the safeguard that the Assembly should set a rate of 3p either side of the UK rate, a matter to which other noble Lords have referred. The excellent submission to Silk by the Changing Union project, funded by the Joseph Rowntree Charitable Trust, pointed out that the Holtham commission estimated that in 2007-08 total identifiable expenditure in Wales was about £25 billion, exceeding Welsh tax receipts by £6 billion. It said:

“This represented a fiscal deficit of 10% of Welsh GDP, although he”—

Holtham—

“suggests this gap would have more than been made up with a possible revenue equalisation grant of £27.5 billion from the Treasury based on 5% of UK population share”.

Other devolved Administrations have borrowing powers. In Wales, speedy investment in much-needed infrastructure and capital projects will stimulate the economy in both the short and long term. The Welsh Government cannot fund a long-term programme of investment out of their general expenditure. Borrowing powers are essential.

In the 1960s, I was greatly influenced by the late Professor Ted Nevin, then of Swansea University, who attacked the policy of bribing companies to come to Wales with cash subsidies. His view was that you invest such funds as you have available in creating the infrastructure of communications—road, rail, air and telecommunications—designating enterprise zones and customs-free zones, and investing in training a skilled workforce. Business must want to come to Wales for the business-friendly environment that a Welsh Government should create. That is what we hope for. That was the policy of the Welsh Liberal Party back in the 1970 general election—I know, because I wrote it—and it remains the policy of the Welsh Liberal Democrats. The Welsh Government need the funds for these long-term aims to be realised. I fervently hope that the Silk commission produces the right decisions.

13:25

[Lord Rowe-Beddoe]

My Lords, I also thank the noble Baroness, Lady Randerson, for securing this debate—a debate on a highly pertinent and relevant matter.

The Silk commission appears to be on track to complete and publish part 1 of its work in the autumn of this year. I tend to agree with the noble Lord, Lord Elystan-Morgan, that parts 1 and 2 are the wrong way round, but so be it. If the commission does reach the conclusion of part 1 by the autumn, it will then have to be prepared to offer recommendations on a package of powers to improve the financial accountability of the Welsh Assembly. I can well imagine that whatever those recommendations are, they will receive considerable support. However, part 2 of the commission’s work, reviewing the powers of the Assembly, is likely to be much more contentious, and the linkage between part 1 and part 2 is inseparable. Businesses of all sizes and shapes can be severely hampered by uncertainty, which is disliked, and any question of tax-varying powers is also disturbing. The Holtham commission, which has already been quoted today, recommended measures in regard to income, property, land and minor taxes, but it also proposed exploratory discussions with the United Kingdom Government in regard to corporation tax.

I shall briefly highlight two or three submissions to the Silk commission which are at variance with the poll—which has been quoted on all sides of your Lordships’ House this morning—showing that 64% are in favour of tax-raising powers. I say that these submissions are at variance, but they represent quite a body of opinion. The Institute of Directors in Wales, for example, said in its written evidence that its members feared that,

“business could be seen as an easy source of cash for social or environmental policy areas that the WG has traditionally favoured”.

CBI Wales said that,

“the retention of the unitary tax system for corporation tax”,

is necessary to retain “the status quo”. The National Farmers Union Cymru said that its members had,

“a wide range of views”—

as can be expected—

“on what, if any, fiscal powers the NAfW should have”.

The NFU also said that it felt that the Barnett formula did,

“not serve Wales … well”.

Noble Lords have talked about the Barnett formula and I am going to say a little more about it. If we do not address the Barnett formula, we will simply be playing round with the deck chairs. If we do not know the baseline, what is the point of talking about anything else? We have no national accounts, and the tax take in Wales is not published at the moment. That has got to be done. If we do not have a satisfactory baseline, we will only be playing about with those deck chairs, as long as they exist.

The Barnett formula is the elephant in your Lordships’ Chamber, in the Welsh Assembly Government, in Wales and in Scotland. All your Lordships would agree that Wales has suffered, as was amply illustrated by your Lordships’ Select Committee in its report published in July 2009, which has been referred to. I was privileged to serve on that committee, which the noble Lord, Lord Richard, so ably chaired. Its first witness when we were taking evidence was none other than the noble Lord, Lord Barnett. I will quote from the noble Lord’s opening statement:

“The system I decided to use at that time to change was that any increase or decrease in the overall budget for public expenditure for the whole of the UK should be divided amongst the regions on a population basis which was roughly 85 per cent England, 10 per cent Scotland and 5 per cent Wales. Northern Ireland was taken as the same at 5 per cent but of course in Northern Ireland's case they got a lot more than that for a variety of reasons which will be fairly obvious”.

A few minutes later he said:

“I thought it might last a year or two before a government would decide to change it. It never occurred to me for one moment that it would last this long”.

It is now 35 years later and it has lasted this long. It is a totally inadequate way in which to block-fund the constituent nations of this Union. If we do not, as I said earlier, address the inequalities quickly and expeditiously, I cannot see how any meaningful changes can be agreed and implemented to a baseline which is demonstrably not fit for purpose.

It is my belief that both the previous Government and the current Government recognise—of course they do—the grave seriousness of the problem, but there seems to be no political will to address and resolve it. There are reasons why the previous Government backed away and reasons why the current Government back away. I am sure they do not have very much thought to agree with what may happen in Scotland in 2014, with the referendum. However, they are just putting off the inevitable. It has to be done.

All my life, throughout my education, I had impressed upon me—and I firmly believe and have upheld it—the great virtues of an unwritten constitution. I have in these past few years come to realise that the virtues seem to be rather less than the obvious problems and faults that now emerge in the continuous way in which the constitution is added to, bolted on to and changed in this piecemeal way. It has been mentioned already, but these continuing piecemeal changes are such that we are in urgent need of a national United Kingdom convention to consider the governance of England, Scotland, Wales and Northern Ireland in the 21st century and where we have got to. Asymmetric devolution: so crazy when you think about it. Then we have the problems of the north-east of England, which I was well aware of when I was on the Barnett Formula Select Committee. The rest of England increasingly feels that it is somehow missing out. It is not quite sure what it is missing out on, but it is missing out. Federalism, in some shape or form, is becoming increasingly attractive to me. It could address what I believe are the well-founded concerns of the inhabitants of this United Kingdom.

13:33

[Baroness Gale]

My Lords, I thank the noble Baroness, Lady Randerson, for bringing this debate before us today. It gives us the opportunity to debate the important topic of the Silk commission’s remit while we await the report on part 1, which I understand will be published in late autumn. I thank all noble Lords for their contributions. It has been a typical Welsh debate, but I welcome the contribution of the noble Lord, Lord Maclennan, who is a non-Welsh Peer but all the more welcome. I thank him for his contribution.

Many contributors have said that we are on a journey of devolution—it is an evolution, not a big bang. We have had to take this step by step and, as my noble friend Lord Rowlands said, it is about building consensus on the way. I was there on the night we awaited the Carmarthen result, holding our breath. We certainly got that result and it was, for most of us, a great cause for celebration. Today’s debate gives me the opportunity of laying out Labour’s comments on the progress that has been made by the Silk commission, as well as our priorities regarding the two parts of the commission’s remit: on the devolution of fiscal powers, which would improve financial accountability and the powers of the National Assembly for Wales; and to recommend modifications to improve current arrangements.

The commission is due to report on part 1 in the autumn and, so far, it seems that the commission has been very well received across Wales. Individuals and organisations across the country have engaged constructively via written or oral evidence, or through attending one of the commission’s meetings—although, as my noble friend Lord Anderson said, they have not all been very well attended. On part 1 of the commission’s remit, we are clear that the Welsh Government should have borrowing powers so that they are able to invest in infrastructure. This is especially important given the 41% real-term cuts that the coalition Government in Westminster have inflicted on the Welsh Government in Cardiff Bay.

Many noble Lords have talked about the poll conducted by ICM recently, in which eight out of 10 people supported the idea of granting the Welsh Government borrowing powers. I think that all noble Lords have said that that is where we should be going. The poll suggests that this proposal is likely to have the wide support in Wales that, as I am sure all noble Lords will agree, is essential for any change. The Welsh Government are the only elected institution in the UK, at any level, that do not have borrowing powers. As other noble Lords have said, even community councils in Wales have that power.

One striking result of the poll was the level of support for giving the Welsh Government the power to borrow, especially for capital projects such as schools, roads and hospitals. It seems that the Welsh people are happy with the nudge taxes we have been talking about, such as the carrier bag levy, which has proved such a success and has altered people’s behaviour, with an up to 90% fall in the usage of carrier bags. This was not a tax—the Welsh Assembly does not benefit financially from it, as the money goes to charity—but we have benefitted environmentally.

In a statement on 17 July, in reference to the opinion poll, Paul Silk, the chair of the commission, said:

“A majority of people believed that if the Welsh Government is given responsibility for taxation and spending it would be more accountable, the economy in Wales would be stronger, and public service would improve”.

It was also clear that people wanted to be consulted on the devolution of taxes such as income tax through a referendum. I think we would all agree that in those circumstances a referendum would be essential—many noble Lords have spoken about the difficulties of having an income tax in Wales.

In a Statement to the Welsh Assembly in June, the First Minister, Carwyn Jones, set out the Welsh Government’s position on financial reform and called for a comprehensive reform of Wales’s financial powers. He said that landfill tax, stamp duty, the aggregates levy and air passenger duty could be devolved to Wales as part of a new package of fiscal measures, but that the priority remains the reform of the Barnett formula, and that the Welsh Government should have the same borrowing powers as the other devolved nations. As the First Minister said in an earlier statement:

“We can’t go ahead with fiscal devolution without the funding being addressed otherwise we risk locking ourselves into the current Barnett formula which is to our detriment”.

This is the key question that needs to be addressed. In the mean time, we support the immediate introduction of a Barnett floor, as the Holtham commission recommended, while we await a long-term solution. This would stop any further escalation of Wales’s underfunding problem in future years. I understand that there are ongoing intergovernmental talks with the Chief Secretary to the Treasury, Danny Alexander, and the Welsh Finance Minister, Jane Hutt, with the aim of finding a fair funding settlement for Wales which includes discussion on the Barnett floor. Can the Minister say how these talks are progressing?

On the devolution of tax-varying powers, we believe that there may be some value in devolving some of the taxes under consideration. As I said earlier, the First Minister gave us the examples of air passenger duty, stamp duty, landfill tax and the aggregates levy.

As for phase 2 of the commission, it is regrettable that one of the key issues that the Silk commission might have considered—the electoral arrangements for the Welsh Assembly—was considered not by the commission but rather in the Green Paper on electoral reform which the Secretary of State for Wales published recently and was debated in Grand Committee on June 18. In fact, the issue that we are debating today is notable for being the one constitutional issue where the Government have adopted a broadly consensual approach. On other constitutional matters there has not been such a consensus—such as the review of parliamentary boundaries which, if the proposals go ahead, will see a 25% reduction in Welsh representation, 10 fewer MPs, a weakening of the Welsh voice in the other place and, of course, the proposed changes on how the Welsh people elect their Assembly Members. Far greater dialogue should have been taking place with the Welsh Government and the Secretary of State on this matter, rather than the “top down” approach.

Its seems that the coalition Government are far more interested in these constitutional matters than they are in addressing the real issues facing families in Wales, such as the high cost of living, an economy in recession and high unemployment. So while we note the good progress that the commission is making and that its voice is important, it is not our top priority. Jobs and growth are our priority. Today’s unemployment figures for Wales stand at 9%, and an increase of 2,000 more people without jobs means more heartache for Welsh families. Commenting on these figures, the Secretary of State for Wales said that she was “disappointed but not surprised”, and urged firms to seize the opportunity offered by rail electrification. While we welcome these announcements, it will take time for jobs to materialise. In the mean time, what seems to concern the Secretary of State is the consultation on the electoral arrangements for the Welsh Assembly, and the Commission on Devolution in Wales, neither of which will provide jobs for Welsh people now.

The Secretary of State for Wales met with the Silk commission this week to receive a report on what progress is being made. Can the Minister tell your Lordships’ House the results of that meeting? I hope that there will be an opportunity to have a fuller debate when the commission completes its work. We can then see what the recommendations are, what the Government’s response will be and, more importantly, what the Welsh Assembly and Welsh Government’s views are. I suggest to the Minister that if we do have a debate on the recommendations—as we have had a two and a half hour debate today, and I think that we could have gone on longer, perhaps a lot longer—perhaps we could have a five-hour debate next time so that we can explore everything and have the time to put our views on what we think of it. In the mean time, I look forward to the Minister’s response to our debate today.

13:44

[The Advocate-General for Scotland (Lord Wallace of Tankerness)]

My Lords, I start by joining others who have contributed to the debate in congratulating my noble friend Lady Randerson on securing it. It has been a welcome debate with welcome contributions from all sides of the House. I certainly know from recent debates in the Moses Room that there has been an appetite among a number of noble Lords who have contributed today for a debate on a Welsh issue in your Lordships’ Chamber. I therefore welcome this particular debate, which is very timely. I also welcome the constructive tone of my noble friend Lady Randerson, who herself had distinguished service in the Welsh Assembly, and in the contributions from noble Lords in all parties and the Cross Benches.

The Commission on Devolution in Wales, commonly known as the Silk commission, was set up by my right honourable friend the Secretary of State for Wales in October 2011 to review the present financial and constitutional arrangements in Wales. The commission has met nine times to date, most recently last week in Cardiff.

The noble Lord, Lord Howarth, queried the commission’s terms of reference. It is fair to point out that the Government sought to work collaboratively—indeed, succeeded in doing so—with the party leaders in the Assembly to establish the commission. It is supported by all four parties in the commission. The terms of reference were agreed by all four party leaders in the Assembly. They are similar in many respects to many of those of the Calman commission on devolution, on which I was privileged to serve during the previous Parliament. However, the Silk commission has a considerable benefit over the Calman commission as it has buy-in from all parties in the Assembly. Rather regrettably, the Calman commission did not have buy-in from the SNP Government in Scotland when it deliberated.

As has been indicated, the first part of the commission’s remit concerns improving the financial accountability of the National Assembly. The commission is looking at the case for devolving tax-raising powers to the Assembly and the Welsh Ministers. While Members of the Assembly are accountable to the electorate via the ballot box every four years, the Welsh Government and the Assembly as a whole are not accountable to Welsh electors for the money that they spend. They simply spend what they are given. This point was very graphically made by a number of contributors to the debate, not least my noble friend Lord Thomas of Gresford and the noble Lord, Lord Rowlands, who talked about representation without taxation.

The public, it is fair to say, have placed their trust in the devolved institutions in Wales in the 13 years since they were established. During that time, the Assembly has been seen to mature, culminating in the overwhelming yes vote in the referendum on further law-making powers in March 2011. However, as my noble friend Lord Roberts of Llandudno graphically reminded us, the original vote in 1997 was on a knife edge. I remember watching it on television in the small hours of the morning. The point made by the noble Lord, Lord Rowlands, is important: over time a consensus has emerged. That is probably reflected in the fact that all four parties were able to agree on the terms of reference and the setting up of the Silk commission.

However, the financial accountability of the devolved institutions in Wales has not changed. That cannot be right. My noble friend Lord Roberts of Conwy drew attention to the fact that existing bodies such as the National Audit Office and the committees of Parliament already exist. Obviously there is a role for them, and perhaps it is a role that has not been developed as much as it could be in achieving greater accountability for the way in which money is spent. With power comes responsibility. With the powers that the Assembly has acquired, Welsh Ministers should be responsible not just for spending the money but for raising some of the money needed to pay for the decisions which they make.

A number of comments have been made about the survey carried out by ICM on behalf of the commission and published earlier this week. It appears that the Welsh public agree with the need for greater accountability. I share my noble friend Lord Roberts of Conwy’s view that it is not always clear precisely what was said, given that a number of the findings do not seem to quite add up. Nevertheless, there was quite a clear finding that 66% of those surveyed were positive about the Welsh Government having the right to change the level of taxation in Wales, and 56% believed that doing so would make the Welsh Government more accountable.

The commission itself has a wealth of experience, being chaired by Paul Silk, a former clerk in both the Assembly and this Parliament, and comprises nominees from each of the four political parties in the Assembly: Sue Essex, the Welsh Labour nominee; Nick Bourne, the Welsh Conservative nominee; Rob Humphreys, the Liberal Democrat nominee; and Dr Eurfyl ap Gwilym, the Plaid Cymru nominee. In addition, there are two independent members, who are equally experienced: Dyfrig John CBE, chairman of the Principality Building Society; and Professor Noel Lloyd CBE, former vice-chancellor and principal of Aberystwyth University.

As we have debated, the commission has been looking at the possible tax and borrowing powers that could be devolved to the Assembly and the Welsh Government. These include powers in relation to landfill tax, air passenger duty and stamp duty, but they are in no way limited to those taxes. The commission’s terms of reference require it to make recommendations that are likely to have a wide degree of public support. In announcing the commission, my right honourable friend the Secretary of State for Wales acknowledged that it would have to consult widely to secure that support, not just in Wales but throughout the United Kingdom.

The commission’s call for written evidence closed in February this year and there has been a series of public meetings throughout Wales, starting in March in Swansea, ending in Flint in May and including every local authority in Wales in between. The commission has received written and oral evidence from a number of cross-border bodies—some referred to by the noble Lord, Lord Rowe-Beddoe—such as the Confederation of British Industry, the Institute of Directors and the Federation of Small Businesses. It has also held drop-in sessions to allow representations from Members of your Lordships’ House and of the House of Commons.

Further afield, the commissioners have met legislators and interest groups in Scotland and Northern Ireland to discuss the implications of ongoing developments in these countries on the commission’s work. These included, in Scotland, Sir Kenneth Calman, Scottish Government officials, members of the Scottish Parliament’s Finance Committee; and in Northern Ireland, the First Minister and Deputy First Minister and the Committee for Finance and Personnel.

I have no doubt that, in addressing its work, the commission will take into account some of the very important considerations that have been raised during our debate: issues such as tax competition and—as mentioned by my noble friend Lady Randerson and graphically illustrated with figures by the noble Lord, Lord Rowlands—the practical problem of the percentage of the population living very close to the Welsh-English border. This is much greater than the equivalent on the Scottish-English border, which itself brings its own implications and considerations when looking at tax. Indeed, the noble Lord, Lord Rowlands, mentioned the impact of using a tax-varying power of 3p in the pound on the purchasing power of poorer communities. That is the sort of consideration that one would expect that the commission might take into account.

As I said, the commission is expected to report on part 1 in late autumn this year, and the Government will consider its recommendations very carefully. The noble Baroness, Lady Gale, asked for a further debate. As she knows, that is not in the gift of Ministers, but no doubt the usual channels will look at this. My own view, and clearly that of the opposition Front Bench, and I am sure others in the Chamber too, is that it would be useful. Once we have some concrete proposals, having a debate would be a useful part of considering them.

My noble friend Lord Roberts of Conwy asked about a referendum. We think that this is probably jumping the gun at the moment, given that we do not actually know what the proposals might be. However, it is obviously an issue that would have to be considered in view of any decisions which the Government came to on the commission’s findings. Certainly at the moment, we believe it is premature.

After publication of part 1, the commission will begin work on part 2, which will look at the powers of the Assembly and modifications that may be needed to the boundary between what is devolved and what is non-devolved. The aim here is to simplify the settlement where possible and to make it work better. Again, the commission will need to consult widely and make recommendations only where they are likely to have a wide degree of public support. As we know, the Assembly has powers in 20 devolved areas, and it is for the commission to decide where there is a requirement to tidy up the boundary of the settlement. Any further changes to the settlement must be right for Wales and for the United Kingdom as a whole. In the course of this debate, we have heard references to water, prisons, police, local government finance and broadcasting. I do not think that there will be a shortage of matters for the commission to consider, but it would certainly be inappropriate to comment on these at this stage.

My noble friend Lady Randerson also talked about the structures of the different devolution Acts. There was a difference between the Scotland Act and the original Wales Act, subsequently the Government of Wales Act; and a different settlement again in the Northern Ireland Act. I did not wholly agree with the noble Lord, Lord Elystan-Morgan, when he said that the reservations in the Scotland Act were all relatively simple. Part of my job is to look at these regularly, and sometimes it can be quite difficult to interpret them. Indeed, a case has recently been referred to the Supreme Court on the extent of some of the reserved functions, so it is not straightforward.

[Lord Wigley]

The Minister will have noticed that several noble Lords raised the issue of borrowing powers. He is coming to that in a moment, I gather. When he does, will he address the question of the Welsh Assembly’s existing powers to borrow via the Welsh Development Agency Act? The problem is that the full sum is placed against the DEL allocation by the Treasury. If that could be lifted, it would enable that power to be used as it is now available in Scotland.

[Lord Wallace of Tankerness]

Almost on cue, I was about to turn to a number of the specific points that noble Lords raised in the course of this debate. What was described by at least one noble Lord as the elephant in the room is the Barnett formula. This, of course, is not part of the remit of the Silk commission, nor of the Calman commission.

I know it will disappoint noble Lords, but the Government made it very clear in the coalition agreement that the priority is to stabilise the public finances and that no replacement to the Barnett formula will be considered until the nation’s finances are back on track. However, I could not fail to hear the comments of everyone who contributed to the debate, I think without exception. Someone pointed out, although admittedly not in the context of what appears in the coalition agreement, that the Secretary of State for Wales had said that the Barnett formula was coming to the end of its life. However, I reiterate that the Government’s position is that the priority must be the stabilisation of the public finances.

[Lord Anderson of Swansea]

The Minister has said that the Barnett formula will be reconsidered only when the economy is back on track. Recently, the Prime Minister said that austerity will last until 2020. Does that mean there will be no substantial revision of the manifest injustices resulting from the formula until that time?

[Lord Wallace of Tankerness]

My Lords, I have described what was said in the coalition agreement for this Parliament. I do not think that anyone would be wise enough to predict the policy of any Administration, of whatever hue, in a subsequent Parliament. My noble friends Lord Forsyth and Lord Roberts of Llandudno were right to point out that the previous Administration did not address this either. Indeed, in their response to your Lordships’ Select Committee report, they stated that the Barnett formula:

“has a number of strengths”.

[Lord Forsyth of Drumlean]

There is unanimity throughout this House that Barnett has to be changed. Will the Minister explain the logic of the coalition agreement? What on earth has dealing with Barnett got to do with dealing with the deficit? Surely the Government are capable of doing more than one thing at the same time. I cannot see the linkage between addressing the Barnett formula and dealing with the deficit. The Barnett formula, if it is changed, is simply about the distribution of existing resources. It does not affect the deficit in any way. When the coalition agreement was drafted, what on earth was in the minds of the four people who did it?

[Lord Wallace of Tankerness]

My Lords, I am not a mind reader. It does not necessarily follow that it is a zero-sum game, as my noble friend would consider. I have heard people make this case before and no one has suggested that it should be a “beggar my neighbour” approach, which could actually lead to an increase in expenditure.

In a debate on a commission that does not have the Barnett formula in its remit, the Government’s position is not going to change. I have indicated the Government’s position, but there are intergovernmental talks, which have been referred to, and the Government indicated that they would engage in them. I was asked a number of other questions, initially raised by my noble friend Lady Randerson. The talks between the United Kingdom Government and the Welsh Government are looking at all aspects of the Holtham reports, including the extent of convergence between the trends of devolved funding and equivalent funding for England, and how need might be best measured. The commission is not considering, as I made clear, the fundamental overhaul of the Barnett formula. However, as I indicated, it is looking at these issues, such as convergence—although at the present time it is divergence rather than convergence—and how the need might best be measured.

My noble friends Lord Maclennan and Lady Randerson asked about borrowing and the state of discussions, as did the noble Baroness, Lady Gale. The Silk commission is looking at the case for borrowing powers for Welsh Ministers as part of its consideration in part 1. The bilateral talks between the United Kingdom and Welsh Governments are looking at how the latter might best use their existing powers—I hope that this refers to the point raised by the noble Lord, Lord Wigley—which were inherited by Welsh Ministers on the abolition of the Welsh Development Agency. They are, admittedly, relatively limited, but this is part of the ongoing discussion between the two Governments. Indeed, my right honourable friends the Chief Secretary to the Treasury and the Secretary of State for Wales have each met Jane Hutt, the Welsh Finance Minister, in the past fortnight, so these talks are very much alive and active.

The noble Lord, Lord Anderson, asked how the recent initiative to encourage the banks to lend more, announced by the Government this week, would impact on Wales. The funding for lending scheme is designed to boost lending in the real economy, making mortgages and loans cheaper and more easily available to families and businesses right across the United Kingdom. Wales will be as entitled to apply and take advantage of that as any other part of the country. The scheme opens on 1 August for 18 months.

Another important point, which was raised by noble friend Lord Maclennan and then spoken to by the noble Lord, Lord Rowe-Beddoe, is that there have been a number of different commissions. They asked whether there was a possibility of taking a more strategic look. Very recently, the Prime Minister indicated that there will be a need for an open, involved and comprehensive conversation about what kind of union we want to see, and—almost 15 years after the process of devolution started in the United Kingdom—that we should consider the best way of having such a conversation. However, the Prime Minister made it clear that that should await the outcome of the Scottish referendum, which is likely to be in 2013-14. That view was reflected in at least one speech in your Lordships’ House today. We will certainly be arguing for the integrity of the United Kingdom and for Scotland to remain part of it. That is the first and foremost objective and focus of not just the Government but the Labour Party in Scotland and across the United Kingdom. The point is one that I suspect will feature in more of our debates in the weeks and months to come.

In conclusion, I indicate that in introducing the debate my noble friend asked how we might take forward the comments made in it. I certainly undertake to write to Paul Silk, drawing the commission’s attention to the fact that the debate has taken place and to the comments that have been made. It is also pertinent to say that not only to the commission but within government. Points have been made in this debate on which I am sure some of my colleagues in government will wish to reflect.

14:05

[Baroness Randerson]

My Lords, I thank all those who have contributed to the debate. Every noble Lord who has done so has made a very valuable contribution. In particular, I thank the Minister for his informative reply.

A wide variety of opinions have been expressed but I think there is consensus that the time is now right for the Welsh Assembly to have tax-varying powers. In some of our eyes, that time is well overdue. However, I detect that some people are coming to this for the first time. The debate has revealed the complexity of the issues. However, there is certainly agreement across the board that the Assembly needs borrowing powers. Some very interesting ideas have been put forward on the convention—for example, on the future of the UK constitution. The idea that there should be a permanent monitoring commission is very interesting.

Of course, you can never get a largely Welsh group of people together without their discussing the Barnett formula. After today’s debate, the Minister is well aware of the strength of feeling on this. I shall make just one quick point of clarification: when I referred to the Barnett floor, I was referring to it as a way in which we could quickly make some progress on this issue. Something to which no noble Lord has referred today is how long it will take once the decision is made to reform the formula. It will take years, rather than months, to develop a new needs-based formula, and in Wales we need that action quickly.

Once again, I thank every noble Lord for their contribution.

Motion agreed.