UK and Welsh Governments (Finance)

(Limited Text - Ministerial Extracts only)

Tuesday 11th September 2012 Westminster Hall

[The Parliamentary Under-Secretary of State for Wales (Stephen Crabb)]

I thank the hon. Member for Arfon (Hywel Williams) for his kind comments about my appointment. I am sorry, or perhaps glad, that he missed my rather embattled response to a debate on unemployment in north-east England when I stood in for a Minister recently. The hon. Gentleman rightly referred to the near total silence in which I have been working as a Government Whip over the past two years or so. I pay tribute to him. He and I served together on the Select Committee on Welsh Affairs in the previous Parliament. I always appreciated the intelligent and sensitive approach that he brought to all the issues we looked at, which he has again demonstrated in the manner he has approached the topic today.

We have an opportunity before us to provide a timely update to Members on the progress of the intergovernmental talks on funding reform. In July last year, the Secretary of State for Wales informed the House in a ministerial statement of the Government’s plans to establish the Commission on Devolution in Wales—now commonly known as the Silk commission. It was established in October 2011, fulfilling a commitment in our programme for government to establish a process for the National Assembly similar to the Calman commission.

As hon. Members from Wales know, the commission is looking at the case for devolving fiscal powers to the Assembly and the Welsh Government, to improve the financial accountability of the devolved institutions in Wales. The Government will consider the commission’s recommendations carefully when it publishes its part 1 report in, I hope, late autumn.

The Secretary of State’s July statement also made clear the Government’s commitment to consider all aspects of the Holtham commission’s reports and to continue discussions with the Welsh Government on Holtham’s funding reform proposals for Wales. The talks will also cover the operation of the Welsh Government’s existing borrowing powers. The aim of the intergovernmental talks has been to explore and test the conclusions reached in the Holtham report in respect of Welsh funding, to look at what the trends in funding have been and are likely to be, and to consider the extent to which there has been convergence between the Welsh block grant and relative funding in England. The hon. Gentleman drew attention to the difficult issue of convergence, which has been at the heart of what the two Governments have been discussing.

The talks have also explored previous studies carried out on Welsh needs. The hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) talked about a cloak of secrecy; there has been no cloak of secrecy around the talks. They have been conducted on exactly the normal basis that one would expect intergovernmental talks to be conducted on. They have been going on for about 12 months and have been conducted in a positive way. The two Governments have worked closely and collaboratively as the talks have progressed. As one would expect, they have involved the Chief Secretary to the Treasury and the Secretary of State for Wales. Together, they have had a productive and positive dialogue with Welsh Government Ministers, and, in particular, the Welsh Minister for Finance. Those meetings between Ministers have been supported by meetings between officials. Officials from the Welsh Government have met on an almost monthly basis with officials from the Wales Office to carry forward the discussions, analyse the evidence and determine the funding trends.

I am pleased to tell the hon. Member for Arfon and the House that the talks are now reaching a conclusion. I hope that hon. Members will appreciate that, although the talks are in their final stages, I am not able today to give a detailed statement as to what the outcome will be. I am confident that we will be in a position to make an announcement in the near future on the outcome. I hope that the hon. Gentleman is made positive and optimistic by my confidence, and that he will recognise that the outcome will benefit Wales, and be good for Wales and the United Kingdom as a whole.

[Jonathan Edwards]

I appreciate that the Minister does not want to disclose the outcome of the discussions. We understand that we are most likely to see the introduction of a Barnett floor. My hon. Friend talked about that floor being based on the Holtham estimates, which go back four or five years. The key question we want answered is whether there has been any reassessment of those estimates in terms of coming to a conclusion on the Barnett floor. If there has not been, and the situation has worsened—and we believe it has—that floor would end up becoming a Barnett ceiling. That outcome would be disastrous. To be perfectly honest, given the record of the Finance Minister in the Welsh Government, we are concerned that Treasury Ministers will be running rings round her.

[Stephen Crabb]

Tempted though I might be to be drawn into discussing what might be in the final statement, I will not do so. On what the Holtham report said about the financial position of Wales, the hon. Gentleman mentioned his party’s belief. There are a lot of beliefs about the position. Big assumptions are made in the report about Wales’s funding situation. Not all of those beliefs and assumptions are shared by the UK Government.

Over the past 12 months the two Governments have together been exploring the issues in detail. The hon. Member for Arfon went into a little detail about the Barnett formula, and its weakness. I caution him about claiming that the current system always delivers an unfair outcome for Wales. The spending settlement for Wales in the 2010 spending review was fair in a difficult economic climate. It represented a 7.5% reduction in the Welsh Government’s resource budget—an average cut of less than 2% a year. We recognise that there are challenges in that, but it is significantly less than the 3% a year cut that the Welsh Government had previously planned for. In addition, the Government have provided almost an additional £500 million since the spending review for the Welsh Government to use in any way they want.

In our programme for government we recognised the concerns expressed by the Holtham commission, but our priority was and is to stabilise the public finances. Plaid Cymru’s perspective may differ from the Government’s, in not recognising the necessity of the UK fiscal framework, but that is the context in which we are operating. Reform of the Barnett formula cannot take place in the current environment. It should be borne in mind that comprehensive reform, as my hon. Friend the Member for Montgomeryshire (Glyn Davies) so eloquently said, would have huge implications not just for Wales but for all parts of the United Kingdom. That is why the intergovernmental talks between the UK and Welsh Governments have not looked at replacing the Barnett formula, or at the pros and cons of alternative systems.

[Nia Griffith (Llanelli) (Lab)]

Will the Minister explain something to me? The economic forecast given to us in 2010 does not seem to be holding up. We seem to be in a no-growth situation. Is there therefore a case for revising the view of when the Barnett formula should be reconsidered, given that we now face perhaps another five years of double-dip recession?

[Stephen Crabb]

I have yet to see any economist forecasting five years of double-dip recession. I always enjoy listening to the hon. Lady, but given the zero progress that her party’s Government made on the issues, I am not sure we should take guidance from her on this subject.

[Hywel Williams]

I do not wish to torture the Minister with Keynesian quotes; but Keynes did say:

“When the facts change, I change my mind. What do you do, sir?”

What do the Government do if the facts have changed?

--- Later in debate ---

[Stephen Crabb]

There are established processes in place, through the comprehensive spending review, for looking at all those issues. I hope that the hon. Gentleman will take me at my word when I say there is a genuine commitment among the new team in the Wales Office, and our colleagues in the Treasury, to work with Ministers in the Welsh Government to explore those issues in depth, and ensure that Wales gets the fairest possible outcome.

The hon. Member for Arfon raised some other financial matters. Progress has been made on the issue of the housing revenue account, about which the hon. Member for Carmarthen East and Dinefwr spoke so powerfully in, I think, November 2010. The Government are working with the Welsh Government on how the HRA in Wales can be abolished, in line with the approach taken in England. We agree that any reform of the HRA subsidy system would need to be fiscally neutral, as it was in England. I know that Plaid Cymru Members have strong feelings about the current system, but Ministers here and in Cardiff agree that it is not unfair to Wales. However, they are considering ways to improve it. Discussions are continuing, and we are currently awaiting clarification from the Welsh Government to proposals that they made in August. I emphasise, again, that we are operating within the framework of the UK fiscal system, and need to bear in mind the consequences to other parts of the system of change affecting Wales.

Hon. Members should be aware that the former system of end-year flexibility has now been replaced with a new budget exchange system. In designing that system, the Government worked closely with the Welsh Government and have implemented a system that provides increased flexibility for the devolved Administrations to manage their own underspends. The Welsh Government have signed up to that approach, as indeed have the other devolved Administrations. I want to make one point about underspends. Generally it is not good to have many of them. Administrations should plan prudently as well as spend prudently, and if they do that, and carry out their spending plans efficiently, there should not really be any case for large underspends at the end of the year.

I hope that I have dealt with all the points that the hon. Gentlemen raised. I look forward to hearing the outcome of the talks.

[Wayne David (Caerphilly) (Lab)]

I welcome the Minister to his position—to both of them, in fact. He is a remarkable person, as he is able to spend so much time both as a senior Whip and a Wales Office Minister.

I want to ask him about the future, and how he sees the work of the Silk commission progressing to part II. Will he talk about the future constitutional relationships? Will there be dialogue with the commission on the West Lothian question, for example?

[Stephen Crabb]

Part II of the Silk commission goes way beyond the subject that we are debating, as the hon. Gentleman knows. It looks at wider devolution in Wales, and the potential for devolving other powers. Part I, which has more of a bearing on what we are discussing, looks at potential fiscal devolution; so, tempted again as I might be, I am not going down that path.

[Wayne David]

We have got plenty of time.

[Stephen Crabb]

I know we have plenty of time, but I am still not going to talk about that issue when we are debating funding issues.

Question put and agreed to.