Empowerment and Responsibility: Financial Powers to Strengthen Wales
(12 years ago)
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Lord Wigley
To ask Her Majesty’s Government what is their response to the first report of the Commission on Devolution in Wales, Empowerment and Responsibility: Financial Powers to Strengthen Wales.
Lord Wigley
My Lords, this is the first occasion I have had to sponsor a short debate. I am glad to have the opportunity to focus on the recommendations of the Silk commission’s first report, published last month, and, through my Question on the Order Paper, to invite the Government to spell out how they intend to take forward the commission’s recommendations.
The Silk commission was established by the UK Government in October 2011, with a double remit. The first is:
“To review the case for the devolution of fiscal powers to the National Assembly for Wales and to recommend a package of powers that would improve the financial accountability of the Assembly, which are consistent with the United Kingdom’s fiscal objectives and are likely to have a wide degree of support”.
Secondly, the commission is now considering the National Assembly’s non-financial powers. However, Silk was specifically asked to report on part 1 by autumn 2012 and the Government, as far as I know, have indicated no intention to await the completion of part 2 before implementing part 1 recommendations.
It may be worth reminding ourselves that the National Assembly has no tax-varying powers. Llanwnda Community Council, where I live, has greater taxation powers than our National Assembly. It was surely short-sighted to create such a body without adequate financial powers. It makes it far too easy for a Welsh Government, of any party, to blame Westminster when they do not have the resources they feel they need to fund portfolios such as health, education and roads. The Assembly should, as a matter of principle, have taxation powers so that it can be truly answerable to the people for the way in which it spends their money.
This is a totally different question to whether the Assembly is currently receiving adequate finance to maintain services to a standard comparable to those obtaining in England. Successive reports suggest that there is a shortfall of some £400 million per annum, and all parties in the Assembly believe that the Barnett formula should be replaced by a needs-based formula. The previous Secretary of State, Mrs Cheryl Gillan MP, stated categorically that,
“we all recognise that the Barnett formula is coming to the end of its life”.—[Official Report, Commons, 11/5/2011; col. 1146].
It is suffering a slow and painful death and it is high time it was put out of its misery.
The second reason for new powers is that if the Welsh Government want to change strategic priorities and spend more, say, on our schools or hospitals, or want to introduce more enterprise zones or extend the business rate relief, they should have the capacity to do so provided that they accept responsibility for raising additional resources to undertake those tasks.
Thirdly, the most significant issue facing Wales is that of economic regeneration. Wales has the lowest GVA per head of any nation or region in the UK, standing at 74% of the UK average. We must await updated figures which will be published tomorrow, but the UK Commission for Employment and Skills forecasts that Welsh economic growth will continue to lag 0.5% behind the UK as a whole. This would mean that, by 2020, the Welsh GVA per capita will be less than 70% of the UK average.
Currently, places like Kensington and Chelsea enjoy a GVA per head 10 times higher than that of Anglesey, Merthyr Tydfil or Blaenau Gwent. This is frankly intolerable. The Assembly has devolved responsibility for economic development, yet it has virtually none of the necessary tools to do the job. In particular, it has no borrowing powers which would enable it to launch capital investment programmes to stimulate economic growth. If it uses its powers under the Welsh Development Agency Act, it loses a pound of its DEL limits for every pound it borrows. Similarly, the Welsh Government have no power to issue bonds, something which would be available to regional Governments in many overseas countries.
Devolving material taxation and borrowing powers to the National Assembly would change the mindset of political parties in Wales. They would have to consider the impact of proposed policies on the tax base. Political parties would offer the voters of Wales different approaches to taxation at election time, giving voters a wider choice of policies. As things stand, the Welsh Government are a spending agency. They need to be a more rounded and responsible form of government. All these issues were carefully considered by Silk. Unlike the Calman commission in Scotland, the Silk commission consisted of representatives of all four parties and produced a unanimous report that has been widely welcomed. This was a remarkable feat and I congratulate the commission on it. It reflects a single-mindedness of purpose on these issues across party lines in the National Assembly.
What are the recommendations that should now be implemented? They include the devolution to the Assembly of business rates in totality, stamp duty land tax, landfill tax, the aggregates levy, long-haul air passenger duty, powers to provide enhanced capital allowances at an increased number of sites and enterprise zones, the right—already conceded to Scotland—to raise new taxes with Treasury agreement, the right to borrow above DEL limits to fund capital projects with Treasury agreement, and the power to issue bonds. The Silk report also recommends that income tax raised in Wales should be shared between the Welsh and UK Governments. The Welsh Government should be able to change the basic, standard and additional rates of income tax independently, with the Assembly bearing the consequences of such changes. The income tax proposals would not be implemented until the fair funding dispute had been resolved.
Such unanimous recommendations from a body set up by the UK Government demand a positive response. In the debate of 27 November in the National Assembly on the Silk report, First Minister Carwyn Jones said that he was happy to accept the report as the basis for future funding reform and that he expected the UK Government to publish a White Paper in the new year. Plaid Cymru leader Leanne Wood stated that the recommendations,
“should be accepted in full and pushed forward”.
Conservative spokesman Paul Davies AM formally placed on record his party’s support for the Silk report and its recommendation, and Liberal Democrat leader Kirsty Williams called for early legislation at Westminster to implement the report. On the same day, I was heartened to hear the Minister say in our Chamber that the Government intended to respond to the report with all due speed and in a timely manner. Might a start be made today?
On the issue of income tax, I do not see why all income tax on earned income should not be transferred to the Assembly, so that taxpayers will be clear where responsibility lies for their income tax bills. Some colleagues seem to fear Wales taking responsibility for income tax because of our lower average-income levels. However, provided that—as recommended by Silk—there is agreement on fair funding, that a needs-based equalisation mechanism is introduced before responsibility is transferred, and that there is an agreement on the method by which the block grant is reduced to reflect the changes in taxation arrangements, there is no reason to fear the taking over of income tax by the Assembly.
I also believe that corporation tax should be devolved to the National Assembly. It is one of the tools with which we can tackle our economic problems. The Silk report was ambivalent about corporation tax. On page 84 it states that,
“it is clear that corporation tax is a potentially useful policy tool”.
However, it continues:
“We do not recommend devolving corporation tax to Wales”.
But then it adds:
“However, if the UK Government were to agree to devolve corporation tax to both Scotland and Northern Ireland, we would recommend the same powers be given to Wales”.
Will the Minister ensure that, if corporation tax is devolved to Scotland and Northern Ireland, the Wales Office will fight to secure the same powers for Wales?
What has been recommended by the commission is no more than common practice across the member states of the OECD. Silk’s first report pointed out that, on average, sub-state Governments in OECD countries are responsible for raising a material proportion of their budgets. Silk recommends a figure of about 25% of total devolved spending, which is in line with international practice.
The commission recommends that changes that do not need legislation should be implemented without delay, and that a new Wales Bill should be introduced in this Parliament to devolve tax and borrowing powers. The commission specifically states that this should not wait until the completion of part 2 of Silk. In the foreword to the report, Paul Silk pointedly states that he is proud to recommend the package of his recommendations to the Government “for early implementation”. From this it is clear that the commission expects the Government not to cherry pick the report but to implement it quickly in its totality as a balanced package of measures.
In conclusion, will the Minister confirm, first, that the Government accept the Silk recommendation that, in order to empower the National Assembly and to improve its answerability, it is necessary to give it the right to finance a material proportion of its budget, and that the most effective way of doing this will be by sharing responsibility for income tax between the UK and Welsh Governments? Secondly, will he confirm that if a referendum is to be held on the income tax issue, it can take place meaningfully only after the fair funding issue has been resolved? When do the Government intend to announce their proposals for fair funding for Wales? Thirdly, will the Government commit to implement the Silk recommendations during this Parliament?
I hope that the Government can now make a clear statement of their intentions, and I look forward to the Minister’s response.
Lord Morgan
My Lords, the Silk commission indirectly draws attention to a fundamental weakness of the devolution settlement, with Wales consistently subordinated for what are said to be historical reasons but which are in fact quite unhistorical reasons. It is an asymmetric settlement that has in some respects undermined the Welsh Assembly. As we know, it had no primary or legislative powers until 2006. As the noble Lord, Lord Wigley, said, the Barnett formula is persistently unfair. You can see it as a stop-gap created a long time ago, based on archaic and now quite unfair calculations, and it has been shredded, first by the Holtham commission in Wales, and more recently by an extremely powerful Lords Select Committee, which included at least one former Chancellor of the Exchequer.
Above all, the Silk commission points out the inadequacy of representation without taxation. The democratically elected Welsh Government do not have the resources either to promote their objectives or to achieve accountability with the Welsh elector when they spend money that they do not raise. The Silk commission addresses this, and I hope that the Government will respond. So far we have heard the sound of silence, particularly from Conservatives. I notice that no Conservatives are speaking in this debate, so I hope that the Liberal Democrat Minister will be more communicative.
The Silk commission underlines the weaknesses of the present situation in key respects. First, it shows that, almost uniquely in Europe, Wales has a democratically elected Assembly that does not have taxing or borrowing powers. It is fundamentally undermined by being denied that basic authority, which has been fundamental to many of the great upheavals in the history of the world; not only, as everyone knows, to the American Revolution but to the Civil War in this country and the coming of the French Revolution. We have representation without taxation, which is no basis for a democracy.
Secondly, the Silk commission shows that the baseline of the block grant is determined in an arbitrary fashion, and that this has led in practice to its being reduced in size year by year.
Thirdly, as we have heard, the discredited Barnett formula complicates matters, and we await a settlement on that. We have had discussions about the Barnett formula for many years. The coalition has replied with speeches of total irrelevance, claiming that it is a problem of the debt, which is not germane to the issue. The Labour Party replied with unmitigated waffle. We heard waffle in debate after debate, which did not advance the argument.
Finally, the Silk commission shows that the borrowing powers that the Welsh Assembly has are, in effect, not under its control but under the control of the United Kingdom Treasury, which sets those powers against the block grant in such a way that Welsh resources do not increase overall. Again, therefore, authority in financial matters does not lie with the Welsh Assembly. The formula encapsulated in the famous phrase, “For Wales, see England”, is still being played out.
The Silk commission makes two major proposals, as the noble Lord, Lord Wigley, explained. First, it proposes that the Welsh Assembly should have the power to raise its own taxes. It lists, as we heard, a variety of taxes such as stamp duty, landfill and air passenger duties, but the most important is income tax. The devolution or transfer of income tax to the Welsh Assembly would be central, and would enable the Welsh Government to do things that they cannot do now and to have a clearer horizon in terms of economic planning. Furthermore, the prospect is raised—although not, as the noble Lord, Lord Wigley, said, with total clarity—of the ability to vary the rate of tax at the top, standard and bottom ends of the tax scale. The Silk commission is cautious about this, but it is a principle that is bound to grow and extend. Rightly, the Silk commission states that there has to be engagement on these matters between the Welsh and United Kingdom Governments, but it seems clear that this is the way we are moving in terms of devolution being implemented in a much more complete way.
It is interesting that the Silk commission for Wales is more radical in some respects than the Calman commission for Scotland, in that it raises the issue of varying taxes. Secondly, it raises the issue of the power to borrow for capital purposes. There would be a stronger case for borrowing if the Welsh Government could vary the size of its budget through taxation to meet the repayment of loans. It is, as the Welsh First Minister said, a very strange system under which Welsh local authorities can borrow on the open market, say from the European Investment Bank, but the Welsh Government cannot. This greater power to borrow would give the Welsh Government the flexibility to meet variations in income and would make them more accountable.
Silk points the way to a more pluralist United Kingdom. It affects the whole of the United Kingdom—which may need a codified constitution—but its proposals cannot be put into effect until Barnett is dealt with. At the moment, the Welsh Assembly is locked into an unjust system that gets more unfair every year. Therefore, the Silk commission proposals cannot be implemented immediately. I hope that the Minister will tell us that the Government will find the will to deal with both the matter of raising more resources for Wales and securing a more honest and honourable system for their distribution, which is lacking today. Above all, I hope that the Government will communicate and tell us what they are going to do.
Lord Roberts of Llandudno
My Lords, I appreciate very much the opportunity to speak again on these matters; as we have heard, this is one of a series of debates we are holding. The Silk commission is the natural progression of what has been happening in Wales over the past century. It is a natural development, not an explosion, in Wales; perhaps it is because we are a more reasonable people that we act in such a way. You could go back to the century before last—although perhaps I should not in a time-limited debate. However, you can go back to ET John, a century ago, with his first Bill for a Welsh parliament, and then on to all the developments that we have had in education, such as the University of Wales, and with health boards and the setting up of the county councils. There have been myriad developments over the past century and the previous one as well. The former Secretary of State for Wales, Jim Griffiths—whom we admire whichever party we are from—did a tremendous amount. Others have had a hand in developments such as the setting up of the Council for Wales and Monmouthshire, with Huw T Edwards as its chairman, and the setting up of the first Welsh Office, in its embryonic sense; before Jim Griffiths of course, the Home Secretary shared the responsibility of being in charge of Wales.
However, these are different days. We have our own, very vibrant, television channel, which has done so much to safeguard the Welsh language, and the Welsh school movement. It is gradual but certain development, and last year of course we had the referendum that gave us more authority in 20 defined areas. We are on our way. We are not going as fast as some would like us to go but I think we are going as fast as it is possibly wise to go. Some might not agree with me, but we are on our way to having more responsibility and authority over our own affairs.
There is a great deal of unfinished business. I brought up three things with financial implications in a debate a wee while ago, which we have to look at again. What is the future of the television services in Wales? When will the DCMS and the BBC lose their grip and the Welsh Assembly Government take responsibility and have financial responsibility? We have problems there, and there are strong financial implications.
Then we have Welsh Water. I and others remember the great outburst when the Welsh valley, Tryweryn, was drowned and Liverpool took our water without any payment or anything. How are we now going to have authority over the water supplies, the rivers and the reservoirs, of Wales? There are great financial implications there.
I have worried about cross-border issues many times in the Chamber. The Welsh border with England is about 160 miles long. The Scottish border with England is only 96 miles. The problems of border responsibility are much greater for Wales than they are between Scotland and England.
The health service is another issue. It is much easier for us in north Wales to go to Liverpool or Manchester than to go to Cardiff or Swansea. Whatever happens, we have to keep these links with the north-west of England in a healthy state.
Then there is transport in Wales. The Welsh border is woven with railways and roads from the north to the south. You could never dig Offa’s Dyke again because the transport system would go berserk. The border issues mean that, whatever decision we take, in Wales we must always keep that link, in a healthy and positive way, with those on the other side of it.
We need the wisdom of Solomon or the magic of Merlin to be able to resolve some of the border issues, but they all affect Welsh revenue. How much revenue we are going to have, how we are going to dispense it and what taxation systems we bring in under the auspices of the Welsh Government are all involved.
I make one plea. I do not see independence for Wales as our final destination. I see a more federal establishment where, as now, the devolved issues in Wales—education, health and so on—remain entirely under the authority of the Welsh Assembly Government. Things such as defence would remain the responsibility of the Parliament of the United Kingdom: the four nations represented here at Westminster.
Where are we going with our devolution? I worry about the result of the Scottish referendum in a year or so. If Scotland, with 59 Members of Parliament, withdrew from the UK Parliament, you would have here what amounted—to some people’s delight, but not to mine—to a permanent Conservative majority. If that happened, the people of Wales would be very, very unhappy. At the moment, we have only seven Conservative Members for Wales—more than the Liberals, we admit—with a majority of Labour Members. The people of Wales would find life pretty intolerable under a permanent Conservative Government. I plead with the people of Scotland to vote no in their referendum for Wales’s sake.
We will have to tackle these issues, and not always by ourselves. Some things we in Wales can do, but for other things we are dependent on what happens in Europe, in the world and in financial circles. So we advance with care and with a wide vision, saying and realising that we are not absolute masters of our own destiny.
Lord Elystan-Morgan
My Lords, I, too, congratulate my noble friend Lord Wigley on achieving this debate. Few people in the past 100 years have contributed as honourably and richly to the cause of Welsh devolution as he has.
The referendum of March last year gave Wales limited but nevertheless very wide-ranging primary legislative powers. It seems to me that the Silk report gives the opportunity to complement those very considerable constitutional rights with fiscal power. Those twin sinews of authority would essentially give Wales a home rule Parliament, something which Thomas Edward Ellis and Lloyd George cherished over a century ago and, indeed, the noble Lord, Lord Roberts of Llandudno, referred to.
I reiterate everything that has been said about the Silk report being very much in the track of history in this context. One should see it in the context of the establishment of the Welsh Office in 1964, the Richard Commission, the 2006 Act, the Holtham report of 2010 and to some extent—we cannot be isolated or insulated from this—the Scotland Act 2012. It is in that devolutionary track that one should see the Silk report. The momentum that has been created is very considerable. I argue that it is a dynamic movement that cannot now be stopped, nor, indeed, essentially decelerated.
I wish to confine my few remaining remarks to the Barnett formula. Barnett, as we know, was a stopgap measure, intended to last perhaps only a year or two. It was a crude mathematical division which was calculated as follows: for any moneys that were invested in England, a sum would be allocated to Wales based on the percentage that the Welsh population bore to the population of England. It was crude and took no account of need. As we know, the Holtham commission clearly proved that as a result of that formula we have lost massive sums of money year by year. The estimated loss by now is £350 million. Indeed, today we have heard a figure of £400 million from the noble Lord, Lord Wigley. I am prepared to accept that figure. That, of course, is what we lose purely on the question of need. Our situation is very different from that of Scotland. In relation to Scotland, we lose more like £700 million per annum. Once Scotland gained a Secretary of State in 1885, the Goschen principles were applied. By various subterfuges all manner of weighting considerations were applied to Scotland, with the result, of course, that it was given massive subventions which Wales does not enjoy.
The First Minister of Wales has made it very clear that any question of varying income tax rates should depend first on the reform of the Barnett formula. That is the heart, core and kernel of the whole situation. It is an annual swindle to which Wales has been subjected for very many years and it must be brought to an end. How do we do that? We do it by exploiting this new feeling of unanimity and unity that has shown itself in relation to the creation and acceptance of the Silk commission. Mewn Undeb Mae Nerth—in unity there is strength. That is our prospect and our salvation. For too long we in Wales have been blighted by the curse of disunity. Now we have a chance to put that right. In relation to the Barnett formula, we must realise that justice delayed is justice denied. A stop has to be brought very quickly; there must be a concentrated campaign in Wales to bring it about.
Lord Rowlands
My Lords, I support a number of findings of the Silk commission. I support the proposed transfer of stamp duty land tax, of minor taxes and of business rates, as mentioned by the noble Lord, Lord Wigley. I also support the idea of additional borrowing powers. It is absolutely absurd that a Welsh Assembly Government cannot borrow when almost every other authority can. Apparently to do that one needs to service the debt. I assume and hope—perhaps the Minister will confirm this—that if you transfer the range of minor taxes, plus stamp duty land tax, it will bring in sufficient income to service any borrowing power. If that is the case, the package will be easy to introduce immediately. I also agree with all noble Lords who stated that it would be impossible to introduce major tax-varying powers unless the Barnett issue was addressed. There is little or no point in having tax devolution if such underfunding has not been addressed.
I will confine my remaining remarks entirely to one issue that I have raised before: my concern about the effect on low-income communities such as those I represented of raising tax rates by 3 percentage points or more. I hoped that the Silk commission would tell us what the impact would be on those communities of exercising such a power. I found the answer on two very difficult—in fact, almost incomprehensible—pages on estimates of the impact of income tax changes in Wales. There is a very complex equation and the introduction of the notion of the elasticity of taxable income. I hope that the Minister will translate those two pages into language that I can understand. It is essential to understand the impact the changes would have. If we will the power to a Government to raise the basic rate of tax by, say, 3p or whatever, we should understand the consequences for communities.
The most interesting in a wealth of tables in the report is that on income and income tax in Wales in 2009-10. It shows that of the 1,390,000 individuals who paid tax, 900,000—nearly two-thirds—had an annual income of between £10,000 and £20,000. Nearly 1.4 million people fell into that income tax bracket. I suspect that the percentage was bigger in Merthyr because the percentage of those on lower incomes will have been even higher. That substantial group of 900,000 or more would carry the additional tax burden if we raised the basic rate of income tax. Therefore, I am concerned that if we go down this path, it could lead to a regressive form of taxation. In constituencies such as the one I represented, we would be swapping—in fact, converting—beneficial public expenditure into a tax burden. That would be the effect of implementing additional rates of income tax. We must be honest. Politically it is highly unlikely that a future Welsh Assembly Government of any complexion will substantially reduce income tax and cut expenditure. The whole ethos of political life, among almost all parties now, would be against such a proposal.
If we will the power, we have to accept the consequence of it. I am not convinced, as the people on whom the burden of this would fall are those who should least expect to carry that burden. I keep an open mind, and am very supportive of all the other range of taxes, but I remain sceptical until I can find out exactly what the impact would be on the communities I represented of raising the basic rate of tax above the standard rate. We are not only talking about raising it 1p, 2p or 3p but, at this moment, have a very unfair tax anyway. The moment you come into tax and use up your personal allowances, which will eventually be around the £10,000 mark by the end of this Parliament, the tax on every pound then leaps from 0% to 20% because there is no middle band. I deeply regret the previous Administration’s abolition of the 10p band and have not been able to work out whether Silk recommends that a Welsh Government could actually introduce one. That would at least make an easier tax progression, if that was possible. I am sorry to end on a discordant note but, although it is now 10 years since I represented my former constituency, I still sense and feel that an injustice could be perpetrated if we started to raise the basic rate of tax on low-income communities and low-income families of the kind I represented.
Baroness Gale
My Lords, I thank the noble Lord, Lord Wigley, for giving us the opportunity to debate this important matter, and all noble Lords who have taken part in this short debate. I wish we could have had longer, but the contributions show the wisdom and the knowledge that we have in Wales, particularly with our Welsh Peers. Before giving our response to the report, I will ask the Minister two procedural questions.
First, why is the Wales Office limiting debate on such a vital constitutional matter to meetings of the Grand Committee in your Lordships’ House and the Welsh Grand Committee in the other place? The Minister will know that my honourable friend, the shadow Secretary of State for Wales, has written to the Wales Office asking that a debate be held on the Floor in the House of Commons. In his letter, my honourable friend urged the Secretary of State to hold a full debate so that Members from all parts of the United Kingdom would have the opportunity to participate. No reply has been received, but at Welsh Questions on 28 November in another place, the Secretary of State appeared to suggest that such a debate would not be held until legislation was introduced, which could possibly be two years away. Does the Minister agree that this debate should not be confined or restricted in this way and does she agree that the recommendations of the report are constitutionally significant enough to warrant a full debate in both Houses? I look forward to her comments on those points.
The second procedural point I will raise is the speed of the Government’s response. In a previous answer to me, the Minister said that the Wales Office was,
“committed to dealing with this with all due speed”.—[Official Report, 27/11/12; col. 88.]
However, since then, we have heard that the Government may not respond formally until spring next year. Can the Minister explain why it seems to be taking the Government longer than anticipated to respond to the report?
The Silk report is an important publication, which has wide-ranging recommendations for Wales and the rest of the United Kingdom. We welcome the report and congratulate the commission on its work. We agree with the list of taxes that Silk suggests should remain under the full remit of the United Kingdom Government and should not be devolved. We welcome the recommendation that certain taxes, such as stamp duty land tax and the aggregates levy, should be devolved to Wales and the recommendation that the devolution of these taxes should pave the way for borrowing powers for the Welsh Government, which would enable Ministers in Cardiff Bay to offset the impact of the 45% cut to their capital budget and allow them to further invest in jobs and growth. Can the Minister confirm that the devolution of these taxes would constitute an income stream against which the Welsh Government could borrow? What discussions has she had to this effect?
Furthermore, does the Minister accept that enabling the Welsh Government to borrow against this income stream—in addition to the devolution of the taxes in their own right—would be to the benefit of people in Wales? When it comes to the devolution of income tax-varying powers, the commission has recommended what my honourable friend the shadow Secretary of State described as a triple-lock test. Such devolution should be to Wales’s financial benefit and, to test as much, a nominal amount of Welsh income tax receipts—Silk suggests £2 billion—should be assigned to the Welsh Government without the ability to vary rates.
Proceeding with a test case is a sensible approach because Silk’s evidence suggests that it is far from clear that such devolution would be in Wales’s financial interest. Whether or not it would prove to be so would depend on the change in Wales’s income tax receipts and on the change in income tax receipts from the rest of the United Kingdom. If the Welsh change is higher, Wales will stand to benefit. However, Silk alludes to the fact that Wales was hit particularly hard by the recession and so, if this approach had been in place from the time the global financial crisis hit in 2008, Wales would now be worse off.
Since the Government took the United Kingdom into a double-dip recession, it could well be the case that Welsh income tax receipts have decreased by more than income tax receipts in the rest of the United Kingdom. In other words, Wales is being hit disproportionately hard by the Government’s failing economic policies. That is why the first test is crucial; there is no guarantee that the multiplier will be positive over the next few years. Is the Minister aware of any analysis or modelling that has been forecast regarding this first test? Does she acknowledge that Wales may be disproportionately hit by the Government’s failing policies?
The second test set by Silk concerns reform of the UK’s wider funding formula. Before devolving income tax, a funding agreement needs to be reached that is fair to all of the UK. Silk’s view is that that the Barnett formula would need to be revisited before income tax-varying powers were devolved. I would welcome the Minister’s comments on whether this view is shared by the Government.
The third of the triple-lock tests is that before income tax-varying powers are devolved to the Welsh Government, there should be—I believe that there must be—a referendum. Silk accepts this principle and we share the view expressed in the report that there,
“is a special nature to income tax”,
which necessitates approval from the Welsh people. These three tests would allow for the devolution of income tax-varying powers on the provisos that it would be in Wales’s short and long-term financial interests and that it would speak to the will of the Welsh people.
This debate has given an opportunity for the Minister to shed some light on the Government’s thinking and to inform your Lordships of the progress that the Wales Office has made on this report. I would be grateful for the Minister’s comments on the triple-lock test, as well as on the other questions that I raised. I look forward to her response.
The Parliamentary Under-Secretary of State, Wales Office (Baroness Randerson)
My Lords, I thank noble Lords, in particular the noble Lord, Lord Wigley, for proposing this debate, which has provided an opportunity to consider the recommendations of the Commission for Devolution in Wales—the Silk commission—on fiscal devolution and financial accountability. The noble Lord has rightly taken a keen interest in the Silk commission’s recommendations since they were published on 19 November and clearly recognises the importance of the report for Welsh devolution and for improving the financial accountability of the Assembly and the Welsh Government. I agree wholeheartedly with his comments in this regard.
The Government gave a clear commitment, in our programme for government, to set up a Calman-like process for the Welsh Assembly, depending on the outcome of the referendum on law-making powers for the Assembly last year. Following that vote in the referendum on Assembly powers, there was a clear need to examine Welsh devolution in a methodical way and to ensure there was no repeat of the case-by-case, drip-by-drip approach to devolution that typified changes to the Welsh settlement during the “LCO years”, as I call them. Our commitment to a Calman-like process for Wales did just what was needed.
The Secretary of State set up the Silk commission in October 2011, with, as the noble Lord, Lord Wigley, has emphasised, cross-party support. That support was reflected in the commission’s membership, which included representation from all four parties in the Assembly. Since then, the commission has gathered evidence and criss-crossed Wales to hold public meetings to inform its work on improving the financial accountability of the devolved institutions in Wales. The fruits of that labour, in the form of a nearly 200-page report, were published three weeks ago.
I take issue with the idea put forward by the noble Baroness, Lady Gale, that in some way three weeks is too long to spend analysing a complex package and a complex set of tax proposals, with 33 recommendations. I believe that noble Lords would expect the Government to take that seriously, as we are. Discussions on this are already well under way between Cabinet colleagues and between the Welsh Government and the Treasury. I assure noble Lords that we are taking it so seriously that there will be a response, we hope, in the spring, which I believe is timely for a report of this importance.
There is no doubt that the report is detailed and thorough. It relates to the financial accountability of the Welsh Government and the National Assembly, and how that can be improved through the devolution of tax and borrowing powers. I pay tribute to the commissioners for their hard work.
First, the commissioners recommend that the Assembly should be able to take tax decisions in order to better empower it to deliver policy objectives in devolved areas. To achieve this, the commission’s proposals include the devolution of smaller-yielding taxes, as set out here today.
Secondly, they suggest that to improve financial accountability, the Welsh Government should be responsible for funding a material amount of the money they spend. The commission recommends that responsibility for income tax should be shared between Cardiff Bay and Westminster, and that the Welsh Government should be able to set income tax rates within the UK income tax structure. The commission recommends that income tax devolution should be subject to a referendum, which the noble Baroness has indicated she supports.
Thirdly, it suggests that the Welsh Government should be granted borrowing powers; an issue that was raised very powerfully by the noble Lord, Lord Wigley, and others. That recommendation fits well with the announcement, already made before the publication of the report on 24 October, in which we agreed the principle of borrowing powers for the Welsh Government to fund infrastructure investment, subject to an appropriate independent revenue stream being put in place. In answer to the question of the noble Lord, Lord Rowlands, in general terms the minor taxes that are suggested would be considered to be a sufficient income stream to support borrowing, along the precedent set for the Scottish Government. Indeed, the UK Government have indicated that they will be prepared to anticipate the establishment and devolution of those taxes in order to enable more rapid progress to be made on infrastructure development in Wales.
Taken together, the package of measures recommended by the commission would make the Welsh Government responsible for raising about a quarter of their revenue. That is a significant change, and both the Government and Parliament need to scrutinise the implications in detail. In response to the noble Baroness, I say that my right honourable friend the Secretary of State for Wales has indicated his willingness and keenness to have a debate as soon as possible in the other place. Of course, there will be further opportunities when the Government officially respond to the Silk report.
That brings me on to where we go from here. As I have said, these recommendations would represent a fundamental change in Welsh devolution—perhaps the most fundamental change since it was established in 1999. That requires careful examination. As we announced in last week’s Autumn Statement, the Government plan to publish an initial response in the spring. It is a clear demonstration of our commitment to progress this work seriously, but in a timely manner. There is a significant amount of work to assess. Clearly, the Scotland Act sets a precedent for fiscal devolution, but we need to consider the Silk commission’s package for Wales on its own merits. As I have already said, discussions have already started.
The noble Lord, Lord Wigley, talked about the importance of economic regeneration. I feel that the Silk report neatly linked the policy objective of economic regeneration with its recommendations on specific taxes. The noble Lord also raised the issue of corporation tax. Of course, corporation tax is a very specific area for Northern Ireland in particular, because Northern Ireland shares a land border with the Republic of Ireland, where the rate of corporation tax is particularly low. Corporation tax is a particularly tricky issue if you are to avoid a “race to the bottom”. It is important to bear in mind that if you are on the wrong side of that border in that race to the bottom, you get the flight of businesses over the border. That is a difficult issue to be considered. The Silk commission certainly did not have a clear recommendation on that at all.
The proposed timetable is very tight, but I understand the issue. The Silk commission put forward a package of measures. Fair funding is also a package of measures, and there are ongoing discussions between the Welsh Government and the Treasury, with the agreement announced on 24 October that there would be discussions at the start of every spending review period. It would take into account whether there was likely to be convergence within that period.
The noble Lord, Lord Morgan, raised the interesting concept of representation without taxation. I felt that that was a neat way of referring to the problems that the Welsh Assembly has experienced. He drew attention to the weakness of the devolution settlement. He also spoke about the ability to vary the rate of income tax, and rightly says that Silk is more radical than Calman on this issue. He also rightly said that Silk affects the whole of the UK. However, I point out to several noble Lords who referred to the unfairness of the Barnett formula that it is a pretty blunt instrument because it does not take into account need, but it is also important to place on record that the discussions between the Welsh and UK Governments have led to an agreement that there is no longer convergence occurring. Indeed, in the past couple of years there has been divergence. In other words, Wales is doing rather better than it was a couple of years ago in terms of the Barnett formula. Indeed the figures show—and these are figures agreed between the Welsh and UK Governments—that we are within the rough area that the Holtham commission stated in its report was the fair level of funding for Wales. It is important to bear in mind that there has been that agreement.
Finally, I will, of course, review the record and will take the opportunity, with their permission, to write to noble Lords about any issues of substance that have been raised that I have not been able to address in my response.
The Deputy Chairman of Committees (Lord Brougham and Vaux)
My Lords, that completes the business in Grand Committee this afternoon.