The Parliamentary Under-Secretary of State, Wales Office (Baroness Randerson) (LD)
My Lords, the Bill before us today continues this coalition’s ambitious programme of reforms to devolved governance in Wales. We have already achieved the commitments in our programme for government relating to Wales, including delivering the 2011 referendum on full law-making powers for the Assembly and establishing the Commission on Devolution in Wales—the Silk commission—which has since published two detailed reports.
I pay tribute to Paul Silk and his commissioners, including my noble friend Lord Bourne, for their two excellent reports. The commission included representatives from all four political parties in the Assembly, and reached unanimous agreement on its recommendations. I hope that a similar spirit of broad consensus will exist in this House in respect of this legislation.
The Bill implements the vast majority of the recommendations that the Silk commission made in its first report, devolving an exciting package of tax and borrowing powers to the Assembly and Welsh Ministers. These reforms provide the tools and incentives for the Welsh Government to grow the Welsh economy; make the Welsh Government more accountable for raising some of the money they spend; and deliver borrowing powers that will enable Welsh Ministers to invest further in Welsh infrastructure.
I now turn to the detail of the legislation. The Bill provides for the introduction of a Welsh rate of income tax. As the Silk commission recommended, the devolution of income tax powers would be subject to a referendum, should the Assembly decide to trigger one. The devolution of income tax powers to Scotland was subject to a separate referendum question in 1997, and it is only right that people in Wales should decide whether income tax powers should be devolved to the Assembly.
Should the Welsh people vote for an element of income tax to be devolved—and I sincerely hope they will—it would provide a significant incentive for the Welsh Government to grow the Welsh economy and deliver a real-terms boost in revenue—money that the Welsh Government could then spend on key services such as health and education.
In the event of an element of income tax being devolved, the UK rates would all be reduced by 10p for Welsh taxpayers and the Assembly would set a single Welsh rate of income tax for all three income tax bands that would be paid alongside the reduced UK rates; this is the so-called lock-step mechanism. Noble Lords will no doubt be aware that the proposal has generated some intense debate, not least as the Silk commission recommended that the Assembly should be able to set separate Welsh rates of income tax for each of the three income tax bands.
The Government recognise that there are arguments for and against the lock-step mechanism, but we continue to believe that the approach set out in the Bill is appropriate for Wales. Given the porous border with England—almost half of the Welsh population and 10% of the English population live within 25 miles of the border—the changes to individual income tax rates in Wales could have wider effects than similar changes in Scotland.
It would not be logical to provide more flexible rate-setting powers in Wales than in Scotland. The Government have therefore decided that the lock-step is the best system for encouraging the Welsh Government to grow the overall tax base in Wales while safeguarding against the risks of damaging cross-border tax competition and increased tax avoidance.
We are now less than two months away from what I consider to be one of the most fundamental decisions in the history of the United Kingdom. I, along with almost every other noble Lord present, sincerely hope that the people of Scotland choose to remain united with the peoples of Wales, Northern Ireland and England. Nevertheless, the Government recognise that even a clear no vote may well lead to further income tax devolution to Scotland.
Having said that, we are not there yet, and I would not wish to pre-empt that debate. The Government remain open to revisiting the arrangements for income tax devolution in Wales as any changes are brought forward in Scotland; but, as I explained, there are differences between Wales and Scotland, particularly in the nature of their borders with England.
The Bill also devolves powers over stamp duty land tax and landfill tax to the Assembly, giving it the ability to devise a system of tax on land transactions and landfill specific to Welsh needs. That will provide an independent revenue stream for the Welsh Government to borrow against and give them additional tools to manage housing and waste management policy in Wales, both of which are already devolved.
The devolution of tax powers is intrinsically linked to the devolution of borrowing powers. In addition to powers relating to current borrowing, the Bill provides the Welsh Government with the ability to borrow up to £500 million to invest further in capital infrastructure in Wales. That is a generous limit, which reflects the independent income generated through the two devolved taxes, and which can be increased if additional taxes, such as an element of income tax, are devolved. Crucially, it will allow the Welsh Government to move on with much needed infrastructure investment, including improvements to the M4 around Newport.
The Government have been criticised for linking the borrowing limit to the income from devolved taxes. However, we have been clear that any borrowing must be contingent on the Welsh Government’s ability to pay that money back. You or I would not get a reputable loan without a means of repaying it, and Governments should be no different.
Finally with regard to fiscal reforms, the Bill devolves responsibility to the Assembly for its own budgetary arrangements, enabling it to decide how it wishes to scrutinise and approve its annual budget.
I now turn to Part 1, which includes a number of important electoral and constitutional reforms for Wales. Clause 1 deals with the move to permanent five-year Assembly terms. Noble Lords will recall that the scheduled 2015 Assembly election was moved to 2016 by the Fixed-term Parliaments Act 2011 in order to avoid it coinciding with the UK general election. The Bill makes the change to five-year terms permanent, following the Government’s 2012 consultation on future electoral arrangements for the National Assembly. This change will make it less likely that Assembly and parliamentary general elections will occur on the same day in future. I hope that we would all agree that it is important that Assembly elections are contested, wherever possible, on issues specific to Wales and are not overshadowed by wider issues that often dominate parliamentary elections.
The Bill also overturns the ban on candidates standing for election in both a constituency seat and on a regional list in an Assembly election. We are restoring the position to that set out in the Government of Wales Act 1998 and reversing the ban imposed by the then Labour Government in the 2006 Act. That change was made against the wishes of all the other major political parties in Wales and against the advice of the Electoral Commission and electoral experts in Wales. Noble Lords will be aware that, for Welsh Members of the Labour Party in the other place, judging by column inches in Hansard, this is seemingly the most important issue in the entire Bill. Important though this issue is, the Bill simply reverses a change that should not have been made in the first place. It restores fairness to Assembly elections, which the ban on dual candidacy took away.
The Bill also prohibits dual mandates between the Assembly and the House of Commons. The Government do not believe that it is possible for an Assembly Member to represent their constituents effectively and to devote their full attention to their role as an Assembly Member if they must also spend a significant portion of their time in Westminster. From now on, politicians elected to both legislatures will need to make a clear choice whether they wish to serve as a Member of Parliament or an AM. The Bill does not impose a similar prohibition on your Lordships, as we do not have the same constituency commitments or the requirement to attend this place regularly. At the request of the Welsh Government, this legislation also formally enshrines that name in statute. This title has been common parlance for the Welsh Assembly Government since the advent of full lawmaking powers in 2011 and it makes sense for legislation to catch up with the reality on the ground.
Finally, I would like to say a little about the second Silk report. The commission has made some crucially important recommendations about the future governance of Wales within the United Kingdom, most notably by recommending a move to a reserved-powers model similar to that in Scotland. The move would involve a fundamental, top-to-bottom change to the Welsh settlement and is not something which could be entered into lightly or done quickly.
In responding to the report’s publication in March, and while welcoming the report, the Government made clear that the Bill is not the right vehicle for implementing its recommendations. Let us implement the commission’s first report before we turn our minds to the second. Including a whole raft of additional powers in the Bill would serve merely to delay its progress and jeopardise its enactment in this Parliament. Much better that these matters be left for the next Government to take forward, giving all political parties the opportunity to seek the endorsement of the electorate through party manifesto commitments.
This Government believe that devolution should be used to give Wales a competitive edge. It should give its politicians the ability to make decisions for the people they serve, becoming increasingly accountable to them as a result. The Bill delivers on that. I commend it to the House and beg to move.
Baroness Randerson
My Lords, this has been a good debate. I believe that it has reflected the constitutional importance of the Bill for Wales and for the United Kingdom as a whole. I fear that at times it was a debate on a Bill that many of us would like to write rather than the one before us. As the Minister in charge of the Bill here, my first priority is to ensure that we steer the Bill through safely in the time that we have left in this Parliament. It is very important to me personally that we ensure that that is done because across the Chamber today I have noted very strong support for the Bill in general terms.
I am a devolutionary enthusiast but I am also a pragmatist, and I realise that in some ways the timetable is not ideal. As several noble Lords have mentioned, the Bill is being discussed in the shadow of the Scottish referendum, a point made powerfully by the noble Lord, Lord Rowe-Beddoe. We will then have our Committee stage very close on the heels of the result of the Scottish referendum without having time to reflect and to develop ideas. Therefore, I urge noble Lords to judge the Bill on the basis of where we are at present and the fact that it is being very firmly based on the Silk 1 report. The Silk 2 report is for another day and it needs to be considered in the light of our party manifestos. My party’s manifesto will contain a very firm commitment to delivering the Silk recommendations, and I hope that I will see things that I recognise in the manifestos of the other parties represented here today.
I shall try to reply to as many of the issues raised by noble Lords as possible. Many speakers, including the noble Baroness, Lady Morgan, and the noble Lord, Lord Wigley, mentioned the lock-step. It is clearly something that is going to continue to generate passionate debate. I said in my opening speech that the Government continue to believe that the approach set out in the Bill is appropriate for Wales, given the potentially far-reaching and significant effects of allowing the Welsh Government to alter each income tax band independently. That is our belief, particularly in the light of the porous border between Wales and England and the figures quoted by noble Lords indicating that there is a very large population that might cross that border.
The Government believe very strongly in the impact of the tax banding system on ensuring that taxation is progressive and that it reallocates money across society. That is an important aspect that we have been bearing in mind in relation to the lock-step. However, as I said earlier, at this point the Government remain open to revisiting the arrangements for income tax devolution in the light of changes in Scotland, and I am happy to restate that. I also draw noble Lords’ attention to the fact that the new Secretary of State has made it clear that his mind remains open on the issue.
The noble Lord, Lord Anderson, asked: if you do not vary the rate of taxation, what is the point of it? The point of it is that it is the basis for borrowing power. It is used as the basis for borrowing power by the Scottish Government and it would be used as such in future by the Welsh Government.
Several noble Lords, including the noble Baroness, Lady Morgan, referred to the level of the block grant adjustment. A number of different views were expressed on this across the Chamber. I make it clear that if the income tax base in Wales grows faster than that in the rest of the UK, the Welsh Government will benefit, even if the Welsh rate is the same as the UK rate. Inevitably, however, if it grows slower, the Welsh Government’s budget will be lower. That is a simple consequence of more accountability, linking the Welsh Government’s budget to the performance of the Welsh economy. This arrangement would incentivise the Welsh Government to grow the economy in Wales but, importantly, it would protect it from UK-wide effects that the UK Government are better placed to manage. It is a fair system, designed to protect Wales from the greatest volatility and it is consistent with our aims of increasing the Welsh Government’s accountability.
The noble Lord, Lord Howarth, asked about stamp duty land tax volatility. The block grant adjustment will not reflect SDLT volatility. Instead, the Welsh Government are being given new tools to manage tax volatility, which is part of increasing accountability. Those new tools include a cash reserve that can be used to save tax revenues in good years and spend them when revenues are lower than they have been forecast to be. The Welsh Government will also be able to borrow up to £500 million and up to £200 million in any one year if there are insufficient funds in the cash reserve.
The noble Baroness, Lady Morgan, and other noble Lords referred to the sensitivity of the timing of this debate in relation to the Scottish referendum result. I agree, but of course hindsight is a wonderful thing. When the timescale for the Silk process was set out, people did not have any concept that there would be a Scottish referendum at this time.
Many noble Lords raised the reserved powers model. I think that universal support for that has been expressed today across the Chamber. Several noble Lords, including the noble and learned Lord, Lord Morris, also referred to the recent decision on the Agricultural Wages Board. That decision certainly adds to the debate on the issue. However, as several noble Lords recognised and acknowledged, it has to be a longer-term issue. That was recognised by the Silk commission in its second report which made it clear that it was something for manifesto decisions. Even if we made the decision today to go to a reserved powers model, we would not be able to create it and legislate in the timescale left. It is absolutely right that there is a wide public debate on this and I urge noble Lords to encourage that debate.
In many ways the same points should be made about the size of the Assembly and its capacity for scrutiny. It was also an issue raised in the second Silk report, but that is also something for manifestos.
Lord Rowlands
Do I take it that, in principle, the coalition Government are in favour of the reserved powers?
Baroness Randerson
I am specifically making it clear that the Government do not have a position on the reserved powers model. As the Silk report recommended, this is something for manifesto positions from the different parties. However, my party is in favour of the reserved powers model. That does not make it a government position, and it certainly is not something that can be created now. However much one might wish to do so, we cannot write the kind of complex legislation needed for a reserved powers model of devolution for Wales. If we tried to do so at that speed, we would be in danger of ending up with second-rate legislation, which the people of Wales do not deserve.
I move on to the point made by the noble Lord, Lord Wigley, on corporation tax. I remind the House that the Silk commission said that if corporation tax were devolved to Scotland and Northern Ireland it should also be devolved to Wales. There are no current plans to devolve to Scotland and Northern Ireland. However, the Bill contains the power to devolve further taxes to Wales by order. I would like noble Lords to note that. The noble Lord, Lord Anderson, raised the same issue about the power to devolve further taxes. A good example would be the aggregates levy once the EU Commission has completed its investigations. That provision is in the Bill as it stands.
The noble Lord, Lord Howarth of Newport, and others, raised the issue of borrowing powers and why they are not higher. I should point out that there are two capital borrowing limits: the annual limit and the overall limit. The overall limit in Scotland is £2.2 billion, which is supported by around £5 billion of annual devolved tax revenue. Using the same ratio, the overall limit in Wales would have been only £100 million. I ask noble Lords to bear that in mind when they ask for Wales to be treated like Scotland. We accepted that £100 million was inadequate so we increased it to £500 million specifically to enable M4 improvements to be undertaken, although there are no restrictions in law on how that could be spent. Obviously this is a power in perpetuity which the Welsh Government could exert for other things.
Lord Wigley
I asked a specific question on that. If the cost of the M4 relief road around Newport is £930 million, or so, and the limit on the borrowing, prior to having a referendum that would enable more to be levered in, is £500 million, does the balance—the £438 million, or whatever the figure is—have to come out of the capital budget of the National Assembly, and does that mean that all the other projects that are being funded by that are lost?
Baroness Randerson
How the Welsh Government raise the additional money is, of course, entirely at their discretion. It could come directly from their capital budget or they could have a partnership with the private sector to ensure that additional funding is available for them.
Lord Howarth of Newport
Given that the M4 relief road around Newport is an infrastructural benefit to the United Kingdom as a whole, how much contribution are the Government of the UK planning to make to that very large cost?
Baroness Randerson
I think that the noble Lord raises a fundamental point about devolution. The control of building and road infrastructure in Wales is devolved. With it comes the Barnett consequential of the funding for infrastructure throughout the UK, which is reflected in the proportion of the Department for Transport’s budget that is devolved to the Welsh Government.
To complete the point I was making, we have agreed an annual limit of £125 million relating to borrowing in Wales. That limit was proposed by the Welsh Government. A lot of noble Lords referred to the Barnett formula. I remind them that the Holtham report recommended that Welsh funding should be between 15% and 17% above English funding. Funding in Wales is 15% above the funding for England at this time, so it is within the areas deemed as fair by the Holtham commission. That is not to say that it has been fair in the past; it is at the current point because there has been divergence in recent times rather than convergence. I remind noble Lords that in 2012 the Welsh Finance Minister Jane Hutt agreed with the Chief Secretary to the Treasury in an exchange of letters a system to review the situation in relation to Barnett if convergence was about to begin again. That system worked satisfactorily at the spending review last year and it provides a basis for fairness in the future. I am absolutely sure that noble Lords will return to this in the future and that we will be talking about it in some detail.
Lord Rowe-Beddoe
Is the Minister saying that the Barnett formula has been revised in the last 12 months?
Baroness Randerson
No I am not, but the natural process of the way in which the formula works means that in times of spending restraint, where we have been for the last four years, the convergence process, which worked over many years and made the formula more, shall I say, sparing in relation to Wales, ceased to operate and we have had divergence which has brought Wales to a position of greater fairness now than in the past. That means, however, that if we go back to times of financial plenty, there would be an issue once again. That has been recognised in the exchange of correspondence between the Chief Secretary to the Treasury and the Finance Minister in Wales.
In response to the general point made by noble Lords from the Labour Party about dual candidacy, as I predicted, when we read Hansard tomorrow it will appear as the most important matter in the Bill to members of the Labour Party. It is significant to remember that the purpose of doing this is to widen the pool of good candidates. Time and again people have raised the issue of how important it is to have scrutiny of the highest nature in the Welsh Assembly. It is not only a case of ensuring that there are more Assembly Members—whether you agree with that or not—but of ensuring that the best candidates can stand and get elected.
Many noble Lords on the Benches opposite referred to the Clwyd West situation. I refer to the Nick Bourne situation, if my noble friend will forgive me, where, as the leader of a party in the 2011 Assembly elections, he failed to gain a seat because his party had done so well. That is an anomaly, and it is important to bear in mind that within this system you will get that kind of anomaly. I say to the noble Lord, Lord Rowlands, who raised the issue of people who lose still getting into the Assembly, that that applies only if you think that elections should be on a winner takes all strategy. However, if you believe that elections are a way of ensuring that different strands of opinion are represented in our legislatures and Parliaments, you look at ways of ensuring that significant minority opinions are represented as well as majority opinions.
Lord Anderson of Swansea
The very able leader of a party in Wales lost under that system. The solution is simple: his party should have ensured that he sat in a winnable seat.
Baroness Randerson
There are many other answers connected with the problems and anomalies associated with that system. However, I repeat, this system was established by the Labour Party in the first Government of Wales Act. It may not be perfect but it provides an element of proportionality, although not perfect proportionality by any means. Even now within the Assembly, 50% of its members are from the Labour Party even though it gained under 40% of the vote. It is not perfect but it brings some proportionality to the Assembly, which was an essential part of getting the original referendum accepted by the people of Wales.
I conclude by saying that it has been a great pleasure to listen to the debate. I am sure that I will be answering in considerable detail the questions that I know noble Lords will put to me when we return from the Recess. I invite your Lordships to support the Bill.