Baroness Morgan of Ely (Lab)
I will speak to Amendments 53 to 55, which are about increasing the amount that the Welsh Government should be allowed to borrow. One of the key reasons why the Assembly is so enthused about this Bill is that, for the first time, the Welsh Government will be able to access those borrowing powers. This is particularly important at the present time as £1.7 billion has been cut from the Welsh budget and the capital budget has been slashed by 33%. If the Welsh economy is to grow, it needs to invest in essential infrastructure. That ability to invest has been choked off by government cuts. It seems unfair that the Government connected the amount that the Welsh Government are able to borrow to the taxation revenue stream of the Welsh Government. Revenue streams in relation to stamp duty and landfill—two taxes that are, it is proposed, to be devolved initially—have proved to be extremely volatile in the past.
How was it determined how much the Welsh Government are allowed to borrow? It strikes me that the approach to Wales is very different from the approach adopted for the borrowing powers in Scotland, where a connection was not drawn to the funding stream but to the capital budget. The Scotland Act allows the Government to borrow 10% of the Scottish capital budget in any year to fund additional capital projects. That would be around £230 million in 2014, up to £2.2 billion in total. Scotland seems able to borrow proportionately considerably more, despite the fact that it has considerable PFI commitments—unlike the Welsh Government. This is not the case for Northern Ireland, where no revenue stream exists apart from the block grant. Yet, it is allowed to borrow.
This Bill allows the Welsh Government to borrow up to £125 million per year, up to a limit of £500 million. However, if the same rationale were used in Wales as in Scotland, so that borrowing was based on capital budget not tax revenue stream, Wales would be allowed to borrow up to £1.3 billion—or £130 million per year—reflecting that £1.3 billion capital budget in Wales. Ideally, we would like the Government to allow flexibility so that the Welsh Government can increase their borrowing powers at a time when the economy looks like it is much more on its feet. Could the Minister outline whether there is any mechanism through which that would be possible?
Lord Newby (LD)
My Lords, in this group of amendments on borrowing powers, I begin with Amendment 52, which would require the Secretary of State to lay an independent report on Welsh bonds before both Houses. As the Government have previously made clear, the subject of bond issuance by Welsh Ministers is something that the UK Government are willing to consider. Moreover, initial discussions have now taken place between the two Governments on the form that those considerations should take and we are keen to progress this work quickly and bring it to a conclusion.
The Government have previously committed to consider Scottish bonds and have agreed to make this source of borrowing available to the Scottish Government. Our record therefore demonstrates that we are able to consider such matters without legislation, and I therefore ask the noble Lord to withdraw his amendment on that basis.
I turn to the proposed amendments to the borrowing limits. The Government have consistently been clear that capital borrowing must be commensurate with the level of independent revenue available to support the costs of borrowing. This is an important principle that ensures borrowing remains affordable in much the same way as mortgage lending must reflect the capacity to service borrowing. It is also worth repeating that the £500 million capital borrowing limit is already substantial relative to the level of independent revenues that will be available to Welsh Ministers when stamp duty and landfill tax are devolved. In particular, the limit is far higher than it would have been had we simply applied the tax and borrowing ratios implemented by the Scotland Act. Such an approach would have given the Welsh Government capital borrowing of only £100 million rather than £500 million. Although the noble Baroness talks about the relationship between capital expenditure and borrowing powers as the consideration that she wants to underlie the amount that the Welsh Government can borrow, it has to be related to the Welsh Government’s management of their taxes; otherwise, by the same logic—perhaps she supports this—large cities and the English regions could also have large borrowing powers if they were simply related to the fact that they are already spending money on capital. The link between borrowing powers and the Assembly is secured by the fact that the Assembly has its own sources of revenue.
Baroness Morgan of Ely
Will the Minister explain how Northern Ireland is allowed to borrow when it does not have this income stream?
Lord Newby
My Lords, as we have discussed in respect of virtually every tax we have talked about today, the considerations in Northern Ireland, and the situation in Northern Ireland, are very different from those in all other parts of the United Kingdom. The noble Baroness is aware of the history of Northern Ireland and why we do things differently there. Noble Lords have made good points about read-across from Scotland to Wales, but it is a lot less easy to do the same with Northern Ireland. Very different considerations apply, and the nature of the economic challenges facing Northern Ireland is rather different.
I fully understand the desire to see as much investment as possible in Wales, but we must ensure that it is manageable for the Welsh Government. Not only must the Welsh Government repay borrowing, they must fund the associated interest payments. That is why we need to ensure appropriate independent funding streams are in place. I remind noble Lords that for every 1% that the Welsh Government have to pay in interest on their £500 million borrowing—if they reach that level—they will have to take £5 million from their overall budget. The maths is clear. It is a very significant amount that the Welsh Government will have to provide from their overall budget in any event.
We should be encouraging the Welsh Government to hold a referendum on income tax powers. If an element of income tax is devolved to Wales, that increased funding stream could allow Welsh Ministers to borrow around £1 billion. Our message to all parties in Wales is that it is time to get cracking, once we get this Bill through, and get that referendum held and the income tax powers devolved.
Finally, in order to manage forecast error, the Government have provided the Welsh Government with exactly the same £500 million of current borrowing as in the Scotland Act, despite the more limited tax powers initially being devolved to Wales. The Welsh Government’s current and capital borrowing limits are therefore relatively generous compared with Scotland, and I ask the noble Lord not to move his amendments.
Lord Wigley
I am very grateful to the Minister. I certainly welcome his announcement that progress has been made with the bonds issue, and I hope that the National Assembly can move forward rapidly to take advantage of that opportunity.
With regard to borrowing, the capital budget of the National Assembly was reduced by just over 40% when the changes introduced by the Government were brought in. That put an immense squeeze on, among other things, the capital requirements of Governments, such as the Government in Wales, with responsibility for roads, schools, hospitals and all the rest. To get the economy moving, we have to get the capital injection, particularly into the economic infrastructure. I entirely accept that there has to be a cash stream to service this, and the Minister once again mentioned the income tax proposals. As he knows, I welcome those and want to see them used. Are the Welsh Government constrained to income tax? There are other sources of taxation revenue, and there may be other sources of revenue as well. For example, in the next four or five years, the M4 tolls will be reconsidered and renewed. Is it not possible for the Welsh Government to use sources other than income tax to service the capital borrowing that they need? Can the Minister give any indication on that?
Lord Newby
As the noble Lord knows, the Bill is permissive in terms of additional taxes being established in Wales. My working assumption would be that if such new taxes were devolved or established, there would be a commensurate rise in borrowing powers. However, many of the taxes that people sometimes talk about do not necessarily raise a huge amount of money. Therefore even if you got a commensurate increase in borrowing it would not necessarily be a transformative amount on its own. However, I think that the principle is very clear. The Bill is permissive in terms of additional tax powers for the Assembly and, as it were, borrowing follows income.
Lord Wigley
I am glad that the Minister has emphasised that there is a basket of possible sources of revenue which would justify the capital that is needed. No doubt the Welsh Government will need to use the capital responsibly as it is for capital investment projects and not just to subsidise revenue budgets that are running at a loss. As far as that is concerned we are making progress. Can I just pick him up on the comments that he made about Northern Ireland when he said that the situation there is different. Of course the situation is different from Wales. I understand the historic difference and all the rest but in economic terms the challenges in Wales are just as great as those in Northern Ireland—they are in terms of the income per head, the GDA. Is the Minister aware that the GDA per head in areas such as Kensington and Chelsea is 10 times the GDA per head in the Gwent valleys and Anglesey? That is the scale of the discrepancy. We need to regenerate the economy, otherwise we are always going to be going down this spiral. We need the tools to do the job and quite clearly this will be a responsibility of the Welsh Government. All I would press for is for him to be as sympathetic to the economic needs of Wales as he clearly is to the economic needs of Northern Ireland. I beg leave to withdraw the amendment.
Lord Thomas of Gresford
I had misunderstood the basis of that committee, so I withdraw what I said first of all—that the last Labour Government addressed the Barnett formula. They clearly did not and it was a committee of this House, chaired by the noble Lord, Lord Richard, which did address it. The Government then ignored its findings. That is what I am told. I am told that there was a second committee but I am not particularly aware of it.
Where the problem really arises is that the Barnett formula is used as an excuse for the failures of the Welsh Labour Government in the fields of education and other devolved areas. They say, “We don’t get enough money”. As soon as I read of the vows given to the Scottish people by the three leaders, it seemed to me that at that moment the concept of having a formula that could apply equally in Scotland and Wales was dead because one surely has to decouple whatever funding formula eventually applies in Scotland when it exercises its powers from whatever formula happens in Wales when it exercises different and more limited powers. Accordingly, we need something specific to Wales through looking at the needs of its people as opposed simply to dividing money on a population basis.
The whole point of the social contract is that taxes are paid—not to be divided equally per head of population but so that services according to need can be paid for by the government of the day. That is the principle that must be the basis of the way in which Wales is funded in the future.
The Parliamentary Under-Secretary of State, Wales Office (Baroness Randerson) (LD)
My Lords, as ever, a debate on the Barnett formula is interesting but I am afraid that from my perspective it is rather too well worn territory.
I start by responding to the comments of the noble Lord, Lord Wigley, in relation to the £300 million to which he referred as the funding gap identified in the Holtham report. The gap has indeed come down in size and it would be very useful to determine the current shortfall. It is particularly important to point out that when the agreement was made between Jane Hutt and the Chief Secretary to the Treasury in an exchange of letters in October 2012, it acknowledged that convergence had ceased to take place, that there was, in fact, divergence and that Welsh funding was within the region of what the Holtham report regarded as fair funding. Therefore, at the moment, there is not a major issue of unfair funding. There may be issues at the edge, but it is not a big problem at the moment, as was acknowledged by the Welsh Government. Of course, that does not solve the problem, because convergence is predicted to start again around 2018. That issue has to be addressed if the gap is not going to widen again. I agree that there is a need to deal with this in the scope of the devolution discussions because it distorts the political debate in Wales. Funding is quite simply blamed for every policy failure. Even if we take the figure of £300 million, in a budget of £15 billion, £300 million is a significant amount of money, but it is not something that could possibly be blamed for every health failure, every education failure and every social problem within Wales. It is not so massive that it is fundamental to the problems that we all acknowledge are faced in Welsh society.
The noble Lord, Lord Anderson, is absolutely right in saying that it is the funding issue that the public are interested in. They do not worry too much in general about devolution, but they are interested in fair funding. The noble Lord, Lord Anderson, referred to the Severn tolls. I look forward to our debates on that in the next Government. Whoever wins the election, there will be debates on the Severn tolls because, of course, the end of that franchise is due in the mid-years of the next Government.
I strongly welcome the acknowledgment by the noble Lord, Lord Richard, that the Labour Party did not deal with the problems of Barnett. Indeed, the Labour Party refused for 13 years to agree publicly that there was any problem with the Barnett formula and it was in those years that convergence was taking place and the funding gap was really growing. It would certainly be the case that Wales would have fewer problems now if that had not been neglected. It is my view, and the Secretary of State certainly agrees, that it is time to look at the funding formula for Wales, and it is my view that one could do this even with the constraints of the agreement that Scotland will retain its current funding. One can look at Wales on a unilateral basis.
The noble Baroness, Lady Morgan, asked me to clarify the Prime Minister’s statement. He simply restated the oft-stated government position on funding in Wales, which is that because the problem of the deficit is our priority, no additional funding can be provided within this Government. That is in no way at odds with the Secretary of State saying that the long-term funding position of Wales needs to be looked at. There is an immediate situation and a long-term situation. The noble Baroness also asked for clarification on the impact of having income tax powers on the block grant and so on and referred to the index deduction method. The purpose of the index deduction method was to protect Wales from big swings in the economy as a whole and the sort of big swings that are due to UK government policy. However, I point out yet again that the Welsh Government have acknowledged that funding is fair at this point, within the region of fairness. Given that the Welsh Government acknowledged that we were in that sort of territory two years ago, it would be a good idea to go for a referendum on income tax powers as soon as possible to give the Welsh Government the maximum opportunities to use the taxation system to increase prosperity in Wales.
I shall very briefly look at the technical details of the amendments. Amendment 56 would require the Secretary of State to lay an independent report on options to replace the Barnett formula. Amendments 59 and 60 would seek to make the devolution of an element of income tax conditional on dealing with the funding formula. They specifically say that income tax can devolve only when the Welsh Government confirm that they are content with how funds are allocated. The progress that this Government have made on working towards fair funding, with the significant exchange of letters in 2012 between the Ministers in the two Governments, can be built on. I urge the noble Lord to withdraw his amendment.
Lord Richard
Can I be perfectly clear as to what the Minister has just said? As I understand it, she is saying that the fact that a vow has been given to Scotland that the Barnett formula should continue to apply there is no bar to the funding arrangements for Wales being reconsidered, and that it is the Government’s position that those funding arrangements for Wales will be reconsidered.
Baroness Randerson
I am saying that I do not believe that it is impossible to overcome the issue of the commitments made to Scotland and that you can honour those commitments and look separately and independently at the funding for Wales. Northern Ireland is also funded via the Barnett formula but from time to time gets additional funding for specific things. I cannot see why Wales cannot be treated, as Northern Ireland is, as a separate thing, as a matter of principle. Having said that, I am simply arguing the case—it is not government policy to do that. I am firmly saying that the Secretary of State for Wales has made it absolutely clear that it is his view that fair funding needs to be looked at in the context of the devolution settlement and the discussions that are going on about it. In that case, I am confident that those discussions will encompass the issue of funding, although I cannot predict the outcome.
Lord Richard
So that is government policy—what the Secretary of State said?
Baroness Randerson
Yes, that is policy, announced by the Secretary of State for Wales.
Lord Wigley
And of course, every word uttered from the Dispatch Box is government policy, as well. What I am trying to reconcile from the Minister’s response are the comments that things are more or less right now and that there is a need to look at fair funding. There is something a little bit contradictory about that. They are not absolutely right now, or at least we do not know that they are. That is the argument in favour of having more investigation.
The Holtham methodology may or may not have been right, though it has generally been accepted that it was. That indicates there has been a closure of the gap, though there probably is still a gap, of maybe £200 million rather than £300 million to £400 million. We do not know. Taking the comments that the Minister made a moment ago in response to the noble Lord, Lord Richard, if there is a gap of £200 million which could be put right, it would bring us on to roughly what a needs-based formula would generate.
The assumption is that Holtham was looking for a communality of standards in public services in Wales, as might be expected in England. Whether it be £300 million or £400 million as it was, or £200 million as it is now, if that could happen with a one-off adjustment and by bringing in a floor and making sure that the changes—convergence or divergence—were on percentage rather than absolute terms, so that we are not missing out, we would at least have a system that would be sort of needs-based. It is not the radical needs-based formula that a lot of us are looking for, where you have determinants that generate entitlement to certain funding, but at least it would meet the Holtham assessment of the needs as he saw them at that point in time.
Baroness Morgan of Ely
My Lords, we have to understand what the Scotland referendum was really about. It was a cry from the people of Scotland who feel cut out of the political process. Of course, that has had an impact not just in Scotland because of the commitments that were made in the last days of the referendum, but it is having and will have an impact across the whole of the United Kingdom. It makes sense for us to place the discussion within a broader context.
We are not in favour of stopping this Bill in its tracks. A lot is in the Bill and there is a lot more to come with Silk 2. It is important that the Welsh devolution process does not stop because of a huge transformation in Scotland. However, it is worth saying that we have to think in a broader way about the constitutional arrangements of our country. What happens in Scotland is having an impact in Wales. Those commitments on Barnett are already having an impact in Wales and there is a problem if they continue to do so. We need to get the balance right and we need to have a broader discussion.
For two years the First Minister of Wales has been calling for a constitutional convention to be established where a discussion about the power relationship between Wales and the rest of the United Kingdom would be undertaken. Who would be on such a constitutional convention? Obviously there would have to be representatives from the devolved Administrations and local government representatives from England. But, crucially, we would also want to see representatives of civil society and the general public. The disconnection between politicians and the public absolutely has to be halted. We would need to work to a clear timetable. The last thing we want is a discussion that goes on for years and years without end. We would also need to think clearly about what the convention would do. We would have to define the core elements of a new constitution that would enshrine a programme of fundamental reform for the UK. The new settlement, while recognising the different circumstances of the four nations, must be based on common principles that reflect the multinational and multi-union character of our United Kingdom.
The referendum in Scotland was a wake-up call for all members of the political class. We must acknowledge the depth of disillusionment in this country and the distance that people feel from the political process. Through establishing a convention, we would have a one-off opportunity fundamentally to reform the system of governance of this country. A constitutional convention is needed and it is well overdue. We recognise, however, that the Wales Bill is not the ideal mechanism for introducing the idea of a constitutional convention, but it seems rather odd for us to be ploughing on with constitutional changes as if nothing has happened. As Carwyn Jones, the First Minister of Wales, has said, the current constitutional settlement is dead. We recognise the need and the demand for more devolution in Wales, but we need to set the whole within the broader UK framework. To proceed in isolation from the wider discussion would be to miss the opportunity to elaborate on a new vision and a constitution for this country, a constitution that would involve, include and invigorate the population so that people would feel as if they had ownership of their own country.
Baroness Randerson
My Lords, the noble Lord, Lord Anderson, has pointed out the flaws in the devolution settlement for Wales. I say to him that I have campaigned for devolution for virtually the whole of my adult life. I have faced downright nasty opposition at worst and a lack of enthusiasm and total incomprehension at best. Long ago, I came to the conclusion that the overwhelming majority of people simply were not interested. It is a really exciting time for me because devolution is suddenly fashionable and a lot more people understand what it is about. Noble Lords will not be surprised, therefore, that I am keen to seize the moment; I am keen to get this Bill through as a basis on which we can take the next step. The Bill is a very important step forward in devolution in its own right.
Yes, there is a great deal to be said for a constitutional convention. The noble Baroness, Lady Morgan, said that the First Minister has been calling for one for two years. My party has been calling for one for 40 years. On that basis, I would argue that one should not place too much faith in the immediate production of an outcome of the concept. I agree with the noble Lord, Lord Howarth, when he says that this is something that we need to think about widely and in the long term. The message from my noble friend Lord Thomas and the noble Lord, Lord Howarth, is that, despite the great advantages of a constitutional convention, we have to get on with it now.
To the noble Lord, Lord Anderson, I say that if I accepted his amendments, it would ensure that Parts 1 to 3 of the Wales Act could be commenced only by the Assembly on a day of its choosing, but the Assembly could not decide to commence the provisions until the recommendations of a constitutional convention had been voted on by both Houses of Parliament or until the Welsh Government had implemented the Williams report. I would say that would mean a minimum of five years. My noble friend Lord Bourne, being a member of the Williams commission, assures me that that should be implemented a lot sooner, but we all know that local government reform in Wales does not prove easy. Therefore, I am not betting my political reputation on the timescale for either of those events.
The last few months have been momentous for our United Kingdom. It is now time for us to come together and move forward, but we also accept that it is not “business as usual”. The referendum in Scotland has led to a demand for reform across the UK. We now have a chance—a great opportunity—to change the way we are governed, and change it for the better. The Government have made it clear that we want a debate on how to make the United Kingdom work for all its nations. We have introduced a new devolution committee, chaired by the Leader of the Commons, to consider how we can best do this. The Wales Office is fully represented on that committee and my right honourable friend the Secretary of State for Wales is also having meetings across the parties to pursue this agenda.
We have as a Government already committed to devolving further powers to Scotland as a result of the referendum, and we will deliver on that commitment. England, Wales and Northern Ireland are now on the agenda. This is the time to put our foot on the pedal of devolution. I regret that the noble Lord’s amendments would apply the handbrake. Wales needs the powers this Bill provides now, not in several years’ time, which would be the case if the noble Lord’s amendments were accepted.
The noble Lord’s amendments would also enable the Assembly to decide the commencement of the provisions in the Bill, subject to his other conditions being met. I regret to say that they are very imprecise conditions and it would be difficult to know when they are satisfied. We will of course—this is a commitment—work with the Welsh Government and the Assembly on the commencement and implementation of the provisions in a Wales Act.
The Bill is about creating truly accountable devolved government for Wales. It is about providing the Welsh Government with the levers to grow the economy in Wales and ensuring clarity for Welsh voters when they go to vote in 2016. All these things would be prevented if commencement of the Bill was delayed in any way, including through the amendments put forward by the noble Lord. I therefore respectfully ask him to withdraw his amendment.
Lord Anderson of Swansea
My Lords, the Minister vastly overstates her case by claiming that this Bill would lead to a truly accountable Welsh Government. If we look at this objectively, it is pretty small beer. It is a Wales (Miscellaneous Provisions) Bill. It was framed in a very different context from that which we have now, after the Scottish referendum. I assure her that the purpose of these two amendments—
Baroness Randerson
Is the noble Lord saying that a Bill that provides fiscal accountability for the very first time for the Welsh Assembly and Welsh Government is not a big step forward? Is he saying that the provision of borrowing powers for the first time for them is not also a big step forward? Does he not accept that the devolution settlement has been sadly lacking up to now because there has not been that proper accountability and that this is a vital development?
Lord Anderson of Swansea
I hear what the Minister says about accountability but given the relatively small changes and the small amount of money involved in these taxes which are to be transferred, I doubt that one can properly say that there is real accountability. There is considerable scepticism in the Assembly in relation to the tax powers, which may be stillborn in any event. Yes, I accept that borrowing powers are a major innovation in the Bill but these borrowing powers, albeit in diluted form, are available to local authorities in Wales in any event so why not to the National Assembly?
On the general point she made, my purpose in having this formula of,
“may not come into force until”,
was clearly only to provoke a debate. It was not intended as a freeze or delaying device. I accept that after the result of the Scottish referendum we cannot return to business as usual. Finally, I also accept the point made by my noble friend Lord Howarth that there are great problems in the concept of a constitutional convention. Even if we have the so-called constitutional experts, no doubt there will be minority opinions—as there have been on similar issues. It may be extremely difficult to find—as we saw in respect of reform of your Lordships’ House—any reasonable consensus following that.
Having provoked the debate that I set out to provoke by using the formula that, I say again, was not intended to freeze in any way the progress of the Wales (Miscellaneous Provisions) Bill, I will withdraw the amendment.
Baroness Randerson