Empowerment and Responsibility: Financial Powers to Strengthen Wales

Debate between Lord Brougham and Vaux and Baroness Randerson

Tuesday 11th December 2012 Grand Committee

[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.