Wales Bill

Lord Newby Excerpts

Wednesday 15th October 2014 Lords Chamber

[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.