Wales Bill

Baroness Morgan of Ely 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.

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[Lord Howarth of Newport]

My Lords, it is enough to make one weep that, in the run-up to the Scottish referendum, political leaders felt themselves driven by expediency to pledge to retain the Barnett formula. As my noble friend Lord Richard explained to the Committee, it is one of the great injustices and malfunctions of government in this country over the past 40 years and a lamentable lack of statesmanship has prevented it being reformed. There was a great opportunity in 2010. The Conservatives had nothing to lose in Scotland. With universal recognition of the need for austerity, there was a political opportunity to deal with it then. That has been made infinitely harder now by the rash and unprincipled pledges that have recently been made.

The report of the committee of my noble friend Lord Richard is unanswerable. We debated it in your Lordships’ House and there was not a scintilla of a persuasive argument to defend the status quo. Indeed, I do not recollect anybody even trying to defend it. The pledges that have been made will come back to bite their authors because I cannot foresee how we can make progress towards new constitutional arrangements in this country following the referendum in Scotland and following the pledges that have been made in respect of devolution so long as there is such a fundamental inequity in public financing. I cannot see how there can be a fair and acceptable new set of arrangements while the Barnett formula is retained.

The noble Lord, Lord Wigley, spoke extremely well and constructively with his practical suggestions as to how we might try to develop a sort of fallback position. My noble friend Lord Richard suggested that if the Scots are to retain their advantage, it may none the less be possible to find ways at least to reduce the inequity for Wales. However, it seems to me that that path also bristles with political difficulties because, if public spending is a zero-sum game, if there is to be more for Wales, then it has to come from somewhere and if the Scots are allowed to retain their present advantages, then it will come from Northern Ireland or, more likely, from England. However, there is, rather belatedly, a growing recognition in the regions of England that the Barnett formula is a lousy deal for the English. I cannot see that there is a path towards remedying at least a part of the injustice from which the people of Wales suffer if it is to be done directly at the expense of the people of England. Hasty pledges have placed us all in immense difficulty but I look forward to hearing from the Minister or the noble Lord, Lord Bourne, who may be able to pluck a solution out of the hat, although I somehow doubt it.

[Baroness Morgan of Ely]

Today, the First Minister called again for a new funding system that meets the public service requirements in Wales. He likened the Barnett formula to,

“fixing a hole in the roof with Blu Tack and cardboard”.

It is no secret that Wales does not do well out of the Barnett formula. However, we know, following the Scottish referendum, that that formula is not in danger of dying any time soon. Indeed, the Prime Minister made his sentiments on the issue quite clear last week, when he reiterated that he had no intention of reopening the debate on providing a fair funding mechanism for Wales. That seems very different from the position of the Secretary of State for Wales, who said yesterday that he is prepared to address the issue. It would be nice to hear which one of those statements is correct.

At present, the block grant provides 113% of the English level of spending on devolved services, while the Holtham report found that Wales’s relative needs were between 114% and 117%. The noble Lord, Lord Newby, has asked me to be more positive, so I will give it a good go. The good news is that an arrangement was put in place in October 2012 that established a process to review the relative funding of Wales to England in advance of every spending review. If it looked like convergence were happening—for example, if the level of funding between England and Wales looked like it was becoming more equal, despite Wales’s needs being greater, due to things such as ageing population and rurality—then the Government would discuss options to address the issue in a fair and affordable manner. That is the good news.

The problem is that there is no guarantee. It is purely up to the good will and subjective decision-making of the respective Ministers in Cardiff Bay and Westminster. The Labour Party has acknowledged that there is a specific funding problem in Wales and that we will address the issue when we are in office.

I am sorry, but I am afraid that I must return to my negatives. One of the problems with the income tax recommendations is that this issue is compounded by the problem of the devolution of income tax in Wales. It is clear from David Cameron’s insistence that Wales should just pick up that offer of income tax powers that he has not understood the link between underfunding in Wales and the method through which the block grant will be reduced in future, should Wales pick up the option of introducing the Welsh income tax. While it is worth re-emphasising that we agree with the principle of income tax devolution, it is also worth underlining the risks that Wales would be undertaking if we were to devolve income tax powers without changing the Barnett formula.

The idea is that, if the Government suggest that in the first year of operation 10 points of personal income tax receipts are yielded to Wales, then the equivalent amount will be deducted from the Welsh block grant. That cut is then adjusted proportionately in subsequent years. The Government have suggested that the indexed deduction method, as recommended by Gerry Holtham, is used as a method to determine what that proportional cut would be. The problem is that if the block grant fails to produce a fair level of funding relative to need at the outset, as every subsequent change will be based on that initial level of funding, any cut in grant in future, however it will be adjusted, will probably make matters worse as convergence happens.

On the one hand, we are saying that we need fiscal accountability in Wales. On the other hand, we need to ensure that before we set out on this path we start from a fair position. It is critical that a fair funding mechanism is established from the outset, otherwise that unfairness will be locked into the system for the long term.

I know that the Minister is intensely aware of this issue. She has her fingers all over it and has been discussing it for years. However, I ask her to reiterate what the Secretary of State said this week: that he is prepared to look at this issue.

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[Lord Howarth of Newport]

If my noble friend Lord Anderson’s Amendment 57 is passed it will be a very long time before the provisions of this Bill are brought into force. I am against that delay because I want the Welsh Government and the people of Wales represented by them to have the new borrowing powers that are built into the Bill. However, if there is to be a constitutional convention, I am in favour of it taking its time. In the field of constitutional reform, more haste means less speed, as we saw rather painfully in the attempt at reform of your Lordships’ House in this Parliament.

I also think that the constitutional commission, if there is to be one, should be very much at arm’s length from the political parties and the Westminster and Whitehall establishment. It will be important that the public should not suppose that this is any kind of stitch-up or a device for the existing establishment to protect its own interests. The public would want to see that members of the commission were deeply versed in constitutional theory and constitutional law, and that while they may have close affiliations and loyalties to the different nations and regions of this country, they were prepared to take, as far as they could, an objective view of the long-term interests of the United Kingdom.

It would also be essential that they should receive submissions from the public. Those submissions would be numerous and would take a very long time to consider. I am sure that if a committee of wise people formed on these principles were to set to work, they would perform a valuable task in clarifying the issues, educating us all and pointing the way forward. They would probably succeed in coming up with a blueprint for a new federal model of the United Kingdom. However, it is one thing to come up with a blueprint; it is quite another to implement it, and then politics would re-enter. I anticipate that the processes of constitutional change would then be, as has always been the case in this country, incremental, and they would be the better for that.

I cannot support my noble friend’s amendment, but as we reflect on what we might be seeking in a constitutional commission we should disentangle it from our continuing day-to-day requirements of legislation and politics. We should get on with enacting this Bill. We should get on with implementing it and think generously, spaciously and patiently about how to develop a future framework for the government of the United Kingdom.

[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.