Wales: Devolution

Lord Anderson of Swansea Excerpts

Thursday 19th July 2012 Lords Chamber

[Lord Anderson of Swansea]

My Lords, I congratulate the noble Baroness, Lady Randerson, on choosing this debate. For me, the real problem is channelling more resources to Wales, and the issues of accountability and the irresponsibility which comes from spending without actually raising the taxes are secondary. The issue of more resources for Wales is important and bristles with problems, so I am sad to see the lack of interest in Wales in the Silk commission. For example, the first public event in Wales, in Swansea in March, was attended by but 11 people.

I am not surprised at the findings of the ICM poll, published this month, in which those polled agreed that, in principle, greater tax powers should be given to Wales. Sadly—or perhaps surprisingly—the most enthusiasm for the transfer of tax powers came from those who do not pay taxes. More than 76% of the unemployed thought that there should be a transfer of tax powers, and Paul Silk himself commented that it is clear from the poll that there is a limited understanding of taxation issues among the public as a whole. This begs the question: how much weight we should then attach to the findings of that poll? The most important finding is on page 13. It states that,

“the public subscribe to the view that in an age of austerity, public spending in Wales must not exceed revenue raised in Wales ... the Welsh public would prefer fiscal transfers from the rest of the UK than higher taxes in Wales”.

Surprise, surprise. This sounds very sensible indeed.

I should like to raise one or two preliminary considerations, if I may. In a unitary system of government, and a small country, the problems of differential taxation are great, and the situation would be made easier in a federal system. There is, for example, the frequently raised problem of air passenger duty. How would it help Cardiff Airport if this were transferred? It would be taken into consideration in the block grant. If the air passenger duty were higher in Wales than England, Wales would lose business. If it were lower, let us imagine the cries from Bristol because of the incentive for people to go to Cardiff. Surely the problem is poor access to Cardiff Airport. Therefore, I welcome the proposed new railway station there, which was announced this week.

Our concern should really be justice within the UK; hence the debate on the Barnett formula. There is an overwhelming case for the distribution of resources to be based on need but, realistically, that will not happen before the Scottish referendum. What do we know about need within the UK? Fascinating figures on regional unemployment were published by the European Union on 4 July. There were two important conclusions. The first was that some regions in England are worse off than Wales; and Scotland is better placed than Wales. So we should beware of interregional conflict. In 2011, for example, the unemployment rate in Wales was 8.6%; in Scotland, it was 7.9%; in the West Midlands, it was 9%; in Yorkshire and Humberside, it was 9.4%; and in the north-east, it was 10.8%.

The second conclusion from these regional statistics relate to the divisions within Wales and, indeed, the widening gap. For example, in west Wales and the valleys the unemployment rate in 2010 was 9.2%, but in 2011 it was 9.9%. In east Wales, however, the figure decreased from 7.8% to 6.5%. Surely this widening gap should be addressed. It should be a major concern of the Welsh Assembly Government and of this House. In passing, I should say that I welcome this week’s announcement of the extension of the electrification of rail as far as Swansea and the valleys. Without that, the regional gap would be further widened.

That obviously leads to a debate about the definition of devolution. Although that debate is not for today, one still might ask why devolution should stop at the National Assembly level. Proper devolution should be extended to the lowest practical tier of government—in other words, subsidiarity. Currently, our local authorities are weakened. I therefore welcome the debate about city regions promoted by the task force report published on 11 July.

On taxation generally, I am not surprised that the Welsh Affairs Committee in the other place, in its January report, reached no conclusions. We should recognise the danger of Wales losing out in interregional competition and falling into the trap of seeking differences for their own sake, such as the variation of income tax or the so-called nudge taxes, such as the 5p we pay in Welsh supermarkets for plastic bags. But the more successful these nudge taxes are in altering behaviour, the less revenue is raised. Thus it is done for social and not revenue reasons.

If we follow the Holtham recommendations, and the Welsh Assembly Government were to introduce new taxes on goods or activities that are currently not taxed at the UK level, it could be a serious disincentive to inward investment at a time of increased competition. Obviously, much of the debate centres on devolving borrowing powers, which I am certainly not against in principle. The trouble with borrowing, however, is that it has to be repaid. One sees the problem, for example, with the PFI scheme and the property bubbles in Ireland and Spain. Clear limits have to be set by the UK Treasury, as the noble Baroness readily acknowledges, otherwise the problem can get out of control, as happened in Spain with the degree of devolution of borrowing powers to the autonomia and the difficulty of the Spanish federal Government in dealing with their fiscal crisis.

Where is the domestic revenue stream in Wales to repay? How can we provide flexibility in the context of block grant variations? To what extent will the problem be met at the UK level by the new government guarantee scheme announced this week to underwrite private sector investment? Perhaps the Minister could say how relevant this scheme is to Wales, and what effect it might have on the current debate.

The starting point of the debate is surely that in Wales we are relatively poor, in the UK context. There is a shortfall between the UK taxes raised in Wales and the UK public spending in Wales of around £15 billion, roughly equal to the total Welsh Government expenditure. Taxes raised in Wales would be raised from a weaker tax base, as Wales generates 70% of the UK average GVA. Therefore, a penny on income tax raises 30% less in Wales, and Wales would lose if, for instance, 10% of income tax were raised here.

If some of the tax raised were taken off the block grant, there would be a worse outcome for us than under the Barnett formula. The devolved borrowing powers could therefore be a distraction from the primary question of how much capital investment we need. What is our fair share of UK capital investment, and where is the continuous income stream to pay for the borrowing? Perhaps we could use the Severn Bridge tolls? In passing, I must say that the Severn Bridge toll is a major tax on Wales, and a major disincentive for inward investment. Perhaps the best way of helping Wales at the moment—certainly south Wales—would be to abolish the toll, or at least make it cover maintenance costs only.

I agree with Geraint Davies, my own MP for Swansea West, in his submission to Silk, that there may be a case for tinkering at the edges, or for experiments such as our plastic bag tax, but that to concentrate on these may well divert attention from the main issue; that is, that our interests are best served not by flirting with ingenious new tax devices, but by claiming more and ensuring that Wales obtains a fair share of the national cake based on our needs, which certainly does not happen currently under the Barnett formula.

--- Later in debate ---

[Lord Wallace of Tankerness]

Almost on cue, I was about to turn to a number of the specific points that noble Lords raised in the course of this debate. What was described by at least one noble Lord as the elephant in the room is the Barnett formula. This, of course, is not part of the remit of the Silk commission, nor of the Calman commission.

I know it will disappoint noble Lords, but the Government made it very clear in the coalition agreement that the priority is to stabilise the public finances and that no replacement to the Barnett formula will be considered until the nation’s finances are back on track. However, I could not fail to hear the comments of everyone who contributed to the debate, I think without exception. Someone pointed out, although admittedly not in the context of what appears in the coalition agreement, that the Secretary of State for Wales had said that the Barnett formula was coming to the end of its life. However, I reiterate that the Government’s position is that the priority must be the stabilisation of the public finances.

[Lord Anderson of Swansea]

The Minister has said that the Barnett formula will be reconsidered only when the economy is back on track. Recently, the Prime Minister said that austerity will last until 2020. Does that mean there will be no substantial revision of the manifest injustices resulting from the formula until that time?

[Lord Wallace of Tankerness]

My Lords, I have described what was said in the coalition agreement for this Parliament. I do not think that anyone would be wise enough to predict the policy of any Administration, of whatever hue, in a subsequent Parliament. My noble friends Lord Forsyth and Lord Roberts of Llandudno were right to point out that the previous Administration did not address this either. Indeed, in their response to your Lordships’ Select Committee report, they stated that the Barnett formula:

“has a number of strengths”.