Wales: Devolution

Lord Forsyth of Drumlean Excerpts

Thursday 19th July 2012 Lords Chamber

[Lord Howarth of Newport]

My Lords, I welcomed the establishment of the Silk commission, but the terms of reference given to it by the Secretary of State are in some respects ill judged. The commission is tasked to consider issues of accountability but not of fairness. The block grant and the Barnett formula, along with the system and structure of democratic representation in Wales, are off limits. The commission is required to consider fiscal matters before it considers constitutional matters when the nature of political and legislative devolution should, I think, determine the appropriate fiscal devolution.

The Barnett formula provides nearly 50% of public expenditure resources in Wales. It is comprehensively discredited. This was stressed in the Welsh Government’s response to the Silk commission consultation, and a while ago a Select Committee of your Lordships’ House provided a comprehensive and devastating analysis of the inadequacies of the Barnett formula. The funding provided by the Treasury to Wales is computed on the basis of changes to spending in England in policy areas that are devolved to Wales and the extent to which they are devolved to Wales, and on the size of the population relative to that of England. So resources provided to Wales follow political decisions and events that occur in England. Notoriously, the Barnett formula is not a needs-based formula, in contrast to the principles on which resources are allocated to local government, social security spending and health spending. The Barnett formula is bizarre and unjust, and it makes a mockery of the principle of devolution. The effect of per capita funding under the formula has been what the noble Baroness referred to as the Barnett squeeze. Wales receives less than if it were an English region. GDP per capita in Wales in 2007 was 77% of the UK average, but Wales received only 8% above the UK average. Holtham, which examined these matters pretty definitively, found that Wales had relative need of 115 per capita on a scale in which England was 100. Wales is poorer on all the significant indices: unemployment, child poverty, social security claims, disability, housing, education, health and mortality.

Poor people in Wales, including unemployed under-25 year-olds in the Alway and Ringland estates in Newport, whom the Prime Minister thinks ought, in due course, to cease to have housing benefit, are subsiding Scots living in wealthy suburbs. Holtham told us that Wales, which has less than 6% of the population of England, is short-changed by a figure in the order of £300 million. I cannot overstate the importance of this issue to Wales. There is no statutory basis for the Barnett formula, which is opaque in its process and has no independent audit—it is a disgrace.

The Government have hitherto set their face against change to the Barnett formula. Why? For reasons of political cowardice? The Conservative Party had nothing to lose in 2010, when it was set on finding every means possible to reduce the deficit, by tackling the problem of the overpayment of some £4 billion to £5 billion to Scotland under the Barnett formula, but mysteriously it did not do so. Was it because Liberal Democrats representing Scottish constituencies held it to ransom or is it simply a product of intellectual indolence in the Treasury?

[Lord Forsyth of Drumlean]

I agree with almost everything the noble Lord says, but in fairness he ought to deal with the point that the Select Committee report was to the previous Labour Government, who were equally unwilling to address this issue.

[Lord Howarth of Newport]

The noble Lord has, as so often, a telling point. I do not disagree with him at all. I am pleased that discussions are now taking place between the Government of the United Kingdom and the Government of Wales. I hope that they will be fruitful, because for Wales reform of the Barnett formula is more important and urgent than any fiscal devolution. At a very minimum, as the noble Baroness said, there should be a floor in the block grant so that it does not fall below the level that would be provided under the English needs formulae. Of course, we need a properly developed needs-based formula for the block grant.

The coalition is obsessed with cutting public expenditure, deflating an already depressed economy. These issues are hugely important for Wales.

It is right in principle that if legislative powers are devolved, then tax-raising powers ought also to be devolved, including a power to vary levels of taxation. This satisfies the principle of accountability and will make for more responsibility and better value for money. It is appropriate that a Government elected by the people of Wales should have discretion to use resources as they judge appropriate for the benefit of the people of Wales. As the noble Lord, Lord Forsyth, suggested too, these considerations ought to have been brought to bear at the very outset of the process of devolution.

What, however, would happen in practice if tax-raising powers were devolved? Wales needs more public expenditure or, at any rate, a less drastic reduction in public expenditure. It needs that if it is ultimately to be able to reduce the disproportionate size of the public sector in Wales. It needs to be able to invest in education and infrastructure and in a strategy to support the development of new leading private enterprise sectors in Wales. What Wales does not need is more and extra taxes laid upon people and businesses. I do not think anybody in Wales ought to nurse the illusion that the block grant would rise to compensate for tax cuts that might be introduced under fiscal devolution in Wales.

So, which taxes ought to be considered? Income tax is perhaps the prime candidate, but the power to raise or lower income tax by 3p in the pound would be a poisoned chalice. The Government of Wales have not sought that power. No doubt they would not refuse it if it were thrust upon them, but would they use it? I think it no more likely that the Government of Wales would than the Government of Scotland.

Then there is corporation tax, but there are problems defining Welsh companies. Holtham found that the only realistic way in which one might be able to devolve powers in relation to corporation tax in Wales was by reference to the number of people employed by Welsh businesses, but we do not want to create an incentive for Welsh employers to reduce the number of people that they employ. There is a broader principle. Competition between the territories of the United Kingdom to offer a lower rate of corporation tax might well not be in the interests of the United Kingdom as a whole.

I will not run over the whole litany of alternative taxes that noble Lords have already mentioned, but if there is to be fiscal devolution then choices have to be made from among the options of business rates, council tax on second homes, stamp duty land tax, capital gains tax on land and property, landfill, aggregates levy, air passenger duty, and so forth. If we examine the scope to use such devolved powers, we again run up against the problem that tax increases would be damaging to business and prosperity in Wales. The Welsh Local Government Association is right to insist that there needs to be a rigorous examination of the merits of devolving any one of these.

Borrowing powers seems a much simpler issue, whether for capital or to offset the volatility of revenue that would be consequent on Wales setting its own tax levels, but this is also excluded from the terms of reference of Silk. It was not, however, excluded from Silk’s consultation, nor from the responses. It is more attractive, but would Welsh Government bonds be underwritten by the Government of the United Kingdom? Is it realistic to suppose that there can be Keynesianism in one small country called Wales? How can fiscal devolution be a reality within a meaningful macroeconomic strategy for the United Kingdom?

The terms of reference of the Silk commission are very restricted on constitutional matters. I simply say that the constitutional matter that is most pressing and important for the people of Wales is the representation of the people of Wales in the Parliament of the United Kingdom. The coalition has legislated to reduce the number of Westminster constituencies for Wales by 25%. The voice and the votes of the people of Wales are to be very substantially reduced, as is the quality of the representation of the people of Wales because of the absurd exigencies of the redrawing of the boundaries. Therefore, I hope that Welsh Liberal Democrat MPs will not hesitate to vote down the proposals to reduce the number of constituencies.

I hope also that people in Wales will consider the issue of an elected second Chamber because if there are to be Senators for one vast Welsh constituency, wandering round undermining the work of Assembly Members and Welsh Members of Parliament without any accountability, and they are to be Members of a second Chamber that is going to be much more assertive in fiscal matters, then they will find that this reform is travelling in the very opposite direction of the devolution that they want.

The proper considerations are how to improve the accountability of the Welsh Government; how to provide funding commensurate with the responsibilities that are devolved, having first defined those; how to ensure a fairness of distribution of money across the United Kingdom; and how to strengthen, not weaken, the coherence of representative government across the United Kingdom. Is there any resting point for devolution? These are issues for everyone, not just for the people of Wales.

--- Later in debate ---

[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”.

[Lord Forsyth of Drumlean]

There is unanimity throughout this House that Barnett has to be changed. Will the Minister explain the logic of the coalition agreement? What on earth has dealing with Barnett got to do with dealing with the deficit? Surely the Government are capable of doing more than one thing at the same time. I cannot see the linkage between addressing the Barnett formula and dealing with the deficit. The Barnett formula, if it is changed, is simply about the distribution of existing resources. It does not affect the deficit in any way. When the coalition agreement was drafted, what on earth was in the minds of the four people who did it?

[Lord Wallace of Tankerness]

My Lords, I am not a mind reader. It does not necessarily follow that it is a zero-sum game, as my noble friend would consider. I have heard people make this case before and no one has suggested that it should be a “beggar my neighbour” approach, which could actually lead to an increase in expenditure.

In a debate on a commission that does not have the Barnett formula in its remit, the Government’s position is not going to change. I have indicated the Government’s position, but there are intergovernmental talks, which have been referred to, and the Government indicated that they would engage in them. I was asked a number of other questions, initially raised by my noble friend Lady Randerson. The talks between the United Kingdom Government and the Welsh Government are looking at all aspects of the Holtham reports, including the extent of convergence between the trends of devolved funding and equivalent funding for England, and how need might be best measured. The commission is not considering, as I made clear, the fundamental overhaul of the Barnett formula. However, as I indicated, it is looking at these issues, such as convergence—although at the present time it is divergence rather than convergence—and how the need might best be measured.

My noble friends Lord Maclennan and Lady Randerson asked about borrowing and the state of discussions, as did the noble Baroness, Lady Gale. The Silk commission is looking at the case for borrowing powers for Welsh Ministers as part of its consideration in part 1. The bilateral talks between the United Kingdom and Welsh Governments are looking at how the latter might best use their existing powers—I hope that this refers to the point raised by the noble Lord, Lord Wigley—which were inherited by Welsh Ministers on the abolition of the Welsh Development Agency. They are, admittedly, relatively limited, but this is part of the ongoing discussion between the two Governments. Indeed, my right honourable friends the Chief Secretary to the Treasury and the Secretary of State for Wales have each met Jane Hutt, the Welsh Finance Minister, in the past fortnight, so these talks are very much alive and active.

The noble Lord, Lord Anderson, asked how the recent initiative to encourage the banks to lend more, announced by the Government this week, would impact on Wales. The funding for lending scheme is designed to boost lending in the real economy, making mortgages and loans cheaper and more easily available to families and businesses right across the United Kingdom. Wales will be as entitled to apply and take advantage of that as any other part of the country. The scheme opens on 1 August for 18 months.

Another important point, which was raised by noble friend Lord Maclennan and then spoken to by the noble Lord, Lord Rowe-Beddoe, is that there have been a number of different commissions. They asked whether there was a possibility of taking a more strategic look. Very recently, the Prime Minister indicated that there will be a need for an open, involved and comprehensive conversation about what kind of union we want to see, and—almost 15 years after the process of devolution started in the United Kingdom—that we should consider the best way of having such a conversation. However, the Prime Minister made it clear that that should await the outcome of the Scottish referendum, which is likely to be in 2013-14. That view was reflected in at least one speech in your Lordships’ House today. We will certainly be arguing for the integrity of the United Kingdom and for Scotland to remain part of it. That is the first and foremost objective and focus of not just the Government but the Labour Party in Scotland and across the United Kingdom. The point is one that I suspect will feature in more of our debates in the weeks and months to come.

In conclusion, I indicate that in introducing the debate my noble friend asked how we might take forward the comments made in it. I certainly undertake to write to Paul Silk, drawing the commission’s attention to the fact that the debate has taken place and to the comments that have been made. It is also pertinent to say that not only to the commission but within government. Points have been made in this debate on which I am sure some of my colleagues in government will wish to reflect.