Wales: Devolution

Lord Rowlands Excerpts

Thursday 19th July 2012 Lords Chamber

[Lord Rowlands]

My Lords, I had the privilege of serving on an earlier commission, the one chaired by the noble Lord, Lord Richard. The report that we produced paved the way, first of all, for the transfer of legislative competence and, secondly, for the full legislative powers that were then endorsed in a referendum. I am afraid that I disagree with the noble Baroness, Lady Randerson, on her strictures about the gradual processes by which we have pursued devolution. One significant and fundamental benefit has arisen from the way in which we have processed devolution, which is that we have begun to build consensus. The noble Lord, Lord Roberts of Llandudno, reminded us of just how fragile the referendum vote was. We were bitterly divided in Wales on the issue of devolution. The gradual nature of the approach that has been taken has therefore been very important in the process of building consensus. There is, now, a growing consensus around the devolution settlement.

I am also therefore grateful for the thoughtful way in which we are approaching the issue of fiscal devolution. Although I understand the point made by noble Lords that we should first of all decide on powers and then look at fiscal devolution, we have reached a rather constitutionally illogical position. We remember the great cry of the American colonies:

“No taxation without representation”.

We have representation without taxation. There are very few legislative bodies in the world that have full legislative power but do not have any form of tax powers. There is a compelling constitutional logic in place that some kind of tax power should accompany legislative power.

The questions that arise the moment that we say that are: what and how? The Holtham report, which is very useful, is based on some interesting principles and made some observations that we would be foolish to ignore. The first, which I will quote directly from paragraph 2.9 of the report, is that,

“tax devolution that leads to tax competition may undermine a tax base and lead to too-low levels of tax for the union as a whole”.

I cannot believe that any one of us wishes to produce an arrangement that would lead to that kind of consequence. The second issue—I was particularly struck by those passages in the Holtham report that deal with the relationship between the English and Welsh economies—is that the economy of Wales is highly integrated with that of England. I was startled by the figures that the report produced: 48% of the population of Wales lives within 25 miles of the border with England, while 90% of our population lives within 50 miles of that border. There is a corresponding, very large, population on the other side of the border—something like 30%. That is in very stark contrast to the situation around the border between England and Scotland. Our border overlap is some 30%; the English-Scottish overlap is 5%. When one says that one does not want asymmetry but conformity or some sort of symmetry, one has to recognise the very different arrangements and situations that apply. Clearly, if one embarked on some tax variations, that border issue would become extremely important. We have therefore to be very careful in the way in which we handle that situation.

Nevertheless, Holtham concluded that,

“small differences in basic rates of income tax (up to around three pence) … could be sustained … without being likely to induce significant migration or changes to labour supply”.

I have, however, a different niggling question about income tax-varying powers. It is not about migration; it is about the impact on communities where incomes are below the national average, which was certainly the case with those that I represented. What would be the effect not only on families but on communities’ purchasing power if you added 3p to the existing basic rate of income tax? The noble Lord, Lord Wigley, mentioned the experiences with regional taxation in the United States. I have read quite a bit about those and know that some of them are very regressive. You have to be very careful, because regional taxes can be regressive. We must be extremely vigilant in this respect.

Before I buy either the Holtham line or the 3p line, I want a meaningful impact assessment to be made. What would be the impact of such a change on the internal purchasing power of, for example, the Merthyr and Rhymney communities of adding 2p or 3p to the basic rate? I could not say yes to the granting of such powers unless I knew what impact I was making.

We all know of Chancellors who have brought in Budgets that have had unintended fiscal consequences. I was a passionate fan of the 10p band, which benefited the constituents whom I represented. I therefore regretted it bitterly when the previous Administration abolished that band. It has left us going from 0% to 20%. If we were to add another 3% to that, one would be left to ask where marginal tax rate issues kick in. We saw a Budget in March that had unintended consequences. The Chancellor completely miscalculated the impact of abolishing, on grounds of simplification, age-related allowances. We should not embark on this kind of change without a full impact assessment. If I were to make any recommendation to the Silk commission, it would be to let us have such an impact assessment so that we can make a judgment on what taxes it would be meaningful, reasonable and sustainable to devolve.

However, as many other noble Lords have said, the fundamental issue is not tax but the Barnett formula. Politicians can vie over this—it has been said that the previous Administration ducked the issue and it will be interesting to see whether this Administration do so, too—but it is not the politicians who drew it to our attention but a very powerful recommendation of the Holtham report. Holtham argued:

“Even if our proposals for tax devolution were implemented in full, the block grant would still account for around 85 per cent of the total resources … Ensuring that Barnett is replaced by a system that sets the block grant by reference to Welsh relative needs therefore should be a priority for Wales”.

I think that most of us would endorse that conclusion, and we sincerely hope that the noble and learned Lord, Lord Wallace, whom I have known for many years and who is not a man to duck an issue, will not duck this one, too.