With power comes responsibility

The UK Government has today published its full response to the 31 recommendations on fiscal powers made by the Silk Commission last November.

Thirty of the thirty one recommendations made by Paul Silk and his team have been accepted by the UK Government, either in full or in part.

Responding to Silk This is the 8th in the series responding the UK Government’s announcements on the Silk Commission.  Read the full UK Government response to the Silk Commission’s recommendations.

Earlier this month, Prime Minister David Cameron and his Deputy, Nick Clegg announced that new financial powers to be devolved to Wales would include:

• Borrowing powers to include early access to these for M4 improvements,
• Landfill Tax and Stamp Duty Land Tax,
• A referendum on income tax devolution.

Today the full response has also delivered:

• The full devolution of non-domestic business rates in Wales,
• The ability to create new taxes with the UK Government’s agreement,
• The creation of a cash reserve that the Welsh Government can add to when revenues are high, and utilise when needed.  However, the amount that the Government can borrow will be linked to the amount it holds in reserve,
• Full details on the mechanisms for adjusting income tax that will be available to the Welsh Government.

Today’s response has delivered the detail that many feared with regards to income tax devolution. Whereas the Silk Commission said AMs should be able to raise or lower individual tax bands, the Government have said the power will be limited. Just like the Scottish Government, AMs will only be able to raise or lower income tax rates in tandem, a so-called ‘lockstep’.

“The Government believes that the key objective of increased accountability for the Assembly and Welsh Government could be achieved by granting the power to vary the basic, higher and additional rates of income tax (currently 20 per cent, 40 per cent and 45 per cent respectively) up or down in tandem.”

This will rule out the ability for Wales to set its own taxation policy based on redistribution. IWA Director, Lee Waters wrote only last week that a lockstep being utilised as a caveat for the devolution of income tax would mean it would be less likely to be used to cut taxes,

“That alone is enough to kill a referendum campaign before it begins”.

The full devolution of business rates in Wales will be seen as a significant victory for Welsh business, as their piecemeal devolution to date has often proven confusing to business owners and the Welsh Government itself. As argued by FSB Wales recently:

“Forecast receipts for 2013-14 suggest business rates will be worth £952m in Wales this year– the sort of money that puts the importance to the Welsh economy of receipts from Stamp Duty Land Tax and Landfill Tax at around £165m into perspective.”

There is however speculation that this full devolution of business rates could lead to a loss of revenue in Wales. Currently Wales receives a share (or ‘consequential’) from the UK Government for the elements of business rates that are not devolved. After this change we will only get the money we raise, and as the Welsh economy is weaker than the English one we may end up worse off in the short term.

The only one of the Silk Commission’s recommendations that the  UK Government has refused to accept is long haul Air Passenger Duty (APD). This is likely to be particularly contentious given that the power was devolved to Northern Ireland in 2011. The UK Government has said it “is not convinced by the case for devolving APD to Wales” as this would not lead to more people flying but would be more likely only to redistribute passengers between airports. However, that was the very point of APD devolution. Advocates wanted to enhance Cardiff Airport’s use given the low numbers still traveling from Cardiff Airport, and to address the limits in capacity of Bristol Airport in terms of infrastructure and terminal capacity.

Taken together the Treasury says new financial powers could see the Welsh Government in control of £3bn of tax revenue.  The Welsh Conservatives say this means “the Welsh Government’s toolbox is now stocked with tools to get on with job of delivering prosperity & first class public services’.  Welsh Secretary David Jones told this morning’s press conference that Carwyn Jones should trigger the referendum soon that would allow AMs the power to vary income tax; and the Conservatives will campaign for yes vote.

Labour’s holding position has been that it will not contemplate devolving power over income tax while the question of addressing Wales’ unfair overall funding is unresolved.  The analysis of the Holtham Commission that Wales loses out to the tune of £300 Million from the population base Barnett formula has not been refuted. But as overall spending is falling, the gap is at least not getting any wider.

This morning’s UK Government response referenced the agreement last October which addressed the problem of convergence in the way that Wales is funded. Today’s response addressed this and committed:

“to review relative levels of funding for Wales and England in advance of each spending review and, if convergence is forecast to resume, to discuss options to address the issue in a fair and affordable manner. These robust arrangements provide a firm basis for the devolution of income tax (subject to a referendum)”.

In other words, before a referendum is agreed to the Treasury will look again at the way the Barnett formula is working.  That is unlikely to be enough to bring Welsh Labour on board, but it will be enough to allow their opponents to claim that Whitehall is taking the issue seriously, and the Welsh Government should stop stalling and start taking responsibility for raising the money it spends.

However, the UK seems to have given up their leverage on Carwyn Jones. The decision to place a time limited offer on income tax powers seems to have been abandoned. Journalists were briefed on Friday that the new Wales Bill will not now have a ‘sunset clause’.

David Jones said this morning:

“It is now up to the Welsh government to seize this once in a generation opportunity – to drive forward Wales’ economic development, and to use this opportunity to secure the growth and prosperity that Wales so desperately needs”

So, far from having a few years to use or lose tax varying powers, Carwyn Jones may have ‘a generation’ to decide.  Unless the voters make themselves heard sooner.