Silk debate: Tax powers will reward successful Welsh government

The launch of the first report of the Silk Commission examining the future of devolution in Wales is a real win for liberalism. The report looks at the financial powers that the National Assembly should have, how accountable it is for its spending and how we ensure effective economic policy is rewarded. Welsh Liberals Democrats have been calling for these changes since the National Assembly was established.

The completion of this report is a major Welsh Liberal Democrat victory from the coalition. Kirsty Williams fought for this as part of the coalition deal and banged heads together when it looked like consensual terms of reference may not be developed. Labour and the Conservatives, who have a substantial number of devosceptics in their party ranks, did not drive this review forwards.

Empowerment and Responsibility This is the third in a series of articles debating the recommendations of last week’s Silk Commission report on tax and borrowing powers for Wales. Tomorrow is the turn of Conservative AM David Melding. On Friday Paul Silk responds.

But we wouldn’t be considering this a liberal report if it had recommended deeply conservative policies. The fact is that this report endorses a number of long-held liberal principles and advances our vision of a federal state. Our submission to the review highlighted a number of new financial powers that we felt would benefit the public in Wales, and all of them have been taken on board.

Firstly, the report whole-heartedly recommends that a number of taxes that are low-yielding and exist mainly to advance policy agendas, rather than raise revenue, are devolved. Housing is already devolved, so it is right that stamp duty should be too. Environmental protection is devolved so it is only reasonable that the Welsh government can reform the Landfill Tax and Aggregates Duty. Economic development is devolved so powers over business rates and Air Passenger Duty help complement our powers to pursue economic growth.

As well as this, we have argued that the National Assembly should require borrowing powers so that we could invest in the infrastructure Wales needs to compete economically and ensure our public services work in modern buildings. It is absurd that every other tier of government in the UK can borrow to support capital investment, including the smallest town councils, but that the National Assembly can’t. This will give us parity with other governments and also help provide us with the resources necessary to invest in crucial new infrastructure.

These proposals, over so-called minor taxes and borrowing, give Wales the opportunity for real policy changes to deliver economic growth and fairness and as a result are relatively uncontroversial. As liberals, we have championed distributing power to the lowest possible level, and now we are proposing to give that level of government the tools that it needs to do the job.

The big changes proposed – over income tax – have been less widely expected.  I firmly believe that devolving income tax powers will improve both the accountability and economic performance of the Welsh government, regardless of whether or not they are used. By ensuring that half of income tax receipts that are raised in Wales are allocated to Wales, we will make sure that good economic progress is rewarded by an increase in revenues, and that poor economic progress will mean a government will see its income lowered.

For the very first time, a Welsh government will have a financial interest in making sure its job-creation strategies are actually effective. Liberalism means making sure that governments are accountable, not only at election times, but constantly. Accountability for performance is guaranteed if governments are financially rewarded for good government. The proposals to improve this accountability are drawn from the liberal tradition.

But devolution of income tax could well harm Wales if it is brought in without substantial reform of the Barnett formula, which allocates money between the UK nations and regions. A study by Gerry Holtham, a leading economist, showed that under the formula, Wales receives less money than it would if it were an equally deprived region of England. I am clear that income tax cannot be devolved unless action is taken on this measure. Otherwise, we will not have the money available to other regions with whom we will have to compete. Wales will be taking a much bigger risk, but from a much lower base, than elsewhere and that is simply unfair. We made this perfectly clear when we put forward the Welsh Liberal Democrat submission to the Commission and I stick by that now.

This conflict is the most important political point, as well as a crucial economic one. The Labour party are content with the current arrangement. They are given money and if they are not able to achieve what they want, then they ask for a little bit more. This is begging-bowl politics and it is does not befit a mature nation. But it explains why they have not driven forward this agenda.  Carwyn Jones, the First Minister, has made it clear that the government will not support the former without the latter and unless there is a referendum. So we need to make the political progress necessary to reform the unfairness of the Barnett formula.

Politically, we cannot proceed with this project without the Labour party. A referendum on income tax powers would need the support of an Assembly and the Labour party would hold an effective veto while they still hold 30 seats. But securing consensus on this is desirable, not just essential – I would like to see the new legislation proposed pass unanimously because this is a major constitutional reform and it deserves better than a party-whipped vote.

I am clear that the Silk report is a real victory for liberalism in Wales. We demanded the report’s production as part of the coalition agreement and it has produced a liberal agenda. But the real test will be when we begin to implement that agenda. When a new Wales Bill receives royal assent and these powers are devolved – that is when we will have achieved a real liberal gain.