Unpacking Cameron’s response to fiscal powers for Wales

Last Friday’s news had ample coverage of the UK Government’s decision about financing Welsh devolved government, following the Silk Commission’s Part 1 report from last November. No doubt the looming anniversary of the publication of the Silk report triggered a certain sense of urgency. Despite promises that the UK Government would produce its response in ‘the spring’ (and strong hints this would be earlier in the spring rather than later), that has been delayed and delayed. At the end of June, Secretary of State David Jones said it had been postponed until after the summer, and now pretty late in the autumn it has finally materialised.

Responding to Silk   This is the first of a series of articles this week on ther UK Government’s response last week to the Silk Commission’s recommendations on tax and borrowing powers for the National Assembly.   Thursday: John Winterson Richards says David Cameron’s position means he can no longer be bothered to defend the UK as a unitary state.

There has been wide coverage of the UK response. The Western Mail’s article by David Cameron and Nick Clegg is here, and their news coverage is here, here and here. BBC News coverage is here, and analysis here. The Guardian’s story is here. The official Wales Office press release is here, and the written ministerial statement is here.

The main elements of the UK Government response are:

• Devolution of stamp duty land tax and landfill tax.
• The grant or extensions of borrowing powers on the Welsh Government, for infrastructure purposes – notably the M4 upgrades.
• Conferring on the National Assembly powers to vary income tax by 10 pence on each rate.
• But those powers require approval in a referendum, which the Welsh Government will be able to call.

In effect, this is making available to Wales the powers Scotland has under the Scotland Act 2012, subject to a referendum.  It means that the Silk Commission recommendations for devolution of the aggregates levy and air passenger duty have been dropped.

Implementation of these measures will, it appears, be through the draft Wales bill which was announced as part of May’s Queen’s speech, and which was intended also to deal with electoral issues for the National Assembly and barring ‘double-jobbing’ by AMs.  But that bill (which had been expected in the next few weeks) seems to be delayed. It will now appear ‘in the next few months’, with a detailed UK Government response to Silk by the end of the year – a de facto White Paper, if not formally one. Quite why it should take so long is not clear, as there are now established legislative precedents for all the measures outlined in the UK Government proposals, mostly in the Scotland Act 2012. While some issues still need to be resolved or remain unclear these are second-order matters that should not be hard to resolve. The fact they have not been resolved before the announcement suggests it has been rather rushed.

There are four main issues on which there is a lack of technical detail in the proposal:

1.  The announcement suggests that borrowing powers will be devolved immediately, along with the two land taxes. It is not clear who the Welsh Government will be able to borrow from: HM Treasury, or the markets. (There has still been no announcement from Treasury in response to their consultation on Scottish borrowing, and whether the Scottish Government should be able to issue its own bonds.) It is debatable how much new legislation is needed for those, at least for the M4 or other road or transport projects; the Welsh Government has inherited legal powers from the Welsh Development Agency which are pretty extensive. That suggests that the urgency of the infrastructure issue has trumped the Treasury’s position that there is a link between borrowing and tax powers such that it would not devolve one without the other. (It is telling that the Wales Office proposals are couched more in terms of funding for transport and infrastructure rather than constitutional change.) In reality, there’s not much need for legal devolution, rather for practical consents for exercising powers already in the Welsh Government’s hands. However, there are also questions about how much the Welsh Government will be able to borrow. The written ministerial statement (which emphasises Treasury support) makes it clear that the Welsh Government needs to have “an independent funding stream to pay back the money it borrows” – which, if only the small land taxes are devolved initially, would imply only a limited borrowing power too. How that can be squared with sufficient funds to cover the M4 works is unclear.

2. It is not clear who will have the power to call a referendum on income tax powers. The UK statement suggested this would be in the hands of the Welsh Government. That surely is wrong. As with the referendum on the Assembly’s legislative powers, that power should be in the hands of the National Assembly as the elected branch of government.

3. It remains unclear how the proposed income tax power would interact with the block grant. Presumably similar principles will apply as for Scotland – that is, there will be a cut, which will be assessed using the ‘indexed deduction’ method recommended by Holtham. But detail on that point would have been welcome.  The appropriateness of that cut is central to the ‘Calman’ approach to income tax devolution – and (as I pointed out HERE) creates very real problem for Wales given the fact that Wales is ‘under-funded’ at present relative to need.  Little wonder that the First Minister has ruled out calling a referendum on income tax powers until ‘fair funding’ is in place.

4. Silk – and Holtham before it – argued that the devolved income tax power should include the power to set different rates for each tax band, rather than the Welsh Government being bound to set the same rate on all tax bands. This so-called ‘lockstep’ applies to Scotland, under the Scotland Act 2012 (and the Calman report before that). The UK response talks of “people in Wales [being able to] decide whether some of their income tax should be devolved, in the same way as it is in Scotland” (emphasis added). That implies maintaining a lockstep, not abandoning it.

It is easier to make sense of the politics. In party terms at Westminster, it is a clear win for the Liberal Democrats and a defeat for David Jones, the Secretary of State. Implementing Calman – and more widely, wresting control of the Welsh constitutional agenda from the Labour Party – has been a key Welsh Lib Dem objective since the Coalition was formed. It was Lib Dem insistence that the proposal for a “process similar to Calman” was included in the Coalition’s Programme for Government.  Its importance to the Lib Dems was shown in the 2012 reshuffle, when Nick Clegg traded ministers in other departments (including the Ministry of Defence) for an unpaid post for Jenny Randerson in the Wales Office. The Lib Dems are entitled to take credit for achieving this, though having committed so much to it they might have been embarrassed if they had not.

It is also clearly a reverse for David Jones. Jones has long been a ‘devo sceptic’, and the Silk report confronted him with a dilemma – should he resist increased powers for the National Assembly, or take the opportunity to rewrite the Welsh constitution on terms that reduced Labour’s advantage?  This was not a dilemma shared generally by his party, particularly in Cardiff Bay, where support for the Silk financial package has been much stronger. Indeed, there are some Welsh Conservatives who think fiscal devolution is essential to give them a real chance in National Assembly elections.

David Jones has spent a long time considering how to resolve his dilemma, missing his own ‘spring’ deadline for a response and taking it well into the autumn. When it was presented, it was by the two party leaders, not the Secretary of State or Wales Office – and while the leaders were keener to talk about it in constitutional terms, the Wales Office put it in much narrower ones, as about infrastructure improvements.  It is hard to resist the inference that his inability to resolve his dilemma – and taking an inordinately long time to do so – led to the decision being taken out of his hands.  Moreover, if we are to read the runes – meaning, in particular, the speech Jones gave at the Pierhead at the end of June, with its support for ‘asymmetric devolution’ and rejection of applying Scottish solutions in Wales – it is tempting to assume that his inclination was quite strongly to reject the Silk proposals.  Now, it will fall to him (or his successor) to pilot them through the Commons.

Moreover, the Silk Part 1 report is not the only game in town. The Commission’s work on Part 2 of its remit is well underway, indeed nearing a conclusion. If the Commission were minded to be radical, they are unlikely to be put off knowing that support can be recruited from the Prime Minister and Deputy Prime Minister, and indeed the Treasury, even if Gwydyr House resists.

It is harder to say how the Welsh Government and Welsh Labour have done. They’re keen to portray this as a ‘win’, and they have secured some key objectives, notably no income tax powers without a referendum, as well as borrowing powers. But they have failed to secure ‘fair funding’ and block grant reform, and indeed implicitly to accept that the much-trumpeted deal on fair funding of last October – which looked like an attempt to lay the foundations for the sort of deal that has now been reached – failed to do the job.

Moreover, they have failed to get anything better out of the UK Government. The best they have is the lever of a referendum on income tax powers, and declining to call one until block grant issues are resolved. Given support of the Conservatives and Liberal Democrats for this package, that has some value. Nonetheless, it is hard to regard this as an unequivocal victory for Welsh Labour. At best, it’s a partial victory that leaves some key issues unclear and others unresolved.

There are wider implications to the Welsh deal, of course – as Severin Carrell has pointed out in his Guardian blog post (citing me extensively; it’s here). Most notably, it shows the flexibility and developing nature of devolution – evidence it is a process not an event, in Ron Davies’s famous phrase. Quite why supporters of Scottish independence decided to use the static nature of devolution as a pro-independence argument is a puzzle, given the extent to which it has been developing since 1999. And there is a wider argument about how the UK is becoming significantly more fiscally decentralised, within England as well as for the devolved governments.