The UK-Welsh Government agreement on borrowing powers and Barnett convergence

The agreement between the UK and Welsh Governments on borrowing powers and finance announced on Wednesday has been much trumpeted by the Welsh Government.  In truth, it’s hard to see that it adds up to a great deal, and it raises more questions than it answers.

The press statement relating to the agreement can be found on the Wales Office’s here and the Welsh Government’s here.  The Agreement itself is on HM Treasury’s website here, and the ‘technical annex’ (which considers the operation of the Barnett formula in relation to Wales) is here.  My own earlier posts on these negotiations, and the Welsh Government’s approach to them, can be found HERE and HERE.

It’s worth remembering that this ‘intergovernmental’ process was adopted by choice of the Welsh Government, which sought to ensure that these issues were kept out of the remit of the Silk Commission.  That of course makes the work of the Silk Commission all the harder, as matters which relate to how devolved government in Wales is funded are excluded from its remit.  That was the subject of particular criticism in a Lords debate on the subject back in July.  In effect, Silk can only consider half the subject.  A Welsh Government official defended this to me on the ground that the issues regarding both borrowing and the block grant were now clear, thanks to the Holtham Commission, and what was left was the political matter of resolving them.  Implicitly, the Welsh Government bet that it could get a better deal by negotiating them directly with the UK Government, rather than letting them form part of the remit of the cross-party Silk Commission.

The part regarding borrowing powers suggests something of a shift by the Treasury, which was talked up by Labour AMs during the Assembly debate, but this is more apparent than real.  The amount the Welsh Government might be allowed to borrow is unclear, the timescale is even less clear, and the strings on the use of the new power suggest either the Welsh Government has given away a valuable negotiating point, or that it will never be able to use them.

The agreement provides that borrowing powers are to be made available to finance infrastructure projects.  The powers on offer are explicitly linked to the Welsh Government having a revenue stream with which to service them.  That implies a) that the Silk Commission will recommend a significant measure of tax devolution and b) that is then implemented.  Carwyn Jones has already declared the Welsh Government’s opposition to significant income tax devolution (even along Calman lines), and insisted there be a referendum before such powers could be introduced.

That suggests two possibilities.  Either the Welsh Government is in fact willing to abandon its extreme scepticism about income tax devolution to get borrowing powers (and has just signalled that to the UK Government, despite insisting its position is unchanged).  Or, the ‘win’ of borrowing powers is in fact wholly empty, as the Welsh Government is not willing to comply with the UK Government’s conditions so it can actually use those powers.

(There’s another issue here, as devolving tax powers also implies devolving a borrowing power to help manage the revenue fluctuations that will accompany tax devolution.  There is no mention of that in the agreement.)

Even if these problems are not material, there is the question of timing.  There is a very limited borrowing power in section 121 of the Government of Wales Act 2006, essentially to manage fluctuations in cashflow.  It only permits borrowing from the Secretary of State in any case – not from the Treasury (which legally is distinct from ‘line’ departments), not from the Public Works Loan Board, not from the markets.  Otherwise, there is no legal power for the Welsh Ministers to borrow money.  A new power will need to be created – with some urgency, if those powers are to be used relatively soon as Jane Hutt suggested in the National Assembly on Wednesday afternoon.  Waiting for the bill that presumably will result from the recommendations of the Silk Commission will imply considerable delay.  (Getting that bill into the 2013-14 session would imply moving extraordinarily quickly, with no intergovernmental negotiations after part 2 of the Silk Commission report is published.  Will that bill be in the 2014-15 session, or postponed until after the 2015 UK election?)  The other obvious vehicle would be a Westminster Finance bill, which of course goes before Parliament every year, but there is no mention of using that in the statement.

While the announcement on borrowing powers is thin, the part of the deal regarding the block grant is even thinner.  This is not a ‘Barnett floor’ to prevent future convergence, nor any sort of agreement about applying a needs-based formula.  It’s an agreement to consider an ad hoc adjustment, if at some future time there might be a question about what happens in the absence of a floor.

The agreement notes the Welsh Government’s ‘concern’ about convergence under Barnett, and the UK Government notes the concern that convergence causes for the Welsh Government.  The ‘technical annex’ surveys the extent to which convergence has happened since 1999, and notes that there will be a small measure of divergence during the period 2010-11 to 2014-15.  (So there should be, given the way the UK Government has sheltered spending on health and schools during the current Spending Review period; see HERE for an explanation.)  What the agreement gives is an assurance that

In future, in advance of each spending review there will be a joint review of the pattern of convergence by the two Governments. If convergence is forecast to occur over the course of the spending review period, both Governments will then enter into discussions on options to address the issue, based on a shared understanding of all the evidence available at that time.

That may sound like a limited assurance that Wales will not be materially disadvantaged in future spending reviews, even if all it does is to build an assessment of convergence into the process and open the path to negotiations during that spending review.  (There’s good reason to be sceptical about how useful that is, given the propensity of Chief Secretaries to finalise the spending review with little regard to the devolution implications of what they’re deciding; that’s where the problems with consequentials for the 2012 Olympics started, as well as the row about funding of S4C in 2010).  The problem from a Welsh point of view is that it isn’t new, and on the whole it probably amounts to a more limited commitment than that given by Peter Hain in 2009:

the Government will make a full assessment of the extent of convergence with consideration of Wales’ position relative to other parts of the United Kingdom as part of each spending review; and

following this assessment the Government would be prepared to take action if appropriate to ensure Wales is not disproportionately disadvantaged.

While this formulation did include the unclear and rather convoluted criterion of being ‘disproportionately disadvantaged’, it did include an assurance of action if that criterion were satisfied (my criticism of it at the time is HERE).  All that the new agreement with the Treasury offers is ‘discussion on options to address the issue’ which must itself be based on ‘a shared understanding of the evidence available at the time’ (which, given the much better information available to the Treasury, offers another significant advantage to the UK Government).  It does however mean that Jane Hutt’s claim that this was a ‘new commitment’ looks rather odd.

It’s unclear whether this is the end of the intergovernmental process, or merely a punctuation point.  The agreement can be read both ways, saying that

Both Governments commit to negotiating to achieve a sustainable arrangement for Welsh devolved funding and the UK public finances, that each can accept as being fair and affordable.

The Welsh Government believes that a mutually acceptable outcome to those discussions is an essential precondition for any significant devolution of taxes and the UK Government will only implement such changes with the consent of the National Assembly for Wales.

That implies a good deal of further negotiation, but does not indicate when or how that is to happen: in the immediate future, or after the publication of the Silk Commission’s reports?

What all this amounts to is that the ‘grand bargain’ does not materially advance Wales’s interests,  nor does it amount to the making of significant concessions by the Treasury (since there is little if anything new in what the Treasury has offered).  What it does do is hamper the Welsh Government’s position in seeking to resist the devolution of some income tax powers, however.  It’s hard to view that as a political success in any respect.

Footnote: I should record that my name was invoked several times in the Assembly debate, by opposition members including Ieuan Wyn Jones, drawing on my earlier blog posts on this subject.  Jones’s question to Jane Hutt was ‘Minister, why have you allowed Alan Trench to be proved right?’

The Assembly Record for Wednesday can be found here; Jane Hutt’s statement on financing and borrowing starts on p. 18.

I was also on BBC Radio Wales’s ‘Sunday Supplement’ programme on 28 October to discuss this; that can be heard here.

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10 Comments

Filed under Devolution finance, Intergovernmental relations, Labour, Wales, Whitehall

10 responses to “The UK-Welsh Government agreement on borrowing powers and Barnett convergence

  1. Old Albion

    More power for Wales, more power for Scotland, continue to ignore the existence of England. Devolution eh! it’s alright for some…………………..

  2. Jeff Jones

    Just one word “Brilliant”. Basically what happened yesterday was that the Welsh government started to walk straight into the Treasury plan. There will quite rightly be no borrowing without taxation. We will then see the end of the present unaccountable ‘representation without taxation’ situation and hopefully the beginnings of grown up politics in Wales. Even Hannibal at Cannae couldn’t have hoped for a better start. I’m afraid It’s also all about capacity or should I say lack of in the case of Wales at both a civil service and political level. What did ole Abe Lincoln once say about fooling the people?

  3. Emyr Lewis

    A very interesting piece, as always, in particular your observations on the need for express borrowing powers to be given to Welsh Ministers by legislation.

    The Welsh Ministers do have express borrowing powers for certain purposes, namely the powers of the old WDA which were transferred to the (then) executive Assembly in 2005. (One also wonders whether other broad executive powers of the Welsh Ministers might not include an implicit power to borrow.)

    I suspect (but don’t know) that the problem has been how to exercise these powers without the Treasury cutting other funding to make up the deficit, which section 120 of the Government of Wales Act 2006 appears to enable it to do.

    • I think it’s clear that the broader powers of devolved governments do not include power to borrow; that’s certainly the view I’d take. The most that can be done is what the Scottish Futures Trust has become – an agency that advises on and helps manage projects, and and groups together local authorities’ borrowing powers, which can only be used for local government purposes. ]

      In any event, there’s the question of who you’re borrowing from. Borrowing from government depends on the willingness of government to lend; borrowing from the market depends on a willing commercial lender. If that lender had serious doubts about the legal capacity of the borrower, that will affect its willingness to lend. This problem killed off early attempts to use the SFT as a more general borrowing fund by the Scottish Government.

      As regards the borrowing powers inherited from WDA, even to the extent the Welsh Government has inherited these they’re of limited use. Para. 3(2) of Schedule 3 to the Welsh Development Agency Act 1975 limited these to borrowing by the WDA for the purpose of ‘meeting their obligations and discharging their functions'; so the powers can only be used by Welsh Government for functions that would have been intra vires the WDA, under the terms of the Welsh Development Agency (Transfer of Functions to the National Assembly for Wales and Abolition) Order 2005. They also appear to limit borrowing to taking place from the Secretary of State, but only on the open market with his consent. How far the WDA’s former functions extend to infrastructure projects is an interesting question on which Emyr is better placed to comment than I am.

      • Emyr Lewis

        Thanks Alan. My aside on the question of implied borrowing powers arose from curiosity about what the legal basis is for saying that you cannot construe broad general powers to include a power to borrow. I haven’t found one, but then I’ve not looked very diligently. Whatever the position may be, your practical point on lender confidence is well made.

        The position with the WDA’s powers is rather complex.

        The wide range of economic development powers which the WDA had, would certainly allow the Welsh Ministers to undertake many kinds of infrastructure projects.

        The Secretary of State’s powers under the Welsh Development Agency Act 1975 were all transferred to the (then executive) Assembly by the National Assembly for Wales (Transfer of Functions) Order 1999. This included the power to approve WDA borrowing. The requirement for Treasury consent only survived in relation to non-sterling borrowing.

        When the WDA was abolished and its functions transferred to the (then executive) Assembly in 2005, the Assembly was, effectively, given the power to borrow.

        The abolition and transfer of functions order dealt with this by amending Schedule 3 paragraph 3 of the 1975 so that it read: “For the purpose of exercising its functions under this Act, the Assembly may borrow money from any person (including its wholly owned subsidiaries), but any borrowing in a currency other than sterling requires the approval of the Treasury.”

        For the Assembly, now read Welsh Ministers, of course.

  4. Indpendent England

    I don’t know why Wales doesn’t just go for full powers.

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