Category Archives: Wales

‘Devo More’ seminar in Cardiff, 11 June 2013

I’m giving a seminar on Devo More and what it would mean for Wales in Cardiff on the morning of Wednesday 11 June. The full title is ‘Devo More: How fiscal and welfare devolution can benefit Wales and strengthen the Union’, and it is part of the UK Changing Union programme based by the Wales Governance Centre at Cardiff University, under the aegis of the National Assembly’s Cross Party Group on the Changing Union. (Those who haven’t seen them can find the Devo More and Welfare paper here, and Funding Devo More here.)
The seminar will take place at 8.30 am in conference room 24 in Tŷ Hywel, with tea, coffee and pastries provided. To book a place, please email info@ukchangingunion.org.uk.

UPDATE, 12 June: The slides from Tuesday’s talk are now available HERE.

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Unlocking the lockstep?

There are interesting changes to the ‘Calman’ model of income tax in the Wales bill (which had its Commons second reading on Monday) and the Finance bill (which had its Commons second reading on Tuesday).

The ‘Calman’ model applies a ‘lockstep’ to the devolved income tax rate, which has to be the same for all three tax bands (basic, higher and additional or 45 per cent). That rate can be 0 per cent, 10 per cent (as it is at present) or some other figure but it must be the same for all three bands – so if the devolved rate were nine per cent, you would have tax rates of 19, 39 and 44 per cent. While this question did not attract particular attention when the Scotland Act 2012 was going through the UK and Scottish Parliaments, it has been controversial in Wales. It was not recommended by either the Holtham or Silk Commissions, and has attracted criticism from the Commons Welsh Affairs Committee, the First Minister (who called the power with the lockstep ‘pretty useless’) and the Plaid Cymru and Welsh Conservative leaders.

The provisions in the Wales bill mark a change from the draft bill published before Christmas. Instead of providing for a single ‘Welsh rate of income tax’ across all three bands, the key operational clause now provides for Welsh basic, higher and additional rates and defines each of them separately (see clause 9 of the bill). Clause 289 and Schedule 34 of the Finance (No 2) bill make similar changes to the finance provisions of the Scotland Act 2012. (Both bills also provide for beefed-up arrangements for reports on devolved tax powers by the Comptroller and Auditor General, something that was conspicuously missing from the Scotland bill.)

The substantive policy behind the devolved rate of tax remains the same; the lockstep is still in place, and UK Government policy backs it strongly. But this change creates the legal basis for having different rates of tax for each band, if that policy decision were taken later, by altering the rule regarding what a ‘Welsh’ (or ‘Scottish’) ‘rate resolution’ would be.

The application to Scotland appears to be an inversion of the position that ‘Wales gets what Scotland gets’, which is apparent throughout the finance provisions of the Wales bill. Since what Scotland has is proving politically very difficult in a Welsh context, creating a framework for a possible different approach is an interesting move. In the light of ongoing debates about fiscal devolution to Scotland, though, including the Scottish Labour Party’s proposals to increase the devolved rate of income tax from 10 to 15 points and to allow the Scottish Parliament to vary higher and additional rates upward, there are obvious potential uses on the table in Scotland as well.

UPDATE: There’s coverage of this issue – quoting me extensively – here, which appeared on the front page of Wednesday’s Scotsman, and a cartoon and comment, here.  It’s interesting to note a firm denial of the idea that there is any plan to break the lockstep from HM Treasury, reported in the Scotsman story.  Ben Riley-Smith of the Telegraph has also tweeted a denial from No. 10.  I don’t doubt the policy remains to maintain the lockstep, but also that this creates a smoother path to break it if the policy were to change.

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‘Devo More and Welfare’ in ‘Scotland on Sunday’

The paper Guy Lodge and I have written on Devo More and Welfare as part of the wider Devo More project is published on Tuesday.   There’s extensive coverage of it in today’s Scotland on Sunday to whom we’ve given a preview of the paper, including a news article here and a comment piece by Guy and me here.

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The Silk Commission’s Part 2 report

If ever a report deserved careful consideration rather than an immediate response, it’s the Silk Commission’s Part 2 report.  The product of more than 15 months’ evidence-taking and deliberation, it is a carefully framed, principles-based blueprint for the next step for Welsh devolution.  The full report is available here, and the executive summary (which I must admit to having relied on for this post) is here.  There’s BBC News coverage here, here and here, and from Wales Online here.

The key recommendations are:

  1. devolution of policing to the National Assembly
  2. devolution of responsibility for youth justice, but not the courts or the legal system generally
  3. devolution of planning powers to approve energy projects of up to 350 megawatts, of powers relating to sewerage and the regulation of some aspects of water supply within Wales, and for there to be a Welsh Crown Estate Commissioner.
  4. some further devolution of powers in relation to rail franchising, bus and taxi regulation, and speed limits and drink-driving
  5. appointment of a Welsh member of the BBC Trust (something already in place for Scotland), and control for the Assembly over public funding for S4C
  6. an increase in the size of the National Assembly, noting many calls for 80 members but leaving the issue for further consideration
  7. an enhanced approach to the conduct of intergovernmental relations and the machinery for that. The Secretary of State for Wales would also lose his seat in the National Assembly, his right to receive its papers and obligation to present the UK Government’s legislative programme each Parliamentary session.
  8. perhaps most importantly, a move to a ‘reserved powers’ model for the National Assembly’s legislative powers, away from the current ‘conferred powers’ one, along with a removal of the current and problematic protection of pre-devolution powers of UK ministers.

There are also calls for further study of a number of matters – not just the size of the Assembly and the number of AMs, but also the possible devolution of prisons and the court system.  It sees no need for a further referendum on any of these proposals.

What is notable about this is how cautious it is.  The recommendations eschew a number of more radical calls – for the establishment of a separate legal jurisdiction, or for devolution of the civil or criminal courts, the civil or criminal law, or of welfare.  I argued in my own submission that it would be very hard to establish a ‘reserved powers’ model without establishing a separate legal jurisdiction, and that this could be done without losing many of the advantages of the current shared arrangement.  (See also THIS EARLIER POST on the relationship between a legal jurisdiction and legislative powers.)   I suggested as well that the Welsh Government’s proposals for a reserved powers model would imply a devolved power to legislate for areas like land or contract law (these are omitted from the Welsh Government’s proposed list of reserved matters).  This would achieve the substantive outcome of a separate legal jurisdiction without formally calling it such –which may be the worst of all worlds.

Welfare devolution is another area which would create a number of administrative problems but offers scope for major gains for both governments and for citizens – as we’ll be arguing shortly through the Devo More project.

The Silk proposals are, in essence, an attempt to make sure the division of powers between Welsh and UK institution catches up with reality.  They’re not actually very radical; they don’t take account, for example, of the impact of the September referendum on Scottish independence (whether there’s a Yes vote leading to Scottish independence and a restructuring of the remainder of the United Kingdom, or a No vote resulting in further devolution for Scotland).  Rather like Holtham before it, this is an exercise in bringing Welsh devolution up to date not making far-reaching plans for the future.

However, the proposals do represent a clear consensus across the Welsh political parties about what should happen next.  I’ll shortly be putting up a post about the problems arising from the way the UK Government approached Silk Part 1, and its profound misreading of the political and economic situation in Wales compared with Scotland.  The gravest mistake the UK Government could make would be to cherry-pick these proposals.  The second gravest would be to take a year to decide what to do, especially given that it has a legislative slot in the next Parliamentary session and not using that would mean a significant wait for any action – even though, from his initial reaction (saying a response would be for the next UK Parliament not the current one), that’s just what the Secretary of State seems to intend.

UPDATE, 4 March: Carwyn Jones’s response to the Silk Part 2 report, here, is interesting.  Although Jones calls for a substantial expansion of the powers of the National Assembly and Welsh Government, he appears unwilling to accept the logical implication that greater self-government means no longer being in a privileged position when it comes to UK-wide institutions.  He seeks to maintain the office of the Secretary of State (despite his well-publicised difficulties with both Conservative holders of that post), and the present number of Welsh MPs.  Both cases are poor. For a discussion of the Secretary of State, see HERE.  The latter case is if anything weaker.  Wales is presently over-represented at Westminster; if MPs were allocated to Wales on a similar basis to England, it would have around 32, not its present 40.  Scotland was similarly over-represented in the Commons before devolution, and the creation of the Scottish Parliament saw the number of Scottish MPs reduced to the English ‘quota’.  That meant a reduction from 72 to 59.  This was provided for in the Scotland Act 1998, and (to avoid  a reduction in the size of the Scottish Parliament as well) required further legislation to ‘decouple’ the number of MSPs from the number of MPs.  (Decoupling has already happened for Wales, as part of the abortive plans to reduce the size of the Commons.)

Wales cannot expect to maintain a privileged position at UK level if devolved powers are to be extended.  Carwyn Jones is trying to have his cake and east it.

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Implementing Silk in Wales: an update

The UK Government has now published its proposals for the implementation of the Silk Commission’s Part 1 report, following its announcement at the beginning of November (and so managed to get its response in just before the anniversary of the publication of the Commission’s report).  The Wales Office’s news release is here and the paper itself, Empowerment and responsibility: devolving financial powers to Wales, is here. (Note for government documentation trainspotters: this isn’t a Command paper to be formally laid before Parliament, and certainly not a white paper or even green paper.  This contrasts with both Labour and Coalition responses to Calman, and again suggests either that the UK is not taking Wales as seriously as it did Scotland, or that this is a response framed in some haste.)

Unsurprisingly, the paper largely confirms the key elements of the deal announced by the UK Prime Minister and Deputy Prime Minister, previously discussed HERE: devolution of two small land taxes, devolution of 10 points of income tax, but only after a referendum.  It confirms that, as for Scotland, aggregates levy may be devolved, but only once outstanding EU state aids issues are resolved, and that air passenger duty will not be. Continue reading

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Wales’s new fiscal package: the UK Government response to Silk

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.

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.

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Implementing the Silk Commission’s proposals, and the Welsh block grant

This post also appears on the Institute of Welsh Affairs’ ‘Click on Wales’ blog under the title ‘Havering over Welsh taxation’, here.  I was on BBC Radio Wales’s ‘Sunday Supplement’ programme to talk about it at around 8.30 am on Sunday 21 July, available to listen again here or as a podcast here.

While the Silk Commission carries on work on Part 2 of its inquiry, the UK Government has been deliberating slowly on the Part 1 report.  Promises of an ‘early’ response vanished, as did the commitment to one in the ‘Spring’. The summer solstice came and went, with no response from the Secretary of State other than a note that ‘good, positive progress’ had been made, ‘many issues’ resolved, but some remained outstanding. The rumour mill abounds with explanations of what the unresolved issues might be (see, for example, David Cornock here and here). If what happens to the Welsh Government’s Block Grant is not one of them, it should be.

The approach for dealing with the reduction in the block grant recommended by the Silk Commission sounds comparatively straightforward in principle, though it is rather harder to apply in practice. In the first year the new arrangements are in operation, the block grant is cut by an amount corresponding to the yield of the devolved tax ‘space’ – 10 points of personal income tax in the case of Silk (and Calman/Scotland Act 2012) for Scotland.  That cut is then adjusted ‘proportionately’ in subsequent years. What ‘proportionately’ means here is not clear. The Holtham Commission did sterling work in identifying what that might mean in practical terms, recommending what it called the ‘indexed deduction’ approach for personal income tax.  The same approach applies in principle to other devolved taxes, but the yields of those are modest so the issue is not so vital there.

The ‘indexed deduction’ method would involve taking the Welsh proportion of the overall UK revenues from that tax, and reducing the block grant by that proportion.  So, if devolved income tax in Wales generates 1.75 per cent of total UK personal income tax revenues in year one, the reduction in the block grant would be 1.75 per cent of UK personal income tax in each subsequent year – whatever the change in overall UK personal income tax revenues. The amount of the deduction would go down if overall tax revenues went down, and be increased if revenues went up. The result would be that the Welsh Government would gain if its use of its powers increased tax revenues in Wales ahead of the UK as a whole, and lose out if they declined more than the UK as a whole.  This approach has been agreed between the UK and Scottish Governments for the working of the Scotland Act 2012, but work on what it means in practice is ongoing in the ‘Joint Exchequer Committee’ established by the two governments. There has still not been any published attempt to show what the impact of making the cut and adjusting it by that method would be.

Applying the ‘indexed deduction’ method is comparatively easy for Scotland. The Barnett formula means that the Scottish block grant is comparatively generous. One can argue about how generous it is, but it is clear that the Scottish Government’s block grant exceeds by some distance any reasonable estimate of Scottish relative needs. Holtham estimated Scottish needs at 104 or 105 per cent of English ones, but depending on how one cuts the numbers (which is tricky) Scotland gets around 118-120 per cent of English spending for services covered by the block grant.

A further quirk is that the public spending boom of the 2,000s should have led to quite rapid convergence in devolved spending on the ‘English’ level – but, for Scotland, it did not. It appears that Scotland’s declining population cancelled out the convergence effect in the block grant, since convergence relates to per capita levels of spending, while the block itself is calculated as a lump sum and updated population numbers only affect incremental changes to that. So if the application of the reduction in the block grant affects the overall resources available to Scotland, it will only eat into that ‘cushion’ of the Barnett bonus – and it will not make a difficult situation significantly worse as time goes by.

Wales would love to have Scotland’s problems. It is clear that Wales is somewhat ‘underfunded’ given its present relative needs. At present, the block grant provides 113 per cent of the English level of spending on devolved services – while Holtham found Wales’s relative needs were between 114 and 117 per cent. That creates a different set of difficulties. If the block grant fails to produce a ‘fair’ level of funding relative to need at the outset, any cut in that grant – however it is adjusted – will probably make matters worse, as convergence happens. As a result, it becomes very hard to reconcile devolved fiscal accountability with reasonable UK-wide equity in public spending.

Matters needs not necessarily get worse, if the grant were adjusted to compensate for unfairness in funding before any reduction is made to allow for devolved income tax. The demand for a ‘fair’, needs-based grant – as articulated by Holtham – would be the simplest and most effective way of doing that. But a needs-based grant looks to be pretty clearly off the cards at present. The effects of introducing that for Scotland, particularly in the run-up to the 2014 independence referendum, are frightening enough to send politicians running in the opposite direction.

By pursuing its bilateral discussions about the block grant with the UK Government – and excluding it from the Silk Commission’s remit – the Welsh Government minimised its influence over securing ‘fair funding’, as well as preventing the Silk Commission from taking a comprehensive view on Welsh devolved funding. What it got instead – the deal announced last October – was promise of some undefined action if convergence appeared to become a material issue, though it isn’t at present because of the restraints on public spending at Westminster.  (My discussion of that on Devolution Matters is HERE.)

How this would be resolved if or when convergence comes back on the agenda would involve a good deal of bargaining and haggling between the Treasury and Welsh Government, and a good deal of reliance on subjective assessments.  Although the Welsh Government seems to have a good deal of confidence in that deal, it is not so much a sticking plaster to help a broken leg, as a fig leaf.

Even then, a ‘fair’ grant would need an adjustment mechanism. You would need to be able to adjust the Welsh block (before the deduction for the share of devolved income tax) as spending changes in the reference point – so Wales gets a consequential change as spending on health or transport in England goes up (or down).  The simplest adjustment mechanism is that used for Barnett – allocating a population share of changes in spending on ‘comparable functions’ in England.  But any formula that works in that way will have a convergence element built into it.  So the problems caused by the Welsh block grant falling below Welsh relative need will not go away.

Indeed, it is made worse because the devolved tax power transfers a degree of volatility risk to the devolved level, while devolved public services are counter-cyclical or inflationary in their cost. A devolved government needs to know as accurately as it can how much money it will have for those services, and the starting point for that figure must deliver a comparable level of spending to that in England.  The more subjective the mechanism for adjusting the numbers, the less certainty and accuracy there is in the system.

Each of these problems is capable of being fixed. It would be quite possible to build into the mechanism for implementing Silk an adjustment to the block grant to avoid convergence, and another to cut the block grant to allow for partially devolved income tax. It would even be possible to establish a system that was also robust and predictable, and pretty stable, though HM Treasury would probably baulk at the loss of control over spending policy that would entail.

But the problem is that such mechanisms will need to be applied by the Treasury, and run on Treasury estimates which will necessarily have an element of subjective estimation built into them. By contrast, the day to day, year to year, operation of Barnett is pretty automatic and clear. The most serious problems arise when it is changed at a spending review.  So ironically, there is a real prospect that the overall effect of devolving income tax while making sure other changes do not damage Wales financially will increase the extent to which Welsh public spending depends on HM Treasury’s calculations, not reduce it. Ensuring a measure of fairness may mean less clarity about how financing works.

And that is the real problem.  The goal of the Silk recommendations is to increase the National Assembly and Welsh Government’s ‘fiscal accountability’. That means establishing clear lines between what is a devolved responsibility and what is a UK responsibility. There is little point in voters being able to hold the Assembly to account for increased (or reduced) income tax if there can then be arguments that this only happened because the Treasury has allowed it. That would not add to accountability. In fact, by creating scope for extra arguments between governments and blame-shifting, it would reduce it.

There are two points here that require further consideration. The first is that the detail of any response implementing Silk needs to be looked at carefully, to see how that mechanism will work.  Steering a course that delivers the benefits of Silk – in the form of increased autonomy and accountability – is difficult, and UK Government claims of success should be treated with scepticism given the difficulties of delivering these objectives.

Second, one has to ask how long the financial system for devolution can go on being amended and patched in this way. It is increasingly looking like one of Heath Robinson’s strange jerry-rigged machines, and increasingly incapable of actually doing what is demanded of it. These problems are much worse for Wales than for Scotland, but Scotland has them too. What look like bolder approaches – such as my proposals set out as part of the IPPR’s ‘Devo More’ project – in fact resolve them much more effectively, by trying to start with a clean slate rather than perpetuating the mess that has accumulated over decades. At some point, clarity and comprehensibility need to take priority over political or administrative convenience.

As part of that, the Treasury needs to be asked a hard question: why does the same framework for financing arrangements have to apply to Wales as to Scotland and Northern Ireland? While almost every part of the three sets of devolution arrangements varies a good deal, the Treasury has insisted on a measure of symmetricality in the block grant and the Barnett formula. It is rather a superficial form of symmetry, as when one digs down there are many substantial differences between each country’s arrangements. At present it is Wales alone that is underfunded relative to need by the block grant, and therefore only Wales that is exposed to the acute problems of convergence on an English level of public spending.  Symmetry causes problems for Wales in a way that it does not for Scotland or Northern Ireland.

In his recent speech at the Wales Governance Centre in Cardiff, Welsh Secretary David Jones lauded the virtues of ‘asymmetric devolution’. Asymmetry when it comes to the operation of financing would have a direct and tangible value for Wales.  It will be interesting to see whether that was merely an attempt to defend a messy status quo, or a preparatory step for an imaginative deal to make fiscal devolution for Wales work.

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Filed under Calman Commission/Scotland bill, Devolution finance, Intergovernmental relations, Wales, Whitehall