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.
The paper does clarify some important issues. First, the ‘lockstep’ will be maintained; the same Welsh rate of income tax must be maintained in relation to each tax UK tax rate (standard, higher, 45 per cent). The idea that the Welsh Government should have the power to set different rates for each band – carefully advanced by both the Holtham and Silk Commissions – is dropped. This move is justified on the ground that devolution of the power to set different rates ‘could distort the redistributive structure (or progressivity) of the income tax system and could potentially be detrimental to the UK as a whole’ (para 2.12). This aspect of the Calman proposals has been advanced despite its rejection by both Welsh commissions that considered the point.
Second, the paper confirms that business rates should be fully devolved. This was part of the Silk recommendations, and has been separately endorsed by the Welsh Government following the Morgan review. It was, however, left out of the Cameron/Clegg announcement, perhaps by oversight. If so, that has now been remedied.
Third, the Welsh Government’s borrowing powers will be introduced immediately, but will also be limited to the devolved tax base. This implies some limited borrowing capacity when SDLT and landfill tax are devolved, but with significant powers only becoming available if income tax is devolved. But there is also what appears to be a separate additional commitment to provide some early access to capital borrowing to fund the M4 improvement works.
At the same time, the paper is silent on some other issues. It does not say who should be able to call the referendum on the new income tax power, only that ‘the model in the Government of Wales Act 2006 worked well in terms of the referendum on legislative powers’. That would imply that the power should be vested in the National Assembly, but exercisable only a) on the proposal of the Welsh Government and b) by a two-thirds majority.
The paper also has little to say on the question of how the cut in the block grant to allow for the devolved relate of income tax might be made – it just talks of a ‘corresponding’ reduction in the block grant. This vexed issue – again, the subject of detailed consideration in the Holtham Commission report and adopted for Scotland as part of the deal to secure passage of the Scotland Act 2012 – is a striking omission. Moreover, the issue of how the cut in the block grant will interact with that (which I discussed in the summer HERE) is glossed over; all the paper does is refer to the October 2012 agreement as ‘robust arrangements …. [which] provide a firm basis for the devolution of income tax’ (para. 2.16).
The paper also offers relatively little on the Silk recommendations regarding information about the financial arrangements for devolution, which remain opaque. (For example, HM Treasury has apparently updated the population figures used to calculate consequential payments under the Barnett formula following the 2013 Spending Round, but has still not published the new ones.) It also offers little on institutional arrangements for the new powers, other than to note that ‘Additional costs incurred in implementing and administering these new devolved powers will be the responsibility of the Welsh Government, as set out in the Statement of Funding Policy’ (para. R29, p.18). It also fails to offer a version of the ‘no detriment’ provision for Scotland, to ensure there was no harm on devolved funding arising from changes in UK tax policy that had knock-on effects on devolved tax revenues.
This raises three sets of concerns about the UK proposals. First, what is proposed for Wales is largely the Calman package as enacted for Scotland. Given Danny Alexander’s comments before the Silk Commission was even established, why did anyone need to bother with the whole Silk Commission process, if the UK Government’s intention was simply to apply the Calman model from the outset and not take into account the changes to that which the Silk Commission recommended? If the main factors influencing UK Government policy were inter-departmental and inter-party bargaining at Westminster, members of the Commission might have reason to wonder why they had to spend so much time and effort to help the UK Government end up with what starts to look rather like a pre-ordained outcome.
Second, where the UK Government proposes changes from the Scotland Act 2012 implementation of the Calman model, they are subtractions from that rather than additions or variations to fit Welsh circumstances. It is unclear why Calman should be applied when it comes to matters like the income tax lockstep but not the ‘no detriment’ principle or the provisions about introducing new taxes. If Calman is the model, should it not be applied consistently save when there is a good reason to do otherwise?
Third, the UK Government proposes to pass on the additional costs of the new arrangements to the Welsh Government’s resources. This does follow a Scottish precedent, and shares a problem of principle that arose with Scotland: why should the UK Government’s policy to promote financial accountability of the Welsh Government which is not something sought by the Welsh Government be paid for by that government? If this policy is intended to implement a UK Government not Welsh Government policy objective, why should the UK Government not bear the costs? In a Scottish context, there was at least a dubious if implicit rationale for doing so – Scotland is generously funded through the Barnett formula arrangements and has financial room for manoeuvre. That is not the case for Wales, and no good reason has been given for the UK Government’s approach. Indeed, given the Welsh Government’s scepticism about financial accountability and concern about the absence of ‘fair funding’, would it not be in the UK Government’s interest to offer it some sort of incentive to sign up, not increase the burden of doing so. As it stands, the UK proposals simply invite the Welsh parties to ask why Welsh services should be further under-funded to pay for such a UK Government policy.