This is a guest post by Gerald Holtham, who chaired the Welsh Government’s Independent Commission on Funding and Finance in Wales and is adviser on finance to the Welsh Government. The question he addresses – of how to manage a reduction in the block grant to allow for tax devolution while maintaining the Barnett formula – is a highly timely one, given the ongoing discussions about the ‘fiscal framework’ for Scotland (for which this is the key issue) as well as corporation tax devolution for Northern Ireland and moves on income tax devolution for Wales announced in the Spending Review. (My own comment on this post can be found here.)
In all the discussions about tax devolution for all parts of the UK, a key issue has not been clarified. That issue is how to reduce block grants when a tax is devolved. Indeed there still appears to be no general agreement between the devolved governments and the UK Government about how to proceed. It is a particularly knotty question in discussions about income tax but also VAT and it has the capacity to delay devolution to Scotland and to stall it altogether for Wales.
There is little problem in the first year of devolution. An estimate can be made of the revenue foregone by the Westminster government, given prevailing tax rates, and that can be deducted from the block grant. Subsequently the deduction can be revised when actual revenues differ from the estimate. The difficulty comes for subsequent years when the deduction must be expected to grow with the economy and its tax base but must not be affected by changes in tax rates by the devolved administration – otherwise devolution of tax powers is not real.
The 2015 Spending Review makes two significant changes to the Welsh Government’s finances: it removes the requirement for a referendum before introducing the partial devolution of income tax, enacted in the Wales Act 2014, and it proposes to introduce a ‘Barnett floor’ for the overall envelope of devolved funding.
The referendum on the Welsh rate of income tax was a way of ensuring that devolution did not happen automatically (as is the case for Scotland) – a rare case of common ground between David Jones and Carwyn Jones. It never made much sense intellectually; if the rationale for income tax devolution was ‘financial accountability’, why should that be optional? And why should the body that would be made accountable get to choose whether it should be accountable? It made even less sense politically, if the aim was to make income tax devolution happen rather than ensure it could not. A referendum campaign would be hard to stage and harder to win. It would mean asking voters to vote for potentially higher taxes, with no guarantee that they would even enjoy additional spending as a result given the lack of clarity about the mechanism for reducing the block grant as a result. There would be little chance of a cross-party consensus, so while Conservatives had a strong interest in seeing income tax devolution since it would enable them to offer a tax cut, they would struggle to find allies for a referendum campaign (unlike 2011). Abandoning the referendum had become the only way to create even a possibility of income tax devolution, and now has support from not just Conservatives but Plaid Cymru.
The welter of responses to yesterday’s UK Spending Review and Autumn Statement have overlooked an important set of things the review did not do when it comes to managing the devolved UK. Despite proposals on the table for tax devolution for all three devolved governments (if not the English city-regions), we learned nothing about how this fiscally devolved UK will work. We got a new, updated edition of the Statement of Funding Policy (the seventh in all and the first since 2010) , but that remains essentially the operations manual for the Barnett formula it always was. Nothing substantial about the framework for managing devolved finances has been altered, despite recommendations for this from a variety of bodies including the Bingham Centre Constitutional Review, the Lords Economic Affairs Committee’s recent report on The Implications of Financial Devolution to Scotland and committees in all the devolved legislatures. The devolved governments remain as entangled in the UK system of public finance as they ever were.
What the Treasury could and should have done was put the basis for devolution finance under the Conservatives on a clear and transparent footing, in particular by:
The Sewel convention has rightly come to be seen as key to the working of devolution in the United Kingdom. It may have first been envisaged as a way of enabling Westminster to continue to legislate for devolved matters and maintaining something like the practical pre-devolution status quo in policy-making, when convenient and politically acceptable, but it was quickly understood to mean more than that.
One reason may be that devolved legislative powers are more far-reaching than was at first appreciated. More important, though, is the emergence of the ‘constitutional’ dimension of the convention. The wording used in the Memorandum of Understanding (first agreed in 1999 and not changed since then) may refer to ‘the UK Parliament … not normally legislat[ing] with regard to devolved matters except with the agreement of the devolved legislatures’, but Devolution Guidance Note 10 on Post Devolution Primary Legislation regarding Scotland has been clear that consent is also required where there are changes to the functions of the Scottish Executive/Government or Parliament. This means that functions cannot be removed from the devolved tier of government without its consent. It also means functions cannot be added without consent, meaning that the UK tier cannot get rid of inconvenient functions, or transfer them without adequate funding, if a devolved legislature objects.
In a speech at the SNP conference in Aberdeen, Grahame Smith of the STUC has apparently argued that the impact of the Trade Union bill currently before the UK Parliament is such that it requires legislative consent from Holyrood under the Sewel convention – ‘a consent that I am confident would not be forthcoming’, so in reality a veto on the bill at least for Scotland. The bill is unsurprisingly under heavy criticism not just from the STUC but also the Greens and Rise. The UK Government does not believe that the bill needs legislative consent, however (see Annex A of the Explanatory Note, available here; the bill itself is here as a PDF document).
Constitutionally speaking, it’s hard to disagree with the UK Government’s view. Industrial relations and trade union law, like employment law more generally, remains a reserved matter under Head H1 of the Scotland Act 1998, beyond the powers of the Scottish Parliament. The criteria for legislative consent under the Sewel convention are set out in Devolution Guidance Note 10 on Post – Devolution Primary Legislation affecting Scotland (available here as a PDF). Consent is not needed for bills which do not apply to Scotland at all; which apply to Scotland but ‘relate to’ reserved matters and do not alter Scots law on non-reserved matters; or which contain provisions applying to Scotland and relating to reserved matters, though they may make incidental or consequential changes to Scots law on non-reserved matters. Consent is only needed if the bill ‘contains provisions applying to Scotland and which are for devolved purposes, or which alter the legislative competence of the Parliament or the executive competence of the Scottish Ministers’.
This post also appears on the Institute of Welsh Affairs’s blog, ClickonWales, here.
The debate about whether there should be a legal jurisdiction for Wales, so that Wales would no longer share a system of law and courts with England, has rumbled on for some time. Plaid Cymru issued its own paper on the subject in 2010. In 2012, it was the subject of a consultation by the Welsh Government as well as a major inquiry by the National Assembly’s Constitutional and Legislative Affairs Committee. The proposition received a conditional endorsement from the Assembly Committee, which noted the legal differentiation between England and Wales that was already underway and the implications of that for a shared England-and-Wales jurisdiction. However, the Welsh Government’s enthusiasm for the idea had disappeared by time it submitted evidence to the Part 2 inquiry of the Silk Commission, when it said, ‘While it would not be appropriate to establish a separate legal jurisdiction for Wales now, such a development is very likely in the longer term and action can be taken which would help to ensure a smoother transition to such a jurisdiction in due course.’ More recently, support for a Welsh legal jurisdiction has come from Justice for Wales and from Plaid Cymru. The relationship of a legal jurisdiction to a ‘reserved powers’ model (an issue that has concerned me since 2005, and previously discussed HERE (my evidence to Silk Part 2) and HERE) means it is now highly topical.
Plaid Cymru is, so far as I know, the only political party in Wales to have taken a position on the issue of a Welsh legal jurisdiction. (The Welsh Government has, but that’s a government not Labour Party matter.) Responding to the recent WGC/Constitution Unit report, Leanne Wood said such a jurisdiction was ‘essential’.
This is not policy-making off the cuff. In 2010, Plaid Cymru held an internal discussion about the establishment of a Welsh legal jurisdiction and the form it should take. As their ‘consultation paper’ from that exercise isn’t otherwise available, and given the developing debate about this issue, with Plaid’s permission I’ve uploaded the paper in PDF format. The English version is available here, and the Welsh one is here.