My Lords, I shall speak to Amendments 120 and 120A, first to Amendment 120, standing in my name and those of my noble friends Lord Murphy of Torfaen and Lord Kinnock and the noble Baroness, Lady Randerson. It is a very straightforward amendment. Clause 2 introduces a new requirement that Parliament,
“will not normally legislate with regard to devolved matters without the consent of the Assembly”.
That was at the heart of the amendments that have just been addressed. It is an admirable clause, and its logic should surely apply to the Bill as well. In other words, the Bill should not come into effect—which is what the terms of Amendment 120 spell out—without
the legislative consent of the Assembly. That is all it is asking for. I know that the Minister has worked very closely with Welsh Government Ministers, and his officials with theirs, so it seems to me that there should be no objection on his part to this amendment. Indeed, I hope he will respond in a conciliatory way because in that way, I think, he will also expedite progress on the Bill.
I turn to Amendment 120A, standing in my name and that of my noble friend Lord Murphy of Torfaen. It will ensure that the Bill cannot come into force unless the Treasury has laid before each House of Parliament a document which sets out a fiscal framework for Wales agreed by the United Kingdom Government and the Welsh Government. As Your Lordships are aware from my speech at Second Reading, I am deeply sceptical that Wales will benefit from income tax devolution and fearful that Wales will actually lose out. The Treasury will not permit much-needed borrowing powers for Wales unless these are set against the revenue-raising powers that this Bill provides for. The First Minister desperately needs that borrowing to invest in infrastructure—from new roads and rail links to relieve chronic congestion, to new hospitals and schools. What is more, the Treasury will not otherwise provide the cover it could so easily do at such minuscule interest rates as currently exist for that infrastructure investment. I think this is financial smoke and mirrors—Treasury subterfuge. Yet the Government have trapped Wales between a rock and a hard place.
I am suspicious that Wales is being badly short-changed by this income tax devolution, which is what I seek to address in this amendment. It is not about the substance of devolution, because that has already been debated, but about the fiscal framework that accompanies it. We do not yet have sight of the fiscal framework to accompany tax devolution, though we are grateful to the Minister for promising, in answer—and on the record—to my question on Second Reading, that we would be able to scrutinise it very carefully by Report. I am also grateful for his recent letter on the subject. All I can say is that it will have to be a mighty, mighty generous fiscal framework to Wales to persuade me to support it. The Treasury in a generous frame of mind will be a novel experience for us all. I speak as someone who, like my noble friend Lord Murphy, has negotiated with the Treasury as a Cabinet Minister on behalf of Wales.
Therefore I wish to put a series of arguments to the Minister which will need to be fully addressed by the fiscal framework. In the time that he has left to tidy up that framework, I hope he will address them.
I draw first on the authoritative 2010 report of the Independent Commission on Funding and Finance for Wales, chaired by Gerald Holtham. The key point is that Holtham acknowledged explicitly the risk that Wales’s income tax base might grow more slowly than the United Kingdom’s income tax base—that is to say, the risk of differential tax base growth. If that happened, the Wales budget would shrink relative to the UK as a whole and the degree of redistribution to Wales from richer parts of the UK would reduce.
Holtham noted that one option could be to index deductions from the block grant to the growth over time of the devolved tax base in Wales. This would
completely offset a devolved income tax in Wales and eliminate any risk arising from differential tax base growth. Other options would only partially eliminate this risk. So Holtham came up with a compromise, concluding in paragraph 5.25 that the,
“best compromise appears to be very infrequent reviews of the tax bases of the devolved administration and a consequent adjustment to deductions from the block grant”.
Such reviews and adjustments would require negotiations between the Wales Government and UK Ministers. Holtham suggested reviews every 12 to 15 years. Frankly that is far, far too long a period in my view, especially with the outlook for the British economy looking so uncertain with Brexit, as the Chancellor confirmed in his Statement today.
Holtham made no recommendation for any kind of Treasury assurance to ensure that Wales did not lose out. The Holtham report simply recommended that the block grant should be reduced by an equivalent amount in the first year of the new system and that in,
“subsequent years, the size of the block grant deduction should be calculated to reflect the growth of the relevant income tax bases across the UK as a whole”.
That leaves the Wales budget open to being squeezed due to the Wales income tax base growing at a slower rate than that of the UK as a whole, with no guarantee that the Treasury would top up the block grant to fill the gap, meaning that Wales could certainly lose out. Holtham recommended that the block grant should be based on a needs-based formula that would determine budgets across England, Wales and Scotland. The three most relevant factors determining need would be demography, deprivation and costs.
Based on past spending in England, Scotland and Wales, Holtham recommended that Wales should receive £115 per person to spend on devolved activities for every £100 per person spent on comparable activities in England. Will that be achieved by the fiscal framework—I hope that the Minister will reassure me—or will Wales be left with a funding gap? Holtham acknowledged that, had his needs formula been applied in 2010-11, Wales would have received only £112 for every £100 spent on devolved activities in England, due to weaknesses in the Barnett formula. This would have left Wales with a shortfall, a funding gap of about £400 million. Will the fiscal framework eliminate that gap?
I also refer to the report by the respected Wales Governance Centre, Income Tax and Wales, published in February this year. On page 4 of the executive summary, it chillingly warns that,
“the method chosen to reduce the Welsh block grant to account for the additional Income Tax revenues has the potential to cause losses of hundreds of millions of pounds each year to the Welsh budget”.
Hundreds of millions each year—that is a massive risk, surely; a serious risk of hospitals and care homes closing, teacher numbers being cut, and local government budgets being savaged still further on top of the current round of austerity. Those issues need to be addressed in the fiscal framework.
The Wales Governance Centre draws attention to important developments since the Holtham and Silk commissions. UK Government decisions to raise the
personal tax allowance have drawn disproportionately more of Welsh incomes out of the income tax base than across the UK as a whole. So while UK income tax receipts have grown by 6% across the UK since 2010-11, the equivalent figure for Wales is only 2%—worryingly, only one-third of the UK figure. That is because Wales has income levels below the UK average. Fifty-five per cent of all taxpayers’ income in Wales comes from individuals earning less than £30,000 per annum compared with 42% across the UK.
When in November 2015 the previous Chancellor of the Exchequer announced the Government’s decision to drop the referendum requirement for income tax devolution to Wales, he also declared that they would protect the Welsh budget by introducing a floor underneath Wales’ relative per capita funding, to save it from any so-called “Barnett squeeze”. But lack of clarification about this proposed Barnett floor has prevented the Wales Governance Centre from checking in detail how it might interact with income tax devolution and subsequent block grant adjustments—so we just do not know. The floor may be flawed, but nobody can tell.
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I find all that extremely worrying. Wales is being pushed to take a leap into the economic darkness through tax devolution. Today’s Office for Budget Responsibility report, Economic and Fiscal Outlook—Devolved Taxes Forecast, has added to my concern. I refer particularly to table 2.6 on page 16. It leads to three specific questions about the likely squeeze on the Welsh government budget if income tax were to be devolved, to which the Government need to provide cast-iron answers in the fiscal framework.
First, how great would the cut to the Welsh budget be if the trend since 2012 for the Welsh share of UK income tax to fall each year continues after 2019, rather than stabilises in three years’ time at 1.25%, less than it was in 2012, for the rest of the OBR forecast period up to 2020-21? What if the OBR’s assumption proves wrong? How hard would the Welsh budget be hit?
Secondly, what would be the loss of income tax in Wales and consequential squeeze on the Welsh government budget if productivity growth and therefore real wage growth in Wales falls below the trend growth for the UK as a whole, assumed in today’s OBR report? How much further would the Welsh share of UK income tax fall due to the consequential rise in the proportion of taxpayer income in Wales attributable to individuals on relatively low incomes? This will surely happen if investment in Wales falls behind investment in the UK, or if Brexit hits the Welsh economy harder than it hits the UK economy, or if London and the south-east of England attract an ever-increasing share of new public investment. The latter was recently signalled by the decision of the transport department to defer electrification of the Great Western rail line to Bristol only days after the National Infrastructure Commission called for both road and rail links along the Oxford-Cambridge corridor to be upgraded, a recommendation endorsed by the Chancellor in his Autumn Statement today, although he made no mention of rail electrification investment to south Wales.
Thirdly, in view of the OBR’s latest forecast in table 2.8 of today’s report that Welsh income tax in 2020-21 will be £417 million lower than in its November 2015 forecast—that means that in just over a year we will have lost £417 million from the income tax take in Wales, in the OBR forecast—how much greater would the squeeze on the Welsh government budget become in the absence of a new Barnett floor, and without a super-humanly protective new fiscal framework, which I just do not believe the Treasury will concede? I hope that the Minister confounds that disbelief. Just eight months after its last forecast, in other words, the OBR is projecting a £417 million reduction in tax revenues, which is a massive amount for the Welsh budget.
I believe that offloading income tax to Wales is being driven to shrink the UK state. Conservative government economic devolution is a neoliberal objective, stunting the redistributive power of the state, and in this case stopping Wales benefiting from revenues redistributed from wealthy London and the south-east of England, where fully 40% of UK GDP is concentrated, and where the economy and therefore tax revenues are growing much faster. The north-east of England has a similar GDP per head and demographic to Wales, yet it will continue to benefit from that redistribution where Wales will not, at least not without radical compensating measures in the fiscal framework. If those compensating measures are as effective as they should be to top up the Treasury block grant to protect Wales, what on earth is the point of income tax devolution in the first place?
For all progressives, whether to be found on the Labour, Liberal Democrat, Plaid Cymru, Cross—and maybe even on the Tory—Benches, surely the great virtue of modern Britain is that we have pooled and shared both risks and resources right across the UK to ensure common welfare and decent standards of life for all our citizens, regardless of nationality or where you live. This is part of what it means to be citizens in the same United Kingdom society. We share the gains and the pains. For generations there has been redistribution from richer to poorer parts of the UK, whether former mining communities in the Welsh valleys or English regions such as Cornwall and Durham. Of course some of that will continue because not all income tax is being devolved—for now at least.
I understand that the proposed 10p income tax devolution to Wales is the equivalent of around 20% of the Welsh block grant—a fifth of the Welsh Government’s budget. The question therefore is: will that huge amount continue to be protected through the fiscal framework, against the warnings of the Holtham report and the Wales Governance Centre, and my own concerns as expressed in the last few minutes? That is a really big question for Wales, which has a large fiscal net deficit. The UK Treasury annually subsides Wales by nearly £15 billion, a massive amount equivalent to the entire Welsh government block grant. There are immense dangers to Wales which Welsh voters will be unable to resist by being deprived of a referendum. In the current climate, there is a danger that Wales is sleepwalking into potential impoverishment.
For that reason—and I conclude on this; I apologise for my argument being at some length, but I think the issues it raises are substantive and need to be put on
the record—I have tabled this amendment requiring parliamentary scrutiny of the fiscal framework and, most importantly, agreement to its detailed terms by the Welsh Government before the Bill can come into force. Given the spirit in which the Minister has responded to many of the amendments moved and tabled in the last few weeks, I very much hope that he will be able to accept this amendment. If there is a technical question around it, he may well be able to come back on Report to achieve the same effect; namely, that we will have the chance to scrutinise in some detail—perhaps by the committees of this House as well—the nature of the fiscal framework and what it will mean in view of the concerns that I have expressed, and which the Holtham report and the Wales Governance Centre have flagged up.