Wales Bill — House of Lords, 2016-11-23
Topic: Macroeconomics
Peter Hain (Labour, Centre-left): 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.