Devolution’s next step in Wales

John Osmond discerns the outline of a political deal emerging to hitch taxation powers to the wheels of Barnett reform

Now that the referendum on powers is out of the way we can start talking about what really matters: the money. It was noteworthy that interviewed in Cardiff the morning after the vote, UK Liberal Democrat leader Nick Clegg was quite clear about the next step on the Welsh devolution road. He said it was about looking at the fiscal powers of the Assembly and making it responsible for raising at least some of the money it spends.

This should have come as no surprise. Writing before Christmas in the latest issue of the IWA’s journal Agenda (republished here),  former Welsh Liberal Democrat leader Mike German who is now in the House of Lords, stated in terms:

“After a successful referendum next March, the Coalition will turn its attention to the way in which Wales is funded. Expect a real step forward in the way in which Wales can have an effective fiscal influence over its destiny.”

What is being prepared is some kind of cross-party Commission, along the lines of the Calman Commission that preceded the present Bill on changing the funding arrangements for Scotland that is now going through its final stages in the Scottish Parliament, following its approval in Westminster. This will be trailed in the run-up to the May Assembly election, certainly in the Welsh Liberal Democrat’s manifesto. It will be interesting to see whether mention is also made of it in the Welsh Conservative manifesto because the lead in setting up the Commission is likely to come from the Conservative Secretary of State for Wales, Cheryl Gillan.

Of course, at present Labour is setting its face against all this. Whatever their other differences First Minister Carwyn Jones and Shadow Secretary of State Peter Hain are at one in rejecting any notion of taxation powers for the Assembly. In an interview with the Western Mail on 19 February Carwyn Jones said taxation powers could only come following another referendum. And he added, “I think one referendum is enough for me in my political lifetime. I think this is the last referendum of my political career.”

However, in a statement to the Senedd yesterday, the First Minister was rather more nuanced about Wales’ funding prospects:

“Ever since the Holtham Commission demonstrated that Wales is significantly underfunded, there has been a cross-party consensus in this chamber that our system of funding needs to change. However, UK Ministers stated in the Comprehensive Spending Review that funding reform must wait until after the referendum. The referendum has now been held and it has been won. We will therefore be looking for an early start to substantive talks with the UK Government on the final Holtham report, based around the position that all parties in the Assembly endorsed in a debate last autumn. This means that fair funding must be the immediate priority. We are prepared to consider any proposals that represent a genuine and sustainable improvement to the status quo.”

As Carwyn Jones says, Labour’s priority is reform of the Barnett formula which determines the size of the Welsh block grant. The Holtham Commission calculated that if it reflected the needs of Wales, rather than being tied to a crude head count, then we would be better off by at least £300 million a year.

The Treasury has accepted the force of this argument – no-one quarrels with the Holtham conclusions. However, the Conservative coalition at Westminster says that any change to the funding formula must await sorting out the deficit in the British budget, which is another way of kicking the issue into some very long grass indeed.

So what could a “a genuine and sustainable improvement to the status quo” look like. I think what is being prepared is a commitment to deliver a floor below which the Barnett settlment won’t drop (as negotiated by Peter Hain in the dying days of the Labour government) coupled with an early look at the the basis on which the block grant is calculated, following Holtham. This would be in return for an acceptance that the National Assembly must emulate the Scottish Parliament in being responsible for raising at least some of its own money. The case for this was set out by Gerald Holtham in another article in the current issue of Agenda in which he wrote:

“There is an argument that fiscal devolution would only work if the block grant were seen to be on a fair and robust basis. Otherwise the devolved government will always be frightened to use taxation powers to deviate from English rates in case it calls the grant into question. And even devolving half of income tax to Wales or Scotland will only pay 15-20 per cent of the devolved budget. The block grant will account for the vast bulk of the rest… Meanwhile, that 20 per cent of own-revenue would make a big difference to the accountability and responsibility of Welsh politicians.”

So how would the politics of all this work? A lot hangs on the outcome of the May election and the balance between the parties. If Labour ends up with 29 or 30 seats and the Welsh Liberal Democrats with three or four, then there would be at least two incentives for Labour to negotiate a deal with the Lib Dems rather than Plaid.

As a much smaller party the Lib Dems would have less policy influence and fewer seats around the Cabinet table that would Plaid. Also, the word on the street is that a message emanating from Labour’s UK leader Ed Miliband, is that he would be quite like to see how a Labour/Lib Dem coalition in Cardiff worked out, as a trial run for one that could negotiated in London following the next UK general election in 2015.

And what would the Welsh Lib Dems be looking for in return? One thing would be Labour’s agreement to hitching an early reform of the Barnet formula to devolving fiscal responsibility to the National Assembly along Scottish lines.

An intriguing question is why the Lib Dems are so keen on pushing fiscal devolution as the next step for Wales. What’s in it for them? The only reason I can think of is that they’re desperate to be associated with delivering a clearly identifiable part of the Welsh devolution settlement. So far it’s all been down to Labour and Plaid Cymru. And as I said at the start, what really matters is the money.

John Osmond is Director of the IWA.

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