Carwyn Jones’s financial shopping list

John Osmond says yesterday’s announcement on new powers for the Scottish Parliament should give our First Minister some ideas

Carwyn Jones needs a shopping list. This was my immediate response the Westminster Government’s announcement yesterday that the Scottish Parliament will be able to borrow more money, apply to issue bonds to access cash from capital markets, and also protect itself from sudden changes in spending levels. These powers will be brought forward in an enhanced Scotland Bill, which next week will begin its final stages through Westminster.

Overall, according to the Treasury at least, the powers are significant. According to a spokesman, “They will provide Scottish Ministers with a total of £12 billion of financial powers and represents the largest single transfer of fiscal power from Westminster in the history of the United Kingdom”.

Which of these new powers would Carwyn like to see for Wales? He shows no interest in taxation powers. But he should be looking closely at borrowing, including the clause which gives Scotland the power to issue bonds without new legislation. This seems like an easy compromise in the area of borrowing powers for which both Alex Salmond and, in his wake, Carwyn Jones have been pressing.

Salmond has been pointing to the need to pay for building a new Forth Bridge, and he has already drawn forward access to £200 million borrowing capacity in this financial year for that to go ahead. But what is the big project that Carwyn Jones wants to see happen for which he needs to borrow money?

Maybe he will enlighten us today when he announces his legislative programme for the coming session. But I wouldn’t hold your breath. Labour’s Manifesto committed to establish a Government Capital Infrastructure fund, but didn’t  go into specifics on what it would like to use this for.

The nearest the Manifesto came to hinting at a big project was when it committed to developing “the business case for the electrification of other parts of the local network in Wales”, in addition to pressing for the electrification of the Paddington to south Wales main line as far as Swansea.

I hope Carwyn Jones will flesh this out today by backing the report we published earlier this year A Metro for Wales’ Capital City Region – Connecting Cardiff, Newport and the Valleys. This scheme would be transformative for the Welsh economy. Moreover, it could be realised for a capital spend of between £2-3 billion, a sum well within the Welsh Government’s potential to borrow, since it could be serviced by just around 1 per cent of the Welsh block grant.

It could also be the ideal project for which, if it was allowed following the Scottish precedent announced yesterday, the Welsh Government could issue bonds.  These could be secured against both the revenue stream that would come from the investment, but also of course by the Welsh Government itself. And don’t forget, we have some expertise in this area in Wales. Welsh Water has been run now very successfully for more than a decade on the basis of a not-for-profit company set up to fund the operation through a bond issue. The Welsh Government should establish a similar arms-length organisation to build and operate a Welsh Metro for the Valleys.

This is the kind of visionary project for which devolution in Wales has been on hold for more than a decade. At a stroke it would demonstrate that Welsh devolution has a purpose and provide Carwyn Jones with the delivery totem he has been gesticulating about before and since the 5 May Welsh general election. Certainly, it would provide suitable a project for the delivery unit he has established within the Cabinet Office to get its teeth into.

A friend of mine with whom I’ve discussed this and who knows a thing or two about finance and the economy, questions my pinpointing rail and the Metro idea as a priority. Why not go for road, completing the dualling of the A465 across the Heads of the Valleys and building the M4 relief road for instance? My answer is that, apart from the environmental impact of more roads, one of the biggest challenges facing the Welsh economy is the projected population growth of Cardiff between 2010 and 2030, which is a staggering 42 per cent. That’s official, and I don’t believe it by the way. But even if its half that it presents an enormous housing and commuting challenge for the capital city and for the Welsh economy more widely.

The only way to handle change of this order is for more people to live outside the city in the Valley communities to the north, and to commute into the centre. But as anyone who does the commuter run into Cardiff knows, the roads are near to bursting already. Only an enhanced Metro rail system will answer. And that’s why we need the Welsh Government to have the borrowing powers to raise the money to invest in a Metro system. First, of course, it needs the vision and political will to make the decision to do so.

As well as the enhanced borrowing powers the changes announced to the Scotland Bill yesterday will:

  • Remove the need for Scottish ministers to absorb the first £125m of tax forecasting variation within their budget, providing more flexibility when responding to changes in spending levels, due to variations in tax income compared to forecasts.
  • Allow Scottish ministers to make discretionary payments into the Scottish cash reserve for the next five years, up to an overall total of £125m, to help deal with tax income changes, in the initial phase of the new system.

On the second, this could be significant in allowing the Scottish Government to smooth out its financial planning, but would the unspent cash reserves that would be accumulated be more secure than the End-of-Year Flexibility balances. This is of great significance in Wales since, as I pointed out here some weeks ago, Wales lost out by £385 million at the end of the 2010-11 financial year (compared with only the 23 million for the Scots) when accumulated End-of-Year balances were arbitrarily cancelled by the Treasury.

As well as seeking borrowing powers to emulate the Scots this should be the top priority in Carwyn Jones’s financial shopping list. No longer should the Treasury be able to repatriate to England significance chunks of the Welsh block grant in such underhand, End-of-Year cash grabs.

The question now is: can Carwyn Jones make headway on this agenda now or will he be forced to wait for the ‘Calman-style’ Commission the UK Government has promised to establish to review the Welsh financial settlement, an announcement on which we are told to expect before Westminster breaks for its summer recess next month.

I suspect the latter. In which case all eyes will turn, I’m told, to one of the following four men (no women) who are in the frame to chair the Commission: Lord David Rowe-Beddoe, former Chair of the Welsh Development Agency and more recently the Wales Millennium Centre; Liberal Peer Lord Alex Carlile QC, former MP for Montgomery; Sir Emyr Jones-Parry, former UK representative at the United Nations who chaired the All-Wales Convention; and Gerald Holtham, who chaired the Independent Commission on Funding and Finance for Wales during the last Assembly term.

The smart money is on Lord Rowe-Beddoe, in which case look out for a robust report. However, by the time it appears and is acted upon (this side of the 2015 UK general election?) we’ll have to put our skates on to catch up with Scotland. If I were Carwyn Jones I’d be putting my skates on now, and rather than waiting for yet another Commission, press ahead anyway. He could do it if he wanted to. As Gerry Holtham points out in an article in the current issue of the IWA’s journal Agenda, all it would require would be some skilful collaborative footwork with Welsh local authorities which already have under-utilised borrowing powers.

John Osmond is Director of the IWA.

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