First Minister Carwyn Jones set out his views on financial reform in a statement to the Senedd today
There is a consensus in this chamber, and I believe across Welsh civic society, that the devolved funding settlement for Wales is no longer fit for purpose.
The UK Government has gone some way to acknowledging this fact by committing to considering the case for financial reform for Wales. When that process gets underway, the Welsh Government will play a constructive role. As I have already made clear to UK Government Ministers at the Joint Ministerial Committee and elsewhere, no serious proposal will be dismissed out of hand, but neither will we accept a set of reforms that fails to address the fundamental flaws in the current system.
Today I wish to set out my objectives for financial reform.
As Members in all parties are well aware, the mechanism by which our budget is decided – the Barnett formula – lacks a coherent rationale. The formula is an accident of history and now has few defenders anywhere. The Prime Minister himself has acknowledged that the Barnett formula is “coming to the end of its life”, but, so far at least, the formula clings on.
Following the work of the Holtham Commission, we now have compelling independent evidence that the formula has become unfair to Wales. It leaves us significantly underfunded in relation to our needs.
Even more seriously, if the formula remains unreformed we are very likely to see underfunding persist and, over time, get worse. Without change we face a growing crisis in the funding of devolved public services in Wales, as the gap between our resources and our needs becomes ever larger.
Such an outcome is completely unacceptable. That is why the number one priority on financial reform must be significant progress on fair funding. All parties in the Assembly endorsed that position when we debated the Holtham report last autumn. Welsh Ministers and Assembly Members share common purpose in achieving a new and sustainable settlement.
The Holtham Commission proposed the introduction of a ‘floor’ to the Barnett formula as a first step towards fair funding, with a move to a new needs-based regime in the longer term. In my view, that is by far the best route map to reform: the work has been done; the case has been made. We can approach dialogue in the confidence that our arguments are robust.
That said, I am not naïve about the scale of challenge facing us. Dialogue means listening as well as talking and I will approach any proposals from the UK Government which address Wales’ needs with an open mind.
Fair funding is the centre-piece, but not the limit, of our ambitions for reform. We need effective borrowing powers as a high priority. This is important to help fund investment in Welsh infrastructure and to support economic recovery. Wales cannot remain the only part of the UK where the Government cannot borrow to fund roads and hospitals. That puts us at a competitive disadvantage compared to other parts of the UK and we look to the UK Government now to correct this. Wales can compete with anyone but we need a level playing field.
Our capital budget faces a massive real terms cut of 41 per cent over the next four years and borrowing powers to fund capital investment would help us to offset the damaging impact of these cuts. I am pressing for effective borrowing powers to be devolved as soon as possible to Wales, on a timescale no less favourable than is being offered to Scotland. That means real change before the end of the current spending review period in 2015, by making a start in this financial year.
I recognise, of course, that these powers would have to be devolved in a way that protects the ability of the UK Government to manage the macroeconomic fiscal position. The Welsh Government will be constructive in seeking a borrowing agreement which acknowledges our responsibility to act prudently. Borrowing is not a panacea; it is an additional tool which, used responsibly, can help us maintain buoyancy in the economy.
UK Government Ministers have indicated interest in exploring tax devolution for Wales. The Holtham Commission has done a great deal of valuable work in setting out the pros and cons of devolving each candidate tax.
Two major taxes – council tax and business rates – are already set in Wales. These generated, in aggregate, over £2.2 billion last year. There are, conceivably, advantages in handing powers over certain other taxes to Wales, particularly in those areas where policy responsibility is already largely or wholly devolved and the sums raised are relatively small in relation to our total budget.
Landfill tax, stamp duty land tax, aggregates levy and air passenger duty fall into that category. In aggregate, these taxes raise around £200 million per year in Wales and each may be a useful policy lever to help deliver the Government’s priorities. There might also be risk arising from devolution; the precise terms of any deal would be crucial to determining whether or not devolution would be in the interests of Wales.
If the UK Government wishes to propose devolution of some, or all, of these taxes the Welsh Government would be willing to consider how that could be achieved, as part of a package of reforms that also delivered progress on fair funding and borrowing powers.
Corporation tax could, if devolved, potentially provide us with a powerful tool to promote economic development. That is an attractive prospect but the budgetary risks would also be considerable. Once again, the detailed terms of any change would be crucial in determining whether devolution was in the interests of Wales but we intend to explore the options with the UK Government.
We are not seeking powers to vary income tax rates. The multiple administrative, economic, and legal obstacles to such a move mean that it could in any case only be feasible over the longer term.
Irrespective of the practical difficulties, there is also a constitutional issue to face. Devolution of income tax-varying powers would represent a fundamental change in the relationship between devolved government in Wales and our citizens. In my view, there would need to be a referendum before powers to vary income tax rates were passed to the National Assembly, as there was in Scotland in 1997. It appears from her recent statements in the House of Commons that the Secretary of State for Wales shares that view.
I began this statement by referring to the welcome cross-party consensus in this chamber on the need for change. That consensus is powerful and, I believe, gives us a strong voice in our dialogue with the UK Government. The scope for reform is multi-faceted and complex.
I argue very strongly that we need a single and coherent package of measures, not a bits and pieces approach. I have set out the Welsh Government’s position on financial reform, it is now time for the UK Government to do the same.