Are the Silk threads unraveling?

Lee Waters argues that the chances of having another Yes campaign for a referendum on income tax devolution are slim.

The Prime Minister and his deputy got the headlines they were after: Wales offered tax-raising powers by UK government. David Cameron was able to show the modern Conservative Party is pro-devolution and financially responsible, and Nick Clegg was keen to stress his party’s historic role in delivering ‘Home Rule all around’.

But just a week after the two men stood side by side in front of Richard Rodgers’ undulating wood celling, and the veneer is already beginning to peel away.

The UK Government have promised AMs the power to borrow money, and have given them the option to vary the rate of income tax and keep the proceeds.  But there’s a catch. The Chancellor may still get to decide what the borrowed money is spent on, and the tax powers are limited, and can only be used if there’s a fresh referendum within a time-limited period.

 

Responding to Silk

 

This is the fifth of a series of articles on the UK Government’s response to the Silk Commission’s recommendations on tax and borrowing powers for the National Assembly. Previous articles were carried in posts today and last week.

 

Taken together, I think the conditions Cameron and Clegg have insisted upon make it unlikely that the offer of income tax powers will ever be taken up.

So what’s going on?

“David Jones was very enthused about the announcement” of devolving tax raising powers to Wales, Welsh Conservative leader Andrew RT Davies told the BBC last week. Really?  The Welsh Secretary who has been fighting trench warfare within Whitehall against moves to give more powers to Wales, enthused?

Hard to believe at first, but the more detail that emerges of the conditions of the deal, the more David Jones’ enthusiasm makes sense.

The Welsh Secretary is something on a sceptic about devolution. He did his best to quietly undermine the referendum on extra powers in 2011, and there is no doubt whom Kirsty Williams was referring to when she noted “there were people in London who didn’t want the Silk Commission to be established”.

But the little discussed, and coded, clause in the UK coalition agreement to set-up ‘a process similar to the Calman Commission for the Welsh Assembly’ set in train a process that was difficult to stop.

Modeled on the Commission which required the Scots to take greater responsibility for raising the revenue they spent, the Silk Commission was set up to achieve similar ends.

In exchange for extra powers would come more responsibility.  To avoid the Government in Cardiff constantly blaming Whitehall for insufficient funds or powers, Westminster wanted to ensure that AMs would face the discomfort of having to raise some of the revenue they wished to spend.

Since last November’s publication of the Commission on Devolution in Wales, chaired by Paul Silk, a hotly contested battle has been raging within the coalition on how to respond.  The Liberal Democrats have expended political capital within Government to fight for devolving tax powers.  Whilst the Prime Minister and Chancellor have been relaxed about the principles of the first part of the Silk report, the Secretary of State for Wales, David Jones, has been fighting its progress through Government at every step. The eventual announcement was seen a victory for the Lib Dems, and defeat for David Jones. However, that caricature is proving too exaggerated.

It has emerged there are two significant qualifications to the deal announced at the Senedd.

It seems likely that the chance to hold a referendum to trigger tax-varying powers will be subject to a cut off date. Unless the vote is held by a certain date – there is some speculation that this will be 2017 – then the deal is off.

The existence of a ‘sunset clause’ in the new Government of Wales Bill was effectively confirmed by Wales Office Minister Jenny Randerson last week. She told ITV’s Sharp End “It is a mechanism that people have put forward as a way in which we can ensure that something happens as an outcome to this in a reasonable timetable”.

By coming out in favour of holding a referendum soon, and pledging to campaign for a yes vote, Andrew RT Davies and Kirsty Williams hope to put pressure on Labour to draw down the tax powers. A position also backed by Plaid Cymru.  However, the First Minister seems to have no appetite for another referendum, or for ever using the power to change income tax rates. After all the Scottish Parliament have had the power since 1999 and have never used it.

Even if he wanted to get greater tax powers Welsh Labour MPs would be in open revolt if he tried.  Shadow Welsh Secretary Owen Smith – who ironically is one of the more pro-devolution MPs – wrote on a Labour blog last week that devolving income tax without more generous grant funding from Westminster  “would be irresponsible in the extreme and lock in under-funding”.

Just as he warned David Cameron that he could only expect him to campaign against Scottish independence in next year’s referendum if he delivered on the Silk report, Carwyn Jones is now trying to pressure the PM to deliver improvements to the Welsh funding settlement if the PM wants the Welsh Government to take greater responsibility for raising its own revenue.  He told AMs last week “I could only campaign for income tax devolution if I was confident that the overall funding regime in place at that time was fair to Wales”. And there’s no chance of that happening unless Scotland leaves the UK, and even then no guarantee.

The First Minister is a lot keener on getting borrowing powers, as well as getting his hands on so-called ‘minor taxes’, like Business Rates, the Aggregates Levy and Air Passenger Duty. But despite a recommendation from the Silk Commission to pass them down to Cardiff, the UK Government have refused.

Stamp Duty Land Tax and Landfill Tax are to be devolved to Wales, but the Treasury may try to decide how the proceeds are used. After all the Welsh Government already has the power to borrow using the powers it took off the old WDA, but it can only exercise them with the approval of the Chancellor.  It is far from clear how much lee-way George Osborne will give the Welsh Government, especially if it is to fund anything other than a new M4.

As Conservative MP Glyn Davies noted on his blog “If its using powers already in existence, and limiting it to what UK Govt approves, not sure how much of a constitutional change this actually is”.

But perhaps the biggest impediment to getting Labour to sign-up to holding a referendum are the constraints on how the income tax varying powers will work. The Silk Commission recommended that Wales be allowed to vary individual tax bands, but the Treasury seems to insist on the same arrangements as Scotland, where it is only possible to raise or cut all tax bands at the same time.

So AMs will be allowed to vote to increase everyone’s income tax in Wales, but they will not be able to cut the top rate of tax.  That alone is enough to kill a referendum campaign before it begins.

As the person charged with shaping the messaging for the Yes for Wales campaign in the 2011 referendum, I do not see how you could sell that message to a public sceptical of politicians in an age of austerity – Even if you could get all parties lined up together to trigger a referendum and campaign in favour.

No wonder David Jones was enthused. As the old saying goes, he who laughs last, laughs loudest.

Lee Waters is Director of the independent think-tank, the Institute of Welsh Affairs. He was Vice-Chair of the cross-party Yes for Wales campaign during the 2011 devolution referendum. This article first featured in today's Western Mail.

8 thoughts on “Are the Silk threads unraveling?

  1. A fascinating article, but even those of us who desperately want it to be true are left with more questions than answers. Above all, how likely is it that any body of politicians offered more power will decline it, and granted more power will not eventually use it? The Scottish exception, if exception it be, is due entirely to the canny Salmond doubling up by staking his winnings on the far greater prize of full independence, rather than just taking and spending the money he has in effect already won. Can Welsh Labour, which now has a very strong and sincere devolutionist streak, suddenly turn Unionist if the Welsh Conservatives turn devolutionist and start pushing tax powers? Will Labour activists permit their party to be caught so badly out of position on the issue? And if it comes to a referendum, who in Wales has the organisation and the money to put together a ‘No’ campaign with a realistic chance of success?

  2. What I cannot understand is the timidity of the politicos here in Wales concerning the need for a referendum on a small measure of financial responsibility for our own financial affairs. For heaven’s sake, community councils in Wales have had the right to raise money since 1884! 130 years later, and now we are expected to hold a referendum so that our national legislative body can have the same right.

    Even Plaid Cymru seem to have accepted this as somehow unavoidable. Surely our nationalist party should not just meekly accept a proposition put forward by two unionist parties, but rather present a counter argument to the Welsh public? For example, that this issue is best considered as part of a Welsh general election campaign in 2016, where any new tax-varying powers could be linked to specific policies proposed by the various parties. Voters could then see what any such powers would actually mean for them, so there is a relevance and wider context to the whole debate. There is undoubtedly a growing desire for more control over areas such as energy, broadcasting, justice so all the parties in favour of the move would need to do is to explain to the public that having more responsibilities over these areas has to be accompanied by a corresponding willingness to ensure that a portion of people’s income tax goes towards a Welsh Treasury rather than to Westminster.

    It might seem impossible to envisage such a scenario at present, but a YES vote in Scotland next year, inspired maybe by the democratic accountability argument, just as much or even more so than the historic nationalist argument, will change the situation completely.

    Plaid Cymru need to prepare for this eventuality and start to flesh out the argument that the Welsh 2016 general election should be the right and proper place for a reasoned discussion about some tax-varying powers. Should electors vote for parties in favour at that election, this change should be introduced immediately without the need for a costly and unnecessary referendum imposed by London.

  3. Is it not the case that the exercise of borrowing powers requires a flow of tax receipts to support the commitment to service the debt? Hence the need to devolve the minor taxation powers in order to get the new M4 built. I don’t think it is in our interests to have income tax powers, whether we use them or not, unless our rate of long term growth exceeds that of the UK average. Otherwise we will see a relative decline in our funding.

  4. The governments pre SNP and Slex Salmond had the power to vary income tax but didn’t. Obvious if you have a higher rate than England the public will be angered, if you have a lower rate then you have to cut public expenditure and the public will be angered.

  5. The sunset clause is unworkable. If the Tories (David Jones apart) really do want Wales to take responsibility for some of its own funding why force a referendum which will be lost because the public don’t understand what is being offered and the largest party in Wales won’t campaign for or even support a ‘yes’ answer. This is going to hang for a long, long time. As Lee Waters says the form of income tax devolution being offered is hardly usable at all – that’s why Slk rejected it. Why would a Welsh government risk unpopularity and spend political capital campaigning for a power they can’t use?

  6. Bill, we won’t know for sure until the UK Government publish their full response – though quite why there is a delay it is not clear.

    But it seems unlikely that the revenue stream from the minor taxes will be enough to fund a debt of the order of £1 Billion needed to finance a capital project the size of a new M4. Income tax is the only pot big enough. Of course WG has formal ability through WDA powers – and informal powers through using local government borrowing powers – but these require Treasury sign off. This does not appear to be forthcoming

  7. I have always considered it bizarre that a thirty year contract or a 30 year PFI project can be set up without an income stream whilst it is needed to borrow

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