Welsh Grand Committee 2014 – Warning On Tax Devolution To Wales

Mr Hain: The Secretary of State mentioned the Treasury’ generosity. In my experience as a Cabinet Minister, the Treasury never displayed any generosity and I cannot believe it has changed its spots.

The devolution of these minor taxes, which along with the borrowing facility is welcome, will mean that the Welsh block will be reduced by an equivalent amount. In the negotiations over that, will he press the First Minister’s case that the Barnett formula has disadvantaged Wales by up to £300 million? Therefore, the slice of that that is allocated to these taxes as a deduction from the Welsh block ought to be less than the result of a straightforward arithmetical comparison.

Mr Jones: It is remarkable that we got 10 minutes into the debate before Barnett was mentioned. Clearly, the Government recognise that Barnett has not got an indefinite life span. However, we regard it as important to stabilise the finances before we look at Barnett reform.

Nevertheless, the right hon. Gentleman will be aware that in October 2012 an agreement was achieved between the Wales Office, the Treasury and the Welsh Government that addressed the Barnett squeeze. It was very similar to the deal that he struck. Before every spending review, convergence would be addressed. That was accepted by the Welsh Government at the time. I do not think that anyone is saying that Barnett has an indefinite life span, but this is not the time to address it, given the state of the public finances.

______

Mr Hain: I am grateful for that clarification and I take the Secretary of State’s point. I am making an additional point to the convergence one that he has acknowledged, which is good. In the negotiations on the figure by which the Welsh block will be reduced in return for devolving these taxes, will the Secretary of State ensure that it is not squeezed beyond what would be fair? It is a smaller proportion of what it should be in the first place, given the way that Wales has suffered in recent times.

Mr Jones: I seem to recall that when the right hon. Gentleman was in government he also acknowledged the need to maintain the Barnett formula in its current form. I do not think there is any question of any unfairness to Wales. I can assure him and the rest of the Committee that the Treasury and the Wales Office will do their utmost to ensure that fairness is allotted to the Welsh Government.

____

Mr Hain: I am not seeking to make an adversarial point because we are at one on this tax devolution and in respect of the minor taxes and the borrowing that comes with them, but can the Secretary of State clarify this for the Committee? When these tax changes come in, let us say on 1 April, in the spending review leading up to that, the Welsh block will have been reduced by an equivalent amount to the revenue that is generated under those taxes. That kicks in from 1 April—let us say that it is reduced by £500 million, for want of a better figure—but the revenue comes back into the Welsh Government later in the year. It depends on how many houses are sold and how much landfill tax activity there is, what aggregates levy activity there is and so on. In fact the Welsh Government in that situation will experience a shortfall. They have already been badly squeezed. Has he considered that, and, if not, could he address it?

Mr Jones: Indeed, it has been considered and it is proposed to introduce a modulating mechanism. The right hon. Gentleman’s point is fair. There is no intention, obviously, for the Welsh Government to be disadvantaged as a consequence of the proposals.

The draft Wales Bill also provides for there to be a referendum in Wales, if the Welsh Government and Assembly decide that that should happen, on the devolution of a portion of income tax. The Silk commission recommended that income tax devolution should be subject to a referendum, as it was in Scotland in 1997, and we agree with that recommendation. I would support a yes vote in such a referendum as it would make the devolved institutions in Wales more truly accountable to the people who elect them.

____

Mr Hain: I am trying to follow the logic in what the right hon. Gentleman is saying. If the Welsh Government decided to impose a lower threshold for stamp duty, it might be that people would want to move to Wales, meaning that more houses would be bought. What is the logic of denying that same principle in relation to air passenger duty?

Mr Jones: The difference is that a house is, by its very nature, immobile—[Hon. Members: “So is an airport.”] Passengers can decide where they want to fly from, and the fact is that Cardiff is in competition with many other airports—not only Bristol, but Birmingham. It is the only international airport in Wales, so what was effectively being suggested was that we favour a single airport at the expense of others. We did not believe that that was right, because we believe—I repeat—that it would distort the wider UK market.

____

Mr Hain: The Secretary of State presents himself as a great tax devolutionist, but beware of Tories bearing gifts on devolution—let us leave that aside.

Airports are fixed. Passengers can move, but home owners can also move, as can those wishing to deposit items in landfill. I do not understand the Secretary of State’s logic, unless he actually wants to disadvantage Wales in respect of air passenger duty.

Mr Jones: I know that the right hon. Gentleman has been a frequent flyer. People frequently decide which airport to fly from solely for the reason of price. That is why Liverpool, for example, has done extremely well, but that is not a consequence of an unfair tax advantage. Liverpool has grown because it has improved its operation; Cardiff similarly can improve its operation. The right hon. Gentleman says, “Beware Tories delivering devolution,” but I am astonished that he is not welcoming what we propose and that he insists on looking a gift horse in the mouth.

____

Mr Hain: I strongly support my hon. Friend’s position. I very much applaud his phrase, which I think should resonate across Wales, about pooling the risks and sharing the rewards of being part of not just a political union but a fiscal union. There is a major deficit in the amount of money that is contributed to Wales compared with what we raise in Wales. The last figure I saw was around £9 billion: it may have varied since then. That is a serious impediment to this manic policy of tax devolution, which I think reflects a laissez-faire, free-market approach in which people want not active government but cut-down government—as, indeed, the Prime Minister has said. [ Interruption. ]

____

Mr Hain: On the point made by the hon. Member for Carmarthen East and Dinefwr, may I remind the Committee that most local authority revenue is provided centrally? If we reduce the ability to fund that centrally, local authorities are disempowered. The heart of the Conservatives’ agenda is to cut public spending and services, and to reduce Government intervention in supporting social provision, so I am surprised that a party such as Plaid Cymru, which poses as being on the left of British politics, is aligning with a right-wing Tory agenda to cut public provision in Britain.

Owen Smith: As is so often the case, my right hon. Friend is absolutely right. He demonstrates that Plaid Cymru’s nationalism or concentration on Wales trumps all social democratic inputs. Our view is that we need to concentrate throughout the whole of the UK.

____

Mr Hain: The right hon. Gentleman might have a fair point in relation to years gone by, but will he concede that more recently—certainly when I was Secretary of State in 2009-10—I negotiated with the Treasury a new commitment to ensure that there was underpinning of the Barnett formula, because, as public spending increased, Wales was converging to a point with the English average spending, which would go below the average, and that was going to damage Wales.

Mr Llwyd: I acknowledge that; that was a useful thing to do. I remember saying at the time that I agreed that that was the proper thing to do, so I am not throwing insults around.

After we discussed the “One Wales” agreement with Labour colleagues in Cardiff in 2007, the Holtham commission was set up to examine the matter. It concluded that Wales loses out by an average of £300 million to £400 million per annum. Now, unfortunately, we have a roadblock situation in which, if I understand it correctly, the Labour party is saying it will not proceed any further with income tax powers unless and until the Barnett problem is sorted out. It is a difficult problem, it needs sorting out, and we need a needs-based formula in due course. However, at the moment, it seems that the matter is being used as a barrier by anti-devolutionists within Labour, although I do not mean the right hon. Members I mentioned earlier.