Wednesday, 21 November 2012

Silk Commission - Part One : Finance & Devolution

On Monday, the Silk Commission published the conclusion of the first part of its remit, covering the devolution of fiscal powers. The full report and executive summary are available here.

There were a total of 33 recommendations, and I've summarised them below. I strongly recommend you read the executive summary at the very least yourselves though.

Devolution of tax powers
Will devolving Air Passenger Duty for long haul flights with Westminster
retaining the control over APD for short haul flights until they decide it meets
their own policy objectives....heh....heh....I'll just catch my breath...
result in a turnaround in....oh f**k it.
(Pic :

"Smaller yielding and local taxes" – It's recommended these are devolved. These include : Air Passenger Duty, Stamp Duty (on land), Aggregates Levy and Landfill Tax. These don't amount to much revenue (less than £200million), but could be used as tools to help Welsh Governments meet policy objectives. For Air Passenger Duty, it's recommended it should only apply to long-haul flights in the short-term, with Westminster deciding whether to go the whole hog as part of its own aviation policy. I think attracting long haul flights to Cardiff requires more than that. And the suggestion that Valley, Swansea, Pembrey or Harwarden could be developed into international airports off the back of changes in APD is hilarious.

Non Domestic (aka Business) Rates
– NDR is currently "half-devolved". The Commission recommends devolution in line with Scottish arrangements. Parties have focused on changes here as a way to boost small businesses, while the Welsh Government carried out its own review earlier this year.

Corporation Tax
– The Commission accepts it's "a powerful policy", but recommends against devolving corporation tax - unless it's devolved to Scotland and Northern Ireland.

Corporation Tax (within enterprise zones)
– Subject to state aid requirements, the Commission believes that "enhanced capital allowances" should be allowed in Welsh enterprise zones.

Income Tax (Partial)
– The headline-grabber. Current bands (20p, 40p, 50p) would be reduced by 10p respectively, and the Welsh Government will be able to either restore the status quo (raising each by 10p) or vary things. The Welsh Government would have the power to set each rate independently of one another. So, for example, they could set a basic rate of 19, a higher rate of 41 and an additional rate maintained at 50. The block grant would use "indexed deduction" to reflect the changes.

The impact of income tax changes is small. If the higher rate rose/fell by 1p for example, it's estimated to make a £16million difference either way. It's the basic rate which has the power as a potent tool, with a £180million impact either way.

I think the Assembly would be terrified of pursuing a different income tax regime from England, because that's been their mentality since day one. I wouldn't be surprised if they maintain the status quo, perhaps raising the basic rate to fund one off projects. Or, they could raise the higher rates to service borrowing when required, or lower them to encourage wealthier people to move to Wales.

94% of residents living in Wales, work in Wales, so I don't see what the report's point is about an "interconnected economy with England." The numbers out-commuting amount to 2.5% of the Welsh population. It looks to be the opposite to a large degree – the likes of Flintshire aside. They do, however, conclude that "modest" changes to income tax would have little impact on cross-border migration.

Why do people think these problems have never been encountered in human history? Have they ever been to a "eurodistrict"? Or US state border? Or better still, the Irish border? Or the Isle of Man?

It's also recommended that new taxes - within devolved areas - created by the UK Government should be considered "with a presumption in favour of" devolution to Wales.

Borrowing, "fair funding" & legislative requirements

"Toytown Treasury"? Or big shake up in economic reporting and powers?
(Pic :

Last month, both governments agreed that the Welsh Government should have borrowing powers, as long as they raise the income to service it. So the fact that borrowing powers were included wasn't a surprise.

Currently, the Welsh Government needs to plan capital spending over a three year period. It's a fixed pot of money set by Westminster. The report recommends that the Welsh Government be able to borrow directly from the UK Government – with agreed limitations – for both:
  • Capital expenditure – Suggested up to £130million per year.
  • Revenue expenditure shortfalls – Suggested up to £100million, with total debt limited to £500million (as currently).

The exact figures, limits and arrangements would need negotiation between the governments. The fact Wales has a significantly lower PFI debt than Scotland – just 1% of the UK's total - suggests Wales might be able to service higher levels of borrowing, perhaps up to £3billion in total.

"Fair funding" wasn't part of the commission's remit, but they suggest a new funding arrangement be agreed before moves on this – so does Carwyn Jones - as both governments will share responsibility over taxation. The Welsh Government might also be able to switch spending between capital and revenue spending – subject to agreement.

It's recommended a "Welsh Treasury" is established - effectively replacing the existing Finance Department – to oversee it. That seems like a cosmetic measure to give us the illusion that these are heavy duty powers. But there are indications that economic monitoring will be significantly beefed-up.

The Commission recommends that within this Parliamentary term (by 2015), a Wales Bill is passed to include all the measures listed, and including provisions for a referendum. All the tax and borrowing powers - except income tax powers - would come into force in April 2016.

The referendum

Sigh. Here we go again.
My bet is on a sub-30% turnout sometime in Spring 2018.
(Pic : BBC Wales)
It's proposed that the power to vary income tax be decided via referendum, once both governments agree to funding reform. Simon Thomas AM (Plaid, Mid & West Wales) let slip on Twitter that it was at the behest of Labour and Conservatives.

True Wales "warned" that tax powers would follow a successful 2011 referendum. They were right, but for the wrong reasons. In an ironic (and hilarious) twist, Welsh Labour have explicitly said several times that they're not seeking tax-varying powers. It's a logic grenade being hurled into the True Wales camp. Do they campaign against Westminster's mandate to decide these things? This was their doing.

Once again, a Welsh constitutional decision, which is very staid, dull and technical – but important - will rest on whether Labour want it or not. All indications are that the answer would be no.

Welsh Labour are,on the whole, pretty good at keeping in step with public opinion, but this might be an example of when they're not. Polls have consistently suggested a majority are in favour of tax-varying powers, whilst, more crucially, there's a suggestion people don't see the point in a referendum on the issue.

A referendum on whether the Assembly should have the power to vary in....your eyes are glazing over, aren't they? Richard Wyn Jones and Roger Scully put it better than me. A referendum would be easily won IMHO, but if we're going to have referenda, let's ask something significant and worth the effort.

The referendum won't happen this Assembly term, and income tax powers (which I said are pointless as, in practice, there'll be a fear of differing from England) won't come before 2020. Seven-to-eight years. In political terms, that's a glacial pace.

There might be a legitimate reason for the "delay" - to get the right state apparatus in place. However, while the Assembly tinkers with landfill taxes and air passenger duty for long-haul flights (that don't even serve our only major airport); Scotland might have seceded, on current trends Offa's Gap is likely to be wider than it is now and our tax base could be much, much smaller.

Conclusion : Pissing into the wind

Aggregates levy. Yeah.
(Pic : Telegraph)

The announcement confirmed the nuggets of info released over the last year or so. It's not exciting stuff, and I doubt it'll make much of an impact, but overall, it's another one of those "steps in the right direction."

The big - and perhaps only significant - positive is the devolution of business rates, which all parties support reforms to. That lever's also hefty in terms of the revenues involved. Borrowing powers could be used effectively too. Emphasis on the "could".

Labour get what they wanted : control of "minor taxes" like air passenger duty, capital borrowing powers, an acknowledgement that a "fair funding" agreement is needed and income tax powers are stalled.

I imagine the other parties will be happy too. Tories because they can propose tax cuts/"responsibility" in Assembly elections without making any real impact, Plaid and Lib Dems (mostly) for the same reasons as Labour. Though Plaid have said, perhaps unsurprisingly, that these recommendations "don't go far enough."

I would've preferred recommendations that put pressure on the Assembly. That means, in addition to business rates, borrowing (including bond issue) and the minor taxes : complete control of income tax, corporation tax - and perhaps vehicle excise, fuel duty and alcohol/tobacco duties too (because transport and health are [supposed to be] devolved).

And all to come into force in the next Assembly term - minus referendum - so we can go into the 2016 elections with manifestos promising policies that would make people sit up and take notice for a change.

I might be pre-judging Part II, but I hoped I would be saying Wales is reaching - in constitutional terms - a federal "endgame". If it's done well, that's something I could live with. This isn't that, and every time it's fudged, it pushes me further into the "screw the lot of you" camp by giving me the distinct impression that Wales isn't being taken seriously in either Cardiff Bay or Westminster.

I doubt I'm the only one pissed off with the same constitutional arguments flaring up again and again. It isn't exciting, it's dull and unnecessary. Gradualism might be appropriate for devolution as a whole, but the economy and fiscal responsibility scream out as areas where Wales - quite literally - can't afford to take mere "baby steps in the right direction".

We'll be back here again in the 2020s, probably deciding whether the Assembly gets full control of income tax, or other minutiae that should've been decided years earlier.

We'll be arguing over whether we have another referendum too. That could be because of our political class's innate lack of confidence in their own abilities, or even their own feelings of inadequacy about their mandate to govern Wales.

And, considering how joint powers over legislation works/worked so brilliantly, I wonder what glories await us with taxes.

We could have a nation state that treats federalism as a serious proposition, whilst being able to elect politicians at "state level" who can improve lives with meaningful, not half, or even quarter measures. If AMs want to play in a sandpit with their paper round money, and MPs approve of that, I think it's fair to treat both accordingly.

If anyone wanted reasons why the vast majority of people don't give a toss about Welsh politics - this is one of them. It's taken me just 20 months to go from wide-eyed optimist to cynic of all things "devolution".

Maybe those massed ranks are the wise ones, and it's never been a more tempting time to join them.



  1. Bluntly put, Owen but I think you're overreacting. It's important to get the right parts in place when it comes to taxes or all hell would break loose. I think it's inevitable corporation tax will be devolved at some point.

    And reading between the lines am I right in thinking this is your last blog!?

  2. Hope it's not your last blog.

  3. As this is one of the best blogs in Wales I would certainly hope its not the last entry... you are of course spot on about taxation powers and the timidity of our parties, Labour in particular.

  4. I don't have a problem with Labour's position, Cibwr. They're just being honest, as they've explicitly not sought tax varying powers. The fact it's on the table is a compromise on their behalf in some respects. Plaid have been sensible enough to pretty much brush these recommendations aside as well, not bigging them up.

    I thought the Tories and Lib Dems would've taken fiscal responsibility more seriously. If they honestly, deep down, think that APD and landfill tax are worth welcoming as "major fiscal levers" then they've done Wales a disservice. Part of me actually hopes these recommendations get thrown out or shelved. I'm not getting my hopes up for Part II, put it that way.

    As for being my last post. No. But it might be the beginning of the end, I haven't decided yet. Because I have some misplaced sense of duty, and nothing better to do with my spare time, it's unlikely. So, until I say anything differently it's best stick to the report's findings. :)

  5. The Silk Report will never be impelented. It's already a busted flush. If nothing is implemented soon (i.e. at time of next Westminster GE) than by 201 and vertainly 2020 the Silk Commission will have passed its sell-by date.

    It will be laughed at by 2020 because things will have moved on so much. Either Scotland will be independent or not, a second term Tory Govt in London (my guess) will radicaliss Labour or a Labour govt implementing Tory policies will radicalise Labour in Wales. On top of that the Basque COuntry and Catalonia will be declaring independence. Now the Basque Country and Catalonia will not be big news in the Canton Cross pub but it'll have some traction if people see that small countries are managing themselves quite well. Even if only to unnerve the governing class.

    Too little, too late, too timid and nobody to implement it.


  6. So frustrating. It's yet another fudge. The timetable is horrendously prolonged. But I don't know how much we can complain. It reflects the timidity of Labour and the Conservatives, the two main parties in Wales. We're not going to get a Plaid Cymru document, because Plaid Cymru finished third.

    We simply don't know what shape the world, Wales, or the UK is going to be in by 2020.

    But we're pretty much stuck with this timescale in terms of fiscal powers. The big "joke" to me is that the report clearly shows that if we'd had income tax devolution already, Wales would be better off. Only by a tiny amount. But it's symbolic really.

    Having a referendum on this is a crazy idea. I am completely relaxed that we'd win. But it would be a nightmare to explain to people.

    Sometimes I feel that those of us who want self-government and devolution to work are banging our heads against a brick wall.

  7. Thanks for the comments.

    I think there's a good chance that it'll be implemented (depending on Part II). There's nothing controversial proposed. I think the Lib Dems in particular will be pushing hard to get a Wales Bill though Westminster to try and prove they're still relevant and take credit.

    And I agree with you both that the timescales involved are quite ludicrous. I don't see the point of going through the expense of setting up a "Treasury", unless there's a guarantee that income tax and corporation tax powers are coming - and they put a roadblock on it with a referendum! As I said, part of me hopes it gathers dust on same shelves as all the other "Commission Reports" that have been produced down the years. But I suppose we're just going to have to suck it up.

    The shadow of the Richard Commission still stalks us all. I think the bulk of its recommendations will be implimented this side of 2100.

  8. I actually think it's pretty good, as long as part 2 is strong. I share the scepticism that people feel when they see a picture of David Jones grinning holding a copy of the report. There are of course hurdles to navigate before it gets implemented. But this is the torturous, glacial speed of Welsh devolution that we should be used to by now. It is torturous and glacial because the public couldn't be convinced in 97 to go for a Scottish style bulky parliament. Then, the divisions within the Labour party have had to be appeased. Hence the slow progress. Short of defeating Labour at elections, I don't see how we can complain.

    Broadly, these recommendations are in line with Welsh public opinion, which generally wants a federal UK, only just short of independence. Implementing them will be pretty straightforward, except for the referendum. I think Labour will carry on justifying a 60 member Assembly, but with income tax they wouldn't be able to. Remember that when we get 80 Members a cut in MPs becomes fair.

    As a patient Plaid Cymru supporter I firmly believe we're on the right track.

  9. I agree we're on the right track, the only problem is we're in Stephenson's Rocket when we should have something a bit faster (but not too fast).

    It's the half-measures and "shared responsibility" clauses on things like income tax variation that irk me most, because I think it'll cause unnecessary friction between Wales and Westminster when the powers come to be used and it locks Welsh Governments into a certain way of doing things. That's not federalism at all. It's not even federalism-lite.

    It might not be a direct comparison, but it reads like a losse fiscal LCO system. I think, at the very least, if income tax is devolved it should be the whole thing - not a 10p variance - with the ability to set tax bands included.

    I imagine Part II will look similar to this year's Scotland Act, perhaps with the inclusion of a separate legal jurisdiction and paving the way for devolution of criminal justice. However, Silk II's remit doesn't include the Assembly's structure or the election of AMs. I'd like to think those powers would be devolved.

  10. Maybe I haven't been following too closely, but . . . My understanding is that whatever Westminster allows the Welsh Government to raise will be deducted from the block grant. Which, if true, means that there's no extra money for Wales, just the extra expense of collecting it. And there's no power to introduce new taxes.

    If I'm right, what's all the fuss about?

  11. There is power to introduce new taxes, same as the Scotland Bill. We could implement a tourist tax, particularly as tourism policy is devolved. Business would of course be against it but it could be a revenue-raiser.

    As for 'no extra money' the idea is that it depends on whether the income tax base grows or not. If the Welsh income tax base declines, Wales loses an amount, if it grows, Wales gains. We won't gain or lose the raw amount, but a fraction of the rate of growth rate of decline (the 'indexed deduction method'). It's not really about giving or taking away money from Wales, but introducing a level of accountability for Welsh Ministers and also giving them an incentive to grow the income tax base. The ability to vary the rates is a policy lever that can be used or not used.

    The Welsh Government is of course holding out for extra money in the form of fair funding. Which an incoming Labour UK Government will deliver. Won't they?

  12. I see neither value nor virtue in further taxing the Welsh people except for 'luxuries'. We just can't afford it.

    So, seeing as, for Welsh people, the drawbacks of tourism outweigh the benefits, let us have a tourist tax. Two pounds per head per night, docking fees for yachts, charges for touring caravans, fixed rates for static 'vans, chalets, cabins.

    As the WG is now talking about dogs, let them re-introduce the dog licence. Twenty-five pounds to register and 'chip' a dog, with a ten pound annual renewal fee. (Working dogs excepted.) Any dog found straying without a chip is immediately put down.

  13. Thanks for the comments, as always.

    It's all well and good talking about income tax bases and incentives to grow them, and although I do genuinely think this are - as I said - steps in the right direction, we have to remind ourselves that income tax powers won't come until at least 2020 and will be subject to a referendum (if the incoming UK Government in 2015 even agrees to all this).

    Stalling it - when it's the headline-grabber of the whole shebang (borrowing powers aside) - is a bit like unwrapping bulky Christmas presents only to find socks.

    I like the idea of a tourist tax, as long as it doesn't cause the horses to bolt so to speak. Something simple like Jac suggested and kept to a small amount (£1-£2).

    I'd prefer compulsory registering of any pet bigger than a rabbit rather than a dog licence - perhaps with a one-off fee - but I can see the pros of dog licences making a comeback.