Are the Silk threads unraveling?

Published on IWA blog on 11th November 2013

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.

 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.