Silk and a possible referendum

There have been several comments in the last few days about the Silk Commission and specifically on whether a referendum would be needed before implementing any recommendation it might make on whether the National Assembly should have tax setting and borrowing powers. The situation is perhaps best summed up here:

     Silk Commission split on referendum about tax powers

Obviously the result of the Wales Governance Centre/YouGov poll is interesting. But I think there is a danger of focusing too much on details at the expense of the bigger picture. When presented with a "shopping list" of options it's easy to say you want items 1, 3, 6 and 7 but not items 2, 4 and 8 ... and that you don't care one way or the other about item 5. But sometimes it's impossible to have one thing without also having to accept another thing.


I've always seen the Silk Commission as a way to resolve a fundamental stand-off between Labour and the Tories.

Labour primarily want the borrowing powers (and a fairer funding formula, although this is not part of Silk's remit) but don't want to be held accountable for how money is raised. In general UK terms, their traditional electoral advantage/selling point is that they're good at spending money. To a large extent, this explains why Labour do well in Wales and in other peripheral parts of the UK that depend on a net fiscal transfer from the more wealthy parts. It's always easier to spend money that, to a degree, has come from somewhere else.

So Labour will obviously say Yes to borrowing and fair funding without a referendum, but are currently holding out for a referendum on tax setting powers (except for a few very minor taxes) because they think they'll be able to get a No in such a referendum. They could eat their cake and have it.

The Tories primarily want the Welsh Government to be responsible for raising some of the money it spends because, again in UK terms, their traditional electoral advantage/selling point is that they will lower taxes. If levels of taxation become a factor in Welsh elections, the Tories believe it will enhance their electoral prospects.


So the name of the game is to put together a package that includes both, which is what Plaid Cymru and the LibDems have consistently wanted. From my point of view, I want Wales to have some control (even if limited for now) over a wide range of economic levers, because it is by carefully balancing these levers that we can put Wales on course to become more prosperous. Having control of just one or two levers isn't much use. It's like flying a plane: you can't get where you want to go with control over only the ailerons; you need to control the flaps, rudder and throttle too.

If a balanced package can be hammered out and agreed by the Silk Commission—which includes a nominee from each of the four main parties in its seven member team—then there won't need to be a referendum. It would be no more than an expensive and time consuming rubber stamp.

Referendums are only useful if there is a reasonable degree of uncertainty about what the result would be.

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Anonymous said...

The best idea of what we will get is by looking at the Scotland Act. It's a fairly weak Act and I can't see Wales getting anymore than this. And if this was the case, I don't really see the need for a referendum- really I don't think the Welsh public can be bothered on such an issue.

There are two taxes that I think that can bring real economic benefit to Wales. The first is a fairly minor one: air duty, I'm sure if this was devolved the Government would cut it.... this would boost Cardiff Airport so so much.

The second is corporation tax, it is self evident why.

Neither of which will be given to us though.

I'm not bothered by Income Tax what so ever. The mechanisms in place in Scotland to vary Income tax is very costly and its just not worth changing it.

Anonymous said...

The powers to vary income tax in the Scotland act are quite limited it is true. However, as some (such as Alan Trench) have pointed out, their real significance is the establishment of a distinct fiscal structure, administration and capacity in Scotland, and the specific definition of the concept of a Scottish taxpayer. This will almost certainly deepen over time, regardless of the independance vote. The same is arguably true of Wales- just as the setting up of the Welsh Office in the 60s, the Assembly in the 90s and the primary legislative powers vote last year were all limited but nonetheless highly significant steps in terms of national capacity and institution building, so too would the implementation of admittedly limited and ultimately inadequate Calman/Holtham-style fiscal powers. All waypoints on the winding road to some form of Welsh statehood in administrative, democratic, legislative and now fiscal terms (and also judicial terms hopefully too).

Welsh not British said...

"To a large extent, this explains why Labour do well in Wales and in other peripheral parts of the UK that depend on a net fiscal transfer from the more wealthy parts. It's always easier to spend money that, to a degree, has come from somewhere else."

A good article let down by this comment. The entire UK is in deficit by around £150 billion a year. How can they possibly subsidise us when they cannot even balance their own books. It's unionist lies to make us feel like we should be lucky to be part of such a "great" institution. Well I call bull s*** on the whole thing. Rant over, for now.

MH said...

No WnB, we need to face up to the fact that Wales has a "normal" fiscal deficit of just over £6bn a year ... the difference between what is raised in Wales from taxation and what is spent. This was what Holtham calculated before the current debt crisis started to take hold, causing the UK's borrowing to go through the roof.

The UK (along with many other countries) has usually run in deficit, though not always. A deficit is not a particular problem provided that the economy is growing at a rate that supports the interest payable on it (for inflation will tend to make the sum borrowed insignificant in the long term). Of course that has all changed now that were in recession, or at best "bumping along the bottom". If times were normal, Wales could probably support maybe £2bn of deficit a year.

I don't think we should be particularly ashamed of this, for the regions of England outside the south east are in a broadly similar position. But the question for us is how we turn this around. As I see it, we will only be able to do it by doing what the UK government tries to do to make the UK a more attractive place to do business: namely to adjust the balance of taxation and other incentives to suit the businesses it wants to attract or maintain. Unfortunately for us, the UK actively favours policies that centre around financial services in London at the expense of other sectors.

A Welsh government would probably favour other things such as, for example, manufacturing. But we can only do this to the extent that our hands, rather than those at Westminster, are in control of these levers.

MH said...

Sorry, perhaps I should have addressed the other comments first. I think it is clear that Scotland will act as a model for Wales. Originally Scotland had power to vary income tax by 3p, but never used it. This tax was chosen because it is the easiest of the big taxes to identify, and Holtham followed that course in its recommendations for Wales.

The fact that Scotland didn't use the power was in part due to it not being worth it, but this clearly annoyed Westminster, particularly after the SNP came to power in 2007. So the new Scotland Act proposal forces the Scottish Government to set a rate. If the first proposal is now seen as a mistake, Wales won't be given it. If we get anything, we will get the revised version to match the new Scotland Act.

Getting responsibility for minor taxes isn't going to be a problem. Getting corporation tax might be a problem, but I think it's essential that we get it. Germany has a system in which half of corporate tax is set at a federal level and half by the Lander. I like that.

As I said, it's better to get the ability to vary a range of taxes by a little bit than one or two taxes by a lot.

That's where Anon 16:22 make a good point. What's important is to set up the structural mechanisms to allow for different rates of taxation in different parts of the UK (and for other things too, but that's for the second part of Silk). The move away from centralized taxation is a big step for the UK, and the Treasury in particular will naturally be concerned about what we will do with the powers. So I don't care if the bike comes with a pair of kid's stabilizer wheels that only allow limited ability to vary the rates to begin with.

The other huge advantage of decentralized taxation is that it will require, for the first time, Wales- and Scotland-level accounting for tax purposes ... and I hope regional-level accounting for England in due course. Then we will know for sure how much tax each part of the UK raises, and the anomaly of companies accounting by location of head office rather than by from where the product or service was actually provided will come to an end.

Anonymous said...

WnB is correct. The "net fiscal transfer from the more wealthy parts" is a unionist hoax. The £6bn we get, over and above what we raise, doesn't come from 'English taxpayers' but is simply our share of what the government puts on the UK's credit card. Slightly less in fact.

Welsh not British said...

Most unionists now accept that Scotland breaks even (at worst). Wales is £6 billion. NI is less, call it £4 billion for the sake of easy maths. That makes £10 billion. Around £40 billion or so is added on each year in interest. That makes about £50 billion.

So from the initial £150 billion a year the UK is borrowing England must account for the other £100 billion.

We need to stop all this subsidy nonsense. It's not a subsidy it's a debt, it's not money that Londoners have raised and is getting spent on us. It's money the UK has borrowed. And obviously an independant Wales could borrow for itself. It could also change the game completely and make the banks borrow from the government. Rather than just creating new money out of thin air.

It's like me paying your mortgage (not going to happen so don't ask) on my credit card and then telling you I am subsidising you.

MH said...

You need to face reality, Anon and WnB. The figure of just over £6bn Holtham calculated for Wales was made before the deficit rose to such huge levels. You can't directly compare the figure then with the situation now. As I said, an independent Wales could in normal times also run a deficit, but not of any more than say £2bn, if that. We would also not choose to spend money on some of the things that the UK spends money on, but maybe £1bn at most. And if tax on company profits was properly accounted to where the profit was made rather than to the head office of the company maybe another half billion. That still leaves us maybe £2.5bn or £3bn short.

We're deluding ourselves if we deny that.

But it can change. My point has always been that we are poor because we are part of an over-centralized state, and that we will continue to be poor because we have no control over the levers we could use to improve that situation. With independence we would have complete control, but we'd be in for a rocky few years before we turned things round. Therefore it's better to get as much control as we can now so that we can start to change things.

MH said...

I can't remember where this graphic is from, but it shows just how much the UK deficit has increased in the last few years. If we say a £40bn deficit is about average over the last twenty years, Wales could sustain a pro-rata deficit of 5% of it, or £2bn, in normal times ... if ever times return to normal.

Welsh not British said...

The graphic came from The Guardian. I also used it here.

You also say that Holtham was done before the deficit became as bad as it is now. But (and correct me if I'm wrong) Holtham was between June 2007 and July 2010. In those years the deficit was £33b, £68b, £138b, £142b and it's stayed around that level for the last 3 years.

So don't go taking (wrong) averages of the last 20 years which are in no way representative of the time frame when Holtham was being carried out. If you average the deficits from the 4 years Holtham was active then it's more like £95 billion.

Even if you only take into account it's first report from 08/09 then the deficit was £68b and 152b.

No one says that we wouldn't still be in deficit. The difference is that we would be able to decide for ourselves what our money is being spent on. And, most importantly. Wales is not subsidised by anyone. Just like the rest of the UK we are funded by the UKs credit card.

MH said...

Thanks for the graphic, WnB. I'd forgotten I'd got it from you.

I agree with the points you've made. I just think you over-reacted to my initial statement. I didn't use the word subsidy (not that it would be the wrong word to use, anyway) I said there was a net fiscal transfer from the more wealthy parts of the UK, which is true, and that the public money spent in Wales has to a degree come from somewhere else, which is also true. Perhaps I should have made it clearer in the original post that Wales' fiscal deficit is met not only from a net fiscal transfer from the wealthier parts of the UK, but also from UK borrowing. Trying to work out the exact proportions is more difficult, but I hope my later comments put it into some sort of perspective.

Welsh not British said...

Well I did end the first post with "rant over". :)

I know you didn't use the S word but you might as well have as it amounts to the same thing. I still don't agree with the fiscal transfers. Maybe in the past but certainly not now. The numbers simply don't add up.

Other than that bug bear, a very good article.

Anonymous said...

Labour don't want any more responsibilty. They're happy with the way things are, they created a Welsh assembly in order to protect their jobs but the only way they can win elections is by ignoring local and Welsh issues completey and putting a focus on English/British issues.

I suppose the local election result does send a message and that message is that Welsh people are apathetic, completely uninterested in their own country and will vote for any old donkey with a red rosette. I hope the Tories give us tax-raising powers whether we want them or not...

Welsh not British said...

Anon, devolution was forced on Labour by the EU. Make no mistakes, Labour has never done anything for Wales.

Anonymous said...

'Devolution was forced on Labouer by the EU'. That's an odd point of view Anon 08:28. Are you John Bufton's script writer by any chance?

Anonymous said...

clearly its inconcievable that a referendum would need to take place if ultimately all silk offers wales is borrowing powers as it would be politically - and financially - impossible to justify such a small change (even tiny parish councils can borrow money after all) being put to the people of wales in a referendum. So i think its reasonably safe to conclude that at the very least we well get borrowing powers without the need for any referendum to take place when silk publishes its recommendations

Unfortunately however the likelhood of any really significant tax varying powers being confered on the senedd without a referendum taking place is far less likely...and the principle reason for this is the hostility of large sections of the welsh labour party to such developments. Almost every leading figure in welsh labour i can think of is on record as opposing significant tax varying powers for wales....and welsh labour is an 'elephant on the doorstep' that silk simply wil be unable to ignore.....and last week's labour landslide in wales wil only have strengthened this salient fact of welsh political life im sure.

Of course people who support the process of devolution for wales and who rightly believe that wales gaining meaningful economic levers is a intergral part of this process would be quite right to ask why should welsh labour have any kind of 'veto' over what silk ultimately concludes..but the sad reality of politics in wales is that without labour backing such moves any referendum held on the issue of wales gaining meaningful tax varying powers - such as the powers to vary income tax for example - would be lost before the campaign had even begun!

Dont get me wrong as id personally be delighted if silk recommends such powers being confered on the senedd but i somehow cannot see welsh labour signing up to such thngs at present my guess is we'll get a recommendation for borrowing powers coupled with powers over minor things such as airport tax and maybe stamp duty without the need to stage a referendum. While the britsh treasury will almost certainly torpedo any powers to vary corporation tax.

But if this is how silk turns out as disappointing as this might be it would be preferable to fighting and losing a referendum on more significant tax setting such a defeat would do immeasurable harm to the still fragile long term developement of political autonomy for wales.

Leigh Richards

Anonymous said...

The income tax varying system being devolved to Scotland looks clumsy and bureaucratic. It does establish the concept of a Scottish tax payer but under Salmond the SNP would not vary the taxes. They can't really afford to without cutting some of the main spending pledges their popularity is built upon.

I don't suspect the leading Welsh parties would want such a system to be implemented in Wales. None of them would even want to vary income tax. Therefore we will get reform short of a referendum. I'm not sure any Welsh Government could afford reductions in income tax. The effects would be too volatile. At least until austerity comes to an end that is. Still it's an interesting debate and we'll see how it moves forward.

MH said...

I'd look at things in a slightly different way, Leigh. I wouldn't start by asking the question which additional powers do or don't require a referendum because that is too, I hesitate to say it, objective. In this post, I'm looking at things from the different perspectives the main political parties.

As with the referendum on primary lawmaking powers, the issue wasn't really decided on what was good or bad for Wales, but what was good or bad for the parties. In broad terms, the GoWA 2006 was based on what was good for Labour (otherwise it would have simply incorporated the recommendations of the Richard Commission). Similarly the decision to actually hold a referendum was also based on what was good for the parties concerned, in that Labour only agreed to it in principle because they needed Plaid Cymru's support to form a government in 2007, and only finally agreed to it when they realized they were going to lose the 2010 Westminster election.

I think the issue of what financial powers the Assembly has will be decided in much the same way. The Tories will not give the Assembly borrowing powers on their own, whether (in objective terms) it is right or wrong. They will want to tie the issue with taxation, saying that the Assembly can't have one without the other. Labour are then faced with a choice: if they really want the Assembly to have borrowing powers, do they give way on taxation to get it ... or do they say no to major tax powers and do without the borrowing?

Labour might well say no. They're probably thinking that if they win the 2015 Westminster election, they will be able to give the Assembly the borrowing powers without taxation powers. And in the meantime they have two alternatives solutions to the problem of borrowing: either to use the Build for Wales model ... i.e. PFI, but through a not-for-distributable-profit body; or to rely on the existing powers of local authorities to borrow, and try to co-ordinate that borrowing in much the same way as the SNP government did in Scotland from 2007. In fact, because last week's local elections have resulted in many more Labour-controlled councils, this second option becomes rather more likely. If Labour take the view that they can wait, then Silk may not be able to reach any meaningful agreement and will become a way of parking the issue in the long grass.

So what would it take for Labour to reach a different conclusion? Because everything depends on Labour gaining power at Westminster in 2015, they would very quickly change their mind if it looked likely that they wouldn't win. There are several reasons why they might not: first the reduction in the number of MPs and boundary changes, which will favour the Tories mainly because of differing patterns of voter registration; second, that Scotland might vote for independence, leaving them without the batch of Scottish Labour MPs that they'd need to give them a majority at Westminster; and third, that the Tories are not that stupid, the reason we are going through much more pain than we need to now is so that George Osborne will have some rabbits to pull out of the hat before the next UK election and spin the line that the short, sharp shock has worked and that the UK is now recovering because of it.

So perhaps the Silk Commission is not so very different from the All Wales Convention, it gives everyone a chance to wait a while until they see how things will work out. As I see it, the best chance for Silk to be a success (i.e. for it to make unanimous recommendations, and for those recommendations to become law) is for it to come up with a balanced package not just on financial powers, but also on further areas of responsibility to be devolved to Wales, such as policing and justice. This could all be incorporated into a new Government of Wales Act 2013 or 2014. If it's unanimous there's no point in a referendum; if it's not unanimous then it will all have been a waste of time.

MH said...

It's not so much a question of whether the Scottish Government chooses to vary the rate of income tax or not, Anon 20:39. Unlike the arrangement that has existed since 1999, there now won't be the option to do nothing. The new arrangement will force them to set a rate for the Scottish component and oblige the UK Treasury to set up mechanisms for collecting/accounting it.

In a sense it doesn't really matter what the rates will be, for the principle of different taxes will have been established, even if it is a bit clumsy. It will therefore be that much harder for Wales (or, to be more precise, Labour in Wales) to resist the same for Wales.

However, if we're talking about what the SNP would do, I think they will almost certainly come up with a way of reforming local taxation by abolishing the council tax and replacing it with a local income tax. They would have done that in the previous term if the sums added up, but it would have needed the ability to increase income tax by more than the 3p they were allowed to (and there were other problems such as council tax benefit). At a guess, I think we will see Scottish income tax rise by something like 4p in the pound, but with council tax abolished. The difficulty is in local variation, which the current Scotland Act provisions don't allow for. But if the mechanism exists, there'll probably be a way of tweaking it.

Anonymous said...

Thanks for that MH and having a lower council tax (local income tax) and a same-as-UK or slightly higher than UK income tax would seem to fit the SNP's current behaviour.

The way you've described it makes it perhaps more substantial than I inititally assumed.

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