Magazine article Public Finance

The SILK ROAD

Magazine article Public Finance

The SILK ROAD

Article excerpt

the welsh assembly Government had to wait 12 long months before Westminster responded to the Silk Commission's proposals on devolution of fiscal powers to the nation.

Cardiff had hoped for a response in spring 2013, but it was November before David Cameron and Nick Clegg made the journey across the Severn to accept virtually all 33 recommendations of the commission chaired by Paul Silk, former clerk to the Assembly. Wales would get borrowing powers, control over business rates, stamp duty, landfill tax and, subject to a referendum, the ability to vary income tax as well.

Since then there's has been whirlwind of activity. A draft Wales Bill, to bring in the Silk proposals, has been published and scrutinised by Westminster's Welsh affairs committee. The final version of the Bill was published the day after the March Budget and royal assent is expected before the year is out.

March also brought publication of Silk Two, which made recommendations to further augment the powers of the Assembly and suggested that control over policing, justice and transport be devolved.

The Wales Bill means the Welsh government will, for the first time, be able to access borrowing, albeit initially capped at £500m. Top of the list of capital priorities is the much-needed M4 relief road around Newport. Business rate policy is set to be devolved as soon as next year (primary legislation is not required) and an expert tax advisory group has already been formed to consider how the collection of other devolved taxes could work. Thoughts are beginning to turn to how Wales might establish its own Treasury.

Catching up with Jane Hutt, the Labour Welsh Finance Minister, in her Cardiff Bay office, she says there have been 'lots of positives'. Westminster's constructive response, which Hutt cautiously expected when speaking to Public Finance last year, she puts down to the work put into building consensus with the Conservatives, Liberal Democrats and Plaid Cymru in the Assembly and her excellent working relationship with Chief Secretary to the Treasury Danny Alexander.

We believe that devolution in Wales can work and has worked with the grain of the political consensus [in the Assembly]. I see my role as finance minister with Silk One to maintain that consensus, to ensure we have a strong partnership with business as well as social partners and to make the case to UK government that there's no turning back,' she tells PF.

There remain, however, some outstanding areas of concern. Wales is disappointed that it hasn't been granted control over Air Passenger Duty, as Silk recommended, but more controversial is the 'lockstep' proposal on the powers to vary income tax. This mechanism means the tax bands can only be raised or lowered together - so a penny off the basic rate would mean a penny off the higher and top rates too. A penny on the top rate would also mean a penny on the basic. Not hard to see that this lack of flexibility makes the power on offer rather unattractive and a difficult sell to the Welsh public.

In any case, Hutt is cool on income tax powers because of the effect it would have on the block grant to Wales. A penny off the pound would take about £200m off the block grant, she points out. And then there's the issue of the Barnett Formula.

Cardiff has long nursed a grievance about the raw deal it gets from Barnett Under the 1970s-devised formula, based on population rather than need, Wales is thought to lose out to the tune of £300m a year. Hutt has been doggedly talking to Alexander about a compromise on Barnett and is, she says, making progress.

'A Welsh Labour government wouldn't consider taxvarying powers until we had clearer confirmation of a fairer funding settlement for Wales,' she says. So there is 'no way' there will be a referendum any time soon.

'There is no appetite on the street, as far as I'm concerned, for tax varying powers at this stage. But as a responsible finance minister for Wales I have to safeguard our whole budget,' Hutt stresses. …

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