Welsh Affairs - Minutes of EvidenceHC 838

Oral Evidence

Taken before the Welsh Affairs Committee

on Tuesday, 18 December 2012

Members present:

David T.C. Davies (Chair)

Guto Bebb

Geraint Davies

Glyn Davies

Stephen Doughty

Jonathan Edwards

Nia Griffith

Jessica Morden

Mr Mark Williams

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Examination of Witnesses

Witnesses: Paul Silk, Chair, Professor Noel Lloyd CBE, Commissioner, and Mark Parkinson OBE, Joint Secretary, Commission on Devolution in Wales, gave evidence.

Chair: Mr Silk, Professor Lloyd and Mr Parkinson, thank you very much indeed for coming back again and talking to us. We have quite a few questions for you, as you might expect, but we all appreciated the report. Whatever we thought of it, it was very well written and obviously had been very well thought through. Some of the predictions I made last time you came seem to have come to pass, but there we are. I call Jessica Morden to begin.

Q1 Jessica Morden: Now that Part 1 is out, what is your view of the political and media reaction to the report?

Paul Silk: We have been very pleased by the reaction. The Assembly passed a resolution unanimously that welcomed the report and called for its implementation. We could not have wanted anything better than that as far as the Assembly is concerned. We have had generally positive reactions from the business community, from civil society as well and indeed from the UK Government. All in all, we are very pleased by the reaction the report has had.

Q2 Jessica Morden: It was obviously a unanimous report, but do you want to tell us a little bit about where the arguments might have been on what should be in or out?

Paul Silk: I am tempted to say, "Only when Select Committees explain exactly where the argument is", but there was discussion about some issues in the report, of course.

Q3 Jessica Morden: Go on. Give us some idea of the areas.

Paul Silk: There was discussion about some of the areas, but we did not have any difficulty agreeing a report that we were all prepared to sign up to. That was very important to me because, clearly, the strength of the Commission’s recommendations is that much greater if we can say the independent members and the members who were nominated by the four parties all were prepared to sign up to the recommendations.

Professor Lloyd: Could I respond on both your questions, if I may, and first thank you, Chair, for your initial response? I have been quite encouraged by the response to the report, both political and in the media generally; we spent a lot of time on it. It is a very carefully written report and I am pleased that the response has demonstrated the value of taking care over it and that people have responded to the arguments put forward. In terms of the way that we operated, it was very much a case of looking at the evidence that was conveyed to us, discussing collectively and coming to conclusions. It was a very good experience of working together.

Q4 Jessica Morden: Did you get much of a public response, from members of the public who might have been put into it as part of public consultation?

Professor Lloyd: Certainly, we have all had individual responses when we meet people. It has been quite encouraging-for me anyway-meeting people in my circle, as it were, who obviously know about it and have responded to it in that way. It is still fairly early days in some ways, but I do not know whether Paul wants to add to that.

Paul Silk: That is right. If you get involved in this sort of work, it is disappointing sometimes that people are not talking about it in the way in which you would like them to be. Trefor Jones, who has just joined the Commission from Clwyd, was telling us that relatively few people in his circle were aware of the Commission’s report, and that is disappointing. But we have, as we all know, issues about media coverage of these sorts of issues inside Wales.

Q5 Guto Bebb: One of the key issues in the report is accountability and the ability of the Assembly to raise taxes. In your research, what evidence did you discover that indicated to you that taxraising powers did actually contribute to accountability within institutions such as the Welsh Assembly?

Paul Silk: There was very good evidence from the ICM opinion poll, which we took early on in the process, showing that people in Wales felt that accountability would be improved by taxvarying powers being devolved to the Assembly. That was something that was very striking to us. I do not know if I have the figures readily to hand.

Q6 Guto Bebb: But the opinion poll would be more about the belief of people in Wales. The question I am asking is: are there examples from other parts of the world where you believe accountability has been enhanced by taxincreasing or taxvarying powers?

Paul Silk: I would put it slightly the other way round. Our international evidence was that it is-and I think Owen Smith described it in this way-a curio to have a legislative assembly with spending responsibilities that has no responsibility for raising any part of its income itself. We could not find any other example like that elsewhere in the world, or, indeed, after the Scotland Act 2012, in the United Kingdom. We would deduce from that that accountability comes from having that responsibility for raising income as well as for spending it. That is the international evidence.

Q7 Guto Bebb: To what extent do you believe that the current status quo in relation to the tax position of the Assembly is unsustainable?

Paul Silk: The tenor of our report is that it should be changed. Is it sustainable as it is at present? I suppose it is sustainable as it is at present.

Q8 Guto Bebb: Is that so in the public view as well?

Paul Silk: The public view in Wales is that accountability would be enhanced by giving taxvarying powers to the Assembly. Yes, of course, the present system could carry on but it would perpetuate something that is an aberration in international terms.

Professor Lloyd: We did pay considerable attention to the international comparators. That is an important part of what we looked at and there is a research paper on it. Certainly, pretty much wherever we looked, in OECD countries and elsewhere, there is a degree of taxraising powers with what are called sub-national Governments-the technical term for it, I understand. So we are very much in line with what is felt to be the case internationally, and that is part of the evidence that we took into account in making our recommendations.

Q9 Guto Bebb: A lot of the proposals that you make are not dissimilar to the Calman Commission proposals in relation to Scotland. As someone who is very supportive of devolution in a Welsh context, one of my concerns is that we tend to always want to follow Scotland rather than think of what is right for Wales. To what extent are the proposals that you make basically proposals made for Scotland and adapted for Wales? Or do you believe that you are offering a "Made in Wales" solution?

Paul Silk: The tax regime that applies in Scotland and Wales at present is the same. So one is starting from, or considering, the same taxes. Let us use the example of a tax that both Calman and we recommend should not be devolved-inheritance tax. I do not think it is strange that we both came to the same conclusion that inheritance tax is not a tax that is sensible to devolve to either Scotland or Wales. We were very careful from the beginning to look at the needs of Wales independently of what Calman had recommended for Scotland. We had read the Calman report and we went to Scotland and met Calman, but some of the proposals we made-for example, the different way in which we propose that income tax should be devolved to Wales-reflect what we saw as Welsh needs rather than the position in Scotland.

For example, the way in which the border is so much more porous in Wales-so many more people live close to the border, both on the English and Welsh sides of the border-as compared to Scotland means that you have to think about possible migratory effects of tax changes in a different way for Wales than for Scotland. That is why we came to our conclusion about income tax. So we did look at things, as it were, through Welsh eyes. We did not simply ape what had been proposed for Scotland. But I do not think that the fact that some of the proposals that we have come up with are the same as those that Calman came up with for Scotland should be regarded as particularly surprising.

Professor Lloyd: We took the view very early on that we would be looking at Scotland, Northern Ireland and other international comparators, not, as it were, to take over directly what they had decided to do but to learn from them. The point that Paul made is very important-that we looked at them in terms of how we could benefit from their experience but not to try and, in any sense, replicate it slavishly.

Q10 Chair: Do you have any idea what the administration costs would be of devolving income tax to Wales and also what might be the costs of establishing-what I think you referred to in the report as-a Welsh Treasury?

Paul Silk: We did not actually work out the administrative costs ourselves. We thought that there would be administrative costs but we did not come up with a figure.1

Q11 Chair: Did I read it right, that you referred to a Welsh Treasury?

Paul Silk: Yes.

Q12 Chair: Do you have any idea what the costs of establishing that would be?

Paul Silk: We do not produce a blueprint for what the Welsh Treasury should be, but I think-

Q13 Chair: It would come out of the Welsh block grant though, wouldn’t it?

Paul Silk: Yes, exactly. That part of the report was saying that if these functions are to exist they have to be done in a serious and proper way.

Q14 Chair: Absolutely, yes, but they cost money.

Paul Silk: Money will need to be spent in doing that. Maybe using staff resources in a smarter way is a possible way of doing it, but I am not suggesting that there would not be any costs. We do recognise that there would be administrative costs. For example, drafting tax legislation is something that the Welsh Government do not do at present. Under our recommendations, they would have to do it and would need to have the resource to do so.

Q15 Chair: As devolution develops, could the Welsh Treasury become some sort of a central bank and start adopting those sorts of functions as well in decades ahead? Could this body be the fledgling "Central Bank of Wales"?

Paul Silk: I think that is further than we had considered.

Q16 Geraint Davies: Do you feel that the basis of this report was really to sidestep the question, "Is Wales getting a fair share of UK income, both revenue and capital?" and instead to ask, "If you want some more money, raise it yourself"? Is that the basic remit?

Paul Silk: We were specifically, under our terms of reference, asked not to look at the Barnett arrangements. We did not do that because it was outside our terms of reference. As to the motivation, I do not know. We were given terms of reference. We felt that we made an important recommendation about the need for progress on their funding before our income tax proposals could be implemented, so we were not oblivious to it but we could not make any recommendations about Barnett.

Q17 Geraint Davies: You have mentioned accountability, but would you not accept that you can have accountability without taxraising powers, as in local authorities where people can make judgments and choices between different spending patterns? You do not have to raise tax at all to get accountability.

Paul Silk: You raise an interesting question about local authorities because very early on, when I met the WLGA, they said, "We think the fact that we have to raise council tax is an important indication of our accountability and we want to retain our responsibility for council tax."

Q18 Geraint Davies: But central Government often cap them-don’t they?-and it is a very small proportion. So the local authority is not really accountable, is it, and that is just something the WLGA is saying?

Paul Silk: Yes, I think that there is a point, but what I would not say-and I hope that the report does not imply-is that, as it were, the Welsh Government are not accountable at present. Of course they are accountable at present. But our view was that accountability would be enhanced by having responsibility for raising some part of the tax bill.

Q19 Glyn Davies: I was going to ask you later about your recommendation in relation to the Barnett formula being sorted out before we could go on with Part 1. We have waited 30 years, pretty well, for the Barnett formula to be sorted out already and then, with all this talk, it is not guaranteed that it is going to be agreed. Are you really saying that, until that is sorted, there is no point in taking Part 1 forward at all? What is the rationale behind that?

Paul Silk: Our recommendation was carefully worded: one of the ones-going back to Ms Morden’s question-where we spent some time thinking about exactly what we said. It is that "We recommend that the transfer of income tax powers to the Welsh Government should be conditional upon resolving the issue of fair funding in a way that is agreed by both the Welsh and UK Governments." That is not necessarily full Barnett reform. It is resolving the issue in a way that is acceptable to both the Welsh and the UK Governments. We are not saying what that position should be, but we recognise, I think, politically that the support of the Welsh people for our proposals on income tax would not be there unless they felt that that progress had been made in a way that both Governments were happy with. This chimes with the announcement on 24 October, which came after we had agreed our report, where the UK Government said that there would be no tax devolution to Wales without the agreement of the Welsh Government. Clearly, both Governments are going to have to agree, and are going to have to be content that the progress is being made towards resolution of the fair funding issue before there is any devolution of income tax.

Glyn Davies: I can understand why you were careful with writing this piece up because I am having a little bit of difficulty getting my head around the clarity of what you are saying. It seems to me that you are not using the term "Barnett formula being resolved". What you are really saying is that, whatever synonym you might adopt for "Barnett formula", the arrangement has to be sorted before you think Part 1 can progress at all.

Paul Silk: That was our conclusion politically, yes.

Q20 Nia Griffith: I want to explore two issues, the first being accountability. Yes, obviously local authorities will say to people, "You can either have your parks or libraries or we will raise the precept", but it is a very small proportion that they raise locally and it does not seem to have such a direct correlation to quality of service. In your report, you imply that the quality of public services will improve if the Welsh Government have more direct responsibility for raising money. But would you not agree that there are many other ways to raise quality that are not necessarily linked to having direct taxation powers?

Paul Silk: Yes, I would, entirely. Going back to the ICM poll, one of the questions was, "Do you think that the Welsh Government will be more motivated or less motivated to improve public services if they have taxvarying powers?" The answer was-perhaps not resoundingly, but certainly substantially-in favour of there being greater motivation to improve public services if they had taxvarying powers. That may have been what you see reflected in the report, but I do not think we would say that the Welsh Government do not have that motivation at present. I know that that was something that, from talking to some Assembly Members, was felt to be an implication in the report. It was not intended to be, if it is.

Q21 Nia Griffith: I question what evidence you have had in terms of the correlation between good performance and low levels of council tax in some other authorities. I think the picture is very mixed. There is some very high quality stuff in very high spending authorities and some very high quality stuff in some very low spending authorities. It does not seem to match up.

Professor Lloyd: I would say that that is one factor among others in the delivery of services. To take a step back, we established a number of principles right at the beginning. Accountability is one of the major ones, but there are others as well in terms of empowerment and fairness, equity and incentivisation. So it is the set of principles that we established. It is not onedimensional. There are several dimensions to those principles, but accountability is an important one.

Q22 Nia Griffith: Following on from that, but on a slightly different tack, you also talk about how having the opportunity to raise more taxes would make the Government in Wales want to improve the economy. Do you not think that they are already making efforts to improve the economy? Secondly, do you think your idea of an increasing performance compared with England, which you mentioned several times, is rather optimistic? First, do you not think they are already doing something, but, secondly, do you not think-and you mentioned this-that perhaps Wales will continue to outperform England? That seems a little bit optimistic and I am sure there will be ups and downs. Thirdly, if you have a mechanism whereby whatever is raised on income tax is then subtracted from the block grant, is that incentive really there that you seem to have identified?

Paul Silk: Absolutely. I think we all believe that the Welsh Government already have an incentive to improve the economy and wish to do so. We do not want to imply and never sought to imply-and I do not think the report actually does imply-that the Welsh Government do not have that incentive at present. I think that we address the risk. The important criterion is the relative movement of income tax in Wales compared with the rest of the UK. We look historically at that and say that what has happened over the last 10 years, rather counterintuitively, shows that Wales has performed in a way that many people might not have expected beforehand. But we say that that trend might continue or might not continue. We do not know whether it will continue. I do not want to suggest that we have been too optimistic, but we do not make any assumption that there is a systemic downside risk. Why should the Welsh economy perform worse than the economy of the rest of the United Kingdom? That was one of the guiding principles for us. We saw no evidence that it will necessarily do so, so why should we assume that it is going to do so? We do not assume that it will behave in any particular way because we can no more predict the future than anyone else. What was your third question?

Q23 Nia Griffith: Is it purely an accounting mechanism whereby the more you raise on the income tax, the less you get on the block grant? Therefore, by having that sort of mechanism, in a way you take away the basis of the argument that it will incentivise the Welsh Government to improve the economy.

Paul Silk: The method that we propose is the indexed deduction method, which was the method that the Holtham Commission proposed for income tax, and it is the method that the United Kingdom Government have adopted in the case of income tax in Scotland. That method means that the risk that is borne by the Welsh Government is more related to Welsh policy risks, if you like, as opposed to UK policy risks or cyclical risks. For example, if personal allowances are changed by the UK Government and result in less income tax being taken, the consequence is not borne adversely by the Welsh Government through the indexed deduction method.

Q24 Nia Griffith: Could you suggest any way to give a greater incentive to the Welsh Government to improve the performance of the economy-"If you actually make more than we anticipate, you can keep it"? Could there be a real incentive of some description?

Paul Silk: That is what our proposals are-that, if there is more income taken in Wales, they will keep it. They will not lose anything from the Barnett grant as a result of that.

Q25 Nia Griffith: So you are sure that your proposals would reward if they do well but not take away if they do badly, and you can confirm that that is definitely how they would work?

Professor Lloyd: Reward if they do better than England certainly.

Q26 Nia Griffith: But not take away if they do worse?

Professor Lloyd: No. The opposite side of the coin is that, if they do worse, then obviously there is a risk. That is the meaning of incentivisation.

Q27 Nia Griffith: So actually you are saying there is a risk there.

Professor Lloyd: We make no-

Q28 Chair: Can we clarify it one more time because I think Nia Griffith is making a very important point here and I would like this on the record? Assuming the Assembly gets taxvarying powers, if it varies them and is able to take more money in, it will get to keep the money. If it varies them in a way that means it loses revenue, then it will lose out?

Paul Silk: Yes.

Q29 Nia Griffith: If the economy performs better than anticipated, it takes the extra and does not lose off the Barnett block grant, or does it?

Professor Lloyd: The key factor is: does the economy in Wales do better than the UK economy? If that is the case, then there is a benefit.

Q30 Nia Griffith: There is a benefit that does not end up being taken from the block grant because they have a higher take. But if they have a lower take, would the block grant be topped up?

Professor Lloyd: Relatively, if they do less well than England, then there is a risk, obviously, because that is the whole point of incentivisation. You benefit if you do better and you do not if you do less well.

Q31 Nia Griffith: There is a risk if you do not do as well.

Professor Lloyd: Could I say one other thing as well? You asked whether the Government are already doing things in Wales to improve the economy. Of course, we fully accept that. What we have recommended is that there will be another mechanism, if you like, which, if the Government wish to use it appropriately-any Welsh Government-can be used in this way. So it is enabling the Welsh Government to have that additional power.

Chair: Thank you very much. I am sorry to move it along a bit, but we have quite a few questions to get through. I would like to bring in Jonathan Edwards at this point.

Q32 Jonathan Edwards: It seems to me that the main political division line following your report is in relation to your income-tax-sharing arrangements between the UK and the Welsh Government. Incidentally, we were up in Scotland last week and it seemed to me that academics, economists, Government officials and even unionist politicians far preferred your proposals to what they received from the Scotland Act via the Calman Commission. The question, therefore, is: do you think that empowering the Welsh Government with only the minor taxes element included in your report would achieve your accountability and incentivising tests?

Paul Silk: The difficulty with three of the smaller taxes is that they are not so directly paid. Of course, we all indirectly pay those taxes, landfill, aggregates and so on. But the way in which individuals feel involved in those taxes does not result in the accountability dividend that there is in a tax that is paid by everybody and is well understood, as income tax is. Stamp duty land tax is a little bit of an exception because anybody who buys a property is likely to pay it, so there is an accountability element there. We felt that it was important to have a material proportion of tax that devolved to the Welsh Government, and that is why we concluded that, of the larger taxes, income tax was the only one that was appropriate to devolve and that got to the accountability issue in a way that the other taxes did not. There is accountability in all those other taxes as well, but not to the extent that there is in a tax that most people pay.

Q33 Jonathan Edwards: It seems to me that one of the main reasons we need these fiscal powers is that they enable the Welsh Government to leverage borrowing powers and enhance borrowing capacity. Won’t it be the case, therefore, that, if only the minor taxes are devolved, the borrowing capacity of the Welsh Government will be curtailed?

Paul Silk: We are careful in our report not to say in what circumstances the Welsh Government should have borrowing powers. Again, looking at current borrowing powers was excluded from our remit, and there are current borrowing powers under the WDAinherited powers. As I understand it-and I am not privy to this-those are subjects that are being discussed between the Welsh Government and the UK Government at present. We see our report as a package, and because it is a package we see borrowing following as part of that package because of the taxes that we suggest should be devolved. But I would not like to get too drawn on the issue of what would be a sufficient amount of taxation to allow borrowing powers to be introduced or indeed whether borrowing powers could be introduced in anticipation of future taxvarying powers.

Q34 Jonathan Edwards: That brings me to the next question. You mentioned there that you see the report as a package-and a coherent package at that. How disappointed would you be as a Commission if it were basically cherrypicked to pieces in the next few years?

Paul Silk: We would be disappointed, I think. I will not go into how disappointed we would be, but we would be disappointed.

Professor Lloyd: We do see it as a package. That is very much what we have said all along. But it is up to the Governments in Cardiff and Westminster to respond to it. We hope that it will retain its nature as an entity and we would prefer, obviously, for it to be implemented as a package.

Could I pick up on your mention, right at the beginning, of your visit to Scotland and highlight, perhaps, the mechanism that we are proposing for the devolutionary context, which is, I think, different from that which pertains in Scotland in quite an important way?

Q35 Glyn Davies: I was going to come in later on the issue of borrowing powers but Jonathan has brought it into the debate now. It interests me because there was a lot of hoohah this week about the surprise revelation that if money is borrowed it has to be paid back. Clearly, the big risk is transferring it to future generations, which is effectively what borrowing is. It just transfers the debt on. For this to function in any meaningful way, do you agree that income tax has to be one of the taxes devolved? The other taxes are peanuts in actual fact. When we talk about borrowing figures, and even having access to the markets, the reality is that you have to have enough money to be able to pay back or else you are not going to be successful in borrowing. How crucial to borrowing powers is income tax and is it fair to say that, without transferring income tax as part of the package, borrowing powers are pretty well meaningless?

Paul Silk: As I said to Mr Edwards, it is a package that we are proposing, and income tax and borrowing are part of it. As I also said, there are discussions, as I understand it, between the two Governments at present about to what extent the Welsh Government are going to be given borrowing powers, whether it is existing WDA powers or borrowing powers in anticipation of taxvarying powers. We certainly see income-taxvarying powers as part of our package, along with borrowing, so the two things go together as far as we are concerned.

Q36 Glyn Davies: What is interesting to us is that you admit you do not want a pick and mix on this, but it may happen. It may be that the Government will pick and mix on this. Are you telling us that, without the income element of this agreement, borrowing powers really are not a worthwhile significant change?

Paul Silk: No, I am not saying that. As to our borrowing powers recommendations, we have said that they have to be seen within the United Kingdom fiscal context as a whole. If the United Kingdom Government were to feel that borrowing powers could be extended to the Welsh Government without income tax powers, then we would not have any difficulty with that. It is not part of the package we are recommending, but it is a matter for negotiation between the two Governments.

Glyn Davies: Access to the markets is the key thing. You are not going to have access to the markets unless you can show you have a capacity to repay that debt at some future time.

Chair: Thank you very much. I should probably have called Stephen on that, but, Geraint, do you have a very quick supplementary there?

Q37 Geraint Davies: I have just a quick one. Mr Silk, you said earlier that the Welsh Government had an incentive to improve the economy. I know they are trying to, but every time they do, and benefits go down and the tax goes up because more jobs are created, all that benefit goes to Westminster, doesn’t it? It is a cost to health and education on the economy, the benefit of which ends up in Whitehall. Do you accept that and is that one of the driving forces behind your wanting to devolve the impact so that you have a share of the economic growth?

Paul Silk: I did not quite understand that, but please-

Q38 Geraint Davies: Basically, if the Welsh Government spend more on economic development and job numbers go up, the benefits cost goes down and the income tax goes up. At the moment, all that benefit goes to the UK Exchequer, when that money could have been spent on health and education in Wales. So there is no incentive. There is a negative incentive, isn’t there, at the moment?

Paul Silk: I suppose that is so.

Q39 Geraint Davies: That is right. So is one of your driving forces to try and provide a benefit from economic development in Wales, even though there is a downside risk that, if there is a problem in that London grows faster than Wales-as inevitably it will in a slump-then Wales will lose out from your proposals?

Professor Lloyd: I think I understand what your point is, and it is very much the point that was being made earlier about the principle of incentivisation-that the mechanism we are recommending for the Welsh Government to have the power to vary income tax is a mechanism to deliver some benefit from an improved economic performance.

Q40 Geraint Davies: If they want to borrow, there are only two streams they can look at. One is income tax, say, if 1p from the income tax went on repaying borrowing, for instance, or, it seems to me, the Severn Bridge, and that is not discussed here. But in that case wouldn’t it basically mean that Wales had to have this tax on inward investment and trade across the bridge for ever and say, "We borrowed a lot of money and have to keep up the tolls on the bridge"? Isn’t that a fear of yours?

Paul Silk: The Severn Bridge was not something which we addressed in the report.

Geraint Davies: No, I know.

Paul Silk: Speaking on behalf of the Commission, I do not think there is anything I can say about that because we never considered it as a Commission.

Q41 Geraint Davies: But isn’t that the only other big income stream, other than income tax, to pay back borrowing?

Paul Silk: I have certainly seen that that has been talked about by the Welsh Government and others, yes.

Q42 Stephen Doughty: Following on from that, I have questions on air passenger duty. Obviously there is some interesting news today about the Welsh Government potentially taking Cardiff airport into public ownership. You proposed devolution of air passenger duty, although there is obviously a wide range of economic facts that are convincing people to go to Cardiff or to airports in England. Do you think there is a clear economic advantage to Wales from devolving APD and potentially having a lower rate?

Paul Silk: What we recommended was the devolution immediately of longhaul APD. We suggested that the rest of APD should be considered in the context of the Howard Davies review of airport capacity. In so far as the longhaul APD is concerned, that was devolved to Northern Ireland in the Finance Act 2012. The reason for that was the economic incentivisation of Northern Ireland. We thought that, if that had been done for Northern Ireland, there was no reason why it should not be done for Wales and that the same economic incentivisation could happen in Wales. There was a special case in Northern Ireland because of a particular longhaul flight that was about to leave Belfast airport. As to the shorthaul APD, which is where the majority of the revenue at present flows in Cardiff airport, we felt that, because the Davies review is going to look at airport capacity-I wrote immediately to Howard Davies when we published our report and I have had a response and he says that he is going to look at airport capacity throughout the United Kingdom, including Wales-the issue of APD, or a congestion charge or whatever it may be, is something that might be looked at in a wider context. He has invited us to give evidence to him and I anticipate that we will do that.

Q43 Stephen Doughty: Calman proposed devolution of APD for Scotland but the UK Government did not proceed with the proposal. Do you think there are likely to be similar difficulties with the UK Government in regard to Wales, despite what you said about Northern Ireland?

Paul Silk: Our immediate proposal is simply to do the same as has already been done in the case of Northern Ireland. One of the interesting aspects of longhaul APD is that it depends on where you start and end. There are carriers that go to Amsterdam and then people go on longhaul flights from there. The fact that there is not a direct longhaul flight from Cardiff at present does not mean that this would not have a beneficial effect on Cardiff airport at present, because if you are flying via Amsterdam to Johannesburg it would affect you.

Q44 Stephen Doughty: So your argument is that there could be a significant economic benefit, essentially.

Paul Silk: I think the Welsh Government would like to see the devolution of all APD. I think I am right in saying that the First Minister has said that if he had that power he would think about removing it altogether. So, clearly, the Welsh Government think that that would be something that should be beneficial.

Q45 Mr Williams: I would like to turn to your deliberations on taxes specifically that were not going to be devolved and, in particular, corporation tax. Why did you reach the conclusions you did on corporation tax? The Committee was in Northern Ireland last week and part of the feedback from witnesses was that people in Northern Ireland saw it as a game changer in terms of a spur for economic growth in that nation. Were you sympathetic to that argument? Why did you reach the conclusions you did?

Paul Silk: We visited Northern Ireland ourselves and we understand the arguments that we heard in Northern Ireland. I think that the one organisation that did not favour corporation tax devolution was the Irish Congress of Trades Unions. Otherwise, we did hear CBI Northern Ireland speaking in favour of it, in contrast with the CBI in the United Kingdom, which is against it. We recognise, and I think we say in the report, that there may be special circumstances in Northern Ireland and it is not for us to make recommendations about what is appropriate for Northern Ireland. In the same way as when I was answering a question previously about looking at what was appropriate for Wales rather than what was appropriate for Scotland, we looked at whether the devolution of corporation tax to Wales would be appropriate and at the mobility of corporation tax. We did not want a firm to be able to simply "brass plate" a headquarters in Machynlleth and in fact not bring any work there. We thought that was an important factor. We also thought the volatility of corporation tax meant that it may be a very difficult tax for the Welsh Government to have devolved to it because it has moved up and down very rapidly. If the Welsh Government were to have corporation tax devolved to them, they would need to reduce corporation tax quite substantially to attract inward investment into Wales. I think our jury was out about whether it would actually result in a benefit.

Q46 Mr Williams: You also made the argument that you felt that having a single corporation tax regime would make the UK an attractive destination for international investment. I think the direct quote is that this would be "put at risk by having different systems in different parts of the UK". But then you went on to say that, if a case could be made for devolution of corporation tax to Northern Ireland and Scotland, then Wales should be included. How do the circumstances change if it is inappropriate, because it somehow militates against marketing the UK, and yet somewhere down the line you could see an instance when it could be of benefit to the nation? Was this one of those compromises-and Jessica Morden asked earlier about the compromises, inevitably, in a crossparty and independent group of people-on your committee that you had to reach?

Professor Lloyd: Could I come to that in a minute? I want to say one thing about corporation tax per se. Yes, there is the mobility and the volatility-on the mobility, in particular, we have seen effects very recently in terms of "brass plating" and so on-but the key point is that there is a difference between the headline rate and the effective rate of corporation tax. The headline rate in some countries is quite high but, because of the system of allowances, the effective rate is much lower. One of our recommendations is that that attention should be given to the allowances.

In terms of what happens to the UK, we feel there is a lot to be said for keeping the same rate across the UK, but we have also said that, should that break down and it is decided to devolve corporation tax to Scotland as well as to Northern Ireland, then that does put a different complexion on the picture and consideration should be given to doing so in Wales as well.

Q47 Mr Williams: I welcome the compromise that you have reached in part, but, again, what is the scenario whereby that would happen? What scenario do you envisage, given some of the arguments you have used against doing this at the present time?

Professor Lloyd: The strength of the argument for a unified rate across the UK would be vitiated if corporation tax were devolved to Scotland. It would no longer be such a strong argument.

Paul Silk: There was an interesting discussion in the Holtham report about the possibility of having different rates of corporation tax throughout the United Kingdom, reflecting, broadly, the economic prosperity of different parts of the United Kingdom. Our advice was that that was something that would not be compatible with the Azores judgment. You could give corporation tax devolution to areas that had legislative competence, such as Scotland, Northern Ireland and Wales, but not to the northeast of England and so on. But there is an interesting argument that Holtham addresses there about other parts of the UK.

Q48 Jonathan Edwards: I have a short question based on the questions of Mr Williams. My party was obviously very disappointed that corporation tax was not included in the report. Can you tell us how many commissioners were in favour and how many were against?

Paul Silk: We all agreed all the recommendations in the report unanimously.

Professor Lloyd: I can support that.

Q49 Chair: We had a very interesting meeting in Scotland last week and we were talking to some academics about the development of devolution there. They suggested that it did not make much sense to just have income tax and that you needed to have benefits as well. Is that an argument that you could subscribe to?

Paul Silk: You are absolutely right in saying that the way the state, if you like, interferes with individuals financially ranges from taxation through to benefits, so there is a continuum there. It is not an area of policy that I am in any sense expert in, but I think the issue of whether the benefits system should be devolved to Wales is something that I guess could theoretically come within our remit in the second part of our work.

Chair: Really?

Paul Silk: As you know, the benefits system is devolved to Northern Ireland, although, as I understand it, the same benefits are paid in Northern Ireland as are paid in Great Britain.

Q50 Chair: Is it something that might be looked at in Part 2? I was going to jokingly suggest that that might become Part 3, but you might be ahead of me there and might be looking at this in Part 2. Is that correct?

Paul Silk: We are open to any suggestions as to what we might look at in Part 2 and, if the Committee were to suggest we should look at this, then of course we would do so.

Q51 Chair: Anyway, there is a logical argument that you can see.

Paul Silk: I accept there is a logical argument, yes.

Q52 Geraint Davies: Very briefly, 3 million people live in Wales out of 60 million, and you seem to be suggesting that those 3 million people should have a different income tax system and, indeed, benefits system. Do you think there is an argument for 20 systems, all with different income tax and benefits, and how would that impact on crossborder mobility?

Paul Silk: I am not saying they should have a different benefits system. All I am saying is that the benefits system, theoretically, could be something that was devolved and, theoretically, something we could look at in Part 2 of our work. I have not heard any suggestions that we ought to do that, but we will cross that bridge when we come to it.

Q53 Geraint Davies: On the 3 million point-and I know you touched upon it-is there a strong case for, in the future, a system of tax and benefits for the northeast, for the northwest and for Wales, to have a sort of whole tapestry of tax and benefits across Britain? Do you think that would help inward investment in terms of understanding or would it be too complex to penetrate?

Paul Silk: You are absolutely correct in saying that we have this rather strange asymmetric system in the United Kingdom with one very large unit, England, and three smaller units. In a classic federal system, there is a difference, for example, between the taxation system in New Brunswick and in British Columbia. That is a federal system and we have a rather different system here. But, once you have reached the position where you have a legislative assembly or Parliament with spending responsibilities inside a part of the United Kingdom, coherent with that is that it should have taxation responsibilities.

Q54 Mr Williams: I want to ask two things on implementation. You alluded to the idea earlier on that you do very much see this as a package and you would be disappointed if it was broken up in any shape or form. The first question is: why should your proposals for income tax devolution require a referendum? Some of us seem to have spent a lot of time going around knocking on doors during referendums over the last few years. Why should these proposals have to have a referendum, given that the precedent in Scotland is not the same?

Professor Lloyd: We took a lot of evidence on this issue and this was a fairly regular theme in the evidence that we received. Indeed, the opinion poll that we commissioned had a very clear majority in favour of a referendum. We felt that this was an important issue and that it is right that the people of Wales do have a say in the decision when the time comes.

Q55 Mr Williams: Presumably at the end of Part 2, when we reach a series of conclusions on further devolution of powers, we will be in the same position, facing, conceivably, another devolution referendum, not least if we have legislation enacting Part 1 first. This cycle of referendums seems to be endless.

The second question is this. The Chairman alluded to the cost of setting up, and the absence of costings for a Welsh Treasury. But in terms of the delivery of some of these proposals, do you feel the Welsh civil service has sufficient capacity and the knowledge to establish a Welsh Treasury, and what specifically could be done to improve that situation?

Paul Silk: The fact is that we have not looked at the capacity of the Welsh civil service, so I would not like to opine about that, other than to say that I have spoken to the new Permanent Secretary at the Welsh Government and he is confident that they could take on the responsibilities that we suggest in this report and they could develop the capacity that is necessary to do that. I have no reason to doubt that.

Q56 Mr Williams: Are you aware of any work that is being undertaken at Assembly Government level to assess that?

Paul Silk: I understand that the Assembly Government is thinking about the implementation of these proposals, so I guess that it is thinking about the capacity issue inside the civil service.

Professor Lloyd: The time scale is such that there will be the opportunity to develop experience. Experience is perhaps the key issue here. With additional responsibilities, gradually the Assembly civil service will develop that experience to deal with them.

Q57 Chair: At the same time-and on this point of experience-surely one of the issues that will have to be looked at is whether there are enough Assembly Members at the moment do the job.

Paul Silk: That was an issue that came through clearly to us from various sources, including the Presiding Officer of the Assembly. We addressed the issue of the capacity of Assembly Members in the sense that we called for them to be perhaps better helped to do the work that they would have to do in scrutinising financial legislation. The numbers are probably outside our remit. I say "probably" because the structure of the National Assembly for Wales is outside our remit. We are going to have a discussion at some stage about whether numbers and structure are the same matter, but the structure and the method of election of the Assembly are specifically excluded from our terms of reference.

Q58 Glyn Davies: I want to return to the issue of a referendum. I do not know how the discussion will have gone in the Commission on this, but some people might have been a bit concerned about the number of referendums and whether one is actually needed. This is a hugely important issue, as you have told us, but, if the parties that formed a Government had made it very clear in their manifestos that this is what they were going to do and that they felt this was a step to move forward to, why would a referendum be needed in that case? General elections are pretty important decisionmaking processes, as well as referendums.

Paul Silk: We address the arguments on both sides in the report and we say that they are pretty finely balanced on both sides for and against a referendum. We concluded that a referendum was necessary because the Welsh Government argued strongly in favour of a referendum and the Conservative Group inside the Assembly argued in favour of a referendum. We felt that it was important to recognise the views of the two largest parties inside the Assembly. We also recognised that the question in the last referendum implied-it did not say specifically, but implied-that a yes vote would not bring taxvarying powers. I think the word we use is that it would be disingenuous now to say, "You cannot have another referendum even though you might have voted last time thinking that the vote was about taxvarying powers."

There were some other arguments like the fact that Scotland did have a referendum-and this was one of the questions in the original referendum in Scotland about taxvarying powers-which we thought was important. We specifically address the issue of the manifesto commitment and say that is another way that the issues could be dealt with, but we recognise that, when people vote in a general election, they are voting about a whole set of issues and would not be voting about this particular issue. Therefore, it would not be an opportunity for people to express a view about this. So, on balance, we came to that conclusion. It was a balanced conclusion.

Q59 Glyn Davies: You are not afraid that we will get to a stage where we have referendums whenever there is a difficult issue and that the general election becomes a bit of a beauty parade and nothing to do with policy? That seems to be the way an awful lot of people want to head when there are difficult decisions to take. Is the fact that Plaid Cymru and Labour in the National Assembly wanted you to have a referendum a fundamental reason why you recommended it?

Paul Silk: I do not think Plaid Cymru recommended it.

Glyn Davies: I am sorry, no.

Paul Silk: It was the Assembly Conservative Group and the Welsh Government that recommended it.

Q60 Glyn Davies: The Conservative Party as well, yes.

Professor Lloyd: As Paul was saying, it is a finely balanced issue, but, after careful consideration, we did come to a unanimous view on this.

Q61 Mr Williams: Having undertaken all this work-obviously, you are about to embark on Part 2 and there is a huge body of work to be done there-do you have a hope and expectation that this part of your work will be delivered in a legislative form this side of a general election? Do you have that expectation and hope?

Paul Silk: For Part 1, yes, we do.

Q62 Chair: I think we have managed to get through all the questions in reasonable time, so if it is okay with everyone else I shall call this meeting to a close. Once again, Mr Silk, Professor Lloyd, and Mark Parkinson, thank you very much for coming in and for being so open with us. Whatever our views, we do appreciate the way in which you are willing to engage with us and deal with these issues. Thank you.

Paul Silk: Thank you very much. We will be delighted to come back and talk to you about Part 2 if you want us to.

Chair: And Part 3!


[1] Footnote by witness: I answered in respect of the costs of a Welsh Treasury. The report gives an indication of general administrative costs of its income tax proposals at paragraphs 5.5.32 to 5.5.34

Prepared 2nd July 2013