Skip to main content

UK and Welsh Governments (Finance)

Volume 550: debated on Tuesday 11 September 2012

It is a pleasure to speak under your chairmanship, Mr Leigh. I welcome the new Minister at the Wales Office to his place. His role recently has perforce been one surrounded by a deep silence. I consulted the online Hansard and apparently his last contribution was in the Christmas Adjournment debate of 2010—some time ago. Many hon. Members, not least from Wales, will be looking forward to that silence being broken. I am glad of this early opportunity to question him on a crucial issue for Wales and I am determined to allow him plenty of time to answer. I am sure that hon. Members who are here today and take an interest in the issue will understand that, as this is a short debate, I will take only a few interventions.

My purpose in applying for the debate could not be simpler. I want to know what is going on. I want to hear evidence of progress towards fair funding for Wales. Neither I nor the people of Wales can wait until the Chancellor of the Exchequer’s misguided policies are conclusively proved to be a failure for funding for Wales to be reformed. This is not a back-burner issue. There is and has been for a very long time a pressing case for reform. It would be worth hundreds of millions of pounds to the people of Wales and would provide part of the springboard—part of the power—that we need to bring Wales out of this deepest of recessions.

The previous Secretary of State for Wales set up a twin-track approach to deal with developing constitutional issues. On the one hand, we have the Silk commission, which has two parts, the first primarily considering taxation issues and the second examining the wider devolution settlement. A great deal of effort was put in to ensure that the commission has cross-party support and cross-party membership. Participants are drawn from the Tory party, the Liberal Democrats, the Labour party and Plaid Cymru. It also has independent members. Plaid Cymru is represented by that fearsome Paxman baiter, Dr Eurfyl ap Gwilym. To my mind, he should be stirring things up in another place, but I will not pursue that line of thought now. With the Silk commission, meetings are advertised, communiqués are posted and consultation takes place. According to its website, the report on part I of its work will be out this autumn and the report on part II in 2013, although the former Secretary of State announced that that might be delayed until 2014. We shall see.

On the other hand, there are bilateral discussions between the Welsh and the UK Governments to discuss financial matters. Participants in those discussions are drawn from the Tory party, the Liberal Democrats and the Labour party, so not all parties in Wales are involved—Plaid Cymru is not involved. I well understand that they are Government-to-Government discussions. I am no more paranoid than any other MP; this is not a case of paranoia or lack of understanding on my part. The point is that, unlike the Silk commission, those discussions are simply not open to all and not transparent.

I congratulate my hon. Friend on gaining this debate and the Under-Secretary on his appointment. My hon. Friend has hit the nail on the head. We have the two processes of the bilateral discussions between the Governments and the Silk commission. My understanding is that the commissioners have some contact in terms of how those discussions between the two Governments are proceeding, but surely it is very difficult for them to put together a comprehensive package unless the cloak of secrecy surrounding the intergovernmental discussions is lifted.

My hon. Friend makes a very pertinent point. The question was asked of me in preparation for this debate whether one set of discussions needed to be concluded before the other set of discussions could be concluded. Do we not need to wait until the questions about responsibility are decided before we decide what the financial settlement is? My hon. Friend makes a very good point. What I am looking for in this debate is some answers from the Minister, who perhaps can enlighten us. My understanding is that, with the intergovernmental discussions, no communiqués are issued. Ministerial statements have lacked detail. Freedom of information requests have been refused or severely curtailed. Written questions have produced stonewalling answers. There is little information in the public domain and there is no schedule for reporting as there is with the Silk commission.

Therefore, as I said, my aim in today’s debate is simply to obtain some information on who is involved in the meetings, what is happening, what progress they have made, when they will conclude and how they will be reported. The debate is an opportunity for the Government and, indirectly, their interlocutor in Wales to report back to the Welsh people in their favourite forum—Parliament here in London—so here is an open goal for the new Minister.

Let me set out the headings of the matters that I would like the Minister to address. The primary aim of the discussions, as I understand them, is to consider the conclusions reached by the Holtham commission about the block funding grant for Wales—the so-called and now much-criticised Barnett formula. I say “now much-criticised”, as the Barnett formula had no stauncher defenders than members of the previous Administration, who repeatedly referred to it as

“a good deal for Wales”—

that is, until they were no longer in government. Then it was all awful.

The Holtham commission, as we well know, found that the Barnett formula was “not fit for purpose”. There was agreement with that in a variety of other reports issued at the same time from the House of Lords, the House of Commons and the Calman commission and in discourse between political parties and the various parts of Welsh civil society. That is because Barnett is unrelated to the relative needs of each of the devolved Administrations. Instead, it depends on the spending decisions made by individual Departments in England, so the amount of money spent in Wales depends on the amount spent in England. More than that, the formula is intended to converge with the English average, irrespective of whether that helps the people of Wales. That was the initial intention at least—a converging formula.

The amount of money that we get is decided not according to our needs, but according to the formula; and the gap between the amount of money that we need and the amount available is growing. The Holtham commission estimated, conservatively, that there was a gap of about £400 million between the amount of funding that Wales receives and its relative needs. However, those figures are now several years out of date, as well as being based on spending estimates rather than the final budget. More recent estimates by our colleague, Dr Eurfyl ap Gwilym, suggest that the difference in 2010-11 could have been as high as £680 million, not £400 million.

My worry, therefore, as far as the discussions are concerned, is that if we accept the much-touted suggestion of a Barnett floor to prevent further convergence, we will lock ourselves into the existing inequality. The Barnett floor might actually become a Barnett ceiling. The question for us today and for the people of Wales is at what level that might be set. Would it be at 112% of need, 113% or 114%, as Holtham suggested? The answers to those questions are crucial.

Members of all parties are concerned about the operation of the Barnett formula. I have always taken the view that we cannot deal with the situation in Wales without dealing with the situation in Scotland, because there is a huge overpayment to Scotland. Does the hon. Gentleman accept that the only way of resolving the issue is to deal with Scotland and Wales at the same time?

I will give a plain answer to a plain question: the Barnett formula should be reformed and we should do whatever it takes to reform it. My concern, as a Welsh MP, is the effect on Wales, and the effect on Wales is very damaging. That is the point. That is why I want answers from the Minister.

Time is catching up with me, so I will press on. We would also like the Minister to report on the housing revenue account subsidy, which my hon. Friend the Member for Carmarthen East and Dinefwr (Jonathan Edwards) has brought up repeatedly. According to a freedom of information request, though they may not realise it, council house tenants in Wales have donated more than £1 billion to the Treasury since devolution began. This year, the estimate is that £73 million will be returned. There is no such scheme in Scotland or Northern Ireland—it never existed—and the scheme in England, which had major changes made to it anyway about 10 years ago, has been scrapped. In answer to a written question, the former Secretary of State confirmed that it would be part of the bilateral discussions, so, I again ask the Minister, what is happening or—to coin a phrase—what’s occurring?

The role of the Welsh Government and their borrowing powers is the third issue on which I want to question the Minister. That was supposed to be part of the bilateral discussions, and the Silk commission is examining it as well. The Welsh Government have limited borrowing powers. The right to borrow to invest would make a significant difference. I know that what I am going to say will not find favour on the Government side of the Chamber: if we were to follow Keynesian principles for public sector investment, when the private sector would not do so, borrowing powers could be hugely significant for the Welsh Government. They could make investment decisions for themselves.

Does it not seem odd to people outside this place that the Welsh Government do not have borrowing powers, but local authorities do? The next strand of government down has such powers, but not the national strand in Wales. We, in Plaid Cymru, believe that significant borrowing powers should be devolved to the Welsh Government. Borrowing limits should be based on an assessment of sustainability and affordability—two principles that I am sure will find favour with the Minister. We are not advocating a spending spree. The Welsh Government should be entitled to set an annual borrowing limit for themselves, which they consider affordable. We also believe that the Welsh Government should be free to issue bonds or obtain commercial funding, as well as use the services of the Treasury’s Debt Management Office. That would enable the Welsh Government to decide which borrowing mechanism best suited their requirements. What progress can the Minister report?

As part of the Holtham discussion on borrowing powers, it was recommended that the Welsh Government have unfettered access to end-year flexibility funds—the money left over at the end of the year. It was a matter of great disappointment to, I am sure, all Welsh MPs—well, nearly all—that an unspent £386 million voted to the Welsh Government by Parliament was clawed back by the new Government in 2010. A huge amount of money disappeared down the M4, again. Previous end-year flexibility reserves were invested in projects such as the strategic capital investment framework. The money has been well used. By removing that £386 million of end-year flexibility, the UK Government in effect removed a significant sum of money from the poorest part of the British state. It would have been useful for job creation, keeping people in work and a host of priorities that all Members share.

There we are. I look to the Minister for answers. There is a new Cabinet, and a chance for a new openness and new dialogue with the people of Wales, or possibly not—let us see.

I thank the hon. Member for Arfon (Hywel Williams) for his kind comments about my appointment. I am sorry, or perhaps glad, that he missed my rather embattled response to a debate on unemployment in north-east England when I stood in for a Minister recently. The hon. Gentleman rightly referred to the near total silence in which I have been working as a Government Whip over the past two years or so. I pay tribute to him. He and I served together on the Select Committee on Welsh Affairs in the previous Parliament. I always appreciated the intelligent and sensitive approach that he brought to all the issues we looked at, which he has again demonstrated in the manner he has approached the topic today.

We have an opportunity before us to provide a timely update to Members on the progress of the intergovernmental talks on funding reform. In July last year, the Secretary of State for Wales informed the House in a ministerial statement of the Government’s plans to establish the Commission on Devolution in Wales—now commonly known as the Silk commission. It was established in October 2011, fulfilling a commitment in our programme for government to establish a process for the National Assembly similar to the Calman commission.

As hon. Members from Wales know, the commission is looking at the case for devolving fiscal powers to the Assembly and the Welsh Government, to improve the financial accountability of the devolved institutions in Wales. The Government will consider the commission’s recommendations carefully when it publishes its part 1 report in, I hope, late autumn.

The Secretary of State’s July statement also made clear the Government’s commitment to consider all aspects of the Holtham commission’s reports and to continue discussions with the Welsh Government on Holtham’s funding reform proposals for Wales. The talks will also cover the operation of the Welsh Government’s existing borrowing powers. The aim of the intergovernmental talks has been to explore and test the conclusions reached in the Holtham report in respect of Welsh funding, to look at what the trends in funding have been and are likely to be, and to consider the extent to which there has been convergence between the Welsh block grant and relative funding in England. The hon. Gentleman drew attention to the difficult issue of convergence, which has been at the heart of what the two Governments have been discussing.

The talks have also explored previous studies carried out on Welsh needs. The hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) talked about a cloak of secrecy; there has been no cloak of secrecy around the talks. They have been conducted on exactly the normal basis that one would expect intergovernmental talks to be conducted on. They have been going on for about 12 months and have been conducted in a positive way. The two Governments have worked closely and collaboratively as the talks have progressed. As one would expect, they have involved the Chief Secretary to the Treasury and the Secretary of State for Wales. Together, they have had a productive and positive dialogue with Welsh Government Ministers, and, in particular, the Welsh Minister for Finance. Those meetings between Ministers have been supported by meetings between officials. Officials from the Welsh Government have met on an almost monthly basis with officials from the Wales Office to carry forward the discussions, analyse the evidence and determine the funding trends.

I am pleased to tell the hon. Member for Arfon and the House that the talks are now reaching a conclusion. I hope that hon. Members will appreciate that, although the talks are in their final stages, I am not able today to give a detailed statement as to what the outcome will be. I am confident that we will be in a position to make an announcement in the near future on the outcome. I hope that the hon. Gentleman is made positive and optimistic by my confidence, and that he will recognise that the outcome will benefit Wales, and be good for Wales and the United Kingdom as a whole.

I appreciate that the Minister does not want to disclose the outcome of the discussions. We understand that we are most likely to see the introduction of a Barnett floor. My hon. Friend talked about that floor being based on the Holtham estimates, which go back four or five years. The key question we want answered is whether there has been any reassessment of those estimates in terms of coming to a conclusion on the Barnett floor. If there has not been, and the situation has worsened—and we believe it has—that floor would end up becoming a Barnett ceiling. That outcome would be disastrous. To be perfectly honest, given the record of the Finance Minister in the Welsh Government, we are concerned that Treasury Ministers will be running rings round her.

Tempted though I might be to be drawn into discussing what might be in the final statement, I will not do so. On what the Holtham report said about the financial position of Wales, the hon. Gentleman mentioned his party’s belief. There are a lot of beliefs about the position. Big assumptions are made in the report about Wales’s funding situation. Not all of those beliefs and assumptions are shared by the UK Government.

Over the past 12 months the two Governments have together been exploring the issues in detail. The hon. Member for Arfon went into a little detail about the Barnett formula, and its weakness. I caution him about claiming that the current system always delivers an unfair outcome for Wales. The spending settlement for Wales in the 2010 spending review was fair in a difficult economic climate. It represented a 7.5% reduction in the Welsh Government’s resource budget—an average cut of less than 2% a year. We recognise that there are challenges in that, but it is significantly less than the 3% a year cut that the Welsh Government had previously planned for. In addition, the Government have provided almost an additional £500 million since the spending review for the Welsh Government to use in any way they want.

In our programme for government we recognised the concerns expressed by the Holtham commission, but our priority was and is to stabilise the public finances. Plaid Cymru’s perspective may differ from the Government’s, in not recognising the necessity of the UK fiscal framework, but that is the context in which we are operating. Reform of the Barnett formula cannot take place in the current environment. It should be borne in mind that comprehensive reform, as my hon. Friend the Member for Montgomeryshire (Glyn Davies) so eloquently said, would have huge implications not just for Wales but for all parts of the United Kingdom. That is why the intergovernmental talks between the UK and Welsh Governments have not looked at replacing the Barnett formula, or at the pros and cons of alternative systems.

Will the Minister explain something to me? The economic forecast given to us in 2010 does not seem to be holding up. We seem to be in a no-growth situation. Is there therefore a case for revising the view of when the Barnett formula should be reconsidered, given that we now face perhaps another five years of double-dip recession?

I have yet to see any economist forecasting five years of double-dip recession. I always enjoy listening to the hon. Lady, but given the zero progress that her party’s Government made on the issues, I am not sure we should take guidance from her on this subject.

I do not wish to torture the Minister with Keynesian quotes; but Keynes did say:

“When the facts change, I change my mind. What do you do, sir?”

What do the Government do if the facts have changed?

There are established processes in place, through the comprehensive spending review, for looking at all those issues. I hope that the hon. Gentleman will take me at my word when I say there is a genuine commitment among the new team in the Wales Office, and our colleagues in the Treasury, to work with Ministers in the Welsh Government to explore those issues in depth, and ensure that Wales gets the fairest possible outcome.

The hon. Member for Arfon raised some other financial matters. Progress has been made on the issue of the housing revenue account, about which the hon. Member for Carmarthen East and Dinefwr spoke so powerfully in, I think, November 2010. The Government are working with the Welsh Government on how the HRA in Wales can be abolished, in line with the approach taken in England. We agree that any reform of the HRA subsidy system would need to be fiscally neutral, as it was in England. I know that Plaid Cymru Members have strong feelings about the current system, but Ministers here and in Cardiff agree that it is not unfair to Wales. However, they are considering ways to improve it. Discussions are continuing, and we are currently awaiting clarification from the Welsh Government to proposals that they made in August. I emphasise, again, that we are operating within the framework of the UK fiscal system, and need to bear in mind the consequences to other parts of the system of change affecting Wales.

Hon. Members should be aware that the former system of end-year flexibility has now been replaced with a new budget exchange system. In designing that system, the Government worked closely with the Welsh Government and have implemented a system that provides increased flexibility for the devolved Administrations to manage their own underspends. The Welsh Government have signed up to that approach, as indeed have the other devolved Administrations. I want to make one point about underspends. Generally it is not good to have many of them. Administrations should plan prudently as well as spend prudently, and if they do that, and carry out their spending plans efficiently, there should not really be any case for large underspends at the end of the year.

I hope that I have dealt with all the points that the hon. Gentlemen raised. I look forward to hearing the outcome of the talks.

I welcome the Minister to his position—to both of them, in fact. He is a remarkable person, as he is able to spend so much time both as a senior Whip and a Wales Office Minister.

I want to ask him about the future, and how he sees the work of the Silk commission progressing to part II. Will he talk about the future constitutional relationships? Will there be dialogue with the commission on the West Lothian question, for example?

Part II of the Silk commission goes way beyond the subject that we are debating, as the hon. Gentleman knows. It looks at wider devolution in Wales, and the potential for devolving other powers. Part I, which has more of a bearing on what we are discussing, looks at potential fiscal devolution; so, tempted again as I might be, I am not going down that path.

I know we have plenty of time, but I am still not going to talk about that issue when we are debating funding issues.

Question put and agreed to.

Sitting adjourned.