COMMISSION ON THE POWERS AND ELECTORAL ARRANGEMENTS OF THE NATIONAL ASSEMBLY FOR WALES

 MINUTES OF PROCEEDINGS

of the

EVIDENCE OF:

Denzil Davies MP

held at

Caradog House, Cardiff

On

FRIDAY 11 JULY 2003

In Attendance

Lord Richard

Eira Davies

Vivienne Sugar

Sir Michael Wheeler-Booth

Tom Jones

Huw Thomas

Ted Rowlands

Dr Laura McAllister

Peter Price

Carys Evans, Secretary to the Commission

Denzil Davies MP

Proceedings

Lord Richard

Thank you for coming. Can I ask you to introduce yourself for the sake of the transcript and then if you would like to open up the discussion. Speak to your paper, then any other bits and pieces.

Denzil Davies

I am Denzil Davies, a Member of Parliament for Llanelli. I did put a paper in as I was requested. I tried to keep it to two pages. If I may just amplify, but very briefly just a couple of paragraphs really. If I could refer you to paragraph three where I make a sweeping statement: "We are reaching a point I believe where it is democratically unacceptable", blah, blah, blah. What I noticed recently, and the campaign for London Mayor is under way and the Members of the House of Commons read every edition of the Evening Standard as it comes out. This fact of the funding of various devolved Assemblies is gradually coming out. People are saying, well, London is really contributing quite a lot because GDP per head is so much higher. Yet they have got problems in London. Livingstone is saying it. Some of the other candidates are saying. We've got problems in Hackney and in Tower Hamlets yet our money is going to fund these dissolute councils, whatever they might be. The question of funding is coming up. I don't think -- what I am trying to say here is I don't think it can be avoided because even I, I am a Member of Parliament for Llanelli, if I vote in the House of Commons I vote money. If people begin to question the fact, well, how is the money being spent, I think there may be some resentment if they have no control over the spending of the money but they have to account for that to their constituencies. We're talking about not just about Welsh constituents but constituents in England as well who are helping to fund the common pool of the UK. Paragraphs four and five I refer to -- there was a so called Welsh budget of income, expenditure, expenditure, revenue paper put out by the Welsh Office in 1997 for the year 1994, '95. I have it here. I haven't got copies. I think it's a genuine document in so far as it's not easy to do a budget for a part of the UK. They did manage to do it, it's basically on total Government expenditure in Wales which, of course, was Welsh Office expenditure then plus the other departments. There was no Assembly. They have come to the figure on the amount of taxation that was raised in Wales. Not an easy to figure to reach. But again with computers and all the information today it probably can be done. There was a substantial difference between the two figures. I don't think it matters how much difference there was there was. It was about 5.7 billion. Then the person---

Lord Richard

1994 values?

Denzil Davies

'94/'95. Total Government expenditure for Wales was 15.6. Total general government revenue 9.9. General Government borrowing requirement was 5.7. These have changed. Then the person who did the paper or the persons in annex E they did a Maastricht calculation, they put the borrowing figure over the GDP figure. They arrived at a borrowing of 20 per cent. For the purpose of a speech I was trying to make round about '99, 2000, I tried to update the figures to those years but I only did id in a very rough way. I looked at the Government expenditure and increased it by a percentage every year. I looked at revenue, which I couldn't get a figure, but I increased that by a certain percentage, I increased the GDP by a certain percentage. For what's it worth I got it down to 15 per cent as a kind of Maastricht figure. Since then the Welsh economy is growing quite well. Much better than Scotland. I try and read the Scotsman from time to time, the Scottish are having problems, the Welsh economy is growing by over two per cent, the Scottish is not growing by two per cent. Quite a bit less. So the Welsh economy has been growing since then. Also Gordon Brown announced substantial increase in public expenditure a few years ago. As far as I recollect public expenditure is going to be increasing by about five per cent. Everywhere. If you have got a five per cent growth in public expenditure, even if the Welsh economy is growing by two and half per cent, the borrowing figure is not going to be much less. If my figure was correct. So I would estimate that we've got still around 15 per cent. But it's a very significant figure. Frankly no country operating on its own could possibly fund the borrowing requirement of 15 per cent. I am told Slovakia was around about 15 per cent at one time. The have to get them down for the purposes of getting in the European Union. I'm not saying it's a highly exact figure but I think that there is quite a substantial deficit as I see it. Finally, can I just refer to my paragraph 7, where I try and say that if more powers are transferred then given the gap in the funding those powers, or the implementation of those powers should be paid for within Wales's own resources. This is not as radical, revolutionary as I would like to think. Because somewhere in the papers for this Commission I noticed an analysis of Spain, I think, which has an asymmetrical devolution, if I can put it that way, like Wales, and Germany, which is more symmetrical, as you would expect. But apparently the southern, so it is said, the southern provinces, the poorer provinces of Spain in fact have opted for not having more powers, whereas Catalonia can fund more powers. But the southern provinces, from what I understand from this paper, I am sure it's a very respectable paper, they also are in this kind of position. I'm not saying that as an argument to clinch my argument. But that's my worry. That taxation and representation are important and those who earn the money should have some say in spending it, otherwise we are in trouble and indeed devolution is probably in trouble. That's my little speech, my Lord.

Lord Richard

Can I ask you, if all this is true, what about Scotland?

Denzil Davies

I'm not an expert on Scotland. I would not know what Scotland's deficit is. I think from again this splendid income, expenditure paper, annex E, I think Scotland's deficit at that time, '94, '95 was 14 per cent. Mind you the UK deficit was seven per cent when there was high borrowing.

Lord Richard

If all you say about the Welsh economy having improved and the Scottish economy not going as fast, one would expect that 14 per cent was larger rather than less.

Denzil Davies

If everything else was equal. But I wouldn't wish our Scottish cousins, they are not really our cousins, I don't think, to upset them by saying anything about Scotland at all, they are a very sensitive lot.

Lord Richard

All I am saying is that the politics of the thing applies equally to Scotland.

Denzil Davies

Indeed, if there was -- what about the English administrative regions? The point I am making is you can't run away, we've done a kind of devolutionary settlement, but we can't run away from the fiscal aspects of it.

Sir Michael Wheeler-Booth

Isn't it actually true that the whole basis of the devolutionary settlement was running away from the fiscal aspects. What people say, if you say that Barnett is unsatisfactory, they say, ah, but it was part of the deal. You can't look at it. When I asked a question in Scotland of the Permanent Secretary about Barnett it was the only question he said: "No comment. I agree with your argument. I think it's got great strength to it. But you can't say one ignores Scotland.

Denzil Davies

I didn't want to say that. I said I didn't know. I am sorry, can I, on Barnett I actually meant to say in relation to one of those paragraphs, if, of course, Barnett is re-assessed and if, as some people say, we should have a ‘needs’ based formula, needs is a long algebraic equation, about as long, as it is with Local Government and the health service. Let's accept it's possible to look at it on a needs basis. Maybe we will get less. But I don't think the people who want to change Barnett envisage that. If we get more the deficit gets greater. It may very well be necessary. Joel Barnett is a very good friend of mine. There was a chap called Goschen before him. I think we are going to have to look at it and before we do a major kind of shift again we can't just ignore the fiscal position.

Lord Richard

Can I add one sentence to that? You are really talking about the politics of the situation in which the rich parts of England, or perhaps rich parts of Scotland are financing the poorer areas, namely Wales and Scotland via block grant and that the revenue coming out of Wales is insufficient to cover that which---

Denzil Davies

Block grant plus the expenditure from the Home Office, the other departments that are not devolved.

Lord Richard

What's wrong with that?

Denzil Davies

I'm not saying there is anything wrong with it, but it's a question of democracy, the people who are funding that are going to say, well, if you are going to have than hand over to the Scots or the Welsh or the Northern Irish or even the people in Tyne and Wear, if you hand over the to them legislative powers so that they can decide, for instance, how hay look after the elderly in their homes, in their residential homes so that the elderly in Wales or Scotland don't have to pay anything for nursing costs at all, if you are going to do that we need a say in that because our money is going there but we're not having any say in how that money is spent.

Vivienne Sugar

This argument has been run and won in other countries, I'm sure fairly early on when we started looking at fiscal arrangements the Commission had evidence from Canada about how taxation streams supported the differential administrations, but at the same time had redistributive mechanisms build into them. It seemed perfectly acceptable that the richer parts would prop up the poorer and also give them the legislative discretion to do things in a different way.

Dr Laura McAllister

Isn't there also an issue in that legislative powers is not the same as independence? It's quite different things. What we're talking about is a form of redistribution in the same way that EU regional policies is a form of redistribution from wealthy areas to less wealthy areas. That is debated is very significant because the talk of renationalising regional policy would have a massive impact.

Denzil Davies

The people whose money you are redistributing, maybe its not pure and logical, want a say in how that money is going to be spent. It's their money that you are redistributing. They will stand up and say, if we're talking politics, say, sorry, this is our money. We don't mind the money going. But we want to have some say. We're talking about legislation now and partnership in terms of legislating. Canada, I had the privilege years ago when I was Deputy Foreign Affairs spokesman of doing the Repatriation of the Government of Canada Act which happened when Trudeau was PM and there was a splendid Red Indian chief who came to see me. He said the Act should not apply to this part of Canada because Queen Victoria gave to it his ancestors. Canada used to be what I would have described as a confederation. I know there are lots of arguments about what is a federation and what is a confederation. The Prime Minister of Alberta had more money than the PM of Canada. He would hand over chunks of his money to the centre. Canada may have changed since then. I'm not saying -- but each country is different and these matters have to be decided politically. But my point is it you raise money by taxation, if you takes people's money they should in the main, the balance must be kept that you shouldn't go too far and take their money without allowing them some say.

Vivienne Sugar

Isn't that exactly what happens now, the Chancellor produces a budget on which MPs vote and that does include redistribution at the moment. What is the difference if Wales was to have primary powers over some of the currently devolved functions like the health and education and housing and so on to do things that little bit differently? Why it is raising in your mind the very principle that because what you are coming at here is a fundamental reappraisal of the way Britain works.

Denzil Davies

The settlement did not look at fiscal matters. I don't complain about that. But what I am saying is we're getting to a point where other parts of UK, are saying we want a say in how the money is spent. In the House of Commons the other night I voted for foundation hospitals. I'm not quite sure why I voted for them except occasionally I feel I should vote with the Government. In Wales, I don't disagree with this at all, the Assembly decided not to have them. But I voted for them. You are going to have two different systems. The same with top up fees next week, I shall votes against them. I'm not quite sure of the Assembly's position. Then nursing homes. In fact, I was going to throw one other red herring into all this, given that the Chairman was a very distinguished Member of European Commission I will now raise the four freedoms. The UK is a more complete single market than even the European Union. It's freedom of movement of persons, freedom of capital, trade on goods and freedom of establishment. European Union treaty says if you impinge those freedoms and discriminate against it then you get taken to the court and you usually lose. If you look at Britain and the UK, here we have a situation where in Wales you don't have foundation hospitals and in England you do. Isn't that a kind of discrimination when you have got free movement? What I am saying we've got to look at a balance.

Dr Laura McAllister

Little disingenuous though, isn't it?

Denzil Davies

It's a single market with a single currency, a common single central fiscal monetary policy. Into that quite rightly, we are saying, well, it's too centralised, so devolve. But there comes a point where I think you have look at it from the centre.

Lord Richard

You have to produce evidence that first of all there is this political restiveness against the existing settlements going on. Secondly, you have to produce some evidence that another step down the devolution road is really going to stir it up to an unacceptable extent.

Denzil Davies

I haven't got evidence with me, I think that speeches in the House, given the London Mayor's campaign, I think there is considerable -- the question of why should Scottish MPs be allowed to vote---

Lord Richard

Look at all the Scots in the Cabinet. Do you think they will cut the allocation of block grant allocation to Scotland?

Denzil Davies

All I am saying is especially with English administrative regions, you are going to have to look at a financial settlement. Look at Barnett. It has to be looked at sometime or other. We cannot run away from it. Because if you do run away you are transferring powers and functions away from the people who are contributing money towards the implementation of the powers. They have got rights too.

Dr Laura McAllister

That's a feature of devolution as opposed to self government in a sense. Devolution maintains the integrity of the---

Denzil Davies

Of course it does. A balance has to be maintained between the centre and the periphery, I do not use that word in a pejorative sense.

Dr Laura McAllister

But in what way don't we have that in our democratic system with Welsh MPs operating as they do?

Denzil Davies

We don't. The legislative power in relation to health matters, for instance, at the moment we have a kind of partnership. But if power were transferred completely the Assembly, Welsh MPs could only vote the budget. They would have no say in a law framed to -- take Home Office powers, for instance. Prison service. All the Home Office powers. We would have no say in any law, in any law that was formulated by the National Assembly. Yet we would be expected to vote money to the National Assembly to do whatever they wanted to do within the parameters of what has been devolved.

Peter Price

This is entirely typical of a very large number of countries and it's effectively the bulk of what's already happened. When you talk about law, the decision as to what is going to happen to certain monies is far more about executive decisions than it is about legislation. Legislation sets some sort of broad framework, but the real decisions about how the money is being spent is executive. You have got your devolution already on that. Isn't the real answer to what you are saying, one just looks at how any country operates there are these fiscal transfers of the regional basis, virtually every agree in the world. But at the centre the decision that is being taken by the UK Parliament is how much money should be allocated to the Wales and Scotland, in our case to the regions, that is an overall view. The control is there at the centre to take that overall view but it is virtually never to control all the detail, the whole point of devolving in a block system is to enable all those detailed decisions to be taken somewhere else. But even with existence of a Barnett formula the control is still there ate centre. That's where the decision is taken about how much, isn't it?

Denzil Davies

Not entirely. Because if you---

Peter Price

It's governed by the precedent.

Denzil Davies

If all the Home Office powers were transferred to Cardiff there would have to be an assessment of the amount of money in the block grant to cover the expenditure. The point I am making is that we're getting to a situation where the people who contribute to that money will want a say in how the money is spent. That's the only point I am making. I don't know about other countries. In the United States I know every state of the Union has to balance its budget. Spain is quite interesting to look at.

Peter Price

At the end of the day balancing the budget has to be done in Wales, but of course after fiscal transfer is made, and that's true in many other countries. But if I take you on to the remedy you are talking about here, in your final paragraph you are saying, your conclusion is that if further powers and functions are transferred then the cost of exercising those powers and carrying out those functions should be made met out of Wales's own resources. Do you then -- let's say fire or police are transferred, you are saying all the other functions already there are subject to block grant, the existing system. But further powers, if you are going to transfer a further power like the police that should be met out of Wales's own resources. How would you organise that? Presumably you are going to transfer still the money that is in the UK budget for those functions. Or are you going to whip away that money and say, you are going to have find the money, in which case do you allow Wales to keep some of its taxation revenue to match it?

Denzil Davies

A choice has to be made. I am not saying that Wales has to accept that settlement. All I am saying is if Wales wants additional powers over the police, for instance, it has to pay for them. We have a some idea how much they cost because the Home Office must know because it comes out of the Home Office budget and suppose it's ten million pounds. Wales can then decide if it wants police powers. If it decides that it does, then it has to find ten million. It may be difficult to find ten million, but the mechanism shouldn't be too difficult. You can raise it by various tax mechanisms. You can have a -- I mean obviously you have to look at ways of raising it. Nothing revolutionary about that.

Peter Price

At the moment Welsh taxation is going into Westminster and paying, inter alia, for that police service.

Denzil Davies

It's not, is it, that's the point.

Lord Richard

It's going into the pot.

Peter Price

Going into the pot.

Lord Richard

There is a big gap there.

Peter Price

If we say the gap is 20 per cent it means 80 per cent, let's take it proportionally, suppose there is a gap of 20 per cent that means that 80 per cent of the funding for the police service is coming from Welsh taxpayers. Are you saying you give back that 80 per cent or that you don't give it back or?

Denzil Davies

If you get police powers you pay for it. Obviously we have to work it out but Wales has got to raise that money. Wales will have to raise that amount of money to carry out the police powers which now the Home Office does out of its budget.

Lord Richard

There is no reason why the block grant shouldn't go?

Denzil Davies

It's the alternative. That's what I am saying.

Sir Michael Wheeler-Booth

If historically a lot of these disparities were disparities in Scotland and Wales and most of all Northern Ireland, a lot of it dates back to the 70s, some of which time you were at the Treasury, and the Barnett formula.

Denzil Davies

I tried to bring in Goschen, I am not quite sure who he was, but quite an impressive figure.

Lord Richard

He's the man Randolph Churchill forgot and he resigned.

Vivienne Sugar

Can we be clear about what you are proposing. Are you building in financial incentive for any further bits of transfer of powers. You are saying the existing cost of running services would not be transferred, the total existing cost would have to be found somehow or other in Wales. So it's not just the cost of any enhancements that Wales would exercise discretion on. It's the current cost as well.

Denzil Davies

No, we've had our settlement. We had a devolution settlement. The block grant covers the areas that were transferred by the Government of Wales Act. The rest of the public expenditure comes directly from central Government. What I am saying is for the future if you decide or this Committee to were to decide that Wales should have further powers of a substantial kind, I'm not talking about the fringes of agriculture powers, for example, then Cardiff has to raise the money and pay it for the cost of implementing these powers.

Vivienne Sugar

And give a windfall to the Home Office?

Denzil Davies

Cardiff would be spending it.

Vivienne Sugar

You would transfer the existing cost of running the service?

Denzil Davies

Wales would have to pay for the police. The cheque would come from the Cardiff not the Home Office.

Sir Michael Wheeler-Booth

What you arguing for is the choices of expenditure should be made in Wales and not as at present happens the Scots decide that they are going to spend more and more on keeping the old in homes and on students and basically the English taxpayer pays for these things.

Denzil Davies

Because of the gap.

Sir Michael Wheeler-Booth

The 1.26 per head that they get.

Peter Price

Can I suggest it is not because of the gap as such, and that indeed the logic of your argument leads to a different conclusion. It is about the Barnett formula and it's the way that it is calculated. What you are really at the end of the day, you're pointing out discontent in, for example, the London Mayoral contest, pointing out, as my colleague as pointed out, things like the way that Scotland is spending on things that people can't get in London. Isn't that largely attributable to the fact that the Barnett formula favours Scotland on any needs comparator, whereas it actually disfavours Wales? And if there were to be a needs based Barnett formula, leaving in one side the composition of how you work out the needs, if it was recognised throughout the UK that the formula for distribution was needs based, taking into account your Tower Hamlets and everything else, wouldn't that remedy the political discontent that you have identified?

Denzil Davies

I don't know. I don't think it is about the Barnett formula. It's about the fact that Wales does not produce enough revenue to fund the money that is spent in Wales and Scotland may not. If we go down the English regions route, that's a difficult route to go down, that's what it's about, the Barnett formula does not really effect that, indeed, as I have tried say if we have a needs based formula, whatever that means, which in fact would mean more money for Wales, your deficit is going to be greater. So the Barnett formula is a bit of a red hearing.

Lord Richard

Basically what you are talking about is the political effect of the situation in which still the rich English are a subsidising the poorer Welsh. It's the politics of that that we're talking about. What about northern Italy and southern Italy, that's very interesting because the north Italians are restive in much the same way you say the South East of England is getting restive. It's having no effect whatsoever. If you are in the situation in which there is a certain amount of restiveness in which the Government is standing firm, does it mean you have to worry about the politics?

Denzil Davies

If the natives are getting restless out there one has to be careful. May I reminisce about Italy and my time at the Treasury, when the Labour Government decided not to join the monetary union in 1978. Some Italians came over. I was told to go and talk to them. They said we are joining. I said to them what about southern Italy? The steel mills which closed, the poor people. How can you join this thing which will effect...they said the Italian economy is based in Milan and we sell our stuff to Germany. They said, any way they are all Arabs in the south. I'm not sure if Italy is a good, but, yes, all countries---

Lord Richard

That's proves my case actually. The point I was making about your cause and the politics.

Denzil Davies

I'm a politician. I want to see Wales prospering. I don't like independent Wales. I don't like dependency whether it's for an individual or nation. May I suggest this may be good for us to stop whinging for a bit and try and do it for ourselves.

Lord Richard

It's not Wales who are whinging. South East England are whinging.

Denzil Davies

They are whinging a bit now. Anyway---

Lord Richard

Thank you very much. It was refreshing.