The latest moves on a Welsh income tax

Danny Alexander interviewed at the Welsh Liberal Democrat Conference by ITV Cymru Wales Political Reporter Owain Phillips Credit: ITV News Cymru Wales

Statements by a senior Treasury Minister and the Welsh Government over the weekend have suggested that the power to raise income tax in Wales could be partly devolved, with the legislation passed in the next couple of years. The prospect was raised by by the Chief Secretary to the Treasury, Danny Alexander, in a speech to the Welsh Liberal Democrat Conference.

We need a new model of devolution for Wales. A model in which additional responsibility for raising revenues strengthens accountability too. A model in which significant income tax powers unlock commensurate borrowing powers for Wales too.

Asked afterwards why he thought the Welsh Government would want income tax devolved at the same time as a range of smaller taxes that it has asked for, the Chief Secretary pointed out that the proposal was in first report from the Silk Commission on devolution, which was backed by all parties in the Assembly. The Welsh Government duly welcomed his speech.

The First Minister has made clear that we want to see full implementation of the Silk Commission's recommendations, with legislation in this Parliament. This is a position supported unanimously by all parties in the Assembly. So it is good to hear the Chief Secretary setting out the UK Government's intention to implement Silk and we look forward to a formal announcement on the way forward as soon as possible. Silk recommends that there would need to be a referendum before powers to vary income tax rates were devolved to Wales. The First Minister agrees. The people of Wales should have the final say.

In the debate in the Assembly when AMs backed Silk last November, the First Minister was very cautious about devolving income tax, which the Welsh Government had not asked for in its evidence to the commission. He said the idea was 'worthy of consideration', bearing in mind the steps along the way that would in his view be needed.

I have made no secret of the fact that there will be many practical challenges to overcome before rate-varying powers could be devolved. For that reason, we have not as a Government sought the devolution of powers over income tax. The blunt truth is that a referendum would have to be held, in my view, and won before people in Wales would find themselves paying, potentially, a different rate of income tax from those in the rest of the UK.

There is, of course, the matter of the budgetary risks that would be inherent in income tax devolution. We would want assurances that any new system that included an element of income tax devolution would provide a fair overall financial settlement for Wales. Otherwise ... we might face the nightmare scenario where the block grant drops and income tax rates rise in order to provide the same outcome. That is clearly not in Wales’s interests. The hurdles are significant, but they are not, in principle, insurmountable.

If the UK government devolves income tax raising powers, the Welsh Government would probably be required to hold a referendum in line with Silk's recommendations. Only after winning that vote could it start varying the tax rate. It could certainly commit itself to not going ahead without winning a referendum. Either way there would be no rush to call such a vote.

But there is a difference between a tax-varying power and a tax-raising power. The UK Government could replace part of the Welsh block grant by devolving a proportion of the income tax raised in Wales. That would mean the Welsh Government would get more revenue if the economy grew -and less if it shrank.

Whether Danny Alexander can persuade his cabinet colleague, the Welsh Secretary David Jones, remains to be seen.