Tax-varying powers call for assembly government

Gerald Holtham says the funding system should be based on need

An influential group of economists are expected to call for the assembly government to be given the powers to borrow money and to vary income tax.

The proposals by the commission, led by Gerald Holtham, would be a radical overhaul to the way Wales is funded.

The commission was set up two years ago as part of the coalition deal between Labour and Plaid Cymru.

It previously said Wales was losing out on £300m pounds a year because of the way it was funded.

At the moment, the assembly government receives a block grant from the UK Treasury which works out what Wales is entitled to based on spending in England on areas including health and education.

This is known as the Barnett formula.

The Holtham findings that Wales does very badly out of this formula received cross-party support in the assembly.

In Tuesday's Financial Times, Gerald Holtham writes: "Remarkably this system, established over 30 years ago as a temporary fix, does not relate the money available for public services for governments in Edinburgh, Belfast and Cardiff to any measure of need in those countries relative to need in England."

His commission has said that the funding system should be changed to one based on need.

The second and final part of the work has focused on the tax system and whether the assembly government should be allowed to borrow money.

In his article, Mr Holtham said: "Decisions on huge blocks of public spending in Scotland, Northern Ireland and Wales are made by elected representatives who are not responsible for setting the taxes paid by their voters.

"This system puts those governments in the role of supplicants looking for ways of increasing grants from central government in London."

He pointed out that ministers in Cardiff Bay at the moment had fewer powers to raise revenue from borrowing or taxes than local authorities, which raise part of their funding through the council tax and business rates.

Ministers in Northern Ireland can already borrow money for investment. The Scottish Parliament has the ability to vary income tax levels by 3%, though this has never been done.

A separate commission, led by Sir Kenneth Calman, in Scotland recommended that the block grant should be reduced but that ministers would have greater powers to vary tax levels in return and have some of the tax revenue that was raised in Scotland paid to the Scottish parliament to allocate directly.

This was aimed at making politicians more accountable for their decisions on spending.

The UK government is going ahead with the proposals for Scotland.

It is believed that the Holtham commission will argue that Wales should have a similar arrangement, with ministers in Cardiff Bay able to keep part of the income tax which is currently raised in Wales but losing some of the block grant.

It is also expected to recommend that the assembly government is given borrowing powers.

In the FT article, Gerald Holtham wrote: "As the government introduces legislation to give effect to the Calman proposals to extend taxation powers to the Scottish parliament it would be extraordinary if it did not take the opportunity to put the block grant on a rational basis at the same time."

Even with the changes proposed, it is still expected that the vast majority of the annual assembly government budget will come from a block grant from the UK treasury for the foreseeable future.