The next item on our agenda is a statement by the Cabinet Secretary for Finance and Local Government on the fiscal framework, and I call on the Cabinet Secretary to make his statement—Mark Drakeford.

Diolch yn fawr, Lywydd. Before this Assembly debates the legislative consent motion the Wales Bill later this afternoon, I’d like to make a statement about the fiscal framework agreed between the Welsh Government and the UK Government last month.

As the Wales Bill has progressed through the UK Parliament, the First Minister has been clear that it would be a significant barrier to the Welsh Government’s support for the Wales Bill if we were not able to reach an agreement with the UK Government on a fair, long-term funding arrangement for Wales. I believe that the fiscal framework agreed with the Chief Secretary to the Treasury addresses that concern. It provides a step forward in the way Wales is funded, taking account of the new tax powers that will be devolved in 2018, and paves the way for the devolution of Welsh rates of income tax in 2019. I shall set out my own judgement categorically at the start of this statement, Llywydd: it’s my belief that this is a fiscal framework that is fair to Wales and fair to the rest of the United Kingdom. It means that fiscal arrangements are no longer a barrier to supporting the Wales Bill, if that is the intention of this National Assembly.

The framework was agreed following an intense period of negotiations with HM Treasury. The result is a complex package of interrelated arrangements. At their heart is the reform of the Barnett formula, as applied to Wales. For the first time we have reached agreement with the UK Government on a funding mechanism that will reflect the relative needs of our population. The reform of the Barnett formula represents the culmination of many years of representations by successive Welsh Governments. I pay particular tribute to the work of my predecessor, Jane Hutt, who achieved a major breakthrough in securing the first ever agreement to a funding floor for Wales. I also want to acknowledge the support of other parties in this Chamber, who have shown their commitment to securing a fair deal for Wales and I have no doubt that that strong cross-party agreement has been genuinely influential in delivering this funding settlement.

The framework will see the implementation of the funding floor recommended by the Holtham commission and it is set within the Holtham range at 115 per cent of comparable spend in England. While relative funding in Wales remains above this level, all funding through the Barnett formula will be multiplied by a transitional factor of 105 per cent. This will both slow down Barnett convergence and deliver extra resources for public services in Wales. Taken together, our estimates are that the agreement as a whole will provide up to £1 billion in additional revenue for Wales over its first 10 years.

The fiscal framework sets out the block grant adjustment for devolved taxes. Land transaction tax and landfill disposals tax will be devolved in April 2018. The framework was explicitly negotiated to agree the arrangements that would be required were the Wales Bill to be passed, should that be the will of the National Assembly and of Parliament, including removal of the requirement for a referendum on income tax. The framework as agreed takes into account Wales’s circumstances, particularly our income tax base, which is different to that in England. This will protect the Welsh budget from the impact of significant potential policy changes by the UK Government.

It is on that basis that I am today setting out the Welsh Government’s intention to introduce Welsh rates of income tax from April 2019, subject to the passage of the Wales Bill. Welsh rates of income tax, together with land transaction tax, landfill disposals tax and existing local taxes—non-domestic rates and council tax—will give the Welsh Government a new set of tax levers to support public spending and to underpin the success of the Welsh economy.

Llywydd, in other aspects of the agreement, greater tax devolution will provide an increased source of capital as well as of revenue spending for Wales. In the fiscal framework, our capital borrowing limit will double from £500 million to £1 billion. This will give us the tools to better manage the infrastructure investment needed to support the economy and wider public services in Wales. That higher borrowing ceiling will be introduced when Welsh rates of income tax are implemented.

To give us greater flexibility to manage our resources in a more efficient and transparent way, the framework allows for a new single Welsh reserve to be introduced from April 2018. This will operate as a sort of savings account, allowing us to deal effectively with any volatility from tax revenues by retaining unspent revenues for use in the future. The reserve will also allow us to manage the end-of-year position without the need for annual negotiations with the Treasury.

Llywydd, we have also secured independent oversight as part of the fiscal framework. For too long, the Treasury has been able to act as judge and jury in funding negotiations. Both the Holtham and Silk commissions recommended a role for independent bodies to oversee financial matters between the Welsh and UK Governments, and this has now been agreed in the fiscal framework. In future, this will apply to the operation of the framework and will include a role for bodies independent of Government to provide input into any disagreements between the Welsh and UK Governments about the implementation of the framework itself. Taken together, this package of arrangements will deliver funding that reflects the relative needs of Wales, it will protect our budget from undue risks that could follow tax devolution, and it will strengthen the ability of the Welsh Government to manage our own resources.

Llywydd, I said at the outset that the agreement is sufficient to enable the Wales Bill to be considered on its own merits. As we move towards the LCM debate, however, I must also, for the avoidance of doubt, confirm that the interrelated nature of the provisions in the framework means that if the Wales Bill is not passed, the fiscal framework as I have outlined it this afternoon will not be implemented. In those circumstances, we would have to renegotiate the adjustment to our block grant to allow for the devolution of stamp duty land tax and landfill tax in April 2018. Which of the other measures could be secured and at what cost could only become clear as a result of the renegotiations themselves. In the meantime, Llywydd, I commend this framework, designed to meet the unique circumstances of Wales, to the National Assembly.

I thank the Llywydd and the Cabinet Secretary for his statement this afternoon, and I would also like to thank the Chair of the Finance Committee for the opportunity to see the transcript of the recent meeting that they held. There is a great deal to be welcomed in this new framework, but in the time available to me, I want to focus on three specific issues, namely: the operation of the Barnett formula; the approach to revising the Welsh block grant in relation to new taxation; and the process of dealing with any conflict or dispute.

Now, as has already been said, there is a new mechanism in the framework—a Barnett floor of 115 per cent in terms of changes to the block grant. I wonder whether the Cabinet Secretary could tell us a little more as to why that particular figure was chosen. We will recall in Gerry Holtham’s report that there was a range proposed in terms of calculating the needs of Wales from 114 per cent to 117 per cent, and this figure is closer to the bottom of that range. Bearing in mind, of course, that we are talking here about a framework that will remain in place for decades, could he perhaps tell us a little about the process of review if Wales’s position in terms of its needs should change? Of course, Gerry Holtham, in coming to that figure, had set out the various different factors, and it’s possible—or, it is likely, in fact—that that situation will change over time. So, what process is anticipated for a review, should a review be required?

Now, in terms of the situation with changes to the block grant, the Wales Governance Centre has pointed to the negative impact in terms of the situation with SDLT, and that is reflected within the agreement between the two Governments on the very low comparative level of 25 per cent. There was a suggestion in the governance centre report as to how the situation could be more equitable by exempting the property market in London and the south-east, which actually skews these figures. Why didn’t the Government insist that that suggestion, or other suggestions to deal with these kinds of factors, should have been included in the agreement? The Government was successful in gaining other concessions, so why leave ourselves open to negative fiscal impacts as a result of the failure to do that?

The Deputy Presiding Officer (Ann Jones) took the Chair.

Finally, may I ask the Cabinet Secretary to tell us a little more about the process of dealing with any dispute? I welcome the fact that there will be a role for an independent council through a new independent body on the Welsh side. But, having read the document, it appears to me that, despite the fact that there will be independent evidence available, it will be up to the two Governments to bring any dispute to a conclusion. Can I ask about one possible scenario? There is mention in the document of the behavioural impacts. For example, if the additional tax rate in Wales were to be reduced, it would mean that people would cross the border, and that that would have taxation impacts for the UK Government. The report states that, in that situation of behavioural changes, if the two Governments don’t come to an agreement, nothing would happen. Therefore, if I have understood the document correctly, it would be possible to cut that rate and, despite the fact that there would be a behavioural impact to that, if the Welsh Government wouldn’t agree, there could be no negative outcomes in terms of the Welsh fiscal situation as a result of that.

Thank you very much, Adam Price, for those detailed questions. May I thank him for what he said at the outset in welcoming a number of elements of the framework? I will now turn to his questions.

Cyn belled ag y mae Barnett yn y cwestiwn, mae’r ffigur o 115 y cant o fewn amrediad 114-117 y cant Holtham; hwn yw’r ffigur y mae Holtham ei hun yn ei ddefnyddio fwyaf aml wrth ddisgrifio i ba raddau y mae anghenion Cymru yn fwy na rhai ein cymheiriaid ar draws y ffin. Nid y ffigur ei hun yw’r peth mwyaf hanfodol yn y cytundeb hwn, ond yn hytrach, y gydnabyddiaeth bod yr anghenion hynny yn bodoli a’r sicrwydd eu bod yn sefydlog yn y modd y bydd y cyllid yn llifo rhwng y Trysorlys a Chymru yn y dyfodol.

O ran yr addasiad i’r grant bloc, mae'n bwysig iawn, Dirprwy Lywydd, i ystyried y fframwaith cyllidol yn ei gyfanrwydd. Mae iddo nifer o rannau cymhleth sy’n cydblethu. Aethom ati’n ofalus iawn i ystyried pa un a oedd hi’n bosibl darganfod cymharydd boddhaol i'r ddwy ochr ar gyfer treth dir y dreth stamp ai peidio, ac yn rhannol oherwydd bod rhai problemau technegol gyda hynny, nad oedd y Trysorlys yn credu y gallai eu datrys, rydym wedi cael y lluosydd Barnett o 105 y cant yn y cytundeb. Mae yna ddilysu a chydbwyso oddi mewn i hyn. Rwy'n credu ei bod yn bwysig dweud wrth yr Aelodau na ddylem dybio yn awtomatig y bydd derbyniadau yng Nghymru o dreth trafodiadau tir yn is na derbyniadau treth dir y dreth stamp yn Lloegr. Mae'r Swyddfa Cyfrifoldeb Cyllidebol, yn ei rhagolwg mis Tachwedd ar gyfer datganiad yr hydref, yn tybio y bydd derbyniadau treth dir y dreth stamp yng Nghymru yn fwy na dyblu rhwng 2015-16 a 2021-22, gan amcangyfrif, yng ngweddill y DU, y bydd y cynnydd mewn derbyniadau yn rhyw 50 y cant. Felly, nid yw’n anochel o gwbl y bydd y gwahaniaethau rhwng Cymru a gweddill y DU yn anfanteisiol i ni. Os byddant yn anfanteisiol i ni yn y pen draw, yna mae’r lluosydd Barnett yno i gywiro hynny ac i sicrhau bod Cymru yn cael ei gwarchod rhag unrhyw ganlyniadau niweidiol o'r fath.

Gofynnodd yr Aelod nifer o gwestiynau am y ffordd y bydd anghydfodau o fewn y fframwaith yn cael eu trafod a swyddogaeth goruchwyliaeth annibynnol yn hynny. Mae'r fframwaith yn nodi proses cam i fyny lle, os oes materion yn cael eu nodi gan y naill ochr yn y fframwaith, y cam cyntaf yw i waith gael ei wneud ar y rhai hynny ar lefel swyddogol, i wybodaeth gael ei chytuno rhwng Cymru a Thrysorlys y DU, ac i gael y rhai hynny wedi’u datrys gan swyddogion. Os nad yw hynny'n bosibl, yna mae'n symud i Gyd-bwyllgor y Trysorlysoedd, lle byddai Gweinidog Cyllid Cymru yn eistedd gyda Phrif Ysgrifennydd y Trysorlys, ac mae’r anghydfodau hynny i’w datrys yno. Os ceir methiant i ddatrys y problemau yng Nghyd-Bwyllgor y Trysorlysoedd, yna mae’n rhaid troi at y dulliau datrys anghydfod hynny a nodir yn y nodiadau cyfarwyddyd ar ddatganoli. Ar bob adeg yn y broses honno, ceir hawliau annibynnol i’r ddwy Lywodraeth ddefnyddio cyngor annibynnol, a gall y ddwy Lywodraeth sicrhau hynny’n annibynnol. Ac mae hynny’n ddatblygiad newydd pwysig iawn; nid ydym erioed wedi cael hynny o'r blaen. Ac mewn sawl ffordd, roeddem yn ddibynnol ar y ffaith bod yr Albanwyr wedi ennill wrth drafod eu fframwaith cyllidol nhw, oherwydd eu bod nhw wedi sicrhau hynny yn eu cytundeb, roeddem ni’n gallu cyfeirio at hynny a dweud nad oeddem yn gallu setlo am ddim llai.

Os, yn y diwedd, nad oes cytundeb rhwng y ddwy Lywodraeth, yna bydd y sefyllfa bresennol yn parhau. Nawr, efallai y byddwch chi’n dweud y gallai hynny olygu y bydd yna amgylchiadau anffafriol i Gymru, lle na allem ddwyn perswâd ar y Trysorlys, ond o fy safbwynt i, yn bwysicach, mewn sefyllfa lle nad yw pŵer yn cael ei dosbarthu'n gyfartal ar y ddwy ochr o’r bwrdd, mae hynny'n golygu nad yw'r Trysorlys bellach yn gallu, drwy ei benderfyniadau unochrog ei hun, gorfodi unrhyw beth ar Gymru. Ac felly mae'n bŵer sy'n gweithredu’r ddwy ffordd, ond rwy’n meddwl y bydd yn fwy arwyddocaol yn ein dwylo ni nag y byddai yn nwylo’r Trysorlys.

Cabinet Secretary, can I welcome your statement today—and that’s not just paying lip service to it; as you know, I genuinely welcome the potential that this framework offers Wales and, indeed, the UK for the future. As you know, I’ve been a full supporter of a fiscal framework for some time now, and since it became clear that tax devolution was with us, was going to happen, and there was an overriding need for a new funding settlement, or at the very least an end or a restriction to the previous Barnett squeeze. So, it’s good news that the Treasury have agreed to a needs-based factor being set at 115 per cent; you mentioned the parameters that the Holtham commission referred to in your answer to Adam Price. That isn’t even at the bottom of those parameters, it’s within them, so that is set at a good level. Also, I recognise the transitional factor of 105 per cent, so, on the face of it at least, this does seem to be a good deal for the Welsh Government.

Key to tax devolution, as you said, is the appropriate adjustment to the block grant so that Wales is not penalised unnecessarily. That’s what this process is about, and, of course, the maxim that you and your predecessor, Jane Hutt, adhered to, that the Welsh Government should bear the responsibility for the fiscal decisions that the Welsh Government takes, but the UK Government should continue to carry its share of risk for the decisions it takes—not always an easy maxim to employ, but something that’s absolutely essential if we’re going to ensure a just and fair settlement for Wales in the future, and a just and fair taxation system.

So a few questions: firstly, can you reconfirm that this is a permanent agreement and is not subject to the whims of a future Government that may consider clawing back, or at the very least shaving off some of our additional funding? I think you mentioned £1 billion estimated over the first decade or so. What is the nature of that agreement? You’ve said previously that it is more permanent than the previous arrangement in the last UK Parliament—just how permanent is it? That’s very important. Can you give us some more detail on how the framework takes into account Wales’s circumstances, particularly our income tax base, which clearly has a lower percentage of higher rate taxpayers than the south-east of England, and, I think I’m right in saying, a small number of higher rate taxpayers who actually contribute proportionately more to the higher rate of tax within Wales than happens across the border in England?

You mentioned your intention to introduce Welsh rates of income tax from April 2019; clearly, a very important part of your statement today. Can I ask you, is it your intention to keep initial rates comparable with those in England, at least in the first few years? I know that in the case of other taxes—stamp duty, landfill tax—the Welsh Government has adhered to the maxim that, at least in the transitional period, things should be kept pretty much the same this side of the border as across the border to allow for consistency, and for people to adjust to the new regime. I don’t expect you to tell us what the new rates—you’re grinning, because obviously you wouldn’t do that, no finance Minister would—I’m not asking you what the rates would be. I’m just looking to see whether you’re going to employ a similar maxim with income tax as to the other taxes, or whether—[Interruption.] Well, you might be considering lower rates or higher rates. I’m not asking that, I’m asking: are you considering—in a roundabout way—a different method of employing those taxes? But I think you’ve not fallen my question, so I probably won’t get an answer to that, but I’d like to hear it at some point.

Population change has been mentioned in the document. We know that that was a key issue; it was particularly an issue for the Scottish negotiations with the Treasury. Wales is affected in a different way. Can you tell us a little bit more about how population change is factored into the equation so that changes in population growth over the next few decades, whatever they might be, do not adversely affect our budgets?

Turning to the new single Welsh reserve, on the face of it, this sounds a huge improvement—much simpler, much more straightforward. How will that reserve operate in practice? Is there going to be a cap on the reserve, a time limit, or will it provide maximum flexibility to the Welsh Government, which, clearly, along with the new borrowing powers, will, I imagine, become an extremely important tool in managing multi-year spending and financial planning?

Finally, I asked you last week about future dispute resolution between the Governments. Adam Price has asked you in detail about that, so I won’t bore the Chamber by continuing the process of mediation, other than to ask: you mentioned in your comments to the Finance Committee last week that you thought it would be important that there is a review process in place, and I think the Welsh Government can call one review in a yearly period, and the UK Government can as well. If you could tell us a little bit more about how that process would work and what happens if there is a surprise that befalls both Governments, and there is a need for an urgent review between those set times for a review to happen.

Finally, Deputy Presiding Officer—Cabinet Secretary, we welcome this statement, we welcome the new framework. It may not be perfect—very few things in life are—but it is head and shoulders above what we had before and it is setting a new framework for the future, which I think will be broadly welcomed. This is, as I said last week, a great example of what can be achieved when the Welsh and the UK Governments put their differences aside and work for what is, in the end, in the best interest of Wales.

Thank you, Dirprwy Lywydd. I thank Nick Ramsay for his questions. I’ve said regularly in this Chamber, during the period that we were negotiating the fiscal framework, and Mr Ramsay would ask me questions about it here, that I would refer to his interest and to the interest of other Members during my discussions with the Chief Secretary. And it’s always been a useful tool for me that the Chief Secretary knew that Members right across this Chamber were keeping a very careful eye on the way that those negotiations were being conducted.

I’ll turn to his specific questions. Yes, I can confirm that this is a permanent agreement. The breakthrough that Jane Hutt secured in getting the agreement to the principle of a funding floor was to last for the period of one spending review. This is now to be a permanent feature of the arrangement. Our income tax base, as Nick Ramsay said—it’s one of the very important parts of the framework that we are only exposed to the element of income tax that is actually devolved. That’s 10p of the basic higher and additional rates. That takes account of the relative strength of the Welsh tax base in each band—we have more taxpayers in the basic band; we have fewer, comparatively, in the higher and additional rates bands—and this means that our budget is exposed to less risk of differential growth at the top of the income distribution. That ability to negotiate a genuine comparator, but fits with the nature of Welsh income tax payers, is a very important part of this framework.

The rates of income tax will indeed come to Wales from April 2019. I won’t be able to say anything significant about them until much closer to the time. We have taken the approach in relation to LTTA and to landfill disposals tax that it’s important in the very earliest periods to make sure that the system we have is working well and is recognisable to those whose job it is to make it operate. I have no doubt that those arguments will be influential when we come to April 2019 as well.

Nick Ramsay drew attention to the issue of population change. Population is a very important element in the fiscal framework. In the Scottish version, the risks in relation to population are taken by the UK Government. In our framework, the risks are taken by us in Wales. That is partly because we are in very different positions. Population in Scotland at the turn of this century was 3 per cent lower than it had been 30 years earlier, while the populations in both Wales and England were 6 per cent higher. Over the last decade, the population has increased in both Wales and Scotland, but the population of Wales has grown faster than the Scottish population, and the reasons for growth are different. In the last 10 years, net international migration has accounted for over 50 per cent of population growth in England; over 60 per cent of population growth in Scotland; but less than 40 per cent in Wales. It means that we are far less exposed to a slow-down in international migration in the post-Brexit period.

Nick Ramsay asked about the single Welsh reserve. It is a very important part of the package as a whole. Is there a cap on it? Yes, there is—it’s £500 million—and there’s a cap on the drawdown from it as well. We will be able to draw in, in any single year, £125 million-worth of revenue, and that compares to £75 million of revenue that we’re able to carry forward under current arrangements, and we’ll be able to draw down £50 million-worth of capital, compared to £20 million under current arrangements. I’ve had to recognise, in my discussions with the Chief Secretary, that he has a responsibility to manage the UK’s budget in the round, and that he has to have some parameters that he can rely on in doing that. I think that the Welsh reserve is at a level that will work for Wales, and that the annual drawdowns will be sufficient to meet our needs.

Finally, Dirprwy Lywydd, to the review process. The review process allows both Governments, independently, to call for a full review of arrangements, once, in the Welsh Government’s case, during an Assembly term, and once, in the UK Government’s case, in a parliamentary term, but that does not preclude agreement on further reviews in that time frame, should something unexpected emerge and be necessary. But the equal ability, and independent ability, to require a review is a very important aspect of the framework and an advance on anything we have at the moment.

First of all, can I welcome the clarity of the Cabinet Secretary’s statement? Can I very much welcome the independent body for dealing with disagreement? As people have heard me say many times in here, I think we had a very bad deal out of the London Olympics. I think that we should have probably had nearer 20 times as much as we got, rather than the amount that we got, and, hopefully, this will deal with those sorts of problems.

Talking of behaviour, there has been no behavioural change due to the huge differences in council tax between local authorities. There hasn’t been a rush from Abergavenny to Allt yr Yn and there hasn’t been a rush across the Carmarthenshire border to Pembrokeshire because the council taxes were substantially less.

I have three questions. First, the two major taxes being devolved are highly cyclical taxes. And we know the ability to vary income tax rates has been devolved to Scotland since 1999. We also know it hasn’t been used. Varying tax rates is incredibly difficult. Increase it compared to England: public resentment. Decrease it: reduction in revenue and cuts to services. It’s hardly surprising that Scotland has not varied their rate out of line with the rest of the United Kingdom, and as the rest of the United Kingdom have varied their rates, Scotland has followed.

There will also be huge difficulty in identifying Welsh, as opposed to English, taxpayers. And there’s been a problem in Scotland with a much less porous border, with much less movement over the border than there is between England and Wales. Does the Cabinet Secretary believe that the safeguards in place regarding looking at each band individually, and protecting the overall Welsh budget as a percentage of the English budget, gives sufficient protection?

The second question is: we voted to leave the European Union, so, does that mean that the aggregate levy can now be devolved to Wales when we leave the European Union, and that other taxes excluded by European Union rules can now be considered to be devolved? On capital limits, does the Cabinet Secretary, like me, find the limit arbitrary? And does he share my concerns that the limit will be seen as a target, rather than a limit, and that the debate that ought to be taking place about the affordability and revenue consequences of capital expenditure will not take place in the same way if, instead of having an arbitrary limit set by the Treasury, we have to engage in prudential borrowing and we actually have to make the case for and show the financial capacity in the future to engage in that borrowing, rather than having a target and aiming for it?

Well, I well remember the discussions with the Treasury over the Olympics. And it’s a perfect example of where, in that case, the Treasury was the judge and the jury and the enforcer of the result of it, and no matter how strong the arguments were on the other side, they weren’t prepared to take any account of them. This agreement means that that position would not be the case in the future.

Mike Hedges asked about behavioural changes, and, Dirprwy Lywydd, maybe I ought to, just for a moment—because I think a number of Members have asked this—explain a rather technical aspect of the agreement, which is how we deal with what are called policy overspills. So, there are three different sorts of policy overspills dealt with in the framework. Where there are direct effects, so if the UK Government was to change income tax allowances, then those effects will be directly taken into account within the framework. If there are behavioural effects, if we were to change the rates of land transaction tax in Wales and that led to people coming to live in Wales, and if that made a difference to the tax taken on either side of the border, then the framework allows for those behavioural effects, exceptionally, to be taken into account where they are both material and demonstrable. So, there are behavioural effects that can be taken into account, but I believe they would be very rare and I believe the hurdle has been set suitably high.

As far as second order effects are concerned, when actions, for example, that we might take as a National Assembly would result in a more buoyant Welsh economy and that would result in greater national insurance contributions from Welsh taxpayers flowing to the Treasury, we’ve agreed that those are simply too complicated to trace, where cause and effect is almost impossible to demonstrate. Those second order effects are not, therefore, encompassed within the framework.

Mike Hedges asked about taxpayer identification, and it’s quite true that HMRC struggled to identify taxpayers who lived in Scotland. We believe that they’ve learnt a lot from that experience, and it is part of the devolved taxes project that we have jointly with HMRC to learn the lessons from that Scottish experience and to make sure that the identification of Welsh taxpayers can be effectively carried out.

Is there sufficient protection within the agreement that we’ve arrived at? Well, I said in my statement that we believe that if you take central scenarios on population, public expenditure growth and historical patterns of tax receipts, then this agreement realises £1 billion-worth of extra revenue for the Welsh budget over the next 10 years. If you assume that there is no growth in public expenditure at all, that it remains frozen at current limits for the next 10 years, we would still be £500 million-worth better off. So, I do believe that the protections are sufficient.

On the aggregates levy, well, I’m afraid we haven’t been able to resolve this as yet. It remains subject to some legal disputes, and leaving the European Union, when that takes place, may be a way of resolving them, but we’re not at that point as yet.

Finally, capital limits are inevitably arbitrary in one way or another. We have agreed a limit that is commensurate with the limit that Scotland would have had when it had a similar level of fiscal devolution. I agree absolutely with what Mike Hedges said: the capital borrowing is there to be used as necessary. It’s not a target to reach, and there are many other ways in which we are able to deploy capital resources, and our ability to fund borrowed money through revenue will be very much under scrutiny in a period when austerity will continue to reduce the amount of revenue available to the Welsh Government.

I questioned the Cabinet Secretary in Finance Committee last Wednesday, and a transcript of that session has been circulated to Members, so I don’t propose to go through all the ground that I covered then on some of the more technical aspects of the fiscal framework, although I was broadly satisfied with the responses the Cabinet Secretary was able to give.

I would just like to raise two areas. Within the narrow terms that the Cabinet Secretary has set in terms of protecting Welsh Government revenue, he may think he’s done a reasonably good job within the fiscal framework. But that, of course, is a necessary but not a sufficient condition for protecting the interests of Welsh taxpayers. I’d like to ask if he shares my concern about a potential asymmetry with how devolved income tax powers will work and the potential to alter Welsh rates of income tax within a band of 10 per cent. I understand that the Welsh Government has said in the Labour manifesto that these rates wouldn’t be changed during this Assembly. But were, at a later point, his or another Government to seek to increase the Welsh rate of income tax, that would lead to two effects. One, there would be a higher rate and the higher rate would, itself, increase revenue, but it would potentially also have an effect on the income tax base, and at least some of that increase in revenue might be offset by what he described as behavioural effects. In the regime proposed, all of the benefit of that higher income would go to the Welsh Government, while most of the cost of any behavioural effect would go to the UK Government. Given that the power to change that rate is held by the Welsh Government, doesn’t that create an asymmetry where the incentive is to raise taxes because the Welsh Government gets all of the revenue benefit of that, but most of the revenue cost of the behavioural changes is felt by the UK Government that isn’t making that decision?

I’d also like to just ask about when decisions were made in this area. We discussed before, Cabinet Secretary, what seemed to be your uncanny powers of foresight. You had told us that, at least, Labour Assembly Members would be weighing this up carefully over the weekend and making a decision last night, I think—Monday night or whenever it was—in your meeting. However, paragraph 14 of the fiscal framework clearly states that the Welsh Government’s funding will ultimately come from two separate funding streams, including Welsh rates of income tax. So, in signing that, you and David Gauke presumed that that devolution of income tax rates would happen. You replied and suggested that perhaps that was a mistake or I shouldn’t put too much emphasis on that, and actually it hadn’t been decided and everyone was going to be carefully considering it before any decision was made. I then went and referred to the Labour Party’s manifesto for the Assembly elections earlier this year, and note that it states in that:

‘We will guarantee not to increase Income Tax in the next Assembly term when these powers are devolved’.

Why, if the Cabinet Secretary says that no decision has been made, that it all depends on the fiscal framework and Labour AMs weighing things up, why did the Labour manifesto categorically state when? I.e., it’s a done deal. At what point between the 2015 Conservative manifesto at a UK level, when they promised there would be a referendum before income tax powers were devolved, and the Labour manifesto of 2016, when it took that as a given, was the decision changed? What discussions did Ministers in the Welsh Government have with Ministers in the UK Government, whether formally or informally, to stitch up a deal to devolve tax-raising powers, having previously promised they would depend on a referendum? And why will the Welsh Government, and indeed the UK Government, jointly, not respect what it stated on the ballot paper of that 2011 referendum: that devolution of tax-raising powers would not follow a ‘yes’ vote? Why have they broken their word? [Interruption.]

Dirprwy Lywydd, let me deal with the first question first—[Interruption.]

Can we listen to the Cabinet Secretary?

[Inaudible.]—that he does in relation to the potential asymmetry of impact of increasing Welsh rates of income tax, this is a point already made by the Institute for Fiscal Studies, but any Welsh Government making such decisions at some point in the future will be wanting to weigh up the impact in the round. It will be looking to look at what impact changing Welsh rates of income tax in the difficult circumstances that Mike Hedges very clearly outlined earlier would have, not just on individual taxpayers and on the Welsh Government’s revenues, but also on the Welsh economy as well. So, it will be a good deal more complex a decision than one construed just on those narrow terms that Mark Reckless set out.

In front of the Finance Committee, Dirprwy Lywydd, Mr Reckless asked me a series of very pertinent technical questions about the fiscal framework, which I was very pleased to try and answer, and then he veered away into the sort of conspiracy theory of politics that he’s offered us this afternoon. There was no deal done. The basis of the discussions with the Chief Secretary was that set out in my statement, when I said that we set off, in negotiating the framework, explicitly on the basis that we were looking for arrangements that would be required were the Wales Bill to be passed. It wasn’t because the Wales Bill was bound to be passed, but we were trying to make sure that, by the time any votes on the Wales Bill, particularly here, came to be taken, I would be able to say to Members either, ‘We’ve got a fiscal framework that allows you to weigh up the Wales Bill on its own merits’, or ‘The fiscal framework has become a barrier to the Welsh Government being able to recommend the Wales Bill to you’. The decision that my group took was taken last night in a very thorough, very detailed and very forensic discussion of the Wales Bill, in which the fiscal framework was, as I’ve said today—and the First Minister has said previously—now a neutral element. It was no longer a barrier to deciding to support the Wales Bill. It was not so good that it was worth voting for a Wales Bill that could not be supported on its own merits. And the whole negotiation has been carried out on those very straightforward and non-conspiratorial terms.

May I thank the Cabinet Secretary for his statement and say that I agree with him that the fiscal framework, as agreed, does provide sufficient foundations to take these taxation powers and to see them transferred, not only those over income tax but the other two taxes that are now being considered by the Finance Committee. There’s another political decision to be made about the Wales Bill, but, in terms of the fiscal framework, I would like to thank the Government for the work that they have done because I do think that this is of great assistance to the Assembly in coming to decisions.

I have two issues that I would like to raise. First of all, one of the things that is perhaps lost in all of this, although the Cabinet Secretary has mentioned it, is the fact that there is quite a fundamental review of the Barnett formula here, and that is something that we have been calling for for some years. This process started, of course, with the establishment of the One Wales Government and the decision to establish between Labour and Plaid Cymru a joint commission to look into the Barnett formula in relation to Wales’s needs, very skilfully chaired by Gerry Holtham. That report has provided a foundation for this work, and it highlights to me the importance of independent advice and an independent source of information and evidence in order to make your case against the Treasury and the UK Government. So, I do think it’s important that we should actually trace this back to the days of Holtham—it has taken almost a decade to get to this point.

And, in that context regarding an independent process, there is recognition within the framework of the fact that the Government can establish and turn to and rely upon an independent source for review and for information. The Finance Committee in the past has recommended that a fiscal commission should be established to carry out that work—that’s what they have in Scotland. Now, perhaps there isn’t enough work for a full commission at the moment, but what you don’t want to do is turn to one source one year and another the next and take independent advice from another at another point. We need to build some kind of corporate memory, as it were, of fiscal issues and the devolution of fiscal matters to Wales.

So, I would like to hear more from the Cabinet Secretary as to how he is going to seek that independent advice, and what he expects to establish, in terms of a body or a process, in order to ensure that the independent evidence and information is available to the Welsh Government.

Well, thank you very much to Simon Thomas for what he said about the framework and about the agreement. Of course I agree; Gerry Holtham’s work was part of that agreement between Plaid Cymru and Labour during the third Assembly—work that we could return to time and time again, and the Treasury couldn’t say anything against the work within the report. It has taken a decade, as Simon Thomas said, but we could refer back to Gerry Holtham’s work every time in discussions with the Treasury. I don’t think I am saying anything out of turn here in saying that, in the first meeting, the Treasury wasn’t particularly open to discussing Barnett at all. That was just on the margins of what we were discussing. But, having gone through the process, and with the report and Gerry Holtham’s work and that of the people who have built on his work following the report, that was vitally important in the discussions with the Treasury.

Simon Thomas raised the question of where we’re going to get those independent viewpoints and opinions in future. Well, there's more than one way of getting that information. We can turn to the OBR, as I said before the Finance Committee. We can do what they already do in Scotland, or we can have another system that is appropriate for us in Wales—I'm still open to discussing the possibilities. I am going to go to Scotland at the end of this week, and I’ll have an opportunity there to discuss with the Minister for finance in Scotland and those people who advise them in that new situation in Scotland. I agree with Simon Thomas that, whatever we’re going to do in future, it will be important for us to be able to have information and advice that flows from one year to the next and not just have one person doing it one year, and someone else doing it the next. So, whoever is going to do it, I agree with what he said about the importance of having advice that does flow from one year to the next.

Thank you. Finally, Julie Morgan.

Thank you very much, Deputy Presiding Officer. I thank the finance Secretary for his statement. I think this does signify a huge step forward, and I’d like to congratulate him and his predecessor Jane Hutt on all the work that they’ve done to achieve this statement today. I think we’ve all talked about reform of the Barnett formula for years. Simon Thomas referred to the history of it when he spoke, and I think it’s a great achievement to have finally got a needs-based element in the Barnett formula, and the fact that, as the finance Secretary said, it does actually recognise that it does exist, and the 115 per cent, I think, is a great achievement.

I also welcome the doubling of the capital borrowing powers, but I particularly welcome the introduction of the independent element into any debate or any sort of form of arbitration, and I think that this is a great achievement, because I know that the Treasury does want to be judge and jury, as the Cabinet Secretary said. There’ve been quite a lot of detailed questions already about how this independent element would work. Has the finance Secretary looked at examples of other countries where it has become the normal custom to have an independent element operating, and is there anything that he thinks we could learn from any of those other countries? From what he’s said, I think he’s referred to possibly using the Office for Budget Responsibility. I wondered if there are any other bodies that he’d think could fulfil this role, and is his mind still open to creating any sort of body?

I thank Julie Morgan for what she said and for drawing attention to those important aspects of the framework. We have looked to see how systems work elsewhere where independent advice makes its contribution to decision making. We have looked particularly at Scotland, because, as I said, it is fair to recognise that we were treading in their footsteps in securing that level of independent contribution to the framework. The OBR is independent of Government, but it is London-based, and you could argue that it sees the world a bit through the Treasury end of the telescope. I look forward to discussing in Scotland the way that their fiscal commission is operating. As Simon Thomas said, I have some doubts as to whether a full fiscal commission is a proportionate response to the level of fiscal devolution that we have in Wales, but we have benefitted hugely, for example, from the work of the Wales Governance Centre and the work of the Institute for Fiscal Studies. So, there are bodies out there that provide independent and robust advice. There will be others as well. At the moment I’m open to a number of different possibilities. We have a period of time. The fiscal framework allows in the beginning for the Welsh Government to operate within its own forecasting ability, so we don’t have to rush it in a matter of days. I want to find the best and proportionate advice that is independent of us and allows us to deploy it, and I’m very happy to continue to discuss with members of the Finance Committee and others the relative merits of different methods as we explore them in more detail.

Thank you very much, Cabinet Secretary.