Radical tax varying powers recommended for Wales

John Osmond reports on yesterday’s launch of the Silk Commission’s report on more financial autonomy for the Welsh Government

John Osmond is Director of the IWA

In a potentially radical move, which could have far-reaching consequences for Scotland as well as Wales, the Silk Commission yesterday recommended greater power for the Welsh Government to vary income tax than has been granted to the Scottish Government in the Scotland Act 2012. The commission has proposed allowing Wales to vary the rate on each of the three current income tax bands separately, whereas the Scotland Act requires any variation to be the same in each band. (The Commission’s full report and an executive summary are both available here).

The proposal is part of the Silk Commission’s package of 33 recommendations including full devolution of business rates, stamp duty, landfill tax, aggregates levy and – with a nod to ongoing debates over the future of Cardiff Airport – long-haul rates for Air Passenger Duty, with full devolution possible in future. It also proposes giving the Welsh Government the power to create new taxes or levies, such as the so-called tax on plastic bags.

On income tax the Silk Commission has proposed that each of the three rates – 20p, 30p and 45p – be reduced in Wales by 10p, allowing the Welsh Government to decide to what extent they wanted to restore the level in any of these bands, if at all, or even to increase them. If the rates in Wales were to be set lower than in England, the Treasury would deduct a sum equivalent to the lost revenue from the block grant.

The Welsh Government would be able to deal with the rate in each band separately, whereas the Scotland Act requires an identical change across all three bands. This has led many in Scotland to worry that it may prevent their taxation powers being used at all, since any increase or decrease in the rate it might wish to set for the basic rate would also have to apply automatically to the other rates.  Similarly, any reduction in the top rate would also have to be applied to the basic rate.

Conference on the Silk Commission proposals

Next Monday 26 November, a major conference on the Silk Commission’s recommendations Taxation and Borrowing Powers for Wales is being organised by the Changing Union project, a partnership between the IWA, the Wales Governance Centre at Cardiff University and Cymru Yfory/Tomorrow’s Wales. Keynote speakers include: Paul Silk, Chair of the Commission on Devolution in Wales; Jane Hutt, Finance Minister, Welsh Government; Baroness Randerson, Under-Secretary of State at the Wales Office; and Gerald Holtham, Chair of the Holtham Commission. Full details of the conference and how to attend are here

Welsh income tax payers and revenue raised in Wales

The Silk Commission clearly believe this to be rather inflexible, because the amounts raised in each band vary so much. In Wales a penny on the basic rate for our 1.3m taxpayers would be worth £180m. – a not inconsiderable amount – while a penny on the 4,000 top taxpayers would yield only £4m. (See table below)

Taxpayers Tax revenue from 10p from each rate Revenue raised from adding 1p across each band (approx.)
Basic rate (20p 1,288,000 £1,800m £180m
Higher rate (40p) 89,000 £160m £16m
Additional rate (50p, coming down to 45p next April) 4,000 £40m £4m
Total 1,381,000 £2,0000m £200m

Source: Silk Commission

Indeed, it is arguable that it might pay the Welsh Government to decrease level of the Additional rate, by say 5p or even 10p, since that would encourage wealthy people to move across the border into Wales, with the potential of significantly increasing the Welsh tax take.

This speculation illustrates one of the commission’s arguments in favour of devolving significant tax powers, that it would enable the political parties to offer the Welsh electorate a real choice on taxation and public spending. It also claims that its proposals would incentivise economic growth. If implemented in full they would be sufficient to raise about 25 per cent of the Welsh Government’s budget.

At a briefing on the report yesterday the retiring Labour member of the Silk Commission, former Finance Minister Sue Essex, said they had been impressed on a visit to Scotland by a sense of frustration amongst politicians across the parties at the inflexibility of their new tax powers. “We didn’t want to recommend something that had little chance of being implemented,” she said.

The Silk Commission’s report is the third major report on Welsh devolution in less than a decade, following the Richard Commission report on the Assembly’s powers and capacity in 2004 and the Holtham Commission report on finance and funding in 2009. Taken together, the three reports have provided a huge amount of analysis of the workings of devolution in Wales, and a route map to improving the devolution settlement, making it clearer, more responsive and more adequately funded. But not all their recommendations have been implemented.

Three taxes recommended for devolution – Landfill tax, the Aggregates Levy, and Stamp Duty Land Tax – are sometimes referred to as ‘minor taxes’, but together they would raise some £200m in Wales.  This is a significant sum not only in absolute terms, but also because that sum should be a sufficient income stream to give the UK Treasury comfort in devolving borrowing powers – another of Silk’s recommendations.

The Commission has recommended that the Welsh Government should have borrowing powers at least proportionate with those granted to Scotland in the recent Scotland Act. In addition to borrowing from the National Loans Fund, the Commission says the Welsh Government should be able to raise money from commercial sources and be able to issue its own bonds.

It does not recommend immediate devolution of corporation tax, unless Scotland or Northern Ireland acquire any responsibility over it, but wants the Welsh Government to have the power to enhance capital allowances in Enterprise Zones, although it would have to pay that cost.

Importantly, the commission sets two conditions for the devolution of powers over income tax: an agreement between London and Cardiff on ‘fair funding’ for the block grant element, and a referendum.

It notes that there are powerful arguments against having a referendum on such a relatively complex issue. However, the fact that both Labour and the Conservatives in the Assembly are firmly in favour, together with polling evidence showing strong public support for one was persuasive. The report also draws attention to the fact that in last year’s referendum on law-making powers specific reference was made to the tax questions. As it puts it:

“… the preamble to the question in that referendum (‘The Assembly cannot make laws on subject areas such as defence, tax or welfare benefits, whatever the result of this vote’) appeared to rule out tax devolution without a further referendum. It may be considered disingenuous to not now hold a referendum when it was implied in 2011 that devolution of taxation powers would require popular endorsement.”

One of the more interesting parts of the report is the final chapter in which the Commission attempts to analyse the economic impact of devolving tax powers. As it states:

“Over the period 2000-2010, income tax revenues excluding savings and dividend income increased on average by 4.1 per cent a year in Wales compared to 3.8 per cent for the United Kingdom as a whole, excluding Wales. This relatively high growth in Wales was a result of the relatively favourable labour market conditions seen in Wales over the last decade resulting in the narrowing of the historical gap in the employment rate in Wales compared to the average for the United Kingdom as a whole.

If this recent historical trend were to continue in the future then the budget of the Welsh Government would be greater than if fully funded by the block grant by just over £6 million per year (which cumulatively would result in an additional £27 million by year five). It may seem paradoxical that income tax receipts rose proportionately more in Wales than the rest of the United Kingdom in 2000 to 2010 since this was a period when GVA per head in Wales tended to fall relative to the UK average. However this fall is mainly explained by falling profits in Wales rather than falling income from employment sources.”

The timetable for implementation of the recommendations is lengthy, although not much longer than has been the case in Scotland. It envisages a first Bill to devolve some taxes in 2014, and a referendum on income tax after the next Assembly elections in 2016. If this produces a ‘yes’ vote income tax devolution would become fully operational in 2020.

The commission believes that a phased approach is necessary to give time for the new governmental machinery to be put in place. There would be a need to develop the Welsh Government’s Finance Department into a fully fledged Treasury function, with the appropriate skills and experience, responsible for planning and controlling public spending, developing and implementing a Welsh fiscal policy and creating a stronger Welsh tax base. It adds:

“The Welsh Treasury should implement international best practice. The development of an effective Welsh fiscal policy would require a culture of challenge and ambition across the Welsh Government. The Welsh Treasury, under the direction of the Finance Minister, should have the central role in the Welsh Government that Finance Ministers and Finance Ministries have elsewhere.”

They also see a need to develop statistics on taxation yields in Wales, and for changes within HM Revenue and Customs and the UK’s Office of Budget Responsibility.

As flagged up by ClickonWales on Sunday Former Education and Environment Minister Jane Davidson will be replacing Sue Essex as the Labour member of the Commission. She will be joined by the chief executive of Cardiff-based law firm New Law Solicitors Helen Molyneux, who replaces independent member Dyfrig John. Trevor Glyn Jones, a former Lord Lieutenant of Clwyd, will also join the Commission as an extra independent member to “ensure the views of North Wales are fully represented”, the Wales Office stated.

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