Wales offered ‘hand me down’ fiscal devolution

Gerry Holtham says the form of income tax proposed by the UK Government to is unlikely to be usable






holtham

The main weakness of the draft Wales Bill published by the Secretary of State for Wales in December  is that much of it is likely to remain a dead letter. The principal tax measure, devolving a share of income tax, requires a referendum. It is unlikely that the current Welsh Government or indeed a majority of Welsh politicians will care to call for and campaign in such a referendum.

There are several reasons. Politicians are currently no more popular in Wales than in other parts of the United Kingdom. There is always a risk that a referendum will be treated as a general plebiscite on the performance of the government rather than a vote on the issue at hand. Moreover, any measure which can be represented as increasing the prospect of tax rises will inevitably incur some opposition. A referendum is therefore far from certain to succeed, with risks to the political careers of those promoting it.

If the costs are evident, the benefits are not. The principal, and correct, argument for significant devolution of taxation is accountability. That is of clear benefit to the electorate but its attraction to the politicians is less obvious. Who would be accountable if he or she could avoid it? The measure has to have other attractions to appeal to the political class. Yet the form of income tax devolution set out in the Bill is most unlikely ever to be used.

It would be going too far to say it is entirely unusable but the Commission I chaired analysed the case carefully before concluding that the single rate form of tax devolution was unsuitable for Wales. The Silk commission concurred. The Welsh border is too open for it to be safe to raise higher tax rates – revenue would be more likely to fall over time than rise. A cut in all tax rates would, however, be prohibitively expensive in the short to medium term, particularly so in current conditions of budget reductions.

However, in each case where Welsh and Scottish conditions diverge and a reasoned case was made for doing something different in Wales, the recommendation has been rejected. Wales can have what Scotland has and nothing else, like the youngest child of a poor family that gets only hand-me-down clothes, whether appropriate or not in style or size.

In any event, the devolution of income tax involves a risk for Wales, namely the risk that the Welsh tax base will be less buoyant than that of the UK as a whole and therefore less buoyant than that part of the block grant that it replaces. That is a risk that I believe it is fair to ask the Welsh Government to run. It is a necessary concomitant of accountability. However, it is combined with another risk, that when public expenditure begins to grow again in nominal terms the Welsh block grant will grow more slowly than public expenditure in England owing to the operation of the unreformed Barnett formula. The UK Government has given assurances that it will consider that issue when it arises but has given no categorical promise that it will do anything substantive about it and the Bill is mute on the block grant and its interaction with tax devolution.

To summarise, Welsh politicians are being asked to run a politically risky referendum for a power that they cannot use that will make them more accountable but will open them up to justifiable revenue risk while another unjustifiable source of revenue risk is allowed to continue. I suggest that only believers in Father Christmas would expect them to do it.

The incentive that the UK Government offers is the prospect of increased borrowing powers for capital investment after the referendum. The difference is probably between a debt stock of half a billion, agreed in any event, and one of one and a quarter a billion – the sum that would probably be available with income tax, on the basis of the ~Scottish precedent. I may be wrong but I doubt if that is incentive enough.

I have a modest suggestion. The Welsh block grant currently permits a level of public spending per head in Wales that is a little lower but within a few percentage points of what it would get if it were an English region, so there is no justification for a continuing Barnett squeeze. Poorer English regions that get higher levels of spending than more prosperous regions are not subject to any squeeze towards equal cash spending per head. Why not promise Welsh politicians that if the referendum is held and passed the Barnett formula will get a floor at roughly the point where devolved territories are getting only the level of potential public spending they would get if Wales were regarded as a region of England?

Such a floor would mean allocations per head in Wales would increase at the same percentage rate as the equivalent public spending in England. That promise would eliminate a revenue risk and enable Wales to more easily shoulder the necessary revenue risk that comes with income tax. It would also make a referendum easier to win since the package would include stabilisation of the block grant and an end to the Barnett squeeze. It would not be a mere sop to recalcitrant public opinion, however, because it would also have the advantage of being fair. It would have the further political advantage of causing no problems with the Scots, which cannot be said of wholesale Barnett reform.

The First Minister of Wales has himself argued that he cannot support a referendum until Wales gets “fair funding”.  He has tended to focus on the fact that Wales currently gets a little less public spending per head than it would if it were an English region (whereas Northern Ireland gets a little more and Scotland a lot more). However, the Welsh discrepancy will be reduced by the current period of austerity since the Barnett squeeze goes into reverse when public spending falls. One can argue indefinitely over needs measures and the point estimate is less significant than the trend. If Wales gets a Barnett floor, in my opinion, that would enormously strengthen the attractions of the referendum.

Of course, the foregoing argument assumes the Bill is serious and the Government actually wants the referendum to occur. If the Bill is just a piece of political theatre or legerdemain to give the impression of meeting Welsh aspirations or concerns but not embodying the intention of doing anything substantial, it may already be adequate for its purpose.

 

Gerald Holtham chaired the Commission on Funding and Finance for Wales and is an adviser to the Welsh Government. This is the written evidence he presented this week to the Welsh Affairs Committee of the House of Commons on the Draft Wales Bill.