All income tax raised in Wales should be devolved

Andrew Davies outlines evidence to the Silk Commission, published today by the Changing Union partnership, on funding the National Assembly

All income tax revenue raised in Wales (excluding that on savings) should be devolved to the Welsh Government so that it is seen to be raising a third of its income from this source. This is that main recommendation being made to the Silk Commission today by the Finance Group of the Changing Union Partnership which I chair.

The Partnership, which comprises the Wales Governance Centre, the Institute of Welsh Affairs and Tomorrow’s Wales, is currently investigating the way the United Kingdom’s constitution is changing in a three-year project funded by the Joseph Rowntree Charitable Trust and the Nuffield Foundation.

In our evidence to the Silk Commission – set up by the UK coalition government to review the devolution settlement in Wales – we say taxation powers should be devolved to improve the accountability of government. The absence of taxation powers from the current devolution settlement in Wales is an aberration from international and British norms. It is probably unique, internationally, to have a body with the power to make primary legislation as well as to spend money, and yet not have any power or responsibility for taxation. Even the smallest units of local government in Britain can raise some revenue.

The financing of the Welsh Government has to be placed on a footing where the nature and quality of its accountability is not inferior to that of any other democratic assembly, not least the Scottish Parliament.

Devolution of taxation powers will encourage debate within and outside Welsh Government about the true value and returns of programmes, force a better debate about means as well as ends, and encourage a more mature approach by civil society to questions of public policy in Wales.

In our submission we also recommend devolution of business rates – which would help the Welsh Government’s focus on the economy – landfill tax and stamp duty, as well as Air Passenger Duty unless there is a wider proposal for reducing the duty on all regional airports.

Taxation responsibilities will encourage more intense dialogue between government and business since there will be an additional revenue incentive to better economic performance, thereby sharpening focus on Welsh competitiveness.

The previous Commission on Funding and Finance for Wales, set up by the Welsh Government in 2010, recommended that 50 per cent of the income tax revenue in Wales should be devolved. However, our group, which includes Gerald Holtham who chaired the 2010 commission, argues for going further by devolving all income tax revenue. If we stayed with the 50 per cent recommendation that would mean the Welsh government received only some £2billion of revenue from income tax out of a total budget of nearly £15 billion. At less than 15 per cent of total revenue that seems inadequate. It is even less than the share of budgets that local authorities generate from council tax, which is around 20 per cent. If all of current income tax revenue went to Wales, at nearly £5 billion, devolved tax revenues would rise to about a third of the Welsh budget. That is a more impressive figure. It is more likely to enhance accountability, and likely to resemble more closely any future Scottish arrangements.

A key recommendation from our group is that any change along these lines must be accompanied by a reform of the Barnett formula block grant system. This is because the underlying public sector deficit for Wales stands at around £12 billion, or 25 per cent of GVA.

The importance of the block grant will remain greater in Wales than in Scotland for the foreseeable future, hence the importance of its reform. Wales would be worse off under any combination of devolved taxation powers, unless it is buttressed by the retention of a needs-based expenditure equalisation system.

Our group also recommends a UK framework for taxation devolution, based on clear principles, and transparent equity across the union – whether in future the union includes Scotland or not – rather than on the vagaries of political leverage. This is why we have come out against devolving National Insurance or VAT.

National Insurance contributions are better not devolved given their strong association in the public mind with the welfare benefit system which is not devolved.  An integrated system of social security is a very important element in the social union constituted by the UK and it is certainly in Welsh interests for that to remain so for the foreseeable future. Devolution of VAT raises difficulties under EU law.

We argue that the Welsh Government should have the power to set the income tax rate separately in each of the tax bands. Any reduction in the rate in the higher bands should be limited by national concordat to 3p in the pound. Thresholds and allowances, we say, should not be devolved.

The system currently proposed for Scotland, where the Scottish Government would set one rate across all tax bands, is not the right way to go. The inter-penetration of the economies of England and Wales would make it difficult or hazardous to raise higher rates of personal tax in Wales. Therefore, if changes to marginal rates of tax were yoked together across all bands, as under the recent Scotland Act proposals, this would make it almost impossible to alter taxes at all.

On corporation tax we accept that there are powerful arguments for retaining a single UK rate, although the experience of variations in corporation taxes in numerous border districts across Europe does not suggest that it is impractical.

However, the case for devolving corporation tax to the Welsh Government would have to be reassessed if this tax were to be devolved initially to either the Northern Irish or Scottish governments. To prevent ad hoc arrangements based on political bargaining we believe that any proposals for devolving corporation tax within the UK should be placed within an overall framework that would both limit the quantum of change and be proportionate to economic need, as measured by relative GVA.

We also argue for granting borrowing powers, primarily for capital spending, based on a formula that can be applied across the devolved administrations, and which would generate limits that are realistic. These powers should include the power to issue bonds. Until this formula is decided the Welsh Government should be granted immediately borrowing powers at least commensurate with those granted to the Scottish Government in the Scotland Act 2012.

Our evidence also argues against the need for a referendum because devolving taxation powers it does not involve change to a fundamental constitutional principle. If the case for taxation powers rests on the enhancement of the accountability of the Assembly and its related Government, then the devolution of taxation powers is by definition an improvement or refinement of the status quo, rather than a fundamental change in itself. Given the international norm for democratic assemblies, the grant of taxation powers can be seen more as the remedying of a constitutional defect rather than an innovation demanding an extraordinary approval beyond the endorsement of Parliament.

Not only that, Wales is suffering from referendum fatigue. The purpose of a referendum is to obtain the fuller and direct engagement of the electorate in the issue in question. That was achieved in Scotland in the 1997 referendum partly because the second question on taxation powers was allied to the first in the principle of creating the Scottish Parliament. The campaign embraced both issues. A referendum that focused solely on the question of taxation powers would be hardly likely to galvanise coherent campaign organisations. Rather, it would risk even lower turnouts than have been seen in previous polls.

Professor Andrew Davies, a former Welsh Government Finance Minister, Chairs the Changing Union Partnership’s Finance and Funding Working Group.

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