Wales should play hard ball with the Treasury

Gerald Holtham unpicks the latest discussions on tax devolution

Muddling through is the time-honored British approach to constitutional change. Leave things alone until someone disadvantaged screams too loudly then put in the easiest most politically convenient fix. Don’t apologize for this didoreth way of doing things.  On the contrary laud it to the skies as the proper,  conservative, evolutionary way to proceed.

Well the British government is sticking to the pattern. It has to devise fiscal frameworks that make sense when it devolves taxes to Scotland, Wales and Northern Ireland. Would you expect that it might think through and enunciate some principles for doing so and then discuss with the devolved government’s how best to implement those consistently?  Don’t be silly.

First of all the Treasury decides it is going to impose a settlement that suits it and brook no discussion, just as it tells government departments what their budget allocation will be. When it finds that devolved authorities want to discuss the matter it resorts to the standard ‘never discuss, never explain, finance-ministry stance.  The old Treasury maxim is never say “no because” – that invites discussion. Just say “no”. That means a constructive discussion cannot occur.  Then once the Treasury finds a political negotiation is likely it adopts the most extreme position it can think of in the expectation that a “split the difference” political carve-up will give it much of what it wants. The eleventh hour dawns, the matter is escalated to a senior political level, an agreement is mandated and the carve-up duly arrives. Quite often it is a mess that defies the cannons of common sense and fairness when a discussion in good faith would have yielded something much more practical and sensible. It is the adversarial system, characteristic of British courts, taken to a pitch that defies parody.  As Gwyn Thomas put it: “satire rolls its eyes and hits the floor”

The Scots are usually in the front line and they can be relied upon to fight their corner But whatever comes out of their carve-up will be proposed for Wales, however unsuitable.  Northern Ireland enjoys a little more latitude because the local dissidents have a fearsome reputation for causing trouble.  Serious Welsh resistance is usually confined to the rugby field.

Take the current devolution of stamp duty on property transactions. If Scottish discussions are a guide,  the Treasury is likely to propose to dock an amount from Wales’ block grant equal to the revenue per head this tax yields in England, with some initial adjustment for Wales’ lower tax base and adjusted for population. The deduction would therefore go up each year by the same absolute amount as tax receipts in England adjusted for relative population. (For the anoraks out there, this is the so-called base-adjusted levels deduction method of adjusting the block grant).

This introduces a whole new Barnett squeeze because the increment to tax per head in England will be much higher in relation to the smaller Welsh tax base than it is in relation to the English tax base. In other words however fast stamp duty receipts rise in England they will have to grow faster in Wales if Wales is not to lose out. Deductions from the block grant will inevitably rise faster than Welsh tax receipts even if the receipts keep pace  with those in  England. Bad enough, you might think but of course  there is worse.

It may not have escaped your attention that house prices in Maerdy and Ponsticill have not enjoyed quite the same buoyancy as those in London. It seems likely that the situation will persist unless  Singapore millionaires, Russian oligarchs and other investors suddenly decide that the Rhondda Fach and the upper Taff vale is the place for their cash rather than the fleshpots of Mayfair. Not a great bet, you might think, but the Treasury apparently wants the Welsh government to take it.  The arrangement certainly gives the Welsh government a strong incentive to promote a lively housing market in Wales but incentives are not the point if there is no way to achieve break-even, let alone success. Yet if  housing transactions in England, including the south-east grow faster than in Wales, the Welsh budget gets screwed twice over.

Can they possibly be serious, you ask.  Well, perhaps not. The Treasury may be looking for a “compromise” in which the initial deduction is the actual Welsh receipts in year one and that deduction then grows at the same rate as English receipts. That removes half the detriment to Wales but surely still leaves a deduction growing faster than receipts unless there is a big change in housing market trends.

Don’t forget the point of the deduction is to compensate the Treasury for the loss of tax revenue to Wales and to do so in way that leaves Wales incentivized to grow its tax base. If those two objectives were agreed and discussed in good faith a reasonable solution could be found but since the Treasury regards every change as an opportunity to save money and refuses to discuss it, “reasonable” is not what we’ll get.

Similar horror stories could be told about business rates, which have been devolved to Wales in a way that will cost the Welsh budget untold millions of pounds in coming years – but I am sure no reader has the stamina to go through those convolutions now.

What should the Welsh government do? In my view, the answer is the so-called nuclear option. Just say we don’t want the stamp duty tax. Unless the UK sets a reasonable price for stamp duty, what good is it to Wales? George Osborne has already reformed it, removing its worst features. Taxes are supposed to be sources of revenue not revenue drains. If the UK government wants to slash transfers to Wales let them say so and do it openly not sneak cuts in via recondite formulae.


Gerald Holtham is the Sir Julian Hodge Visiting Professor of Regional Economy at Cardiff Metropolitan University. He chaired the Independent Commission on Funding & Finance for Wales

16 thoughts on “Wales should play hard ball with the Treasury

  1. Cracking read with a very serious point from Gerry Holtham.

    The finance function has grown in importance with every Assembly, and negotiations over the Barnett Floor in this past term were difficult and drawn out for a funding fix that has little impact in this Parliament. Gerry is absolutely right to point out the rapidly diverging growth rates in Stamp Duty receipts between Wales and the rest of the UK (in particular since the 2007-08 financial crisis and reform of the old slab system which increased receipts from high-value properties in London & SE England). Adjustments to the Welsh Block under Levels Deduction would very quickly become detrimental to the Welsh budget, and business rates and Income Tax compound the problem.

    The Finance Minister portfolio in the fifth Assembly promises to be a high-profile and difficult job.

  2. Thank you Gerry Holtham for illustrating that the old definition of insanity still holds true. “To keep on doing the same old thing expecting a different result” Problem is he seems to want to do exactly that! It’s Stamp duty this time, what happens when we go cap in hand to Westminster, like we did over Stamp Duty and get another devolution of tax? The same old humiliation when the Treasury send a couple of young whippersnappers down to meetings to explain patiently and slowly, in big letters for little people, why we are not worthy! Why won’t the same old same old happen with APD for instance? Gerry Holtham deserves utmost respect and approbation for sharp and analytical fiscal acumen. He is clear that the Scots are much stronger and the NIrish to some extent, why aren’t we? Why isn’t Westminster fearful of us? Why are we held in such contempt? Why isn’t this ineffectual, lily livered Labour government not standing up for us? It’s because we don’t frighten them as we are a nation of Saturday afternoon Welsh! It goes back to old adage how can we possibly expect the government of another country to run our country in its best interests? We can’t! For all the intense and obtuse mascinations of fiscal policy, it boils down to that! If we want the best for our nation we must take responsibility for our own affairs! It’s as simple as that! Or we continue with the ‘cap in hand’ policy.

  3. In recent years, SDLT has raised between £100M & £210M annually in Wales.Income tax @ £3B offers a much larger issue. It is right that Gerry brings this to our attention in such a well constructed piece but it is for our Government in Wales to fight our corner considerably better than they are doing so now.

  4. ‘Muddling through is the time-honored (sic) British approach’ to many things. And the Scots understand this well because the Scots are as British as the English. But what of the Welsh? Our education teaches us that we are different. But our genes suggest we are just the same.

    Is it any wonder the Treasury tires of our nonsense?

    As for ‘serious Welsh resistance’ death, bombing and the burning of property quite readily springs to my mind. Have such atrocities been educated out of your recollections?

    If we cannot face up to our own failings what right have we to expect others to discuss ‘in good faith’?

  5. Richard Jenkins. The primary reason for the weakness of the Welsh negotiating position is that we are the recipients of a large transfer from England. Public spending in, on or for Wales is around £30 billion a year, give or take. Tax receipts in and from Wales are about £18 billion. That is a hell of a hole, more than one fifth of Welsh GDP. The Welsh position will be stronger only when we can boost our economy and start to close that budget gap. To put this in context: the collapsing oil price has taken the Scottish budget deficit from the same level as the UK as a whole to three times that of the U.K. – and knocked on the head any early prospect of Scottish independence. Yet the Scottish deficit is now 9 per cent of GDP, still less than half the Welsh proportion. The Welsh economy cannot currently support the Welsh population at current levels of income and public services. That is the reality with which we must deal.

  6. Sorry Karen but you’ll find the word “Welsh” in the dictionary. We do exist and we are a nation, despite your wanting to wish us out of existence. Nationality has nothing to do with genes. Genetically, the English and Danes are indistinguishable but they have a different language and culture. As for me. I always discuss in good faith and I expect others to do so too, whatever my “failings”. Don’t you?

  7. R Tredwyn, Welsh by my definition means the territory or the people of Wales. Nothing more sinister. Nationality only serves to complicate matters. As for genetics, I think you’ll find no other Europeans share the genetic make-up of the British people. Yes, genetically most of us are the same no matter from which part of the British Isles we hail.

    But the point I am trying to make is that we here in Wales have an unpleasant tendency towards entitlement. Entitlement to things we have not earnt and entitlement to things we cannot afford. Worse, we consider it the responsibility of other nations within the UK to treat us fairly as an equal member and yet we offer nothing in return. Nor do we ever attempt to offer anything.

    In other words we, as a nation, behave as a very badly brought up child. A child that most would not want to adopt and yet a child that has no little or no chance of making its own way in the world, as Professor Holtham has just pointed out.

    Isn’t it time we started to be a little bit more grateful to those other nations upon whom we so depend for our way of life?

  8. As someone who was born and raised in Maerdy would I like to see the Rhondda Fach given greater ability to raise its own taxes in return for less control of UK/Wales distribution of Government spending? No of course not and for the reason Gerald writes to Richard Jenkins. This is the devolution dilemma. Denzil Davies, a former Treasury Minister warned of this problem during the passage of the bill in 97.

  9. Karen
    “But the point I am trying to make is that we here in Wales have an unpleasant tendency towards entitlement.”

    Sorry but this just sees to be parroting English pub talk

  10. I agree that we in Wales should not think the world owes us a living and I think in spite of Denzil Davies we have to take some risks to acquire more powers to try and get out of the hole we are in. Still, expecting citizens of a single state to be treated equally is not “entitlement” in the perjorative manner that Karen uses the term. What else is one to expect? And if we take more tax powers we take a risk but that is not a reason to be penalised on top, which I think is Professor Holtham’s point.
    As for genetics, Karen you are simply wrong. The y-chromosome pattern varies across the UK with more teutonic forms east of the Pennines. Those forms are the same as those found in Denmark and Friesland. Other forms are said to derive from earlier post-ice-age settlers from Iberia. None of that has got anything to do with nationality. I am not claiming the Welsh are genetically distinct and your attempt to claim there are distinct “British” genes is erroneous.

  11. However long it takes, we have to start making our own way in the world which means a better balance between the public sector and the private sector in terms of jobs.

  12. The dilemma, R Tredwyn, is that we wish to devolve power to determine our own taxation whilst retaining or enhancing a distribution of tax income from elsewhere. In effect we want to determine the taxation of others as well as the taxation of ourselves.
    A unitary state can distribute resources and a federal state can agree something similar. The devolved UK is neither of these.

  13. JOJ. Not so. The starting point is everyone has the same opportunity for public services, and social security if needed, at the same rate of taxation. That is the fariness principle of the single state. When some taxes are devolved that is not, or should not, be changed unless the devolved government decides to alter the taxes. If it cuts them it loses revenue and the people no longer have the same public spending – but that is their democratic choice. The centre ensures people have the same potential resources, the devolved governments and electorates decide what to do with them and bear the consequences if their policies don’t work. They benefit if policies do work. So they take on risk in return for opportunity but the starting point can and should be fair.

  14. “The arrangement certainly gives the Welsh government a strong incentive to promote a lively housing market in Wales….”

    Given that this is a tax I feel inclined to pay once, or preferably never, the lively market could involve a fair amount of stamp duty being paid on purchases in England. It’s a form of revolution against devolution…

  15. What remains of the “centre” after a tax is devolved. In this case we are looking at stamp duty. If Wales, Scotland and N. Ireland can decide their levels then England should have the same right. However that leaves a problem of distribution to the poorer regions. Who decides and how? Gerald has indicated two variables. The relative populations and the house values. In a Federation these matters are resolved by a political process at a national level. It isnt a simple matter of arithmetic, Federations dont always act fairly.

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