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

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