2020 vision for Wales | Public Finance Opinion

The Welsh Government will be able to vary income tax rates from the end of the decade if today?s Silk Commission proposals are implemented. But there are risks and hurdles involved, not least winning the public?s support in a referendum

Published today is the report of the Silk Commission on the means of public funding in Wales. If its far-reaching recommendations were implemented it would imply a huge transfer of political power from London to Cardiff perhaps greater than the law making powers handed to the National Assembly for Wales some years ago.

Perhaps these recommendations are not surprising given that the Silk Committee was dominated by representatives of the four major political parties in Wales ? what politician wouldn?t be against accessing more power? At this point, those with a classical education will recall Plato?s famous maxim: ?Beware of those who seek power?.

The biggest and by far the most controversial element of the Silk report concerns the recommendation that the Welsh and UK governments should share responsibility for income tax paid in Wales and that the Welsh government should have the power to set the rate of its tax share. Moreover, the Welsh government should be able to change the rate of each tax band independently and without limits.

Other key recommendations are that house stamp duty, air passenger duty and landfill tax should all be devolved, and the Welsh government should have sole responsibility for business rates, but these are relatively ?small beer?. On the other hand, big taxes such as corporation tax, national insurance, capital gains tax, VAT and fuel duty would remain the responsibility of Westminster.

However, it is the proposals on income tax that will generate most interest and controversy. These represents radical changes. At present spending by the Welsh Government is almost entirely funded from a block grant from the Treasury. The combination of taxes proposed for devolution by Silk would mean the Welsh government would be responsible for raising around 25% of the money it spends while the rest would still come from the Treasury.

Progress in this area will not happen quickly. The Silk Commission proposes that the radical changes to income tax in Wales would require a referendum of the Welsh people towards the end of the decade. In the meantime, it suggests that an interim system called ?assigned income tax? should be brought in. The interim system would take ?2bn off the block grant and replace it with a nominal ?2bn of Welsh income tax. Crucially, in this system, the Welsh government would have no powers to vary the tax rate.

The Silk report is a long and complex document of almost 200 pages and it will take time to digest and consider its proposals. However, there are a few themes which deserve early consideration:

• Public attitudes ? the usual political conventional wisdom in the UK is that, in general, people do not want to pay more tax, especially income tax. Interestingly the Silk Commission obtained opinion poll evidence in support of the Welsh Government being able to introduce new taxes (as it has done with a tax on plastic bags in supermarkets) but perhaps more surprisingly, 64% favoured income tax devolution to Wales. However, this is not the same as saying that there is support for the Welsh Government having powers to vary tax rates and definitely not the same as saying that Welsh people are happy to pay more income tax.
• Balancing the Welsh economy ? the Welsh economy is in a parlous state with negligible growth, low business formation, domination by the public sector and a perception that the Welsh government is not that business friendly. There will always be a concern that Welsh Governments (almost always dominated by the political left) will opt to raise income tax to support public services while ignoring the impact on the rest of the economy. For example, high rates of income tax may deter inward investment in Wales as is happening, to some degree, in the UK. The Silk Commission poll suggested that while only 25% wanted higher spending and higher taxes, 44% thought that the Welsh Government would put up taxes. A pressure group known as True Wales were concerned that under devolution-max 115 taxes would have to ?double overnight?.
• Public sector performance ? there are serious problems in several important public services in Wales (e.g. schools and health) and it is also the case that the Welsh Government is averse to introducing radical changes such as competition which have been applied worldwide with significant success. The ability to raise income tax could be seen as a ?Get out of jail? card. It could be viewed as a much easier option than dealing with the professional vested interests that are rife in Welsh public services.
• Risks to tax proceeds ? the tax proceeds to the Welsh Government, from income tax, would be driven by the tax rate and the income base to be taxed. If the tax base rises then the total amount of income tax paid in Wales?s increases and ministers have more to spend. Alternatively, if the tax base fell then there would be less to spend on public services unless the Welsh Government increased the tax rate. Given that income tax receipts in Wales fell from ?5.1bn in 2007-08 to ?4.8bn in 2010-11 as a result of the recession and the Welsh economy has significant structural weaknesses then this poses a great risk to Welsh Government funding.
• Greater responsibility and accountability ? At the moment, the debate in the Welsh Government centres on how to share out the block grant. With tax-varying powers at their disposal, politicians could stand for election promising to increase spending in particular areas and have the option of raising one or more of the tax rates to pay for it. They could also promise to cut taxes in order to stimulate the economy. The Commission?s opinion poll found that a majority of respondents thought that if the Welsh Government had some tax powers the Welsh Government would be held more accountable for its decisions. But would it? Under these arrangements the vast bulk of public funding in Wales would still come from the Treasury and it is difficult to imagine Welsh politicians not claiming that problems with public services were the fault of a stingy UK government rather than their own failings.
• Slippery Slope ? there is always a concern in Wales that changes such as this are part of a slippery slope. There are some in Wales whose ultimate ambition may be outright independence but who recognise that this can only be achieved in stages. Firstly, devolution, then limited law making powers, then partial fiscal devolution and next full devolution of tax raising powers. Unlikely perhaps, but still a concern among many voters. These things seem to have an inevitability to them.

The Commission has laid out a timetable to move from where we are now to tax-varying powers by 2020, if backed by the Welsh people in a referendum. That referendum can only be triggered by a two-thirds majority vote in the assembly as well as the backing of both Houses of Parliament. While these may seem formidable hurdles, similar arrangements existed for last year?s referendum on the assembly?s law-making powers.

These are exciting times for politicians in Wales, but will the population see them as equally exciting?

Malcolm Prowle is professor of business performance at Nottingham Business School and a visiting research professor at the Open University Business School. Malcolm is an expert on the economics, finance and management of public services. He has advised ministers, senior civil servants and public service managers on a wide range of public policy and implementation issues

Source: http://opinion.publicfinance.co.uk/2012/11/2020-vision-for-wales/

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