Income Tax and Wales

A new report by the University’s Wales Governance Centre has warned that potential changes to the funding Welsh Government receives from Westminster, following the partial devolution of Income Tax, needs very careful consideration to ensure Wales doesn’t lose out on hundreds of millions of pounds.

The report, “Income Tax and Wales: The Risks and Rewards of New Model Devolution”,  demonstrates that the method chosen to reduce the Welsh block grant to account for the additional Income Tax revenues has the potential to cause losses of hundreds of millions of pounds each year to the Welsh budget.

The report follows the on-going discussions between the Scottish and UK Governments over the way Scotland’s funding settlement from the Treasury will be calculated following the full devolution of Income Tax.

Almost six years after it was first mooted, the Welsh Government will soon begin to receive its share of approximately £2billion of the Income Taxes paid by taxpayers in Wales. In their report, the Cardiff University academics say that:

• The merits and disadvantages of the principle of Income Tax devolution have been widely debated but the practicalities of implementing partial fiscal devolution to Wales have not. The success of tax devolution in bringing increased financial empowerment as well as true accountability to devolved Welsh politics will, however, largely be determined by the method used to allocate money to Wales by the Treasury.

• That important developments have emerged since the work of Holtham and Silk which now need to be factored when considering how to implement tax devolution. The population growth of Wales has recently diverged significantly from the rest of the UK, with Wales’ population growing at less than half the rate of the UK as a whole between 2008 and 2014. This will tend to mean slower growth in the Welsh tax base. In addition, the UK Government’s policy to rapidly increase the personal allowance will have drawn disproportionately more Welsh incomes out of the Income Tax base than was the case across the UK as a whole. Such a move would have meant a substantial cut to the Welsh budget under currently proposed methods of adjusting the Welsh block grant.

• The Scottish experience has shown that these debates are likely to be intense. Using the three methods proposed for the new system of allocating money to Scotland, the report demonstrates that the method chosen to reduce the Welsh block grant to account for the additional Income Tax revenues has the potential to cause losses of hundreds of millions of pounds each year to the Welsh budget.

• Given the amount of money that is at stake for Wales, and given also the UK government’s intention to continue to increase the personal allowance, it is vital that the key issues in this debate are well-understood and that potential hazards widely known. As persuasively argued elsewhere, solutions arrived at during negotiations focused on Scotland may not necessarily represent an acceptable outcome in the rather different circumstances of Wales.

• Due to the outstanding uncertainties, and in the absence of any formal timeline for the partial devolution of Income Tax to Wales, any discussions on changing tax rates and policy during the forthcoming Assembly elections should be regarded as premature.

Commenting on the issues identified in the report, Ed Poole of the Wales Governance Centre, said: “This report argues that there are a number of practical issues that need to be addressed regarding the partial devolution of Income Tax. The increased accountability that this will bring is to be welcomed, but the Welsh Government’s budget shouldn’t suffer as a result of the unintended consequences of UK Government tax policy such as changes to the personal allowance.

“Over the five years of an Assembly term, a block grant adjustment method that disadvantages Wales could represent a cumulative loss of hundreds of millions to the Welsh budget. That the method is likely subject to lengthy negotiation makes it impossible to begin to calculate potential aggregate impacts of any changes to the Income Tax rates themselves.”

Guto Ifan of the Centre, added: “Our report concurs with a 2015 review by the Bingham Centre for the Rule of Law in recommending the establishment of an independent adjudication commission to advise the Treasury on devolution finance and grant matters. This body would also be responsible for decisions in the event of disputes between the different governments of the UK that cannot be resolved through current joint ministerial processes.”