Welsh budget tax devolution warning

A new report released by the Wales Governance Centre at Cardiff University argues that the methods that could be considered by the Treasury for implementing Wales’ first home-grown taxes would have negative implications for the funding of Welsh public services.

The authors show that if Stamp Duty had been devolved to Wales over the last decade, and despite a growing Welsh tax base over the period, budget cuts would have resulted from the exposure to deep-rooted differences in housing market conditions across the UK that are outside the control of the Welsh Government.

The report proposes a decoupling of the London and South East England property market from the calculation of Wales’ eventual budget settlement to mitigate the more extreme budget consequences of devolving Stamp Duty to Wales.

From April 2018, UK-wide Stamp Duty and the Landfill Tax will be “switched off” in Wales. The Welsh Government will introduce two devolved taxes to replace them, the Land Transactions Tax and the Landfill Disposals Tax, which will directly form part of the Welsh Government budget.

But the ultimate revenue impact of these taxes will be determined by how Wales’ block grant will be changed as a result of their devolution.

After the introduction of the new Welsh taxes, the Treasury will make a downward adjustment to Wales’ block grant funding to compensate the UK Government for the revenue it will no longer receive.

How this will be done is the subject of negotiations between the Welsh Government and HM Treasury this autumn.

In their report, the authors find that:

• Each of the four methods of block grant adjustment considered during the recent Scottish Fiscal Framework negotiations would likely lead to cuts in the Welsh Government budget after devolution.
• The Levels Deduction approach, understood to have been the Treasury’s preferred method during the Scottish negotiations, could lead to cuts of almost £500 million a year after a decade of devolution.
• The projected negative effect on the Welsh Government budget stems from the difference in the Welsh housing market compared with other areas of the UK, meaning Stamp Duty revenues tend to grow much more slowly in Wales.
• Stamp Duty revenues from London and South East England account for nearly two-thirds of all UK revenues and considerably influences overall growth. An alternative and arguably fairer approach to adjusting the Block Grant would be to exclude revenues from London and South East England from the indexing calculations.

The report demonstrates that had Stamp Duty been devolved over the last decade, the Welsh Government budget would have been far better protected had revenues from London and South East England been excluded from the adjustment calculations.

Ed Poole of the Wales Governance Centre at Cardiff University and one of the authors of the report said: “After tax devolution, changing the amount taken away from Wales’ block grant funding according to revenue growth in the rest of the UK exposes the Welsh Government to the deep-rooted differences in UK housing market conditions.

“In many ways, the property market of London and South East England is detached to that of the rest of the UK and is heavily influenced by international factors totally outside the control of the Welsh Government. And that distinct nature of London’s property market has further amplified since the UK’s vote to leave the European Union.

“Excluding revenues from London and South East England from the adjustment calculations would still provide an incentive for the Welsh Government to grow the Welsh tax base, but with a more realistic and achievable target.”

Guto Ifan, also of the Wales Governance Centre at Cardiff University added: “The agreement reached after the Scottish Fiscal Framework negotiations treated all of Scotland’s devolved taxes in a consistent, ‘one size fits all’ way.

“But such an approach does not recognise that each devolved tax bears different levels of likely growth and risks to Wales, and should therefore be considered separately in the forthcoming negotiations between the Welsh Government and HM Treasury.

“Furthermore, economic differences and varying levels of devolved powers mean that precedents agreed for Scotland may not be appropriate for Wales. These factors will need to be reflected in the crucial agreement eventually reached for Wales.”