Owen Smith questions whether Wales would be better off with a measure of income tax offset by a reduction in the block grantDecember 4th, 2012
The Silk Commission report presents an important opportunity for a stock take of the devolution settlement, a chance to assess, in particular, the strengths and limitations of the current arrangements for the economy of Wales and the prosperity of the Welsh. Its publication is also an appropriate point at which to consider the place of Wales within a British economy and a wider European and international financial system that is still trying to find its equilibrium after the seismic shocks of 2008-9.
Empowerment and Responsibility
This is the second of a series of articles debating the recommendations of last week’s Silk Commission report on tax and borrowing powers for Wales. Tomorrow: Liberal Democrat AM Peter Black contributes. On Thursday is the turn of Conservative AM David Melding. On Friday Paul Silk responds
The report, in summary, says that the Welsh Government is anomalous among international comparators in having responsibility for spending but not taxation, and that devolution of tax-raising powers would increase accountability and incentivise activity to generate growth. Such a package of devolution could involve smaller taxes such as Stamp Duty or Landfill tax. However, according to Silk, income tax would have to be partially devolved to achieve the twin aims of accountability and empowerment.
Silk disappoints Plaid Cymru and their outriders by concluding that devolution of income tax would constitute a significant change to the current settlement and that, after last year’s referendum, which explicitly ruled out making laws on taxation, and after the Scottish poll, which sought specific permission to rule it in, the Welsh people would expect to be asked their opinion once more at a referendum in the future. Nonetheless, the Commission is right to conclude that is the case. It is right, too, to suggest that the impact of partial devolution of income tax should be tested through the assignment of a nominal sum to Wales with an indexed offset against the block grant, as recommended by Holtham.
Of course, in Plaid’s Panglossian world, this is all too cautious, when Welsh economic renaissance might be sparked so easily through slipping the English yoke. Yet, in the modern reality of interwoven and inter-dependent economies, it is a prudent strategy, and one aligned with Welsh Labour’s position. For us, the benchmark for success is not how many financial powers are exercised in Wales, but what impact they might have on the wealth and economic opportunities for the Welsh people. And what effect they might also have on the cohesion and strength of the wider British economy within which we sit.
That perspective was typically absent in yesterday’s rallying cry for tax devo by Plaid’s Jonathan Edwards. In it, Jonathan gleefully pointed to Silk’s conclusion that Wales would be no worse off on day one of tax devolution (without any variation) if, as Holtham/Silk recommend, the block grant were initially reduced in line with the assignment of income tax receipts. It might even be better off in future if the trade off were indexed to the rate of relative growth in Welsh receipts versus their English equivalents. ‘Ha!’ implied Jonathan, now Smith will have to reconsider his (my) pre-Silk comment that income tax shouldn’t be devolved to Wales in the short term because we don’t have to tax base to support our level of public spending.
Well, no, not really Jonathan, because the underpinning and fundamental concern that informed my remark remains in place. Wales currently spends about £25-30 billion (give or take Defence) on total public expenditure (Identified and Non-Identified). Our total tax take from the Welsh base is £18-19 billion, leaving a shortfall of about £11-12 billion.
Of course, Jonathan airily waves this uncomfortable truth away as irrelevant because Silk isn’t talking about devolving all taxation to Wales, or asking us to fund our expenditure only out of Welsh taxes. He’s merely talking about assigning, then devolving, a nominal sum of income tax (£2 billion) to Wales. However, it is Jonathan who is (quite deliberately) missing the point. This is that it is redistribution of taxation across the family of the UK that allows Wales to meet the needs of our people for public services, social security, international engagement and so on. Any disaggregation of that tax base – however limited in its initial scope - should be weighed against the risks that it poses to such redistribution in future.
Now, that isn’t to say that the scale of tax devolution recommended by Silk should be rejected out of hand. The Commission is right to regard the Assembly as a curio in not having any responsibility for raising revenues. Taxation and representation intersected in the Colonies, so why not in Cardiff Bay? However, a progressive, Labour Government at Westminster, operating in the best interests of the Welsh people, would want to work with the Welsh Government to properly understand the evolving effects of such changes. It would need to consider both the short run effects on any Welsh Exchequer and, longer term, on the common bonds of Britain, which make the redistribution of resources possible and acceptable.
Plaid Cymru’s objective of a creating an independent Wales necessarily precludes acceptance of Labour’s belief that the British people are stronger when they work together, when their uniting values, their shared heritage – and their shared assets – are pooled and drawn upon in common. That’s why Jonathan grasps at Silk with both hands, because he assumes Wales will inevitably be ‘better off’ when governed exclusively from Wales.
But, even from their geographically-limited perspective, he and his colleagues would do well to consider the fine print of Silk – the numbers, to be precise – and to consider carefully the short run effects I mention above. Because the numbers in Silk, and their accompanying analysis, are not always as robust as the rhetoric they support. Indeed, at risk of striking a lone, discordant note among the chorus of approval that has greeted the report in Wales, some of the analysis is weak.
Take, for example, Silk’s assumption that Wales would likely be better off under their scenario of assigned income tax offset by an indexed reduction in the block grant. This is predicated on the fact that Welsh receipts grew at a faster rate than those of England between 2000 and 2010. It is a trajectory that Silk thinks reasonable to assume will continue, netting Wales an additional £6 to £27 million per annum. However, a prudent Welsh Government would never be so sanguine about that course being maintained, not least when one looks at the graph which Jonathan helpfully reproduced here yesterday and which clearly shows the narrowing differential between the respective growth rates.
Nor indeed would a prudent Government be sanguine when they read that the Commission concludes Wales’ strong performance is built on relative growth in employment rates. No doubt, this is a result of Labour’s record investment in Wales under devolution, and one surely in jeopardy under a Tory Government that is cutting public sector jobs and threatening regional pay.
In addition to such specific Welsh vulnerabilities, the overall tax take in Britain is down under the Tories and future receipts right across Britain will be increasingly reliant on the army of low paid, part-time workers that are being generated by austerity economics: a workforce that will individually pay less in tax.
Silk makes no specific assessment of how these less favourable trends might affect a Wales with assigned or devolved income tax. However, he does briefly note that Wales is projected to have a worsening ratio (versus the whole UK) of employed and tax-paying citizens to those dubbed ‘dependent’. This is a key driver that would significantly impact the employment rates on which the earlier period of relative outperformance was based. This change alone, he suggests, might account for a net loss to the Welsh accounts of £13-57 million per annum, the precise inverse of the most positive alternative scenario.
Even though it should be said that such sums are marginal when set against the Welsh Government’s total expenditure of some £18 billion, the uncertainty is clear and underline’s Silk’s wisdom in recommending a stepwise approach to any changes, allowing proper assessment of their impact. It’s also why Carwyn Jones and his colleagues have been right to approach the report with prudence and intelligence. They will want to be certain that the risks of tax devolution do not outweigh the benefits for Wales, let alone the rest of the UK.
Further assessment will need to be made of the costs of administering Welsh taxes, estimated at around £25 million to establish and £2 million a year to run thereafter. A more serious analysis of the possible migratory incentives created by any variance in tax rates would also need to be undertaken, as Silk’s examination of the effects seen between Swiss Cantons or US States is clearly an inadequate basis on which to assume minimal impact.
Crucially, even if Silk’s upside scenario for benefit versus the block proves accurate, a Welsh Labour Government, hopefully in collaboration with a future Labour government at Westminster, will need to weigh the risks and benefits of stepping beyond the largely symbolic position of tax assignment to the fundamental change of tax rate variation. Cost and unintended incentives, as outlined above, will have to be considered, of course, but a more fundamental question might also be asked: what would we do with the power?
Could we afford to reduce taxes? Unless, like the Tories, you subscribe to Arthur Laffer’s cocktail napkin scribbling, that would mean cutting Welsh budgets, something hard to imagine as either acceptable or desirable. Could we increase them, reinstating the 50p additional rate, for example? Well that would be fairer than cutting taxes for millionaires, of course, but the limited number of such tax payers in Wales, and their proximity to the border, would need to be accounted for.
What does Plaid suggest we ought to do with any such powers? There’s little specific in the windy rhetoric about ‘taking control of our economy’. However, their Scottish sister party might offer some insight. They have the power already to vary taxes but have not done so – indicative, perhaps, of the limited attraction of introducing variation within the close confines of a market and an economy as integrated as Britain. Even Scottish Nationalists understand that a race to the bottom will benefit no-one in the end.
Nationalists’ fuzziness on the detail and avoidance of uncomfortable truths is deliberate of course. Plans for separation or independence tend to fall apart under close examination, as witnessed in Scotland. By contrast, the emotional appeal of sovereignty and accountability to reflect national identity and patriotism, stands up to some scrutiny by the heart at least, and cannot be underestimated as a force for good or ill. And in part because of the emotional pull of this modern identity politics, the practical difficulties, and possible downsides of further devolution must be subject to rigorous challenge, especially by those of us who are committed to devolution as a means of increasingly local democratic control and empowering national and regional communities.
Silk’s incremental recommendations allow time to test their strengths and weaknesses. The present settlement seems certain to evolve over time and, if the people of Wales, whose primary concern it is, agree to it, may embrace changes to modes of taxation. But a narrow, separatist perspective on the issue is not the only way to look at it. Certainly, not if you want to look beyond the emotion to the bottom line for future Welsh prosperity. Nor if you believe, as I do, that Wales will always be better off, culturally and economically, as an integral, though distinct country within the United Kingdom, and thus able to benefit from membership of our historic Union, and a more equitable distribution of resources between its united peoples.