Eurfyl ap Gwilym says it is time to face the unpalatable facts and join together in building a stronger Welsh economyOctober 12th, 2013
On 2 October, for the first time, HM Revenue and Customs published their estimates of tax receipts disaggregated across the four nations and regions of the UK. Although they emphasised the experimental nature of their work, the estimates provide a useful platform for analysis and discussion.
It is planned to publish such disaggregated data annually in future. The decision to do so reflects recommendations from many quarters that, following devolution, it is important to provide better fiscal information regarding the constituent parts of the UK. Scotland has for many years published a comprehensive set of financial data in the form of Government Expenditure and Revenue Scotland. Unfortunately the Welsh Government has not shown the same initiative.
The headline HM Revenue and Customs numbers are that with 4.8 per cent of the UK’s population Wales only generates 3.5 per cent of central government tax receipts (central government receipts exclude non-domestic rates and council tax). This should come as no surprise. It reflects estimates made in the past by the economic consultancies Newidiem and Oxford Economics and by the Holtham and Silk Commissions. In a common fiscal system such as that of the UK there is a close correlation between relative tax generated per head and relative gross value added (GVA) per head. Thus Wales with 4.8 per cent of the UK’s population and a relative GVA per head of 75 per cent would be expected to generate approximately 3.6 per cent of the central government’s tax receipts. The HM Revenue and Customs data shows that this rule of thumb continues to be a good guide.
Of the total £16.3bn central government revenue generated in Wales in 2012-13 a high proportion (77 per cent) came from three taxes: income tax, national insurance contributions and value added tax (VAT). Wales with its low incomes generated 3.1 per cent of UK income tax receipts (gross of negative tax credits), 4.1 per cent of VAT receipts and 3.6 per cent of national insurance contributions (NIC). Based on these estimates it is fair to conclude that compared with the overall UK tax system income tax is relatively progressive, VAT relatively regressive and NIC neutral.
The next two major sources of tax were fuel duty £1.3bn (4.9 per cent of the UK total) and corporation tax which yielded £830 million (2.4 per cent of the UK total). Against the backdrop of our weak economy it can be seen that fuel duty is relatively onerous which in turn reflects the geographical sparsity of Wales and possibly poorer provision of public transport.
The low yield of corporation tax will come as no surprise to those who track the component parts of GVA. Between 1996 and 2009 ‘gross operating surplus’, which is a key component of GVA and a measure of corporate profitability has shown a sharp decline in Wales compared with the UK as a whole. Attention to this was drawn by Plaid Cymru’s Economic Commission last year in its publication Offa’s Gap. This decline is a reflection of a reduction in capital intensive industry which, in turn leads to lower productivity and lower pay. Welsh governments have concentrated their economic development programmes on job creation but this may paradoxically lead to more labour intensive, low productivity employment. The knock-on effect is low profitability and low wages and is reflected in the continuing decline in relative GVA per head, the principal element of which is compensation from employment.
The five taxes discussed so far account for 90 per cent of the total central government tax take in Wales. The remaining minor taxes may have important policy and behavioural implications, but are of a second order of importance when looking at Wales’s overall fiscal position.
Subject to HM Revenue and Custom’s caveat that the data published is experimental analysis of the yield of some of the minor taxes provides insights into the way we live in Wales. We generated 3.5 per cent of the UK government’s total tax take but accounted for 4.7 per cent of tobacco duties, 4.9 per cent of spirits duties, 5.4 per cent of beer duties and 8.4 per cent of cider duties. On the other hand Wales accounted for 1.6 per cent of capital gains tax, 2.7 per cent of inheritance tax and 2.0 per cent of stamp duty land tax. These estimates reflect a relatively poor country where many people may also make some poor lifestyle decisions.
In its first report the Commission on Devolution in Wales (the Silk Commission) recommended the devolution of a material proportion of taxes to Wales. By giving the Welsh Government such powers it would not only give it more power but also make it more accountable for the performance of the Welsh economy. Devolving taxes in the way the Commission recommended would incentivise the Welsh Government.
The Commission recommended the devolution of stamp duty land tax, aggregates levy, landfill tax and long haul air passenger duty together with the sharing of income tax powers with the UK government. The HM Revenue and Customs estimates reinforce the reasoning behind the Silk Commission’s recommendations. The three minor taxes recommended for devolution account for an estimated £211 million of revenue. This compares with the annual Welsh block grant of around £15bn. Thus unless income tax powers are partly devolved the Welsh Government will be responsible for raising approximately 1.4 per cent of its revenue: a trivial sum which will neither empower future Welsh governments nor promote fiscal accountability.
The Silk Commission’s recommendations on sharing income tax powers would ensure that any future Welsh Government would be responsible for raising approximately £2bn of income tax. Taken with the minor taxes to be devolved and council tax and non-domestic rates (which would become fully devolved under the Silk Commission’s recommendations) approximately £4.4bn out of total Welsh devolved spending of £18bn (Welsh Government and Welsh local government) would be devolved to government in Wales. This would represent a material proportion of its expenditure and would put Wales more in line with other countries of the OECD where there is devolved government.
The HM Revenue and Customs tax estimates reflect the poor economic performance of Wales. There are two ways to react to these estimates. Some will seek to look the other way or question the basis of the estimates. While there may be grounds to challenge some of HM Revenue and Customs’s methodology the stark fact is that their estimates are in line with those made by others. They are a reflection of Wales’s current economic weakness.
The other way of reacting to these estimates is to face the facts, unpalatable as they are, and to determine what needs to be done to enable Wales to raise its economic performance over the coming decades. Empowering and incentivising future Welsh Governments by making them responsible for raising a material proportion their income will ensure that they will have to concentrate much more strongly on reviving the economy.
In the first fourteen years of its existence the Welsh Government has been a spending agency with no control over its income. It is too easy to blame all our woes on austerity or on the policies of successive UK governments. Moreover, for the first nine years after devolution the block grant grew strongly year on year, but Wales’s relative economic performance continued to lag that of the rest of the UK. Austerity has clearly made matters more difficult but surely it is time for all those with the interests of Wales at heart to face the facts, unwelcome as they are, and join in building a stronger and more healthy economy. In this context the HMRC report is to be welcomed as a useful input into the debate.