Owen Smith warns of the consequences for Wales of unpicking the Union

February 7th, 2014

These may be confusing times for casual followers of the devolution saga in Wales. Labour, my party, the party that campaigned for a Welsh legislature for a hundred years, and delivered one in 1999, is being painted as ‘anti-devolution’ by Conservatives who used to wear that epithet as a badge of honour.

In fact, anyone would swear that my remarks at Wednesday’s Welsh Grand Committee in the House of Commons committed Labour to rescinding devolution, judging by the feigned hysteria of the Tory response. It’s nonsense, of course: desperate stuff from a Tory Party scratching around to find a foothold in Welsh politics and fearful that next year’s election may sweep them away. Though not quite as desperate as the current Welsh Secretary’s attempts to present this all as a split between Labour in Wales and Westminster. Nice try, but I’m afraid this won’t cover his blushes at the unseemly public spat with spat with his Leader in the Assembly, especially when the truth is that Carwyn’s government has never asked for income tax to be devolved and has always been mindful of the risks.

As they stated in their submission to the Silk Commission last year: ‘The Welsh government has not sought devolution of powers to vary income tax rates….We are mindful of the need to ensure any proposals on income tax must take account of Welsh socio-economic circumstances, particularly the integrated nature of the Welsh and English economies.’

As for the spurious notion that Welsh Labour’s support for devolution has waned, well that’s nonsense too. Our attitude is unchanged. We are the party of devolution, which believes it is the best way to respect and reflect the identity of Wales and deliver more locally intelligent and accountable government, but within the supporting framework and family of the United Kingdom. We do not support independence for Wales, and we do not see devolution as a stepping stone to that destination. And though our devolution journey may not yet be done, with important prizes such as the shift from a conferred to reserved powers model still to be won, we should not fall into the mindset of assuming any new measure of devolution is good for Wales by default. There are some presents you wish you’d never received, and Tory gifts to Wales tend to fall into that category. If only John Redwood had come with a receipt, sale or return?

The gift in question today is the devolution of income tax raising powers from Westminster to Wales. The Coalition government intends to give Wales the same powers that Scotland will have from 2016: to raise or cut current income tax rates of 20p, 40p and 45p for ‘Welsh taxpayers’ by up to 10p in the pound. That would mean Wales could have a basic rate of 10p or 30p and a top (additional) rate of 35p or 55p.

At first sight, that might seem a reasonable proposition. Why shouldn’t Wales have the same freedom as the Scots, after all? And don’t the Tories say they’d cut taxes for us all if they had these powers (even if their landowning leader in the National Assembly says he’d only cut them for the richest 90,000 people in Wales)? Unfortunately, it’s not quite that simple. Because every penny the Tories cut off our taxes (if, heaven forfend, they ever got elected in Wales) would mean a cut in Welsh budgets of £200 million, at a time when the Tory-Liberal Coalition has already taken £1.7 billion from us, and are coming back for more if they win in 2015.

We know a Tory Government in Westminster would cut the Welsh block grant if Wales cut its taxes. They would use this as another means to pursue their goals of shrinking public spending and forcing privatisation of the public services – health and education – that Wales has wisely kept out of private hands.  You want better public services, they’d say, well don’t look to us for fair funding, you’ve got the powers: raise the money yourselves.

No, the Tory agenda is quite clear, which is why they aren’t too bothered to look into the details of how income tax devolution might work for Wales: whether we’d be better or worse off, or whether, in fact, it would work at all? If they were bothered, they’d surely have done some analysis to figure out whether it was feasible, how much it might cost to run two separate tax areas and what any unintended consequences might be. But the uncomfortable truth is that they’ve done none of those things. Not one.

They have absolutely no idea what the price tag for the Welsh Government might be, or of the impact on businesses with both Welsh and English taxpayers on the payroll. They have no clue how many people might move to or from Wales to exploit any difference in the rates, behaviour that would be entirely rational when faced with the ‘competitive advantage’ that David Jones wants Wales to aim for. Crucially, they’ve made no analysis of the impact lower rates in Wales, which, remember, the Tories say they would deliver, would have on attitudes in England’s regions that remain subject to centrally determined tax rates, and to the Barnett Formula support for Wales, which those taxes underwrite. Though Barnett may be flawed, it still provides us with £112 for every £100 of English public spending. How long would solidarity and support for Barnett last in Bristol or Chester, Herefordshire or Shropshire, when border Tories started complaining about the unfairness of lower rates in Wales, I wonder?

Of course, the Secretary of State for Wales will tell you that he’s got the Silk Commission which addressed some of those questions, a referendum first, and the example of Scotland to follow too. But as far as Labour is concerned, Parliament has not outsourced scrutiny of new laws to the Silk Commission or any other. Cross-party it may be, elected it is not. And I am quite sure that Paul Silk would expect Parliament to undertake detailed scrutiny of any of his proposals, especially something as significant as Wales’ partial withdrawal from the United Kingdom’s taxation system.  Also, while we absolutely support the Silk’s proposal for a referendum on the issue, the people of Wales would expect the Parliament at Westminster, as much their Parliament as it is any of the nations of the UK – indeed as much their Parliament as the Assembly in Cardiff – to do its job and make sure that the implications of a yes vote were properly understood.

To date this scrutiny has focused on the model that might be on offer – in particular whether the Welsh Government should be able to vary each band independently, or can only move them all ‘in lockstep’. Entertaining though it is to see David Jones and his Assembly leader Andrew RT Davies squabble so publicly over this question, the reality is that the debate about lockstep is secondary to the primary question of whether Wales would benefit from these powers at all. That said, it is right, of course, and entirely responsible for the Welsh Government in Cardiff, which might have to exercise these powers as they are proposed from the Tories in Whitehall, to question their utility without the lockstep. But against that utility must be balanced the issue of tax competition between nations and regions, risking a race to the bottom.

As for the argument that Scotland’s got these powers so why might Wales not want them. Well, simply, Wales is not Scotland. And For Wales, see Scotland isn’t reason enough to make the argument for total symmetry in our settlements – even if, in certain areas, more symmetry might deliver greater stability to those settlements.

Wales’ population is 2.2 million less than Scotland, our historic, legal, financial and economic connection with England that much greater, our border more populous. Scotland’s economy is wealthier than ours, with oil, financial services and powerful city engines in Edinburgh and Glasgow. And, most importantly, as any variance in tax rates will require people to register as English or Welsh taxpayers, based on both residency and ‘connection’ to Wales, whereas only 4% of the Scottish population lives within 25 miles of the border, almost 50% of the Welsh population does, and nearly 10% of the entire English population too: 6.3 million people in total. Across much of Wales people’s working and social lives take them regularly back and forth across the border.

So straightforward comparison with Scotland is facile, and detailed analysis essential. Already the Scots are set to spend £45 million just preparing to take on the powers in 2016, enough to scrap the bedroom tax in Wales tomorrow or put 14,000 youngsters back to work. How much more complex and expensive a task might that be for the Welsh Government to bear, with the radically different make-up of our border and the integration of our economy with England?

But there’s another potential cost at stake in this debate; not just the set-up expense of establishing a new system, nor even the baking in of the Barnett gap should the system be imposed on Wales before Silk’s other caveat – fair funding agreed between the UK and Welsh Governments – is addressed. No, the real cost may be the damage to the Union of the United Kingdom, to the solidarity and common threads that bind us. Because what is a Union if not, at base, an economic and social alliance through the pooling of risk and the sharing of rewards? Yes, we share cultural, political and historical bonds too, but in practical, tangible terms, it is a common defence and foreign policy that protects and unites us at our British borders, and a common policy of taxation and social security that binds us within them.

That union is more fragile today than it has been for several generations. Not just in Scotland, but in Wales where the presence of a Tory Government at Westminster strains our patience, and in England, where frustration at English identity’s non-representation, strains the bonds too. In fact, look beyond our shores and note that those traditional alliances and bonds are strained right across Western democracies, as nationalist protectionism and racial discrimination rise up once more in austerity and poverty. It is not just our economics that bear some resemblance to those of the 1930’s, but our politics too. However, Labour, the party of the UK and of devolution, a social democratic party with roots and representation in every corner of our isles, has a duty to defend the unity of our peoples as well as to reflect and cherish the uniqueness of their national identities. Because in that unity there is strength and hope, solidarity and reciprocity. In that unity there are British values and Labour values.

Devolving 10p of income tax to Wales would not break those bonds tomorrow, of course it wouldn’t, and there are obviously examples of federalised tax systems in other unitary states. But there are risks in pursuing that course in Britain, especially in these times, and especially for those parts, like Wales, that currently spends far more than we earn. So Labour does not set its face against ever seeking incomes tax devolution for Wales, but we will weigh carefully the risks against the benefits we’re promised. And when there are Tories making the promises, we’ll greet them with a jaundiced eye. The people of Wales, whose interests we serve, deserve that from Labour. And the people of Britain, whose union we so value, deserves that too.

Support for devolution is not some nationalist virility test, where every measure must be grabbed without thought as if, by default, it must be better if devolved. Welsh devolution is for a purpose: for better government, local accountability and greater prosperity for Wales. It is not meant to jeopardise the union of our United Kingdom and would not command the support of the Welsh people if it did. Those are the yardsticks against which we will weigh the Government’s plan to devolve income tax. A One Nation Tory party would have understood that. This tin-pot, Tea Party version just doesn’t get it.

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Owen Smith is the Shadow Welsh Secretary and Labour MP for Pontypridd

15 Responses to:“Wales is not Scotland”

  1. Yvonne says:

    ‘Wales is not Scotland’.

    Has our education system taken another nosedive?

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  2. Phil Davies says:

    Owen,

    Why didn’t you submit these arguments to the Silk Commission two years ago?

    You are, after all, Shadow Secretary of State aren’t you?

    … 8.337 million people live in New York City (which is in New York State) and about 4 million in the northern counties of the state of New Jersey with only the Hudson River and half a dozen road tunnels separating them. Now that’s what you call a populous border…(Queensferry and Blacon eat your heart out). As I’m sure you are aware, a whole raft of taxes are devolved to state legislatures in the USA including Income Tax, creating an incredibly varied patchwork of tax types, bandings and rates. Far from predicting the end of civilisation as we know it, I think our American cousins consider it a crucial part of democracy and a vigorous economy. But what do they know?

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  3. Gareth Clubb says:

    The most significant comment of Owen Smith’s is this one: “And though our devolution journey may not yet be done, with important prizes such as the shift from a conferred to reserved powers model still to be won…”. Presumably that means that the reserved powers model will be in Labour’s 2015 manifesto?

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  4. Geraint Carey Davies says:

    With Owen Smith’s intervention, backing up David Cameron’s speech, it is good to finally see both major branches of British nationalism showing their colours.

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  5. stuart conway says:

    Sadly more evidence of Labour’s can’t do attitude – Phil’s example demonstrates what is already possible.

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  6. Shoni Bob Ochr says:

    This is worth a read, not least to contrast and compare:

    http://www.newstatesman.com/politics/2014/02/labour-must-not-retreat-further-devolution-scotland

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  7. Robat Powell says:

    Mr Smith’s timid admission that ‘Barnett may be flawed’ is an understatement. It is generally accepted now that the Barnett formula is indeed flawed and unfair to Wales. The crucial point is that Labour were in power at Westminster for 10 years with the opportunity to revise Barnett to Wales’ benefit – and did nothing. Mr Smith’s protestations that ‘Labour is the party of devolution’ ring rather hollow when measured against their failure on Barnett.

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  8. Keith Parry says:

    Scotland is NOT that different to Wales. The SNP has won because it has kept the demand for independence as its base message, The SNP has had nothing to do with unionist parties.
    If nationalists did the same in Wales, we would defeat Owen Smith and other apologists for Tory government of Wales by England.
    The Scots will vote for independence in September. We in Wales. as Lord Rogers said, will be faced with Tory Government for ever if the union remains, We have as much right to national freedom as the Scots.
    The economic, health,education and other failures in Wales will not be cured until we have independence. Ed Balls third rate neo-Tory future New Labour government offers the people of Wales business as usual ,more and more decline. We need to get rid of New Labour and government by England. FREE WALES!

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  9. CA Jones says:

    ” Labour, my party, the party that campaigned for a Welsh legislature for a hundred years…”

    Anyone know the Welsh for ‘chutzpah’?

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  10. Planeshift says:

    This is massive exercise in missing the point. The point about fiscal devolution was never about the ability to vary taxes by plus or minus a penny, it was about ensuring accountability for the actions of the welsh government. At present the welsh government could take it’s £14 billion block grant and throw it off the M4. This would have no influence over the amount they received the following year (although at least it would stimulate the car repair industry I suppose) which is decided in London due to English spending decisions. There is no link between the success or failure of welsh government economic policy and future income.

    This means the incentive for the welsh government to adopt projects or policies that have a direct benefit to the treasury is not there. For example a major investment in social housing paid for by the welsh government would bring housing benefit down and thus benefit the treasury not welsh government; extending the age at which the state has a duty to financially support looked after children would cost the welsh government but would bring long term financial benefits to the treasury; even the south wales metro would have some funds from the transport department but benefit the UK treasury not Wales over time. With these incentives is it any wonder economic development projects take second stage in Wales? Our ability to finance public services is currently entirely dependent on the tories not slashing spending in England even more. And a labour politician likes this?

    Fiscal devolution changes this, although frankly silk doesn’t go far enough. For the first time it would mean the income of the welsh government is linked to economic activity. Which makes numerous policies affordable.

    The truth is that this article is just territory marking in the labour party, and smith is guilty of the same thing he accuses David Jones and RT Davies of doing. (and the motivation for the squabble in their case is exactly the same – fear that Assembly members end up with more status than lowly backbench MPs and the assembly becomes the place where young ambitious politicians want to be).

    And the comment about the bedroom tax is just laughable and could only have been made by somebody who doesn’t follow welsh politics. This week Carwyn Jones in first ministers questions estimated the additional cost of meeting the shortfall created by the bedroom tax in Wales as between 8 and 10 million. But refused to do so because he didn’t think it was his job to mitigate welfare reform. (despite the cost to local authorities of evicting and re-housing people – particularly disabled people – likely to be more than £10 million – which sort of illustrates the point about fiscal devolution really). But then we should expect this from a party that gave Lord Freud his first ministerial job and turned ATOS in a household name amongst disabled people for the wrong reasons

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  11. Geraint says:

    I agree this is a tool designed to reduce the size of the state – why else would the Tories want it? With lockstep, income tax devolution is an incentive for an ever smaller state, and, without, it opens up a race to the bottom in tax competition. The US example quoted above holds no sway not least because their tax revenues as a % of GDP are massively lower than the UK’s (approximately 39% in the UK v 26% in the US) – they can’t get much lower. So the US example actually strengthens the point that tax competition will lead to a smaller state at the centre, and, as this article says, in the long-term, that would not be in Wales’ interests.

    Also, I would question whether there is any public demand for this in Wales. The only poll on this does in Wales showed under a third of people in favour – http://www.walesonline.co.uk/news/wales-news/referendum-income-tax-powers-welsh-6405086 – and that was before the introduction of lockstep. If you now asked: “Would you support the partial devolution of income tax to the NAW of 10p for each tax band, without the ability to vary those bands independently, and with corresponding changes made to the Welsh Budget?”, I think a. turnout would be a massive issue and b. confusion and indifference would reign supreme.

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  12. Phil Davies says:

    Geraint, 11.30

    The NYC/New Jersey example was quoted in order to disprove Owen Smith and others’ sophistry and scare-mongering about the unworkability of combining ‘populous borders’ and different tax regimes. There is no evidence anywhere in the world that such a problem exists.

    I concede that the USA is a ‘small-state’ tax and spend system. To what extent, however, that is the result of structural aspects of their fiscal system (having state taxes) or political culture and history I wouldn’t hazard an opinion. I’m not sure I’m qualified. However, the preponderance of ‘big-state’ equivalents in other federal systems with federal tax regimes (high degrees of tax devolution) (Germany and Spain immediately spring to mind) does rather negate the simplistic, causal argument you’re putting forward doesn’t it? “Federal tax systems lead to small government” Where is the model of causality that supports such a statement?

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  13. Geraint says:

    I take the point. However, the article’s not about different tax regimes, it’s about different income tax regimes.

    My view is that little insight can be gained from the American example because they’re already at the end-point that it’s feared could be reached by igniting income tax competition (irrespective of how they got there).

    I agree the Germany example offers more insight. However, it’s telling that – even though they have a federal system – they have opted not to devolve income tax to the state level, nor have they devolved corporation tax. I would argue that has helped them preserve a strong central government with the ability to redistribute.

    The implied causality isn’t that federal tax regimes lead to smaller states, as you suggest. It’s that specific taxes – corporation tax and income tax – can lead to smaller states when they’re devolved to areas with porous borders.

    On that point, I’d be interested to know if you think the devolution of corporation tax would lead to tax competition, and whether you support the four nations of the UK being able to set different rates? If not, why this is so different to income tax devolution would also be interesting to hear…

    Suppose it would also be interesting to hear what you’d want Wales to do with income tax/corporation tax powers, and what impact that would have on overall tax revenues at the UK level.

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  14. Phil Davies says:

    Geraint,

    Thank you for taking an interest in my ideas.

    Firstly, we may differ on a fundamental….Whilst not being a Conservative, I am more than happy to make it clear that I don’t have a principled problem with a ‘small state’. Neither, as it happens, do I have a problem with a ‘big state’. The state, in my view, should be proportionately scaled to the problems a society has at any given time, not prescribed as a matter of ideology. To that extent, there is a strong argument for a ‘big’ state in Wales at the moment, if one believes, as I do, that there is legitimate place in politics and economics for state intervention. There is also a strong argument for a smaller state the more successful and prosperous a society becomes.

    ‘Competition’ and ‘choice’ are two sides of the same coin in economics and it is purely a subjective decision as to which term you use or how you perceive their relative virtues. Since I am broadly comfortable with the market principle, I am comfortable with the idea of competition and choice, and I don’t think that either of them necessarily leads to perdition in fiscal systems any more than I believe that they lead to perdition in consumer markets. It is sub-standard regulatory regimes and practices that lead to perdition in markets, not competition itself. It follows for me that a degree of tax competition can be a good thing in an economic union if regulated properly. I have every confidence that the UK has within its wit the capability of such proper regulation.

    All ‘pricing’ systems (and tax systems are no more than an extended matrix of state pricing) tend to be largely self-formulating and tied to the realities of wider market structure (or geopolitics and geoeconomics in the case of tax). In reality, therefore, it is highly unlikely that a Welsh tax system (whether as part of a federal UK or even as an independent nation) would diverge radically from that of its main trading partners and neighbours. The simple dynamics of consumer choice (mobility, common tastes and expectations, etc.) would prohibit such a divergence. But that is not necessarily a bad thing, and it does not diminish the utility and value of variability at the margins or in areas of taxation where no such consumer convergence exists (and there are plenty, even between Wales and England).

    Fiscal variability is a hugely important tool in the successful management of an economy and for reflecting the different flavours of political choice democratically expressed across different regions and countries. It is not a tool, for example, that the UK government would willingly relinquish to the EU…

    For all of these reasons, I am more than comfortable with the devolution of all and any taxes including income tax and corporation tax within the right framework. It is simply mature politics and economics.

    If one objects to self-determination because one objects to the choices that the self-determiner may take then one is on a short road to stifling paternalism and possibly worse. I’m afraid I can’t sign up to that.

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  15. Urien says:

    So, as someone said, Labour’s new line is ‘For Wales, see England’.

    The philosophy of concentrating power in London and the Labour party which has made Wales poorer says the system isn’t broke. More of the same please; same party, same structures.

    Maybe Owen, Wales would have more money to tax if the Assembly (your party, Owen) controlled Welsh water? So why vote with the Tories to keep welsh water under Westminster control? Where will the profits from the proposed barrage in Swansea Bay go?

    Why are other devolved enties which control their own taxation – the Basque Country in Spain, South Tirol in Italy, Bavaria in Germany, rich and Wales not? Because they collect their own taxes and vote for independent parties. The lesson for Wales is control over taxation generates better policies and that a regional/national parliament is better run by a party which is independent of the centre.

    In any case, Owen Smith not Carwyn Jones is the boss of Welsh Labour and the mantra is clear – ‘for Wales, see England’

    Under Labour devolution is no longer a process. The message to Scotland is clear – vote No and there’ll be no DevoMax.

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