Tax Devolution Debate Begins in Wales

July 8, 2010 Tax HavensTaxation in UK

Llandudno Junction Office / Swyddfa Cyffordd Llandudno
A new report has sparked fresh debate on the concept of the Government of Wales attaining partial tax varying powers from the UK Government. Proponents of the idea argue that tax devolution will bring a greater sense of fiscal responsibility and economic planning for the Welsh Government.

The Welsh Assembly Government and the majority of political parties have welcomed the release of a new report by the Holtham Commission on the possible methods of bestowing greater tax revenue responsibilities to the Welsh Government. Currently, the Welsh national budget is based on the Bennet Formula, which is calculated on spending of the Government of England. Under the report’s proposal, the Welsh Government would be able to vary personal income tax rates by three pence to the pound. The tax-devolved rate is considered to be small enough to stop Wales actively becoming a tax-haven or inadvertently causing tax flight to England.

The Holtham Commission report, which was released on June 5th, claims that the current system of funding for the Welsh Government lacks fairness and accountability. In regards to “accountability”, the report elaborated, saying, “If you share the pain of raising it [tax revenues] then you’re more careful when spending it.” Commenting on “fairness”, the report claimed that the current method of determining funding by the English Government is too arbitrary and removed from the needs of the Welsh people. Additionally, the high-levels of funding a disproportionately unfair on English taxpayers, as they share a great responsibility for raising the money.

The report also advocated allowing a limited set of debt borrowing powers for the Welsh Assembly. The ability to take on a pre-determined amount of debt would allow long-term project planning, and the ability to consider previously unfeasible public infrastructure endeavors. According to the report, stamp duty should also be devolved. Additionally, local councils should be able to vary their own rates on second properties. The possibility of devolving landfill tax, the aggregate levy and air passengers duty was also posited, although the ideas were considered a secondary concern.

The report has been met largely with acceptance, although some politicians have voiced concern about its greater political implications. Rhodri Morgan, former First Minister of Wales, has already voiced his concern, saying that there is “no mandate” for tax devolution in Wales. Glyn Davies, Welsh Conservative Member of Parliament, argued that if a referendum is called on the tax-varying issue, political parties will misconstrue the facts surrounding the proposal in their campaigns. He also described the possibility of tax devolution as “a very dangerous change”. However, David Miles, UK economist and member of the Monetary Policy Committee, has said that the proposal is likely to result in lower net costs for the English Government, and would ultimately be in line with the new UK coalition party’s policy of national debt reduction.

Photo by Welsh Assembly Government / Llywodraeth Cymru