Fairness and accountability: new financial arrangements

for Wales

Gerald Holtham

2

Weaknesses of the current arrangements

• Current finance is via a fungible block grant from central government with practically no tax or borrowing powers

• Barnett formula makes the allocation of the block grant unfair

• Lack of tax-varying powers hampers the accountability of the Assembly to its citizens

• The report proposes how to correct these flaws, in a way that is consistent with the current devolution settlement

Fairness: a grant based on need

4

Projections of relative Welsh spendingBlaenamcanion cyllidau cymharol i Gymru

Wales expenditure per head on programmes covered by the Barnett formula (England = 100)

In the near term forecastingis difficult, but without reform convergence is very likely to continue

100

105

110

115

120

125

130

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

2011

-12

2013

-14

2015

-16

2017

-18

2019

-20

2021

-22

2023

-24

2025

-26

2027

-28

2029

-30

-1% then 3% growth

2% then 5% growth

Higher need variations

Needs formula

First report

5

A budget based on needs

• The Assembly Government should pursue the introduction of a simple needs-based formula as the means of determining the Welsh block grant

• Such a system does not have to be overly complex

• The case for introducing a 'floor' in the meantime remains strong

• Replacing Barnett with a needs-based formula could well reduce total resources allocated to the devolved administrations – reform is consistent with deficit reduction

Accountability: devolving taxation powers

7

An ideal devolved tax

• Ideal devolved tax that would enhance accountability:- levied on immobile goods or activities- linked with devolved responsibilities- raises substantial sums- well understood by the general population- is paid by a large proportion of citizens

• No tax has all these features

8

Tax devolution: unsuitable taxes

National insurance contributions (NICs)

Betting & gaming duties

Fuel duty Inheritance tax

Alcohol and tobacco excise duties Value added tax

Income tax on savings and dividend income

Vehicle excise duty

Capital gains tax, other than on property and land

Insurance premium tax

Stamp duty on shares Climate change levy

9

Tax devolution: remaining candidates

• Income tax• Taxes on property and land• Corporation tax• Package of smaller taxes: landfill tax, aggregates

levy and air passenger duty• New taxes, levied by the Assembly Government on

goods or activities currently untaxed at UK level Of these, income tax makes by far biggest

difference to accountability and revenue

10

Income tax: results of analysis

• Small differences in basic rates could be sustained without inducing major migration / behavioural response

• Small increase in basic rate income tax in Wales relative to UK could generate substantial additional revenue

• High earners more likely to move / alter behaviour in response to different income tax rates in Wales

• Small numbers of high earners moving could have a large impact on the Welsh income tax base

• Variations in the higher rate would have to be limited if a serious degree of tax avoidance to be prevented

11

Income tax: recommendations

• Limited devolution of income tax-varying powers to Wales

• Half of each band to be devolved• Ability to vary each rate separately• Powers over allowances and thresholds to remain

with UK Government

12

Land & property taxes (1)

• Stamp duty land tax should be devolved to Wales, provided a fair offset to the block grant can be negotiated

• Administrative costs of devolving capital gains tax on property and land should be explored. If costs are not prohibitive, then it should be devolved to Wales, provided a fair offset to the block grant can be agreed

13

Land & property taxes (2)

• Consider reform of council tax by investigating (i) the introduction of additional bands covering high value properties and (ii) the scope to undertake more frequent revaluations of the housing stock

• Local authorities should have discretion to levy higher council tax on second homes

14

Corporation tax

• Volatile and difficult to measure at regional level• Devolution would ideally be part of a UK-wide

initiative• However, likelihood of substantial legal barriers• Less attractive option is full devolution to Wales,

with Welsh budget bearing all risks• Recommendation: issue to explore with UK

Government and other devolved administrations

15

Minor taxes

• Landfill tax, air passenger duty, aggregates levy could all be devolved but their value is limited

• Revenues are small and volatile, raise onlyaround £70 million in total

• If they would be of use as policy levers, they should be devolved

16

New taxes

• A procedure should be established to enable the UK Parliament to confer power on the National Assembly to introduce new taxes in Wales, where the Assembly requests that power

17

Borrowing powers

• Limited powers to borrow in order to finance capital expenditure should be devolved to the Assembly Government

• Borrowing via HM Treasury, subject to a ceiling on total debt