Wales could lose ‘hundreds of millions’ a year in tax revenues if a deal to devolve tax powers to Cardiff does not take into account lower incomes and slower population growth in the country, a report suggests
The findings from Cardiff University’s Wales Governance Centre warn that the principality’s tax base is very different to the rest of the UK’s, with a greater proportion on relatively low incomes, meaning wider UK policy, such as increasing the personal allowance, could disproportionately hit its tax take.
It added Wales’ relatively slow rate of population growth means that the overall size of the Welsh tax base will likely grow more slowly than England’s, regardless of Welsh government policy. Not accounting for this slower growth could mean that the Welsh budget would be £110m lower after 10 years compared with full block grant funding.
Currently, funding for the Welsh government comes from the UK Treasury's block grant, but from 2018 stamp duty land tax and landfill tax will both be devolved to the assembly.
Further income tax powers are also set to be devolved under the provisions of the Wales Bill.
The report suggests two options to account for Wales’ differences and ensure tax devolution happens in a way that is more appropriate and sustainable for the long term.
The first option would be to calculate separate block grant adjustments for each tax band (i.e. the basic, higher and additional rate bands of income tax), which could help account for a large part of the differences in revenue growth attributable to differences in incomes between Wales and the rest of the UK.
A second option would be to update the block grant adjustment using changes in tax revenues in regions of the UK that are more comparable to Wales, such as the north of England.
Senior Research Economist at the Institute for Fiscal Studies David Phillips said: ‘Although the deal reached for Scotland provides a useful starting point for the Welsh negotiations, the major differences between the Welsh and Scottish economies and devolution settlements, mean it might not be appropriate simply to ‘cut and paste’ the Scottish approach into Wales’ new fiscal framework.
‘It is crucial that any deal reached by the ministers in the coming months is subject to proper scrutiny, that the opportunities and risks inherent in the deal are widely understood, and its potential impact on the future funding of Wales’ public services is thoroughly assessed, because many millions of pounds are at stake.’
Read For Wales Don’t (Always) See Scotland: Adjusting the Welsh Block Grant after Tax Devolution here.
