Labour only wants ‘peanut’ taxation

Welcome everyone to devolved Britain where a mechanism for fiscal devolution, championed by Labour in Scotland as part of a Unionist response to the SNP, is opposed by Labour in Wales as a threat to the union. If this seems rather difficult to comprehend then don’t worry, for this is the Alice through the looking glass world of post-devolution politics in Wales and the United Kingdom.

I have written extensively in previous articles about the Silk proposals on fiscal devolution and the ridiculous situation whereby the decision to be fiscally accountable has been placed in the hands of the very actors with the least incentive to accept it. However, the Welsh Grand Committee’s recent debate on the draft Wales Bill appears to have taken the debate on fiscal devolution to a new, and if possible, more farcical direction.

The most significant aspect of these normally overlooked proceedings were the comments of the Shadow Secretary of State for Wales, Owen Smith on fiscal devolution. Up until now the line fed by the First Minister Carwyn Jones had sought to provide a respectable veneer to Welsh Labour’s refusal to accept income tax powers. He argued that accepting such responsibilities would be economically detrimental to Wales without a reform of the Barnett funding formula. That position, thanks to the politics of Barnett reform, essentially rules out calling, and then campaigning for a yes in, a referendum on income tax devolution, without having to say so explicitly.

While accepting, until now at least, the devolution of stamp duty land tax and the landfill tax as a means of securing borrowing powers, the result is that Welsh Labour has been able to effectively evade meaningful fiscal responsibility. Overall, this has been a convenient fudge for a convenient abdication of accountability.

At least it was until Owen Smith spoke at the Welsh Grand Committee this week. During the course of his contribution not only did he make it explicitly clear that Welsh Labour would not accept income tax devolution, the manner with which he expressed his opposition leaves little doubt about Welsh Labour’s real position. As Smith put it:

“I do not think I can be much clearer: I am opposed to tax competition. I think it is bad for Britain, especially those parts of Britain with lesser GDP per capita. The British Union is about a common set of labour standards, taxation standards, benefits and social security, and we unpick part of that crucial fabric at our peril”  (Welsh Grand Committee debate, 5 February).

Forget talk of Barnett reform and safeguards, it is now readily apparent that no safeguards could persuade either Carwyn Jones or Owen Smith to accept partial responsibility for income tax in Wales. Furthermore, with such strident comments regarding “tax competition”, Owen Smith has managed the rare feat of making Welsh Labour’s attitude to income tax clear, while simultaneously managing to add confusion to its commitment to even the ‘peanut taxes’ of stamp duty and landfill tax.

Having previously declared in a press release in response to the publication of the draft Wales Bill that, “the devolution of stamp duty and landfill tax are welcome”, Smith appears now to be calling even these, the most minor of taxes into doubt. Rather than welcoming stamp duty and the landfill tax, Welsh Labour revisionism is fully operational, insisting that the party had actually never sought stamp duty devolution.

And as Smith told the Welsh Grand Committee this week, tax devolution has been grudgingly accepted as “the only way in which they (the UK Government) are prepared to extend vital borrowing powers to Wales.” Reading his words one is left with the impression that Welsh Labour almost expects to be thanked by the UK Coalition Government for their magnanimity in accepting the yoke of landfill and stamp duty land taxes.

While Smith has, therefore, muddied the waters with this positioning on the ‘peanut taxes’, his rhetoric leaves little doubt about the overall attitude of Welsh Labour to Silk’s recommendations on fiscal accountability: they don’t want it and who can blame them? The Welsh Government – of which Welsh Labour has been a permanent member, and is likely for the foreseeable future to continue to be – exists in a utopian world. This is one where they are essentially provided with no-strings-attached block grant and can spend with impunity.

That the Welsh Government has been given the option of turning down free money is the true failing of the Silk Commission’s first report. It is worth noting that the Silk Commission’s recommendations were unanimously made by a cross party group that counted among its membership a former Welsh Labour finance minister, Sue Essex.

This has been made even worse by the UK Government’s mishandling of the way in which income tax would be devolved. Having spent months appearing to postpone a response, David Jones and his colleagues in the Treasury produced a mechanism for fiscal devolution that has been denounced by leading economists and academics as simply unworkable.

Their model of income tax devolution entails the same lockstep that has been devolved to Scotland by the 2012 Scotland Act. This is in contrast to the free, independent band setting approach envisioned by Silk. Expecting Welsh Labour to not only choose to be accountable, but fiscally responsible in a system which makes any form of tax rises politically impossible (because if the higher band, pays more, the lower and middle band payers have to pay more) is naivety bordering on political insanity. The lock-step is almost ideologically designed to incentivise smaller Government, through across the board tax cuts or the fiscal status quo at a time where the public purse is struggling to maintain services. While Conservatives may welcome such a tax system, it is be completely unacceptable to Welsh Labour. Indeed, barring some significant political developments, it seems unlikely to ever see the light of day.

Rather than just a one-off occurrence, Smith’s comments at the Welsh Grand Committee appear to be yet another manifestation of a continuing mediocre chapter in the history of post-devolution Wales. Welsh Labour’s refusal to accept the responsibility and accountability that comes with political office, and their ability to do so because of the blundering statecraft of Whitehall, means that even when the draft Wales Bill becomes law, meaningful fiscal accountability will remain a pipe dream. As we await the imminent publication of Silk Part Two perhaps it is time to clear some space next to the Richard Commission on the bookshelf.