Welsh taxation as an economic lever

Carwyn Jones’s announcement of his preferred financial settlement for Wales last week was curiously insubstantial. The call for the block grant to reflect relative needs is long-standing and well-known. Coupling it with the so-called ‘Barnett floor’ is odd. The ‘Barnett floor’ is simply a means of preventing convergence on English levels of spending  – a further decline from the 112 per cent where Wales presently is, to 100. That will only happen if there is significant nominal growth in comparable public spending in England over the coming years. As that’s very unlikely, the Barnett floor is superfluous – it would be overtaken by putting the block grant on a needs-based formula.

Unsurprisingly, the First Minister rejects the argument that income tax-raising powers are necessary to ensure a devolved government has fiscal as well as electoral accountability. This idea was central to the Calman Commission’s recommendations in Scotland. Again, that’s nothing new, and Jones has also restated his view that income tax devolution would require a further referendum. Despite there being a number of problems with the way the block grant assumes a similar structure of public services in Wales to those in England, he seems happy to stick with the present arrangement rather than pursue a more radical change.

What Jones does want to do is to pick the most tempting morsels from the Holtham Commission’s recommendations: borrowing powers, and the small land-based taxes it said should be devolved. Again, the position regarding borrowing powers is odd. There is a very close relationship between being able to borrow, and having a revenue stream to support that borrowing – a point made very clearly in the work of the Independent Expert Group that advised Calman.

It would be open to the Treasury to decide to advance funds against future receipts from the block grant, but they would be the only source of lending around. And why should the Treasury wish to support capital spending in Wales – the reason Jones advances for his borrowing powers – when the squeeze on this is part of its overall UK public spending plan? If you’re going to choose to be wholly an integral part of UK public finances, you can’t really complain about being subject to the constraints imposed on those finances.

Moreover, if the priority is to maintain capital investment during the recession, the Treasury are likely to ask two hard questions. First, why was capital investment in Wales so low during the boom years? This was an ongoing source of concern in Whitehall, and much of the debate in the 2004 Spending Review and 2007 Comprehensive Spending Review was concerned with the Treasury setting minimum levels of capital investment. It tried unsuccessfully in 2004 but more effectively in 2007. The Welsh Assembly Government (as it then was) was a major target of this. The lack of consistency will be noticed. Second, why was a comparatively low priority given to capital spending in the Welsh Government budget for 2011-12 and later years?

Comparing the level of capital spending there with the much higher levels maintained by the SNP government in Scotland is telling. Within the room for manoeuvre available to them (and the comparative generosity of Barnett in Scotland means that government has more room), the Scottish Government used that to the full. However, the Welsh Government very largely stuck to the indicative capital investment figures set out in the UK Spending Review. And there’s a pressing practical reason to offer and accept the borrowing powers in the Scotland bill, in the need to fund the replacement Forth Road Crossing. It’s hard to see where there are similarly urgently-needed infrastructure  projects in Wales.

There are perfectly good reasons for a devolved government to seek greater borrowing powers, and to maintain capital investment in a time of austerity. But those reasons are at odds with the policy of the UK Government, and the Welsh Government’s approach to pursuing its goals doesn’t seem to make the best case for them.

Devolution of the taxes Jones identifies – landfill tax, aggregates tax, stamp duty land tax and air passenger duty – was part of the Holtham recommendations, and was also recommended for Scotland by the Calman Commission. However, even though the UK Government has largely delivered the Calman recommendations in the Scotland bill, this area triggered two subtractions from Calman. Aggregates tax and air passenger duty were excluded from the Scotland bill, pending European Court of Justice litigation in the former case and a UK-level review in the latter one. (The latter makes little sense, if the principle of devolving it is accepted – surely, if the tax were to be devolved, it would be for the devolved government to decide how to levy it in future?)

Jones claims these taxes are worth £200 million a year in Wales, but it’s not clear what his source is. The best published information we have about their yield is from the Holtham report, and is for 2007-08. In that year, the four taxes taken together raised £120 million in Wales – a modest amount in terms of public spending, and equating to less than 0.9 per cent of Welsh Government spending that year.

For all this, there are two interesting features to the announcement. The first relates to its timing, with details of the ‘Welsh Calman’ expected to be announced before the Westminster summer recess. This statement may be not so much an intergovernmental démarche as an opening statement of the Welsh Government’s position for that Commission. The timing would imply it’s also an attempt to shape the terms of reference for that commission, something which (if rumours are to be believed) has been the subject of considerable discussion between the Conservatives and Liberal Democrats, and between Cathays Park and Gwydyr House.

The second interesting feature is Jones’s rationale for choosing these taxes for devolution. Part of this may be a reluctant acceptance of the need for the Welsh Government to have a self-generated revenue stream to justify borrowing powers.  That’s not mentioned in his statement, but may be in his mind. If so, the modest amount of revenue it would raise doesn’t really aid his argument. The acceleration of borrowing powers for the Scottish Government, before the Scottish income tax rates would come in, implies this isn’t crucial from a London point of view, however.

But Jones does explicitly talk of these taxes as levers for economic growth, and of the possible devolution of corporation tax in the same way. In this, he seems to agree with the position of the SNP and most of the parties in Northern Ireland, that tax devolution is a way of securing economic levers rather than sources of revenue to fund public services. But that’s only part of the role of taxation in the ‘fiscal constitution’. Taxes are also used to fund public services, though that side of the issue has been overlooked in the recent debates. It’s intriguing that Jones prefers to emphasis the ‘economic lever’ side of the debate than the other.