The taxing nature of Welsh devolution

The announcement by the Prime Minister and Deputy Prime Minister of the devolution of some fiscal powers to the National Assembly is a welcome development, and something that FSB Wales has called for during the Silk Commission process.

It means that for the first time the Welsh Government will have the ability to take charge of some forms of taxation, notably Stamp Duty Land Tax, and will have the power to borrow in order to fund significant infrastructure investment. This will lead to a step change in the nature of political debate in Wales and should place the importance of economic development firmly in the minds of policy makers.

Responding to Silk  This is the sixth of a series of articles on the UK Government’s response to the Silk Commission’s recommendations on tax and borrowing powers for the National Assembly. Previous articles were carried in posts on Monday and last week.

But, despite this welcome step, the moves announced by UK Government fell far short of the full package recommended by the first report of the Silk Commission.

FSB Wales’ 10,000 members have backed the full implementation of those recommendations, not out of ideology, but of necessity. The piecemeal devolution settlement that we have here in Wales is frequently confusing. It is also a settlement that does not provide the level of accountability that more developed taxation powers would bring.

A quick calculation suggests that the taxation being assigned to the Welsh Government will amount to around 1.2 per cent of the Welsh Government’s £15bn plus budget. But that figure could have been considerably higher if we had seen the full devolution of Non domestic (business) rates, as recommended by Silk.

Forecast receipts for 2013-14 suggest business rates will be worth £952m in Wales this year– the sort of money that puts the importance to the Welsh economy of receipts from Stamp Duty Land Tax and Landfill Tax at around £165m into perspective.

There is no obvious impediment to their devolution to Wales. The other devolved nations already have their own systems of business rates and have used them creatively. Indeed, the current Welsh system is already slightly different from the English system thanks to multipliers that mean that small businesses in Wales would pay slightly more than small businesses with a similar rateable value in England.

This has essentially left Wales with a tax that cannot be reformed, a relic of the days before devolution, despite governments in other parts of the UK taking steps to ameliorate its impact on their own small businesses.

So, moving forward, our focus is now on the full response to the Silk Commission’s recommendations.  It is vital to Wales’ businesses that we avoid any further confusion of the devolution settlement. It was therefore concerning to hear the First Minister suggest in Plenary that the devolution of business rates was being “pursued through other means”.

The First Minister’s comment is particularly disappointing when you set it in the context of the Minister for the Economy’s response to Professor Brian Morgan’s report into business rates. That response said, “The devolution of business rates should not be undertaken in isolation or in a piecemeal fashion”. Yet, given the First Minister’s comment, one has to question whether that is precisely what we are seeing.

FSB Wales was happy to support the First Minister in a communiqué alongside other business organisations in Wales, stressing the importance that we placed on taxation and borrowing powers. Indeed, the First Minister has gone on record in expressing his thanks to business organisations such as our own that backed him on this when push came to shove.

Of course, the devolution of tax and borrowing powers is not an end in itself, the objective in doing so has to be making Wales a better place to live and work.

As an organisation representing the voice of Wales’ 217,800 small and medium-sized businesses, we have a role to play in this. Our focus now moves beyond simply assessing the impact of legislation and government spending on our members towards suggesting reforms to the way our members are taxed. As a result, the 2016 National Assembly election will be as much about promoting positive reforms to taxation, such as business rates, as it will about legislation. Our aim will be to answer the question; how do we create prosperous communities across Wales?

As we pointed out in our article on this blog in January this year, how the Welsh Government assesses the impact of tax changes is crucial. We now need a robust Welsh Treasury that can develop and model economic statistics for Wales. This should include a Government Expenditure and Revenue Wales publication, detailed input/output tables and the development of regular GVA statistics for Wales. Scotland leads the way on this, where the Scottish Government’s SNAP project is providing robust regular GVA updates with further statistics in preparation.

We currently find ourselves in a position where the Welsh Government has no reliable way of modelling the impact that any changes in taxation will have. It is clear from what the First Minister and Finance Minister have said that, once devolved, they propose to make changes to the Stamp Duty Land Tax regime in the interests of the Welsh economy. The need for statistics becomes even greater if we were considering, for instance, lowering the higher rate of income tax.

Ultimately the devolution of new tax and borrowing powers provides many new opportunities to Cardiff Bay. However, the Welsh Government now needs to evolve and develop if it is effectively administer those powers, and become increasingly accountable to the people of Wales.