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Welsh Liberal Democrats

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Silk Commission Submission

February 7, 2012 1:05 PM

 

Accountability, fairness and growth:

proposals to reform the funding arrangements of the National Assembly for Wales

The Welsh Liberal Democrat submission to

part one of Commission on Devolution in Wales

February 2012

Introduction and Context

"....the Barnett formula is unfair as it is based primarily on population, although it also takes into account the level of spend and the extent of devolution. Welsh Liberal Democrats find this unacceptable. We believe that Wales is a more challenging nation within which to deliver public services, thus needing a greater amount of funding to allow for the effective delivery of these services. This is due to the higher levels of deprivation, lower levels of economic prosperity and a much higher degree of rurality."

1. What, if any, tax powers including possible new taxes and levies should be devolved to Wales?

Our approach to devolving tax powers to Wales is based on three principles; effectiveness, accountability and ease of operation.

No devolved parliament should be wholly reliant for its revenue on another Parliament nor it should it be responsible for its spending without also being accountable for how at least some of it is raised. Without this accountability, there is too little incentive for achieving economic growth because successful economic development does not then lead to higher revenues for the devolved administration. It should also be clear which taxes are levied by which government.

We believe that any system of taxation should be simple to operate, efficient to collect and enforce and provide the least instability for the Welsh government's fiscal planning.

The most commonly cited proposals for taxes to be devolved are income tax and corporation tax. We support both these proposals, although we note that there are significant legal and technical barriers to overcome in order to do so. However, it is vital that the mechanism for the devolution of these taxes ensures that the budget of the National Assembly increases when the government pursues successful economic development policies. The Welsh government should be rewarded for creating more jobs and more businesses by an increase in its budget, as is the case with other national governments. However, they must also be given the powers to influence these policy areas sufficiently.

We believe that proposals similar to those in the Scotland Bill should be developed, giving the National Assembly responsibility for raising a proportion of income tax from within Wales. This will give it both the opportunity to vary taxation in Wales and also the requirement for a proportion of those taxes to be levied by the Assembly. We again stress the importance of reform or replacement of the Barnett formula. Introducing the former without the latter could seriously diminish the Welsh block grant and undermine the ability of the Welsh government to deliver effective public services.

We note that, after the passing of the Scotland Bill, Scotland will have had control over its income tax through two different mechanisms. The first was the ability of the Scottish Parliament to vary the rate of income tax in Scotland by 3p. The Scotland Bill will replace this by reducing the rate of income tax in Scotland by 10p in the pound and giving the Scottish government the onus to raise its income tax rate beyond that.

We believe a model for Wales will rest somewhere between these two mechanisms. Given that wages are lower in Wales than in England or Scotland, it is essential that any system should not disadvantage Wales. Therefore, we expect that, at least initially, the ability of Welsh Ministers to vary income tax may need to be restrained.

The Holtham Commission suggested that rates of income tax should be lowered by 50% in Wales (as is the case with the proposal in Scotland) to 10p, 20p and 25p respectively and the National Assembly should be required to vote annually to raise the remaining taxes. However, the Assembly would be required to set a tax rate that was within 3p (either way) of the UK tax rate. We believe that this proposal should form the basis of the Commission's approach.

We also believe that the requirement that the National Assembly vote each year to raise taxes is essential to ensuring the government is accountable for its spending decisions, even if the government decides to set taxes at a level that is the same as HM Treasury.

We note that most of the discussion about devolving income tax has revolved around the rate of tax and not the structure of the tax bands. We accept this current limitation because altering the structure of the tax system will seriously undermine the efficiency of the system.

Clearly, as a poorer nation within the UK, Wales will require some form of equalisation funding. Any formula seeking to achieve this is likely to include a measure of economic prosperity. As a result, any progress from the Welsh government on economic development is likely to see this element of the formula reduced. This would undermine the principle that effective economic development should lead to increased tax revenues. Any formula should ensure that, should the prosperity of Wales increase relative to the prosperity of other nations and regions in the UK, this will not cancelled out by a consequent reduction in equalisation funding. The reduction in the grant should not be more than the increase in tax revenue as this would act as a disincentive to the Welsh Government to pursue economic growth.

We also believe that a long-term aspiration should be for the Welsh government to have control over some element of corporation tax in Wales. However, we acknowledge that there would be significant difficulties in deciding which companies were "Welsh" and addressing the potential of a race to the bottom. The development of proposals for Northern Ireland may well lead to proposals which can be adapted to the Welsh context.

The two taxes discussed above (income tax and corporation tax) produce the greatest yield of the taxes suggested for devolution to the Assembly but also carry with them the greatest risk. The choice over what proportion of the tax-levying responsibility should be held at a Welsh and at a UK level is clearly a complex one. Given the economic challenges facing Wales, too high a proportion could lead to a reduction in the size of the Welsh block grant. As the Welsh block grant is already lower than is equitable, a further reduction would not be acceptable. However, if the proportion was set correctly, the Welsh government would receive the same benefits from pursuing successful job-creation and business-friendly policies as most other governments.

Other taxes that we believe should be devolved, as they are part of a policy area which is already largely devolved, include:

In order to address the acute crisis in Wales, stamp duty should be devolved to the National Assembly in order to help lower the cost of buying a house in Wales.

As waste management and recycling are largely devolved to the National Assembly, taxes relating to this policy area, most notably, Landfill Tax and Aggregates Levy should be devolved to enable the government to take a strategic approach to environmental matters.

Aspart of the Welsh government's approach to economic development, they have chosen to identify specific sectors for development. We propose that there should be regular, formal discussions between Ministers on the most effective taxation of these sectors in Wales, including some taxes on the financial and insurance sectors, some taxes and tax credits relating to green jobs and other tax and tax credit issues that affect industries that Wales has identified as a priority.

Greater freedom should be given to the Welsh government to reform legislation relating to local government rates, both domestic and non-domestic. The legal and financial situation surrounding both of these taxes, and which elements of the process are reserved to Westminster, is complex despite the fact that local government is devolved and business support is perceived to be devolved. Greater control over business rates beyond the multiplier would allow the Welsh government to deliver a more coherent reform of business rates.

In the future, the Welsh government may seek to introduce new taxes that do not exist across the UK as a whole, whether to discourage certain activities or to promote others. (The Welsh government has already done this, although in a roundabout way, with the introduction of a compulsory levy on carrier bags). A formal mechanism should be established to allow the UK government to confer, by Order in Council, the power to levy new taxes, provided both governments are satisfied that no tax base is being over-taxed.

We would like to re-iterate our belief that any reform of Wales' financial relationship with the United Kingdom must be concomitant with reform of the Barnett formula and must preserve the ability of Welsh ministers to determine their own spending priorities.

What, if any, borrowing powers should be devolved to Wales?

We would support the development of borrowing powers for the Welsh government and believe that the Assembly is mature enough to use borrowing powers sensibly and frugally. As Welsh Liberal Democrats, we would seek to use borrowing powers for strategic capital investment and for substantial one-off investments into public services... [We] do not believe that borrowing powers should be limited to borrowing from the Treasury.

This remains our position. As we explain later, this should be pursued immediately by the UK government immediately.

Do you have any other proposals for improving the financial accountability and empowerment of the Welsh government?