Gerry Holtham says the form of income tax proposed by the UK Government to is unlikely to be usable

January 16th, 2014

The main weakness of the draft Wales Bill published by the Secretary of State for Wales in December  is that much of it is likely to remain a dead letter. The principal tax measure, devolving a share of income tax, requires a referendum. It is unlikely that the current Welsh Government or indeed a majority of Welsh politicians will care to call for and campaign in such a referendum.

There are several reasons. Politicians are currently no more popular in Wales than in other parts of the United Kingdom. There is always a risk that a referendum will be treated as a general plebiscite on the performance of the government rather than a vote on the issue at hand. Moreover, any measure which can be represented as increasing the prospect of tax rises will inevitably incur some opposition. A referendum is therefore far from certain to succeed, with risks to the political careers of those promoting it.

If the costs are evident, the benefits are not. The principal, and correct, argument for significant devolution of taxation is accountability. That is of clear benefit to the electorate but its attraction to the politicians is less obvious. Who would be accountable if he or she could avoid it? The measure has to have other attractions to appeal to the political class. Yet the form of income tax devolution set out in the Bill is most unlikely ever to be used.

It would be going too far to say it is entirely unusable but the Commission I chaired analysed the case carefully before concluding that the single rate form of tax devolution was unsuitable for Wales. The Silk commission concurred. The Welsh border is too open for it to be safe to raise higher tax rates – revenue would be more likely to fall over time than rise. A cut in all tax rates would, however, be prohibitively expensive in the short to medium term, particularly so in current conditions of budget reductions.

However, in each case where Welsh and Scottish conditions diverge and a reasoned case was made for doing something different in Wales, the recommendation has been rejected. Wales can have what Scotland has and nothing else, like the youngest child of a poor family that gets only hand-me-down clothes, whether appropriate or not in style or size.

In any event, the devolution of income tax involves a risk for Wales, namely the risk that the Welsh tax base will be less buoyant than that of the UK as a whole and therefore less buoyant than that part of the block grant that it replaces. That is a risk that I believe it is fair to ask the Welsh Government to run. It is a necessary concomitant of accountability. However, it is combined with another risk, that when public expenditure begins to grow again in nominal terms the Welsh block grant will grow more slowly than public expenditure in England owing to the operation of the unreformed Barnett formula. The UK Government has given assurances that it will consider that issue when it arises but has given no categorical promise that it will do anything substantive about it and the Bill is mute on the block grant and its interaction with tax devolution.

To summarise, Welsh politicians are being asked to run a politically risky referendum for a power that they cannot use that will make them more accountable but will open them up to justifiable revenue risk while another unjustifiable source of revenue risk is allowed to continue. I suggest that only believers in Father Christmas would expect them to do it.

The incentive that the UK Government offers is the prospect of increased borrowing powers for capital investment after the referendum. The difference is probably between a debt stock of half a billion, agreed in any event, and one of one and a quarter a billion – the sum that would probably be available with income tax, on the basis of the ~Scottish precedent. I may be wrong but I doubt if that is incentive enough.

I have a modest suggestion. The Welsh block grant currently permits a level of public spending per head in Wales that is a little lower but within a few percentage points of what it would get if it were an English region, so there is no justification for a continuing Barnett squeeze. Poorer English regions that get higher levels of spending than more prosperous regions are not subject to any squeeze towards equal cash spending per head. Why not promise Welsh politicians that if the referendum is held and passed the Barnett formula will get a floor at roughly the point where devolved territories are getting only the level of potential public spending they would get if Wales were regarded as a region of England?

Such a floor would mean allocations per head in Wales would increase at the same percentage rate as the equivalent public spending in England. That promise would eliminate a revenue risk and enable Wales to more easily shoulder the necessary revenue risk that comes with income tax. It would also make a referendum easier to win since the package would include stabilisation of the block grant and an end to the Barnett squeeze. It would not be a mere sop to recalcitrant public opinion, however, because it would also have the advantage of being fair. It would have the further political advantage of causing no problems with the Scots, which cannot be said of wholesale Barnett reform.

The First Minister of Wales has himself argued that he cannot support a referendum until Wales gets “fair funding”.  He has tended to focus on the fact that Wales currently gets a little less public spending per head than it would if it were an English region (whereas Northern Ireland gets a little more and Scotland a lot more). However, the Welsh discrepancy will be reduced by the current period of austerity since the Barnett squeeze goes into reverse when public spending falls. One can argue indefinitely over needs measures and the point estimate is less significant than the trend. If Wales gets a Barnett floor, in my opinion, that would enormously strengthen the attractions of the referendum.

Of course, the foregoing argument assumes the Bill is serious and the Government actually wants the referendum to occur. If the Bill is just a piece of political theatre or legerdemain to give the impression of meeting Welsh aspirations or concerns but not embodying the intention of doing anything substantial, it may already be adequate for its purpose.


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Gerald Holtham chaired the Commission on Funding and Finance for Wales and is an adviser to the Welsh Government. This is the written evidence he presented this week to the Welsh Affairs Committee of the House of Commons on the Draft Wales Bill.

18 Responses to:“Wales offered ‘hand me down’ fiscal devolution”

  1. Fred says:

    It stinks to high heaven.
    Money, money money!!
    What is in this union for England.
    Time for all the kids to leave home and earn their own,

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  2. Phil Davies says:

    I think David Davies (Monmouth) has a huge responsibility on his shoulders at the moment and has been put in an impossible position by his government. He and his Conservative (and Lid Dem) colleagues have been asked to defend the indefensible on the Welsh Affairs Select Committee by rubber stamping a statute (the Income Tax parts of it) they know will never be enacted and can never be used. One could see in the proceedings this week that it offended the sense of reason for many of them as it dawned on them that they (and probably hundreds of Committee witnesses) will waste 1000s of man/woman-hours of time in the next 3-6 months on something that we all know is a non-starter.

    David Davies is instinctively opposed to any materially important degree of devolution and yet he is, in fairness, usually scrupulously honest. Will he have the courage to send the Bill back from the scrutiny stage to the Government with a firm “do it properly or don’t do it at all”?

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  3. G.Holtham says:

    Boris Johnson wants you to earn your own money if you live in the North of England, Fred. He doesn’t see why London should pay so much to support you. I daresay people in Mayfair don’t wan’t support people in Peckham either. Where do you stop? I suppose it all depends on whether you think there is such a thing as society and where you draw the lines. The establishment doesn’t seem to have any doubts when sending kids to Afghanistan. Plenty of British, non-English blood left there.

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  4. Peter Hugh Charles Davies says:

    There is only one sensible step forward for 2014. That is for the Assembly to admit,it is a failure in charge of
    Welsh Health Services. It is a disaster in Welsh Education.Local Government is beyond its competence.Virtually everything is out of control and the only way Wales can Progress and improve the standard of living for the Welsh people, is to abolish the Assembly and ask Parliament in London to take back responsibility for its old jobs prior to devolution.

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  5. Bob Jones says:

    Time to abandon the Assembly (and Wales itself) and allow our wiser neighbours to control our lives. There really is no alternative.

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  6. Yvonne says:

    I’ve always had a lot of time for the work of Gerry Holtham and I think much of what he has said in this piece is entirely correct. The fact that he appears to have moved away from the idea of wholesale Barnett reform, transfers being based upon need and so on, is proof positive that he does sometimes take note of what those in Westminster say.

    But, am I the only one who gets confused when ‘more devolution’ needs to be made financially attractive to the people of Wales? What is all this ‘devolution’ for? If an independent Wales is the longer term aim (or ‘solution’) why should the rest of the UK subsidise Wales at all? (this perhaps answers G Hotham’s point above about the people of London not wanting to support those in the north …. at least those in the north are not seeking to break away as and when times improve).

    If independence isn’t the goal, rather better governance of Wales, surely the secret is to get rid of the Assembly all together. If Lancashire and Tyneside can manage without an Assembly then surely North and South Wales can manage too. Alternatively, let’s go the whole hog and force independence upon the country immediately!

    The future of Wales seems to be determined more by localised pressure groups than any real understanding of the aims and aspiration, hope and fears of the mainstream people of Wales. Why is this?

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  7. Aled says:

    A disingenuous gift of an income tax hand grenade by the looks of it – the whole thing does seem to be deliberately half baked with a strong whiff of red herrings and political snaring. At the end of the day financial control is the ultimate control and maybe the UK treasury is committed to using many varied and obtuse vehicles for the purposes of stubbornly keeping a tight grip. How else could the funds be raised for grand runway projects and HS2 schemes etc – which are essential to maintaining the inexorable growth of London and the South East.

    If Wales is to operate with some degree of autonomy, maybe as a trading unit or entity with different societal desires and values, while retaining membership of the UK, then it needs more financial capital and liquidity and a measurable economy. Our membership of the UK is not benefiting Wales as it should – nor the UK either as it happens. It’s in everyone’s interests to get this right – marginal increases or possible decreases in personal taxation are unlikely to change things very much, if at all.
    For everything that is given there is usually another mechanism for taking it away again –Somehow we need to get behind the legislation and rules that influence the way finance flows into the Welsh governments coffers and also how the expenditure requirements can be tinkered with.

    It would be nice to have the opportunity to investigate alternative ways of increasing the inward flow of revenues from outside the UK using other financial vectors. The Welsh government doesn’t own any natural resources I don’t think, which is an unfortunate historic phenomena! If we did then maybe we could set up some financial vehicle leveraging those. Maybe we could sell bonds in return for planning approval of a tidal barrage?

    In regions with lower incomes then the income tax take will always be lower and we have an economy in a downward spiral which mirrors the upward spiral observed in the South East of England – the two are linked and the article is spot on in summarising what exactly is being offered i.e. absolutely nothing except a poisoned chalice.

    More latitude on the legislation that surrounds the taxation and the rules for implementation would be of interest. Some input into HMRC rules of operation would be very interesting – not something that I will ever see in my lifetime no doubt.

    We need to find a curveball from somewhere, but I suspect careful legislation has tied things up, with few loopholes left to exploit. In terms of off-the-wall ideas for example, maybe could local tithes could be reintroduced, to take taxation locally, reducing profits before they become taxable i.e. in the form of a cut of goods and services . Could services to the public sector – free drugs from pharmaceutical companies? be used to offset the tithes owed?. Bonkers ideas, but maybe there is another way?

    Why should all the peripheral things like benefits in kind payments, entrepreneur reliefs, travel expense reliefs etc. etc. be treated the same in Wales as they are in the South East of England. The regions aren’t the same and incomes, personal expenditure needs and property values are increasingly disparate. Tax evasion and superior tax avoidance capabilities are undoubtedly going to be higher in the more affluent regions as well, which I suspect greatly outweighs the divergence in public sector spending per head between regions, and then there are some of the more fundamental critical mass considerations that benefit London and the South East

    Generalised formulas for UK taxation and expenditure are fundamentally flawed, because the UK is not homogeneous – hence the conception of the crazy Barnet formula – but then there’s a report on that one. This Trojan horse of an income tax legislation offer should be flushed down the toilet – where it deserves to be.

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  8. leigh richards says:

    you have to feel sorry for dinosaurs like peter davies and bob jones – still flogging a horse that departed this earthly plane long long ago. even ukip has now accepted devolution for wales is here to stay – the two to one vote in favour of primary lawmaking powers for wales in the 2011 referendum no doubt helping to concentrate a few ukip minds, and alert them to the political reality of the welsh people’s conclusive endorsement of the process of devolution.

    there is of course a very simple course of action open to those sad souls who find themselves so hopelessly and irrevocably at odds with the democratically expressed wishes of the welsh nation – leave! as hangovers from prehistoric welsh political times like peter davies and bob jones will certainly not be missed by anyone in wales that’s for sure.

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  9. Colin Miles says:

    Didn’t someone said, “It’s the economy stupid”? And the only way out for Wales is to get fracking. But what chance is there of that happening?

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  10. G.Holtham says:

    Yvonne, Thank you for your kind remarks. I agree that it is inconsistent to demand fair treatment in a union while intending to leave it. But I’m not sure anyone is doing that. I think you may be running together different arguments by different people. Nationalist independentists are entitled to demand more powers and get them if the people agree. But they can hardly moan about the size of transfers from England. (I accept that some do try though!) People who want devolution within a continuing union and reject independence can both argue about the fairness of transfers and debate which powers should be devolved – without being inconsistent.. The extent of devolution in the UK is quite modest compared to what happens in many federal states. And with 60 million people the UK is a lot bigger than many federal states. Yet in Wales any discussion of devolution throws a few people into a panic about “slippery slopes” to independence. Wales can’t be independent unless the majority of Welsh voters want it and there has been no sign of that since roughly 1415. A majority however have often wanted some measure of home rule within the UK.

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  11. John Winterson Richards says:

    The debate centres disproportionately on higher rate taxpayers because (1) their relative wealth makes them more mobile, (2) they contribute a disproportionately high proportion of overall tax yield, and (3) their presence, as entrepreneurs, top managers, and key specialists, is essential to the health of the overall economy. Despite this, the rhetoric of some of the more antediluvian elements of Plaid and Labour suggest that Wales might adopt a suicidal ‘soak the rich’ strategy without some sort of lockstep.

    Yet, although a significant rise in the higher rate would trigger a disastrous exodus of essential people and capital, and a significant cut might trigger an influx of entrepreneurs and capital that could transform Wales into the most prosperous part of the UK, a change of one or two percent either way might not make that much difference. After all, one would certainly consider moving if the difference was, say, 10% of an income of a million pounds, but would it be worth the disruption of moving if the difference was 1%? Even moving money rather than one’s principal place of residence involves administrative costs.

    Bearing this in mind, tax powers, even with a lockstep, will be too tempting for the Assembly to resist for long. A referendum will pose little obstacle because there is no properly organised opposition and, like last time, Labour can always rely on the payroll vote.

    Mr Holtham may believe sincerely that devolution or federalism need not lead to nationalism, but the evidence of the last fourteen years is against him. He helped to start a rock rolling downhill and, in accordance with the laws of physics, it is now beyond his control, gathering momentum and getting progressively harder to stop.

    As for linking the block grant to English regions, it underestimates the extent to which English people believe we have already decided to go it alone as a result of the 1997 referendum. Hoping for their goodwill is no longer a viable strategy, if it ever was.

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  12. Dafydd Williams says:

    All three London parties, Tory, Labour and Lib Dem, are refusing to reform the Barnett formula. The Welsh Labour Party has at last come round to the idea of reform after rejecting it during the 13 years of Labour government in Westminster. The Unionist parties should be challenged to commit themselves to reform now. Ed Miliband is making all sorts of promises about what he would do if elected – but he is keeping quiet about a fair deal for Wales.

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  13. Tegid Roberts says:

    Gerald Holtham as always makes an excellent argument and explains clearly for laypeople such as myself. One comment I would make is that the Scottish Government has had the means to modify income tax now for 15 years by +/-3p in the £ by the Scottish Variable rate mechanism. The fact that the SG has never used this mechanism speaks volumes to me and with a 96 mile or so border with its much larger neighbour I rather see why. Perhaps it is National Insurance we should be looking at varying to better reflect our society and of course Corporations pay towards that.

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  14. Gerald Holtham says:

    Mr Richards. I wonder what “evidence” of increased nationalism you are referring to? Perhaps you would care to compare Plaid Cymru’s share of the vote in 1999 and now. No sign of the slippery slope you fear there.

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  15. John Winterson Richards says:

    Mr Holtham, it is necessary to distinguish between nationalism in the broader sense of the shift of the political consensus in Wales, especially within the Welsh ruling class, towards a more autonomous Wales and the narrower sense of the vote in particular elections for the principal nationalist party, Plaid Cymru.

    One must assume you are not denying the broader shift in consensus – since the pro-devolution lobby goes on and on and on about it all the time. If one piece of evidence must be cited, it is the increase in the ‘Yes’ vote between the 1997 and 2011 referenda. Some might object that the increase is due largely to a gigantic propaganda campaign led by the new authority itself and to the lack of a properly organised opposition but it still cannot be denied that it has happened.

    With tax powers now on offer, Wales is now within sight of being where Scotland was 14 years ago, and Scotland is within sight of independence this year. If the Scots vote ‘Yes,’ it is hard to imagine Wales not following before another 14 years are past. A narrow ‘No’ vote will keep things up in the air until the uncertainty forces another referendum. Even a decisive ‘No’ cannot alter the fact that the end of the Union has been placed on the political agenda as a serious possibility.

    If Plaid have not benefited from the shift in consensus as much as SNP in Scotland, it is due largely to the difference in leadership and strategy. You may recall that Plaid did in fact do very well in the first Assembly election, and looked to be breaking out of their ghetto to turn into a genuine all-Wales party, but now they seem to have fallen back on their geographical and intellectual comfort zone. There remains a lot of scope for a Welsh Alex Salmond to shake things up quite spectacularly – if one could be found.

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  16. Aled F says:

    The real concern in this income tax debate is that it just shows a real lack of commitment and fair play when it comes to providing the really important powers and tools that are needed to enable devolution to work properly and flourish – no real surprise, but these are the things that are needed to enable Wales to continue to be distinctive and hopefully prosper. I suppose it shows where the real power lies and there was a lot of talk leading up to this about the delays etc in getting anything at all. All those opposing increased devolution offer nothing constructive in return and probably feel Wales was well catered for in the years that preceded devolution. I hope Carwyn respectfully dopped his cap and said he was grateful for the snippets that were offered.

    Going off topic, but following on from the last post by John Winterson Richards I don’t think anyone need worry on the Welsh independence front – nice idea, but I can’t see it happening in 14 years or 140 years even with a very charismatic leader at the helm. Independence is not an end in itself anyway, preserving the distinct values and identity of Wales as a nation (whether that is in or out of the union), in the face of increasing anglo-british homogenisation is far more important. Even independence might not be able to halt that one, but we have too rich a history and cultural tapestry to simply allow these things to wither away uncontested.

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  17. G.Holtham says:

    I think we are close to agreement on a number of points. Yes, devolution has become more popular or at least more accepted. No, there is no sign of an increased demand for independence; if anything Plaid has lost ground. Aled F reflects the views of many in saying that preservation of the best aspects of the nation and its culture is the objective and it is not clear that political independence is necessary or indeed sufficient for that.

    The only point of disagreeemnt appears to be that J W Richards still believes there is some inevitable process that turns devolution into independence. I don’t see any such inevitability. History is largely adventitious. If the Victorians had had the sense to grant Parnell’s party home rule, it is very likely there would now be no Irish republic and all of Ireland would be part of the United Kingdom, albeit with its own Parliament enjoying considerable autonomy over irish affairs. Alex Salmond does not want to be Parnell; he wants to be de Valera. But it remains to be seen what will happen in Scotland.

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  18. John Winterson Richards says:

    In accordance with Mr Holtham’s commendable desire for some form of consensus, there is at least agreement of two points:

    First, there is a lot of wisdom in Aled’s last two sentences – they certainly merit further consideration;

    Second, there is no such thing as historical ‘inevitability.’

    However, there is such a thing as historical probability, and it is hard to accept his contention that Ireland would likely have remained part of the United Kingdom to this day if granted home rule in the 19th century. It is a shame that no one who drafted the 1998 Act seems to have read the writings of the great Edwardian scholar A V Dicey on Irish home rule. These draw on numerous historical and international examples to show how any legislature that comes into being will tend to increase its own power, so that autonomy leads to ever greater autonomy until home rule becomes independence. Since then, there have been numerous precedents in support of Dicey’s thesis, especially during the break-up of the British Empire. Today’s Click on Wales article on Carwyn Jones’ attitude to federalism makes interesting reading in this context. Even if, as the polls suggest, the Scots vote ‘No’ this year, the issue is not going away.

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