With the 2017 Wales Act receiving Royal Assent at the end of January, removing the need for a referendum before it can occur, tax devolution is set to come to Wales in 2019.
The Current System
Currently, the Welsh Government’s situation has been unique in the sense that it is one of the few governing institutions in the world. It has the power to make significant spending decisions in areas such as health and education, that does not also have the power to raise its own revenue. It is, instead, funded via a block grant, largely determined by the Barnett formula.
In many ways, the Block Grant funding system has been good for Wales. With Wales being the poorest region of the UK-based on GVA figures (£18,002 per head in 2015), we benefit from the way in which the block grant system does facilitate a geographically equal supply of public spending across the UK. However, Block Grant funding provides little or no budget incentives for the to develop growth-based policies to increase the tax base of Wales because the Welsh Government will not reap the benefits of these policies within their budget.
What will change?
As it stands, for every £1 of income earned in Wales, 10p will be kept by the Welsh Government to form part of its budget. The Welsh Government predicts that income tax will raise £2.2bn for its budget and aggregate levies will raise a further £32m, and while it is a small proportion of its £15bn block grant, it is a step-change from block grant funding alone.
By making the Welsh Government partially responsible for raising its revenue, it provides the incentive for the Welsh Government to also invest some of its budget to boost the Welsh economy as they will directly benefit from this.
The Silk Commission also recommends that with the devolution of some taxes to the Welsh Government, including income tax, “enhanced capital allowances should be able to be offered with more enterprise zones” provided the Welsh Government pays the incremental cost.
Having grown up in the South Wales Valleys, I have seen first-hand the extent to which the economy here has struggled to find itself since the 1980s. Blaenau Gwent, my home constituency, falls in the top 6% in terms of unemployment and one in 10 working age residents are on incapacity benefits.
Companies who move to one of these enterprise zones will benefit from tax breaks and government support. Giving the Welsh Government the power to establish more of these across Wales provides potential for private investment and jobs growth that Wales needs to thrive. While the enterprise zones that have already been established have had relatively little impact, If these are promoted effectively they still have the potential to bring growth to the Welsh economy.
Politically, the Welsh Assembly has faced many challenges over the years. Having campaigned for the Welsh Conservatives during the 2016 Welsh Assembly elections, I have experienced the extent to which the general public seems relatively disengaged with the Welsh Assembly.
Although the Welsh Government is still responsible for policy in major areas such as health and education, this is not common knowledge. The Welsh Government having the power to independently vary income tax levels could improve public engagement. If people are aware that their vote could directly impact their take-home pay, they are more likely to vote.
Tax devolution also has the power to massively improve the accountability of the Welsh Government to the electorate. In the 2016 election Labour blamed the government in Westminster and cuts to the Welsh budget for its decision to cut NHS spending etc. If the Welsh Government is directly responsible for raising its own budget, it can be held directly accountable for the decisions it makes. Accountability is a crucial factor of any democratic institution if it is to be considered at all legitimate.
If the Welsh Government is directly responsible for raising its own budget, even in part, and is not completely dependent on Westminster for its funding, it is in a position where it can be held directly accountable for the decisions by the public, which is a crucial factor of any democratic institution if it is to be considered at all legitimate.
Tax devolution will come with challenges. It would not be unreasonable to suggest that there may be teething problems while the Welsh Assembly determines the tax rates, and potential changes that would be necessary to maximise government revenue without alienating investment. However, provided competent policies accompany the powers, there is massive potential for the Welsh economy to grow and see levels of prosperity not yet experienced since the 1980s. Particularly when we consider the other ways in which some other barriers to growth to the Welsh economy, such as the Severn Bridge Tolls (proposed to be scrapped by 2018), are set to be removed.