There will be no simple way to increase income tax revenue using Wales’ new devolved tax powers, according to a new report by Cardiff University academics for the Wales Centre for Public Policy.
‘The Welsh Tax Base: Risks and Opportunities after Fiscal Devolution’, written for the WCPP by researchers at the Wales Governance Centre, highlights that the performance of the Welsh economy will directly impact potential future tax receipts.
As debate intensifies around Wales’ new powers over income tax rates, the report highlights:
- A rise of 1p in the basic rate of income tax would raise £184m, equivalent to only 2% of the current health and social care budget
- It would require a substantial migration response from high-earners to make cuts in the top rate of income tax cost-neutral
- Tax policy reform should be pursued in an integrated way, with all devolved and local taxes considered in the round. For example, a fairer Council Tax system could be implemented alongside income tax rate changes
The report also finds several risks to future devolved tax revenue:
- The performance of the Welsh economy and what happens to the Welsh labour and housing markets will now have a direct effect on the size of the Welsh budget
- The working age population in Wales is expected to shrink over the next few years, limiting growth in the Welsh tax base
Dan Bristow, Director of Policy and Practice at the Wales Centre for Public Policy, said:
“Once the partial devolution of income tax is complete in April 2019, the Welsh Government and local councils will control nearly £5 billion of tax revenues – 30% of their current spending.
“With greater tax powers comes greater responsibility, and our report sets out what needs to be kept in mind so these powers can be used responsibly.
“There’s a limit to which tax policy should itself be used to achieve wider policy goals, as even small well-meaning changes could have profound effects on the amount of money brought in.”
Guto Ifan of Cardiff University’s Wales Governance Centre said:
“The Welsh Government now has the opportunity to chart its own course on tax policy in Wales, and policy-makers need to consider how best to raise revenue from the Welsh tax base to pay for devolved public services.
“Given the potential knock-on effects of any change in income tax rates in Wales, it would be sensible to reform Council Tax at the same time to create a holistic approach to taxation.
“Given the influence that wider policy areas like education and housing have on the economy, there are cross-departmental challenges for the Welsh Government to ensure it successfully manages the increased risk inherent to fiscal devolution.”