Fairness and accountability: new financial arrangements for Wales Gerald Holtham

2 Weaknesses of the current arrangements Current finance is via a fungible block grant from central government with practically no tax or borrowing powers Barnett formula makes the allocation of the block grant unfair Lack of tax-varying powers hampers the accountability of the Assembly to its citizens The report proposes how to correct these flaws, in a way that is consistent with the current devolution settlement

Fairness: a grant based on need

4 Projections of relative Welsh spending Blaenamcanion cyllidau cymharol i Gymru Wales expenditure per head on programmes covered by the Barnett formula (England = 100) In the near term forecasting is difficult, but without reform convergence is very likely to continue

5 A budget based on needs The Assembly Government should pursue the introduction of a simple needs-based formula as the means of determining the Welsh block grant Such a system does not have to be overly complex The case for introducing a 'floor' in the meantime remains strong Replacing Barnett with a needs-based formula could well reduce total resources allocated to the devolved administrations – reform is consistent with deficit reduction

Accountability: devolving taxation powers

7 An ideal devolved tax Ideal devolved tax that would enhance accountability: - levied on immobile goods or activities - linked with devolved responsibilities - raises substantial sums - well understood by the general population - is paid by a large proportion of citizens No tax has all these features

8 Tax devolution: unsuitable taxes National insurance contributions (NICs) Betting & gaming duties Fuel dutyInheritance tax Alcohol and tobacco excise dutiesValue added tax Income tax on savings and dividend income Vehicle excise duty Capital gains tax, other than on property and land Insurance premium tax Stamp duty on sharesClimate change levy

9 Tax devolution: remaining candidates Income tax Taxes on property and land Corporation tax Package of smaller taxes: landfill tax, aggregates levy and air passenger duty New taxes, levied by the Assembly Government on goods or activities currently untaxed at UK level Of these, income tax makes by far biggest difference to accountability and revenue

10 Income tax: results of analysis Small differences in basic rates could be sustained without inducing major migration / behavioural response Small increase in basic rate income tax in Wales relative to UK could generate substantial additional revenue High earners more likely to move / alter behaviour in response to different income tax rates in Wales Small numbers of high earners moving could have a large impact on the Welsh income tax base Variations in the higher rate would have to be limited if a serious degree of tax avoidance to be prevented

11 Income tax: recommendations Limited devolution of income tax-varying powers to Wales Half of each band to be devolved Ability to vary each rate separately Powers over allowances and thresholds to remain with UK Government

12 Land & property taxes (1) Stamp duty land tax should be devolved to Wales, provided a fair offset to the block grant can be negotiated Administrative costs of devolving capital gains tax on property and land should be explored. If costs are not prohibitive, then it should be devolved to Wales, provided a fair offset to the block grant can be agreed

13 Land & property taxes (2) Consider reform of council tax by investigating (i) the introduction of additional bands covering high value properties and (ii) the scope to undertake more frequent revaluations of the housing stock Local authorities should have discretion to levy higher council tax on second homes

14 Corporation tax Volatile and difficult to measure at regional level Devolution would ideally be part of a UK-wide initiative However, likelihood of substantial legal barriers Less attractive option is full devolution to Wales, with Welsh budget bearing all risks Recommendation: issue to explore with UK Government and other devolved administrations

15 Minor taxes Landfill tax, air passenger duty, aggregates levy could all be devolved but their value is limited Revenues are small and volatile, raise only around £70 million in total If they would be of use as policy levers, they should be devolved

16 New taxes A procedure should be established to enable the UK Parliament to confer power on the National Assembly to introduce new taxes in Wales, where the Assembly requests that power

17 Borrowing powers Limited powers to borrow in order to finance capital expenditure should be devolved to the Assembly Government Borrowing via HM Treasury, subject to a ceiling on total debt