Raising Income Tax should be a last resort, not a first response
From April 2019, the Welsh Government will have the power to vary devolved income tax. CBI Wales Director Ian Price calls for an open and evidence-based debate on the role tax plays in a competitive global economy.
Written for the Western Mail
It’s an interesting time in Welsh politics. With changes to the top of all the major political parties, the big question is what’s in store for business? What vision will the new leaders have for our economy and Wales’ place in the world? With increasing powers over taxation and the Welsh Government on the front line in Wales’ response to Brexit, the priorities and principles of Welsh politicians will shape our nation more than ever before.
Come December, when the new leader of Welsh Labour and de facto First Minister makes their way to their office in Cathays Park their ministerial inbox will require a strong stomach and, more importantly, the right vision for Wales. From short-term decisions needed on issues as complex as Brexit, fairwork and automation to more long-term, strategic decisions on the shape of local government, the health service and our education system.
After years of very tight budget settlements for the public sector and a government response that, while well intentioned, has largely been incremental and reactive rather than bold and strategic, we need to set a new direction.
There is a risk that the years 2019 to 2021 will be a continuation of more of the same and tough decisions will be kicked into the long grass. That would be a mistake. We need to take brave decisions on local government and public service reform. We need to see our public services as the key anchors of our local economies and, as a consequence, have higher expectations on delivery and innovation.
But perhaps most importantly of all, we face a fundamental choice on the shape of our economy. With income tax powers being devolved from April 2019, the choice is this – is Wales a pro-growth, low-tax nation or a pro-growth, high-tax nation? That, at the end, will be the decision before us, and it is critically important that we make the right choice.
As a society, the questions we must answer is do we use our limited tax powers to grow the pie or to focus instead on redistributing the pie we already have? Do we use our tax powers to incentivise and grow our economy or simply increase the overall burden of taxation and direct the scant additional resources to a largely unreformed public sector?
In the coming months we are likely to hear such political questions as ‘will you pay a penny more on Welsh income tax to save the NHS?’ This kind of simplistic argument will not help us make an informed choice. The problem is far more complex, far more nuanced and far more challenging than to hope it can be solved just by reaching into the pockets of the working people of Wales through higher taxation.
Raising Welsh income tax should be a last resort, not a first response. As the Scottish Government have found, raising income tax is no magic bullet for public services but it will send a message to the private and public sectors that their employees will face a higher tax take for living and working here.
Wales, due to the cross-border nature of our economy, is especially vulnerable to the risks of legal tax avoidance and arbitrage. Behavioural responses to higher tax levels are likely to be significant and may result not only in less revenue collected but further market distortions and a reputational hit to Wales as a place to do business.
The debate on Welsh taxation needs to be reframed. We need to consider how tax policy can deliver a devolution dividend – not a devolution risk premium. A pro-growth approach to taxation, which leaves more money in the pockets of the people of Wales, could deliver both higher economic growth and more tax revenue for the Welsh Treasury to spend on vital public services.
Indeed, we have already seen what happens if we increase Welsh taxes without a deep understanding of the inevitable economic and behavioural responses. In April, the top tier of Non-Residential Land Transaction Tax (LTT) was increased from 5% to 6% - placing the Welsh property market at an automatic disadvantage to the rest of the UK, despite the more challenging environment we already operate in. The consequence of this choice can be seen in recent quarter two investment volumes which show a reduction in Wales of 78% - a greater fall than any other part of the UK.
There is an alternative. The SNP-led Scottish Government faced with the same choice on LTT decided to reduce their rate from 5% to 4.5% - giving Scotland a competitive advantage. The result? A more buoyant property market.
When it comes to Welsh tax policy, we should start with a blank piece of paper and ask ourselves how we can best incentivise growth and, in turn, grow our economy and tax revenues. We should consider all options from cutting income tax and leaving more money in the pockets of Welsh consumers, to reforming council tax and business rates. But most importantly of all, whatever we decide, we need a full, independent and thorough economic assessment of any tax reforms before they are undertaken. The people of Wales deserve to know if tax reforms will slow down or speed up growth compared to the rest of the UK. The Scottish Government created a Fiscal Commission to consider tax options in an independent and competent way. We need to consider following their example.
If we want to grow the Welsh economy, provide more opportunities for young people and provide more resources for public services, cutting devolved taxes in a targeted and strategic way could be the answer we are looking for. Whatever your view may be, we need at least to be making informed and evidence-based choices and that means rigorously testing all options, having a public debate and then choosing the best path for Wales.
For more information please contact CBI Wales Assistant Director and Head of Policy Leighton Jenkins Leighton.Jenkins@cbi.org.uk