How Wales can be smarter on its limited tax powers to boost its …
Wales continues to face economic challenges. The impact of rapid changes in key industries, such as manufacturing, mining and steel making, can be seen in continuing poor employment, productivity and poverty rates.
The latest official figures (albeit relating to the situation a year ago) show Wales experiencing the sharpest economic contraction of any part of the UK.
There are a number of in-built obstacles to improvement. Productivity and economic growth are driven by capital investment but, whilst government revenue spending per person is higher in Wales than the UK average, that masks far lower than average capital expenditure provided to Wales by Westminster.
So, we could do with generating more economic growth, creating more jobs and increasing average wages as these all boost the tax take, enabling more capital investment as well as supporting education. But what’s in the Welsh Government’s toolbox for achieving this?
Tax possesses a unique power to influence individual and organisational behaviour but there are tight legislative constraints on the Welsh Government’s tax powers. For instance, most business taxes, including corporation tax, remain beyond Welsh jurisdiction and Senedd control. The two nationally collected devolved taxes, Land Transaction Tax and Landfill Disposals Tax, generate only modest revenue.
Income tax is devolved but only in relation to earnings and, even then, the Welsh Government has limited powers. There is no ability to change income thresholds for tax bands or introduce new bands. A reduction in revenue raised through Welsh rates of income tax is matched by a reduction in the block grant. In short, it is a very blunt instrument.
The confines of the devolved tax framework have meant that the Welsh Government has had to think creatively about how it can use the powers it does have. There are some striking examples of thought leadership being driven by the Senedd
. The idea of a social care levy was not taken forward in Wales but was picked up by Westminster and introduced as the NHS and Social Care levy (although its abolition was one of the few measures surviving from Liz Truss’s tax cutting mini-Budget). Other initiatives have also proven to be ahead of their time: plastic bag tax, single use plastic plates and cutlery, a visitor levy, council tax premiums for second homes. Originally dismissed as Welsh anomalies, these have proven to be of wide application and tapped into the public mood elsewhere.
In relation to business the Welsh Government is already pursuing a number of initiatives aimed at attracting foreign direct investment, supporting start-ups and local business growth, as well as various sector-specific projects. There is also the UK Government-driven freeport programme.
Consideration might be given to building on these efforts to take advantage of the geography of Wales; for example, incentives for international film production similar to New Zealand’s 20% cent rebate (on specified goods and services purchased in the country) for filmmakers.
However, this would need consent from Westminster so comes with the spectre of internal competition since Cornwall and the Lake District, for example, risk being disadvantaged. Westminster is alert to such risks, hence the block on devolving Air Passenger Duty (APD).
One area where the Welsh Government has substantial powers is business rates. The existing business rates system features a redistributive mechanism, though its effectiveness varies across different local authorities. Possible adjustments could mirror schemes like England’s Business Rates Retention Scheme or Scotland’s initiative under which councils receive incentives for exceeding revenue growth targets.
Wales could offer tax incentives in the form of business rates reductions to companies investing in skills, employee training and apprenticeships. Conversely, levies or penalties on companies neglecting workforce development could encourage businesses towards more responsible practices, reforms to the apprenticeship levy are another possibility.
Education is a key issue for the Welsh Government and, given that Welsh universities punch well above their weight at a national and international level, incentives to encourage smaller businesses to access the different university business schools would be a boost for both education and business. As the key to social mobility, links of this sort between work and lifelong skills training have to be built.
Amid these considerations, the question arises whether the Welsh Government’s limited devolved powers make grants more effective than tax reliefs in supporting businesses. Tailored grant programmes aligned with the specific needs of Welsh businesses could stimulate innovation, job creation and sustainability, although they would add further to the government’s spending totals. Furthermore, the track record of inadequately targeted and mismanaged grants in Wales highlights the importance of maintaining a precise and specific focus in any grants programme.
Of course, effective design and targeting are vital to the success of tax incentives, as complicated administration processes deter participation. Some argue that the lack of take-up in such programmes is a complicated or poorly designed claims process. As HMRC struggles with “customer” service, the administrative cost involved in any tax incentive system is also critical.
Ultimately, it may be that the best mechanisms at the Welsh Government’s disposal for boosting economic growth are not tax incentives or grants but rather supply-side measures around planning, infrastructure and making it easier to do business. However, it would be wrong to dismiss tax based measures since these are a strategic statement and influence behavioural change. Being seen to reward businesses and individuals for positive behaviour has an impact beyond immediate monetary value and supports wider government strategy.
While the Welsh Government’s tax powers are limited, they are not non-existent. Wales should explore innovative tax based incentives favouring job creation, growth and prosperity. Even if Wales cannot unilaterally implement new taxes, there is still a place for a balanced and reasoned debate about tax strategy – and we know that other areas of the UK are listening to the debate in Wales.
- Ritchie Tout is chair of the Chartered Institute of Taxation’s Welsh technical committee.