INCOME TAX POWERS FOR WALES?

With the debate leading up to the Scottish Referendum resulting in a promise to retain the Barnett formula - the device that determines the level of public expenditure in Wales - some commentators have noted that there is a danger that Wales could potentially lose out in the future.

As the UK Government begins its investigation under the watchful and expert eye of William Hague into the transfer of additional powers to Scotland, there is clearly more debate that will take place over the next few months. This will focus not only on how England can gain a fairer settlement both politically and economically, but also how the two devolved regions of Wales and Northern Ireland will also gain additional powers.

In the case of the latter, businesspeople and politicians have been agitating, for the last couple of years, for one major tax change to take place namely that of enabling Northern Ireland to reduce it corporation tax, presumably to 12.5 per cent to match that of its neighbour, the Republic of Ireland.

Interestingly, the Silk Commission that examined the transfer of taxation powers to Wales dismissed the devolution of corporation tax to Cardiff Bay as impractical unless the other devolved parts of the UK also received such powers.

As far as I am aware, there are no immediate plans to do this for Scotland, despite this being one of the key economic planks of the SNP’s strategy for a stronger Scotland. I would doubt that whilst Scotland will be able to control a significant proportion of its income tax, it may be a step too far for the Treasury to create different corporation tax regimes in the UK despite the desires of those in Northern Ireland.

However, the one thing we do now know will happen in Wales is that voters will get the opportunity to vote on whether they want to follow Scotland’s lead and have devolution of income tax powers.

As Stephen Crabb, the new Secretary for State for Wales noted in this newspaper earlier this week, any new deal “will see the Welsh Assembly gain new tax powers; powers that will create an incentive for Welsh Government to grow the economy of Wales and tools to help make our nation more dynamic”.

This will also mean that the so-called lockstep, which prevented any future Welsh Government from potentially changing the higher rate of taxation without, at the same time, changing the lower rate by the same amount, will disappear.

In my opinion, this issue was always a red herring at this stage of the Wales Act due to the realpolitik of the Scottish Referendum, will be removed as I predicted to the Welsh Affairs Committee back in January when I said that, that following the Scottish vote, it would be removed.

As I stated in this newspaper earlier this year, the lockstep was a political device only that would be ditched at the opportune moment, as it has now. To be honest, it was clear to anyone that would be the case eventually given that the Conservatives are by their very instincts not only a tax-cutting party but a pragmatic one as well.

Of course, the indications so far from leading politicians is that the Labour Party in Wales and Westminster will oppose any transfer of income tax powers before any funding settlement has been agreed.

However, what is needed to drive this forward is more than the usual sound and fury from the leader of the Welsh Conservatives in the Assembly. In fact, if the opposition parties come together to support such powers, the chances of success are high in this atmosphere of further devolution.  Indeed, I would hope that if Westminster can solve the Barnett question then even those Labour politicians in Wales that have been largely ambivalent would finally support such powers.

So what effect could such changes have on the economy?

Cutting the top rate of tax could cost the Welsh Government very little whilst, at the same time, having a significant potential impact on the economy.  There is certainly evidence that having a more attractive tax regime, particularly for higher-rate taxpayers, could potentially attract more entrepreneurs to Wales, although some have suggested that entrepreneurs would merely move across the border to live in Monmouthshire or Denbighshire whilst retaining their businesses, and the jobs within those businesses, in England.

That is always a risk but is unlikely in today’s economic environment as the founders of most innovative new businesses would want to be close to them in their early years, as you find in other economic hotspots of the World.

Therefore, the four nations of the United Kingdom are, following the independence vote in Scotland, entering an exciting new era of devolution. What shape that will take will be the subject of much discussion over the next few months.

Whilst there may be positive developments from such a move, there are also potentials danger to the Welsh economy if the other parts of the UK choose to have increased powers of personal or corporation tax and Wales, if we reject further powers, is left having to rely on the largesse of Westminster and the diminishing return from the Barnett formula to develop its economy.

Certainly, that is something I hope that no businessperson or politician in Wales would want at a time when we need to maximise every opportunity available to us to ensure we prosper as a nation.

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