Disaggregated tax receipts for Wales

While reading this story about the proposed Scottish Oil Fund that will be established when Scotland becomes independent, I noticed that HM Revenue and Customs had only yesterday published, for the first time, a set of "experimental" figures which estimate the tax take from the four nations/regions of the UK. The links to the documents are on this page.

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For Wales this is a major first, and its importance cannot be overestimated. This information has been produced for some time for Scotland in the form of GERS (Government Expenditure and Revenue Scotland) and for the Six Counties in the form of NINFBR (Northern Ireland Net Fiscal Balance Reports) but the Welsh Government has never asked for or itself produced an official equivalent for Wales ... although estimates have been produced by Oxford Economics and by the Holtham Commission.

I know Gerry Holtham has urged the Welsh Government to follow the example of both Scotland and the Six Counties, and he believes they have not done so because the situation is so serious in Wales that they think it would be better not to tell the patient exactly how bad things are. That's one way of looking at it. The less charitable explanation for their refusal to do so is that no government would want to draw attention to how bad things are because it would only increase public pressure on them to do something about it.

For me, it is only by finding out exactly how bad the economic situation is in Wales that we will be able to properly direct our efforts to improve it. And indeed this is reflected in Plaid Cymru's renewed emphasis on our economic performance in launching Offa's Gap last year. Owen Donovan did a comprehensive analysis of the situation here.

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This is what HMRC say about the information they've now published:

This publication apportions total UK tax receipts, tax credits and benefit payments administered by HM Revenue and Customs to England, Wales, Scotland and Northern Ireland.

It attempts to measure the true economic incidence of taxation, based on the underlying activity, which can often differ from how or where the tax receipts are collected. Actual administrative data is available for capital gains tax, inheritance tax, stamp duty land tax, child and working tax credits and child benefit; for the others, the estimates are arrived at using best available data and statistical techniques, including assumptions and adjustments where necessary. The numbers in this publication do not represent an estimate of the tax revenue that would be raised if each tax was set at the devolved level.

All statistical methodologies have an inherent degree of uncertainty and, for this publication, a variety of alternate methodologies could justifiably be applied, each leading to a different estimate.

The full data are available on the page I linked to above, but I have extracted the cash and percentage figures for Wales for 2012-13. Wales has 4.8% of the UK population.

Based on actual administrative data

Capital Gains Tax ... £64m ... 1.6%
Inheritance Tax ... £83m ... 2.7%
Stamp Duty Land Tax ... £139m ... 2.0%
Child and Working Tax Credits ... £1,545m ... 5.2%
Child Benefit ... £573m ... 4.7%

Based on estimates

Total Income Tax (Gross of Negative Tax Credits) ... £4,763m ... 3.1%
National Insurance Contributions ... £3,689m ... 3.6%
VAT ... £4,170 ... 4.1%
Corporation Tax (onshore) ... £830m ... 2.4%
Bank Levy ... £30m ... 1.9%
Bank Payroll Tax ... £0m ... 1.9%
Fuel Duties ... £1,311m ... 4.9%
Stamp Tax on Shares ... £4m ... 0.2%
Tobacco Duties ... £451m ... 4.7%
Spirits Duty ... £143m ... 4.9%
Beer Duty ... £183m ... 5.4%
Wine Duties ... £139m ... 3.9%
Cider Duties ... £27m ... 8.4%
Betting and Gaming ... £68m ... 4.1%
Air Passenger Duty ... £8m ... 0.3%
Insurance Premium Tax ... £124m ... 4.1%
Landfill Tax ... £50m ... 4.5%
Climate Change Levy ... £35m ... 5.5%
Aggregates Levy ... £22m ... 8.2%
Customs Duties ... £103m ... 3.6%
Other Taxes ... £17m ... 4.8%

Total receipts

Total ... £16,337m ... 3.5%

It's not a pretty picture. We have 4.8% of the UK population, but generate only 3.5% of the UK's tax receipts. In terms of the big taxes, we generate only 3.1% of income tax, 3.6% of NI contributions, 4.1% of VAT and 2.4% of corporation tax.

However it must be emphasized that many of these figures are based on estimates, that these estimates are each based on a particular methodology, and that different methodologies might result in different figures. This why, for example, the Scottish Government produces GERS instead of relying entirely on UK Government figures. It is now open to the Welsh Government to do the same thing if it believes that using different methodologies will present our fiscal situation in a better light.

In terms of political reality, the publication of these figures is almost guaranteed to spur the Welsh Government into producing a GERW because they no longer have the option to hide how bad the situation is from the Welsh people, and will now have to spend effort trying to make the situation appear less bleak in order to lessen the pressure on them to improve things. Some of it will be justified (for the UK Government has no incentive to make things look good for Wales, and may well have made wrong assumptions that need to be corrected) but some of it will be spin. We will have to decide which is which, in just the same way as people in Scotland have to decide between differing interpretations of Scotland's overall fiscal situation. That's politics.

However the importance of the publication of this data by the UK Government (and the intention is to publish them every year) is that official figures are now in the public domain to be analysed, discussed and argued over. It is only by facing up to how bad things are—and what, in particular, is bad—that we can target our efforts towards making things better.

Bad, twice as bad, or three times as bad?

On Wednesday, Gerald Holtham said this in his evidence to a House of Lords Select Committee looking into the economic effects of Scottish independence on the remainder of the UK:

[Wales] is not economically in good shape. It is running a deficit of 25% of GDP.

Wales Online, 4 July 2012

A video of the session is here. At first I thought that he had made a simple mistake, and had meant to say that there was a deficit of 25% between public spending in Wales and taxation accounted as having been raised in Wales. This would be in line with the findings of the Holtham Commission, which (in round terms) produced these figures:

Tax collected by UK treasury ... £17bn
Tax collected locally ... £2bn
Total tax take ... £19bn
Total expenditure ... £25bn
Fiscal deficit ... £6bn

Holtham Report, Section 4.17 onwards

But in this report on Dragon's Eye on Thursday, he repeated the claim in terms which made it very clear that he was talking about Wales' total economic output, i.e. our GDP:

     

We don't have GDP figures for Wales, but GVA is broadly equivalent to it and we can see from this table that Wales' GVA is £45.5bn. So if Wales' fiscal deficit is 25% of this, it would mean it is somewhere in the region of £11bn or £12bn a year ... in other words that it is roughly twice as bad as had been previously reported.

Now of course things probably have got worse since the Holtham Report, based on 2007-08 figures, was published. Companies will be employing fewer workers and be less profitable, reducing the tax take; and more people will be out of work, increasing welfare expenditure. But it seems highly improbable that Wales' fiscal deficit could be almost twice what it was only a few years ago.

And the plausibility of what he's saying is cast into yet more doubt when he goes on to say that Wales' fiscal deficit is the equivalent of us borrowing some £6,000 for every man, woman and child in Wales. As there are roughly three million of us, this would put Wales' fiscal deficit at about £18bn a year ... which is roughly three times as bad as in the Holtham Report.

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Although we don't always see eye-to-eye in political terms, I definitely have time for Gerry Holtham's economic opinions. But I have to say that on this occasion the statements he made at the House of Lords and on Dragon's Eye appear not only to be self-contradictory, but also to contradict the figures in the Holtham Report.

I hesitate to say this, but I wonder if he isn't being rather sloppy with his figures in order to make a political point. There is a huge difference between £6bn and £12bn a year, and an even bigger one between £6bn and £18bn a year.

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I, and I'm sure everyone else in Wales, would like to know what our fiscal deficit is. We know we have a problem, but don't have a hope of effectively dealing with the problem unless we are realistic about how bad it is, which was one of the things the Holtham Commission was set up to do. So my challenge to Gerry is to clarify what he has said this week and how it relates to the figures in the Holtham Report; and if the figures in the Holtham Report are now wrong, to provide us with the evidence to support whichever new set of figures is correct.

Silk and a possible referendum

There have been several comments in the last few days about the Silk Commission and specifically on whether a referendum would be needed before implementing any recommendation it might make on whether the National Assembly should have tax setting and borrowing powers. The situation is perhaps best summed up here:

     Silk Commission split on referendum about tax powers

Obviously the result of the Wales Governance Centre/YouGov poll is interesting. But I think there is a danger of focusing too much on details at the expense of the bigger picture. When presented with a "shopping list" of options it's easy to say you want items 1, 3, 6 and 7 but not items 2, 4 and 8 ... and that you don't care one way or the other about item 5. But sometimes it's impossible to have one thing without also having to accept another thing.

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I've always seen the Silk Commission as a way to resolve a fundamental stand-off between Labour and the Tories.

Labour primarily want the borrowing powers (and a fairer funding formula, although this is not part of Silk's remit) but don't want to be held accountable for how money is raised. In general UK terms, their traditional electoral advantage/selling point is that they're good at spending money. To a large extent, this explains why Labour do well in Wales and in other peripheral parts of the UK that depend on a net fiscal transfer from the more wealthy parts. It's always easier to spend money that, to a degree, has come from somewhere else.

So Labour will obviously say Yes to borrowing and fair funding without a referendum, but are currently holding out for a referendum on tax setting powers (except for a few very minor taxes) because they think they'll be able to get a No in such a referendum. They could eat their cake and have it.

The Tories primarily want the Welsh Government to be responsible for raising some of the money it spends because, again in UK terms, their traditional electoral advantage/selling point is that they will lower taxes. If levels of taxation become a factor in Welsh elections, the Tories believe it will enhance their electoral prospects.

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So the name of the game is to put together a package that includes both, which is what Plaid Cymru and the LibDems have consistently wanted. From my point of view, I want Wales to have some control (even if limited for now) over a wide range of economic levers, because it is by carefully balancing these levers that we can put Wales on course to become more prosperous. Having control of just one or two levers isn't much use. It's like flying a plane: you can't get where you want to go with control over only the ailerons; you need to control the flaps, rudder and throttle too.

If a balanced package can be hammered out and agreed by the Silk Commission—which includes a nominee from each of the four main parties in its seven member team—then there won't need to be a referendum. It would be no more than an expensive and time consuming rubber stamp.

Referendums are only useful if there is a reasonable degree of uncertainty about what the result would be.

The Clown Prince of Comedy Maths

It was reassuring to read in this story in today's Western Mail that Peter Hain has lost none of his blind tribalism. If the Tories support anything it must be wrong, whatever Labour supports must be right ... and if anyone has any better ideas they must be ignored.

The idea in question is that the Welsh Government should become responsible not only for how much it spends, but also for how that money is raised. Mr Hain is against this because public expenditure in Wales is greater than the money collected in Wales through taxation. That's not in question. But the figures he uses to justify his position are. He says:

The Holtham commission calculated that approximately £17.1bn of tax revenue is raised in Wales every year. Total public spending in Wales is around £33.5bn – almost twice the amount raised.

This latest demonstration of the Peter Principle starts by saying something that is true, but then twists it into a barefaced lie. £17.1bn is the total of revenues raised in Wales by UK-wide taxes for 2007-08. This is broken down in Table 4.1 of the Holtham Commission's Final Report, on page 40.

However this figure doesn't include money raised from local taxes, in particular council tax and non-domestic rates. It's not easy to calculate these figures exactly because NDR are put into a common pot for "Englandandwales" and supplemented by the Treasury before being redistributed, but Alan Trench calculated it at just over £1.9bn in this post on Devolution Matters.

The Holtham Report didn't put a precise figure on this, but does put it at approximately that level, for the very next paragraph says this:

In aggregate, total identifiable expenditure in Wales in 2007-08 was £25 billion, around £6 billion more than tax receipts. This is commonplace given Wales’s relatively high needs. Out of the devolved countries and the nine English regions, only London and the East and South East of England have fiscal surpluses.

So where does Peter Hain get his figure of "around £33.5bn" from? He doesn't say. But I can say that, at the very least, he is not comparing like with like. If he relies on Holtham for the first of his figures, he must surely also rely on Holtham for the second. But not satisfied with a six billion difference, he expects us to believe his figure of more than sixteen billion. Any clown that can get his sums wrong by several billion pounds fully deserves all the laughter he gets.

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I don't think Peter really intends us to take him seriously. He wants to get his name into the papers, and the more outrageous his claims the better. That's just his personal style, and it suits his personal agenda. He knows full well that a few die-hards will now quote this supposed £16.4bn fiscal deficit as if it were the gospel truth ... at least until someone comes up with an even more outrageous figure that they can latch onto.

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But there's a much more fundamental point at stake. After claiming that we only raise about half the total amount spent on us, Peter says that:

We shouldn't be ashamed or embarrassed by that. Wales' needs are greater than most other parts of UK.

No. We should be ashamed of it. We should rightly set out to address any fiscal deficit that we cannot support. The real question is how on earth we can be expected to do this without having our hands on the same enonomic levers that other governments have at their disposal.

Taxation is a tool by which we can take control of our own economy and steer it in the right direction. Every government adjusts the levels of a whole range of taxes to make their own economies more successful and to give them a competitive advantage over their neighbours. Each country has different strengths, different human and natural resources, and a different sense of what is important. Until we in Wales are able to use taxation as a tool to play to our own unique strengths, we will always be at a disadvantage.

Peter Hain and his Labour party clearly have no desire to see Wales fight for its own prosperity in this way. Put bluntly, their only solution is for us to resign ourselves to always being dependent on England; but to sugar it by saying that we shouldn't be "ashamed" or "embarrassed" enough to get off our backsides and do something about it. Nothing can or will change until we start taking responsibility for both the income and expenditure sides of the economic equation.

An Anatomy of Economic Inequality in Wales

There is an interesting story on the BBC website about a report on the economic inequalities that exist in Wales. I don't think there's anything surprising about the headline:

     'Social background affects poverty' in Wales says study – BBC, 12 May 2011

Yet this does appear to be a very heavyweight piece of research. A quick skim through it has convinced me that it is going to be well worth reading, and I'm writing this in the hope of persuading others to do so too. Just click the image:

     

The Executive Summary is fairly concise, so I thought I'd copy it as a taster of what's inside.

Executive Summary

The report sets out outcomes in education, employment, earnings, income, poverty and wealth in Wales in comparison to other areas of the UK. The data analysis compares outcomes by gender, age, ethnicity, religion, disability and housing tenure. Analysing inequality within a small country that has relatively low incidence of certain population sub-groups (e.g. ethnic minorities) sometimes limits the degree of detail that can be achieved in the analysis. Despite this, the following key findings emerge:
 

•  The historical productivity gap relative to the UK is continuing to widen for Wales. The industrial and business structure produces weak demand for skills, with individuals’ earnings in Wales being, on average, lower than the UK average. Disadvantage in education, and subsequently in employment and earnings, attaches particularly to young people, those of Bangladeshi and Pakistani ethnicity, and people who are work limiting and DDA defined disabled. Within each of these groups, women are generally more disadvantaged.

•  While overall in 2009 two-thirds of pupils in Wales attained key stage 4 qualifications at National Qualifications Framework level 2 (NVQ level 2 or equivalent) by the time they were 16, the chance of gaining these qualifications was strongly related to family income. Pupils eligible for Free School Meals (FSM) are 2.5 times less likely to get A*-C grades in core subjects than their ineligible peers. People defined as both DDA disabled and as having a work limiting condition have by far the lowest educational achievements of all the equality categories. Both men and women in these groups are 3 times more likely to have no qualifications compared to non-disabled people.

•  People who are both DDA disabled and have a work limiting condition experience most disadvantage in relation to employment. Seventy four per cent are not employed. This is more than 3 times the overall UK proportion of 22%. Women are disadvantaged in employment terms: in almost all population groups women face an above-average incidence of non-employment. This is particularly the case for some ethnic minority groups in Wales, particularly women of Indian, Bangladeshi and Pakistani and Chinese ethnicity.

•  The median hourly earnings of men in Wales (£9.88, measured between 2004/5-2008/9) were just above the overall UK median (£9.81), while median female earnings (£8.04) were only 82% of the UK median, giving a Wales gender gap of 19% in hourly earnings. Using a low-pay threshold defined as two-thirds of UK median earnings, the proportion of employees who are low-paid is higher in Wales than in the UK as a whole. In terms of hourly earnings 26% of employees in Wales are low-paid, compared to 22% in the UK. The incidence of low weekly pay for full-time employees in the UK is 22%, in Wales 28% and for women full-time employees in Wales it is 38%: a ‘gender penalty’ of 10%. Groups whose median earnings fall below the two thirds of the UK median for full-time employees are young people; those of Bangladeshi or Pakistani ethnicity; workers with no educational qualifications, workers who live in social housing and employees (particularly those working part time) in Elementary Occupations, Retail and Customer Services occupations and Personal Services.

•  Approximately a fifth of the Welsh population live in poverty (measured after housing costs). Those living on the lowest incomes are once again the youngest, disabled people, those of Pakistani and Bangladeshi ethnicity and those living in rented accommodation. However, lone parents are the most susceptible group, with almost half living in poverty. Being in work does not necessarily provide a route out of poverty, with 13% of in-work households in Wales living in poverty. In-work poverty is again most prevalent among lone parent households, Asian households and those who are renting. Levels of wealth are lowest among young people, lone parents and single households, non-white households and those with a work-limiting illness or disability. The lower levels of educational attainment observed among protected groups will effect the positions they achieve in society and the resources and opportunities that these positions confer.

•  Overall levels of inequality within Wales are not as wide as in the rest of the UK as Wales has relatively few people who earn the highest salaries or who are ‘very rich’. Those who are among the wealthiest 10% of people in Wales have around £100,000 less total wealth compared to the wealthiest 10% across the UK as a whole. The level of inequality within most sub-groups of the population is generally narrower than that observed across the population as a whole. Inequality between groups therefore does indeed contribute to overall inequality. However, there is a considerable level of inequality between rich and poor within each of these groups, unconnected with and unexplained by group membership.
 

The UK NEP report suggested that there is little awareness of the enormity of economic disparity which ‘runs through society, from rich to poor,” and that this ‘acts as a constraint on any policies designed to contribute to reducing inequality’ (NEP 2010:398). This report provides the most thorough examination of the material consequences of difference undertaken within Wales. The findings in this report represent a significant body of new evidence on socio-economic inequalities. In each case, the evidence connects the distribution of economic outcomes to social characteristics both between and within equality groups. A widespread recognition of inequality, its causes and effects, is a precursor to the use of policy to intervene to interrupt its reproduction.

Additionally, the raw data can be downloaded in the form of spreadsheets from this page.

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Without wanting to be too dramatic, the economic situation in Wales is very serious, and generally worse than it is in other parts of the UK. As a nation, we need to address this and do something about it.

Of course it is right and good that we focus resources on those in our society who are disadvantaged, and that we do everything we can to overcome the effects of poverty ... but that is to deal only with the symptoms rather than the cause. Poverty is the lack of money. We need to become more wealthy and more prosperous as a nation.

I firmly believe that this is something that we must do for ourselves, rather than relying on the richer parts of the UK to bale us out. We have been living like this for much too long. In the short term it is right that we should seek fair funding on the basis of need ... but only in the short term. The long term answer is to make ourselves more self-sufficient, and this will require taking the levers that control our economy, such as taxation, into our own hands. If we shy away from this, how can we expect anything to change? Our economic decline relative to the rest of the UK will continue until we do.

178 Pages

I have to say thanks to both the Western Mail and RMG:Clarity for respectively commissioning and producing such a detailed breakdown of the result of their latest opinion poll. Click the image to open it:

 

For someone like me, the information is invaluable; though it comes with the obvious health warning that with a sample of just over 1,000 the margin of error on some of the more detailed cross-breaks is quite large, so we have to be careful about the conclusions we draw from it.

The headline figures on voting intention will obviously draw most attention, and here the factor that I think is going to prove most significant is the extremely poor level of support for the LibDems. This and other polls are showing it at less than half that of either Plaid Cymru or the Tories, and this is crucial in determining how many regional seats they will win. It means that both Plaid and the Tories will win two seats before the LibDems can win one ... after, of course, taking into account any seats won at constituency level.

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It is particularly satisfying to see the large level of support for devolving the police and criminal justice system and tax setting powers to Wales.

Would you like to see the Assembly gain responsibility for police and the criminal justice system?

Yes ... 56.2%
No ... 30.9%
Don't know ... 12.9%

Would you like to see the Assembly have the power to raise and lower taxes?

Yes ... 55.8%
No ... 36.2%
Don't know ... 8.0%

The percentages are very similar to those in the poll held just before the referendum, as I mentioned here, except that there are far fewer don't knows. This is only to be expected now that any uncertainty about the result of the referendum has been put to rest, and by the sheer scale of the victory. It shows that a clear consensus has developed in favour of further devolution.

The One Wales Agreement did actually make a commitment to:

Consider the evidence for the devolution of the criminal justice system within the contexts of (a) devolution of funding and (b) moves towards the establishment of a single administration of justice in Wales.

And this was indeed "considered" ... but not taken any further than that. Labour were lukewarm about it and effectively kicked it into the long grass. This poll serves as a reminder that the public desire for progress in this area is much greater than Labour's appetite for it. The One Wales agreement was made in 2007, and we have since seen this area successfully devolved to Northern Ireland in the face what might at one time have seemed to be insurmountable difficulties. It is now very hard to justify this being devolved to both Scotland and Northern Ireland, but not to Wales.

On taxation, we know that Labour are very happy to simply decide how to spend the money Wales gets in the form of the block grant, but terrified of having to take responsibility for deciding how any of that money is raised. On this issue, they are very clearly out of step with what people in Wales want.

Responsibility? ... No thanks

I read with interest the interview with Gareth Jones on rail infrastructure investment in today's Western Mail; in particular the differences between Wales and Scotland, as outlined in these extracts:

Unlike in Scotland, the Welsh Assembly Government does not have direct statutory control over Network Rail’s activities.

As part of the Railway Act 2005, devolved responsibility for specifying the outputs from Network Rail – a not for dividend company that owns and manages the UK’s rail network – passed to the Scottish Government, coupled with a transfer of funding from the Department for Transport. This in 2008-09 was £324m – or 11.7% of Network Rail’s UK operation, maintenance and renewal activities.

The arrangement in Scotland is allowing it to support more than £1bn of rail investment in the next five to 10 years through Network Rail’s own financial borrowing powers. While it has a healthy settlement in its block grant it is also directing more funding into rail from its overall budget – around £600m a year until 2014.

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Even with the “high levels” of investment in Wales being claimed, it still would appear that the £200m quoted by Network Rail for 2009-2010, and an assumed steady investment to 2015, only provides £1bn against the £34bn for the UK as a whole over the next controlled spending period. This is 3%, despite the fact that Wales has 5% of the UK population.

Western Mail, 16 March 2011

I'm actually quite pleased to see these figures, for I remember reading that Wales received only 2.5% or 3% of Network Rail's spending, but then couldn't find the source to link to it. The figures confirm that we are losing out on maybe £135m of rail infrastructure spending each year.

But I was much more concerned by this statement:

Back in 2005 the Welsh Assembly was offered a devolved settlement on rail alongside Scotland, but it was rejected. It is understood that WAG officials had some concerns over a transfer of liabilities.

Mr Jones, who stands down as an AM in May, said : “It was a missed opportunity [devolution of rail spend], but I think it should come around again in view of the situation we find ourselves and the comparison we made with the Scottish model.”

Now I wasn't particularly active in politics in 2005, so I don't remember the circumstances, and I'd be grateful to anyone who could point me in the right direction. Yet it seems incomprehensible to me why the then Welsh Government rejected this opportunity. £135m a year over the last six years alone would have resulted in an additional £800m of rail investment in Wales. To put that in perspective, it would probably have been enough to electrify the north coast line to Holyhead.

I can't help but think that the Labour party in Wales seems to have an inbuilt reluctance to take financial responsibility ... and it's costing us dear.

The St David's Day Poll

The BBC never did explain their decision not to publish the results of the annual poll it commissions from ICM until after the referendum had taken place, and although it was mentioned in this article, the answers to the non-referendum questions did tend to get lost in the excitement of the referendum itself ... which is quite understandable. So I thought now would be an appropriate time to look at them. The results can be downloaded from here:

     ICM Poll for BBC Cymru Wales, March 2011

These are the responses to the three usual questions, compared with the responses in 2008, 2009 and 2010.

	Which one of these levels of government do you think presently has MOST influence over Wales?
		2008	2009	2010	2011
	The European Union	8%	8%	6%	11%
	The UK Government	35%	29%	40%	47%
	The Welsh Government	40%	40%	36%	24%
	Local Authorities	10%	15%	7%	6%
	Which level of government do you think SHOULD have most influence over Wales?
		2008	2009	2010	2011
	The European Union	2%	2%	1%	1%
	The UK Government	22%	21%	24%	27%
	The Welsh Government	61%	61%	62%	58%
	Local Authorities	11%	14%	7%	7%
	Which one of these statements comes closest to your view?
	Wales should be / have ...
		2008	2009	2010	2011
	Independent, outside EU	5%	5%	4%	4%
	Independent, inside EU	8%	8%	7%	7%
	Assembly with full law and (some) tax powers	37%	34%	40%	35%
	Assembly with full law and no tax powers	n/a	10%	13%	18%
	Assembly with limited law powers only	26%	21%	18%	17%
	No Assembly	20%	19%	13%	15%

The trend of answers to the first question is very interesting. It shows that people now think the Welsh government has less influence than they thought it had before, with Westminster having correspondingly more influence.

To my mind the explanation for this is that Labour were until recently in power in both Cardiff Bay and Westminster, and it was therefore very difficult for people to distinguish between what Labour's MPs and AMs were doing. This was not helped by Labour's claims about the economic benefits that devolution would bring, particularly in increasing Wales' GVA per head relative to the UK as a whole. It led people to think that the Welsh government was more responsible for the economic performance of Wales than was in fact the case. But in fact nearly all the levers that effect our economy were and still are very firmly in the hands of the UK government at Westminster.

At a time when very large sums of public money were being spent, it is understandable that people thought the money that was allocated to things like new schools and hospitals was because of the Welsh government at Cardiff Bay. But Wales was only responsible for allocating how the money it was given by Westminster was spent, not how much it was being given. Now that the effects of the financial crisis are beginning to be felt, is it hardly surprising that people in Wales are beginning to realize that the decisions made by Westminster have a lot more importance than they previously thought. And of course the fact that the UK government making those decisions is now a coalition of the two parties that are not in government in Wales makes the distinction much more apparent than it was before.

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But even so, it is remarkable and encouraging that the people of Wales still think that our own government in Cardiff Bay should have most influence over Wales, as opposed to Westminster (with the other two options attracting negligible support). Yes, the margin has gone down a little, but is comfortably more than two-to-one. This shows that there is still plenty of appetite in Wales for more areas of responsibility to be devolved from Westminster to the Senedd. Two very obvious things are police and the justice system, which is supported by 57% with 29% against according to the rmg:Clarity poll produced last week for the Western Mail. Additionally, the poll I mentioned in this post found that 59% thought that decisions about welfare and benefits should be devolved to the Assembly, with only 23% thinking these decisions should continue to be made at Westminster.

We would be very unwise to ignore this, particularly because of the news today that massive cuts are going to be made in policing which will make the case for amalgamating smaller forces all the more urgent. Now would seem to be the perfect time to look at either an all-Wales police force, or some way of combining the administrative and technical functions of the four Welsh forces to make better use of money and resources. On top of this, the ConDem coalition is seeking to replace police authorities with elected commissioners against the wishes of the majority in Wales ... and are having great difficulty in finding a way of holding these commissioners accountable in Wales. One obvious solution is to devolve policing to Wales and let us decide how to make the police democratically accountable.

However it would be wrong to ignore that fact that the percentage in favour of the Welsh government having most influence over Wales has gone down, even if only slightly. I think the reason for this is an increased sense of dissatisfaction with the way Welsh governments have dealt with some crucial areas which are devolved to Wales. As we all know, some aspects of our education system are deteriorating ( ... although not all, because the Foundation Phase and Welsh Baccalaureate are likely to be great improvements). So are some aspects of our National Health Service. Wales has only ever known devolved government in which all or part of the policy agenda has been set by the Labour party, so it is inevitable that people should be asking whether the way some things are done in England is better than the way we have chosen to do them here. But the answer to that is for us not to blindly elect yet another Assembly in which Labour are the biggest party in May.

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Finally, we turn to the question about which governance model is right for Wales. In some ways this question is now out of date, since we have just given our approval to the Assembly getting primary lawmaking powers in the areas devolved to it. But the trend shown over the past few years is still very informative, with fewer of us wanting to abolish the Assembly and fewer of us wanting an Assembly with only limited lawmaking powers. Now that we are going to have primary lawmaking powers, I'd expect there to be a shift in expectations in next year's poll. Most people who want Wales to move forward will prefer to take one step at a time, rather than two.

So the next big question for us is whether the Assembly should have tax setting powers, especially because this always has been and still remains by far the most popular model. Yet in just the same way as Labour did all they could to avoid moving to an Assembly with lawmaking powers, by setting the requirement for what most people now see as an unnecessary referendum; they seem just as reluctant to stop us moving to an Assembly with tax setting powers. It seems clear from what people like Rhodri Morgan and Carwyn Jones have said recently that Labour want to shy away from the responsibility of the Welsh Government being responsible for raising even a modest part of the £15bn it spends each year; and in my opinion, this is why they are so keen to insist on placing yet another obstacle in the way in the form of yet another referendum.

Now I agree with Carwyn Jones that our first priority should be to get a fair funding formula for Wales as a replacement for the Barnett formula. If he had shown any degree of foresight, he would have made sure that the Labour Government in Westminster replaced it when they were in power. Instead, Labour ridiculed us for making the missing £300m a central plank of Plaid Cymru's manifesto in 2010 ... only to have undergone a dramatic conversion now that Labour aren't in power. Leadership requires greater foresight than he or Rhodri Morgan before him have shown.

The Tories, now they are in charge at the Treasury, are doing exactly what Labour did when they were in charge. They are telling us that they think Wales is fairly funded, and that we have nothing to complain about. So we would be fools to expect any major change to the way the block grant is calculated. Instead, we would be wise to look at what is happening in Scotland, where the basic recommendation of the Calman Commission was to reduce the block grant, but make Scotland responsible for raising whatever it thinks it needs to make up for it by setting its own rate of income tax, together with responsibility for a few minor taxes.

With a few modifications (improvements, in my opinion) the Holtham Commission has recommended that the Welsh block grant should be similarly reduced and that the Welsh government should set a level of income tax to make up for it. It may not be perfect, but it is a practical and workable step in the right direction, because it is irresponsible for any government to simply spend money without accepting any responsibility for how that money is raised. It is clear to me that Westminster (whether the Tories or Labour are in power) is not going to reform the Barnett Formula without at the same time addressing how each of the devolved administrations in the UK can become responsible for raising at least some of the money they spend. And should Labour in Wales try to backtrack on this issue, it is worth reminding people that they were one of the parties that set up the Calman and Holtham Commissions. Why spend all that money on them only in order to ignore what they recommend?

There is no great issue of principle at stake that would require a referendum on tax setting powers. Every local council can set the rate of taxes or levy a precept. The Assembly already has responsibility for setting the multiplier that determines non-domestic rates for businesses. So tax setting powers for the National Assembly is an already overdue step, and something the people of Wales have the right to expect to see implemented.

That elusive Welsh Tory report, for all to read

A big thank you to Dylan Jones-Evans for sending me a copy of the report mentioned in the previous post. It's now available for anyone to read and download here:

     

I haven't done any more than skim through it as yet, but at 29 pages each in Welsh and English, it's rather more than just a press release. Nobody can doubt that Wales faces some very serious economic challenges, and I think we should welcome input from across the political spectrum.

Who knows, we might even be able to work out some sort of broad consensus about what we in Wales can do to improve our economic performance ... though that will be a challenge in itself in the run up to the Assembly elections in May.

An elusive, or non-existent, Welsh Tory report

Earlier this week, Dylan Jones-Evans announced that a body called the Welsh Conservative Economic Commission had released a report on the future for the Welsh economy entitled The Challenge. And—no doubt as a result of the press release they had been sent—the Western Mail duly turned it into a story of its own.

I was very interested in this. The first bullet point on DJE's list, and the main focus of the Western Mail's article, was that the Tories would seek to vary the rate of corporation tax in the different devolved administrations. This is something that I would certainly welcome and have myself advocated, but something that requires rather more thought than a bullet point on press release. DJE had first raised the subject in this post on his blog in June last year, and I picked up on some of the issues in this post on Syniadau. So he and his colleagues have had a good few months to think things through, and I was hoping that the report would reflect this.

I was not the only one to leave a comment asking DJE for a link to it, so that we could download it and read it for ourselves. But, at least so far, he has not done so. He's just ignored the requests and turned to write about other things.

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It's all rather strange. Does this "report" actually exist, or was it just a headline grabbing stunt: something to make it appear that the Tories have a coherent set of well thought-through ideas on the Welsh economy? I don't want to unfairly single out the Tories, for I get equally frustrated when other parties—including Plaid—have issued a press release on a particular policy area, but not backed it up with more detailed information. But in this case it has been called a report, given a name, and supposedly released.

So where is it?

Belgium is "clinically dead"

These are the rather dramatic words of Flemish CD&V MP Eric Van Rompuy—brother of the Herman we know rather better—as reported here:

     Belgium coalition talks back to square one

To update the situation from my last report, the technical talks to try and find a way for each region of Belgium to set and retain a proportion of its own income tax have broken down. Early on, it had become fairly clear that the Parti Socialiste and the Green parties would not budge at all on corporate taxation, but they had appeared to accept the principle of reform of personal income tax, which is at present collected by the federal treasury and distributed to the three regions ... in much the same way as currently happens in the UK.

As I noted before, to split income tax half-and-half as the Flemings want is pretty much what the Calman Commission proposed for Scotland (which the ConDem government in Westminster has committed itself to implement) and what our own Holtham Commission has proposed for Wales. So it looks like the PS is digging its heels in on something that hardly seems very radical on this side of the Channel.

It's hard to say whether the impasse is just brinkmanship or the final collapse. The rhetoric still seems to be more designed for the media than for constructive, down-to-business negotiation ... and the mind boggles at quite what sort of "garden gnomes" Bart De Wever has been offered by the PS.

     

The normal mechanism for resolving a situation like this would be to hold fresh elections. But all the signs are that the French-speaking vote would harden around the PS, and that the Dutch-speaking vote would harden round the N-VA. The second largest party in Flanders, the Christian Democrat CD&V, fully supports the same sort of fiscal autonomy as the N-VA ... and that means a new election would be pointless. The issues to be resolved would be exactly the same.

Personally, I think a deal will be done. The only alternative is for Belgium to split, which would mean that Wallonia would be left with 100% fiscal autonomy. So if they are concerned about losing out financially, it is surely better to retain a degree of tax redistribution through a central Belgian treasury rather than lose it completely.

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Yet politics is not always as pragmatic as that: pride, principles and personality also come into the equation and sometimes people anxious to save face end up by cutting off their noses. But that said, if Belgium does split I think separation will turn out to be a very good thing for Wallonia in the longer term. The socialist politicians in Wallonia have been worried about Flanders with 6m people using a different tax regime to unfairly compete with their smaller population of 3.4m, but it is nearly always the case that the smaller country is able to benefit more from any differential with its larger neighbours. Think Luxembourg; think Switzerland ...

... and think what another country with a population of just over 3m people might learn from their example.

Déjà vu ... now in French and Dutch too

For those of us who are following the situation in Belgium, I thought this article from De Tijd shows striking similarities to the discussions of the Calman Commission in Scotland and our own Holtham Commission in Wales:

Parties start discussions on new financing act

The work group assigned to draft a new financing act set to work yesterday. The seven parties deliberating on state reform scrutinised the principle agreement for an amended financing act, which was concluded at the end of August. The principles include, among others, more fiscal autonomy for the federated entities without structurally impoverishing the regions. The latter was discussed in depth yesterday.

The Flemish parties are in favour of more fiscal autonomy for the regions, believing it could be done through a transfer of a portion of personal income and/or corporate tax for the regions, making them responsible for their own income and fiscal policy. In their view regions with a good policy must be rewarded, but those with a poor policy will be penalised. The possibility of the corporate tax being transferred to the federal states is however minimal. The Flemish parties SP.A and Groen! made it clear yesterday that they were not in favour of such a transfer, making rebates on corporate tax more of an option.

As far as a partial transfer of personal income tax is concerned, all Flemish parties seem to be in agreement. The Flemish Nationalists of N-VA defend the most far reaching fiscal autonomy. They want to scrap the existing dotations to the regions and communities and offer the regions and communities responsibility for the collection of a large portion of corporate and personal income tax.

The French-speaking parties are keeping a distance, pointing to the fact that as yet the regions could grant a 6.75 percent rebate on personal income tax, but that they failed to use it to the full. If an agreement is reached on the new financing act during the course of next week, an independent institution will calculate the financial impact on each region. Should the work group manage to make significant progress next week, government formation could be addressed.

De Tijd, 23 September 2010

The issues are almost exactly the same for them as they are for us in Wales and Scotland. The obvious main taxes to devolve are personal income tax and corporate taxes. There seems to be more of a consensus for devolving a proportion of income tax ... but more of a resistance to devolving corporate taxes, particularly from the left. My view is that it's essential to be able to control both, because it is only the balance between different sorts of taxation that enables government to have effective control of the economy.

However the sentence about "rebates on corporate tax" as an alternative to devolving those taxes does strike me as interesting. I've no doubt that details will unfold in due course. However, what emerges might well be a model for how we deal with our own corporation tax. As I've commented before, one of the few good things about the ConDem coalition's programme for government is the promise to consider a mechanism for reducing corporation tax in the north of Ireland. But a different rate cannot be imposed by central government, it can only be done within the parameters set by the Azores Ruling, which mean that the rate has to be set by the devolved government itself and that it must bear the financial consequences of its decision. But there is no reason why the mechanism that is eventually decided should not be applied to Wales and Scotland so that we can make our own decisions about corporation tax as well.

So it appears that Belgium has something to learn from us, and that we have something to learn from them. Perhaps my Dutch-speaking friend in Plaid's research team (you know who you are) would like to be a fly on the wall for this one.

Salmond looks up in Euskadi

Alex Salmond has just paid an official visit to Euskadi, and has in particular singled out the tax arrangements that the Basque Autonomous Community has with Spain as a model which could be applied to Scotland.

Basque tax system sets example for Scotland

Scottish First Minister Alex Salmond with the President of Iberdrola in Bilbao

Scottish First Minister, Alex Salmond, during an official visit to the Basque Country on Monday, took the opportunity to call for a similar tax system in Scotland to that established in the Autonomous Community. The First Minister believes the system has enabled the Basque Country to maintain an economic situation which is currently the most favorable in the Spanish state.

EITB, 13 September 2010

It is certainly true that the Basque Autonomous Community is the wealthiest parts of Spain in terms of GDP per capita, and the headline news there today is that its exports have risen 34% on the year. The BAC is responsible for setting its own taxes, which it retains, and then negotiates a settlement with the Spanish State for services that are provided centrally. In this respect it has greater autonomy that Catalunya.

I read an interesting article about the parallels between Euskadi and Scotland on Joan McAlpine's blog here:

     From the ashes of Guernica: what we can learn from the Basques

This is a short extract which describes the fiscal arrangements.

The Basque country, which enjoys the widest and deepest autonomy of all the Spanish regions, is an attractive model for Scotland.

Holyrood politicians send all taxes south then squabble over how to cut up a shrinking cake returned by Westminster. The Basques set, raise and collect all their own taxes, then negotiate an annual “cupo” with Madrid for central services, usually around 12%.

You might think anyone keen to extend Scotland’s economic powers should avoid discussions of an Iberian nature. Spain is in meltdown, with Europe’s third worst deficit after Greece and Ireland. Austerity measures so far announced are unpopular. Savings banks are collapsing. The federal socialist government want to restructure the labour market, to end infamous “Spanish practices”. Red flags will be raised in Bilbao as well, But while the Basque country is not immune to the global crisis, it is better placed to survive. The area outperforms Spain on nearly every indicator. Its GDP per capita is 34% higher and it has half the rate of unemployment. The credit agency Standard and Poor’s gives the Basques a better rating than the central government – because of its low debt burden, wealthy, diverse economy and “special system framework granting the region control over most of its tax revenues”. That’s a recommendation – CBI bosses take note.

The Basque arrangement is similar to the system devised by the economists Andrew Hughes-Hallett and Drew Scott, which forms the basis of the Campaign for Fiscal Responsibility. Business leaders like Jim McColl and Tom Hunter and trade unionists such as Campbell Christie have backed the campaign, believing that fiscal powers offer Scotland its only option of growing the economy. The tax regime would be designed to meet specific, local, needs. The Basques for example, set a lower corporation tax than the rest of Spain and have borrowed to upgrade their infrastructure.

The two things I would particularly like to highlight are lower corporate taxation and the ability to borrow money to invest in infrastructure. These are two essential elements of what I, and Plaid Cymru, see as the main powers necessary to reverse the economic decline of Wales caused by decades of over-centralization in the UK economy.

And although there are parallels between Euskadi and Scotland which I certainly wouldn't want to detract from, I think there are even more similarities between the Basques and the Welsh. The Basque Autonomous Community is very slightly smaller than Wales has a similar heavy industrial heritage. The language situation is also very similar.

It is remarkable how their degree of autonomy has led to such prosperity, and provides an example of what we in Wales could do if we had control of our own economy.

Reacting to Holtham

I've found the reaction to the Holtham Commission's report interesting. There was a good selection of differing views on last week's Dragon's Eye:

     

It's probably fair to say that a good number of people think this report has come at just the wrong time ... or at least that the second part of it has. The recommendations contained in the first part of the report over replacing the Barnett Formula with a formula based on need remain unchanged, and the report has also incorporated the Commission's model for how a needs-based formula could be calculated. But the second part looked beyond the immediate problem at how Wales should be funded in future.

Betsan Powys might well have a point when she said that the range of political reactions to the second part has actually resulted in people from all sides of the political spectrum reaching a remarkable degree of consensus about the first part. Personally, I think the consensus was already forming, and that the only reason why the parties were not in open agreement was because of the election in May. But I suspect that the force behind that consensus is not primarily one of fairness or principle, but simply of wanting to get more money. If operating on the same principles happened to result in Wales getting less money, we can be sure that most politicians would find some new principles. But that is the one thing we cannot afford to do. If anything is clear from the interview with Gerry Holtham, it's that the power to tax is a fundamental part of government, and therefore the principle of having a Welsh Government that can just spend the money it is given without being accountable for how that money is raised is flawed. Even the most local level of government can set its own precept, which is then collected as part of Council Tax.

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But against that backdrop, politicians from across the political spectrum seem anxious to say how much they are opposed to the Assembly getting tax varying powers, even though they are all in favour of devolution and even of extending the devolution settlement we have. Glyn Davies and Rhodri Morgan are two who made their opposition to tax varying powers perfectly clear.

Rhodri Morgan justified his position by saying that if the 1997 referendum had included an option on tax varying powers it would certainly have been lost. But I have to question that. As I see it, the issue was that we were being offered a very limited form of devolution not because we did not have the appetite for anything more, but because a tranche of Labour MPs were determined not to let us have anything better. It was very hard to stir any great enthusiasm for something so watered down, and that is why the turnout was low.

But, irrespective of what may or may not have been the case then, it is very clear what the situation is now. In a YouGov poll last year, this question was asked:

To what extent, if at all, do you agree or disagree with the following statement?

"The National Assembly for Wales should have the same level of powers as the Scottish Parliament."

Strongly agree ... 35%
Tend to agree ... 28%
Don't know ... 9%
Tend to disagree ... 15%
Strongly disagree ... 13%

YouGov, 23 October 2009

The margin of agreement was 63% to 28% ... over two to one. By clicking the link for the full data, we can see that supporters of every party agreed with the statement: the Tories by 54% to 42%, Labour by 68% to 24%, the LibDems by 59% to 34% ... and Plaid by a margin that makes me blush with pride.

So doesn't it seem rather odd that people like Rhodri Morgan and Glyn Davies should be so adamantly against what the people that vote for their parties want?

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In the programme Betsan Powys also said that the polls commissioned by the BBC showed that about a third of people in Wales wanted a Senedd with powers of taxation ... and that this high a figure was unexpected. I have to tell her that she should be very much more surprised, because that was only those who want Wales to have powers of taxation as a devolved nation within the UK. It excluded those who want Wales to set its own taxes as an independent country.

These are the options and percentages for the past two years:

February 2010 (with 2009 in brackets)

Wales should become independent, separate from the UK and the European Union ... 4% (was 5%)

Wales should become independent, separate from the UK but part of the European Union ... 7% (was 8%)

Wales should remain part of the UK with its own Assembly which has full law making powers and some taxation powers ... 40% (was 34%)

Wales should remain part of the UK, with its own Assembly which has full law making powers BUT NO taxation powers ... 13% (was 10%)

Wales should remain part of the UK with its own elected Assembly which has limited law making powers only (as it has now) ... 18% (was 21%)

Wales should remain part of the UK and the Assembly should be abolished ... 13% (was 19%)

ICM, February 2010 and February 2009

So the latest margin in favour of taxation powers stands at 51% to 44%. In fact the answer to this question was very close to the 52% to 39% margin for those who said they would vote in favour of primary lawmaking powers in the same poll. So Betsan's "third" is considerably short of the mark. The appetite for the Assembly to have some tax setting powers is very much stronger than she and her colleagues thought.

In fact the question has been asked, although with slightly different options, for several years. The margins in favour of the Assembly having taxation powers were:

55% to 41% in 2006
47% to 44% in 2007
50% to 46% in 2008

I'm showing these figures to demonstrate that the appetite for powers of taxation is much stronger than some people would have us believe. I fully accept that people like Rhodri Morgan and Glyn Davies are against powers to set taxes and I respect their candour, but I have to say that I find the attitude of those who do want taxation powers slightly more difficult to understand.

Apart from in 2009, the BBC's annual poll has shown that more people are in favour of tax varying powers than are against. So those of us who want to see it shouldn't be frightened off saying so for fear that it will make next year's referendum on primary lawmaking powers harder to win. First it won't really make any difference one way or the other but, more importantly, I can imagine those who want to see it backing themselves into the position where they are kept on the defensive. I don't want people in Plaid Cymru to feel they have to answer the "slippery slope" question by saying, "Let's not talk about tax, this referendum is only about primary lawmaking powers."

It's true, but it's not a good enough answer. When asked, we should be bold enough to say that this referendum is just one step on the road to the Wales we want. When asked, we should say that we are working towards devolution of not only taxes and borrowing, but of police, justice and prisons, of large scale energy, and of the welfare and benefits system as well. As I noted here 59.5% of us want us to make decisions on the benefits system in the Senedd, compared to only 22.7% who want those decisions made in Westminster. We need to display the courage of our convictions, for we know where we want to go and people will follow us because we have a coherent vision. Look again at how Betsan characterized the "drama of the day" shock reaction of other parties to what the three economists said in the report ... but Plaid's reaction was to point out that they have now said something not dissimilar to what we've been saying for a very long time.

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So if Yes campaigners from other parties want to explain that they are only in favour of primary lawmaking powers, but may or may not take a position on further devolution at some point in the future, we should let them do that explaining for themselves. But what is the point of us in Plaid Cymru—and those in other parties who have said that they want to take devolution yet further—trying to hide what we believe?

Thoughts on Holtham

I've just read the Holtham Commission's final report. As with the first report last year, it's clear and thorough, yet it didn't strike me as being a particularly groundshaking piece of work. When I'd finished reading it I found myself asking, Is that all?

 
   

  

Gerald Holtham	David Miles	Paul Bernd Spahn

 
   Fairness and accountability: a new funding settlement for Wales
   Summary
   Full text

 
1. A fair funding formula

On the subject of replacing Barnett with a needs based formula, the report couldn't be clearer. In fact everything was already clear in the first report, and the Commission then published a working paper which outlined how a needs based-formula would work in December last year. The basic indicators are:

• Number of children
• Number of older people
• Ethnicity
• Income poverty
• Ill health
• Sparsity

And these come together in this rather neat graphic showing how they vary between Wales, England, Scotland and Northern Ireland:

    

But—perhaps tacitly acknowledging that there are political difficulties in implementing a new formula because of how Barnett benefits Scotland—the report repeats its recommendation that a floor be put in to protect Wales until a proper formula is agreed. Despite both Peter Hain saying, and Peter Black believing, that a floor has been put in place, it hasn't. The report also says the 114% floor they suggested before was deliberately conservative.

The political impasse will be hard to break. In my opinion it can only be broken in one way: to acknowledge that Scotland will get substantially less money on a needs-based assessment, but to make up for that by giving Scotland a fair share of the revenue from North Sea oil and gas in its waters in compensation. At present Barnett is trying to be two different things at the same time, and until the two things are separated, there will never be an acceptable political solution. But this will involve the UK government having to concede the principle that—in part at least—it is Scotland's oil and gas. That is a big bullet for the UK to bite.

 
2. Borrowing

This is the most uncontentious part of what the report has to say. Wales already has a £500m "overdraft" facility for short term balancing and, perhaps by coincidence (or perhaps not) the Treasury announced yesterday that Wales would be able to access the small discrepancy between what the Welsh Government spends each year and what it is entitled to spend: the year end flexibility that equates to about £200m. Taken together, these should cover short-term fluctuations.

The block grant already includes elements for capital expenditure, but there is no scope for independent long-term borrowing for infrastructure improvement. Up to now the Treasury have resisted this on the grounds that Wales and Scotland do not have a guaranteed income to service any long-term debt because each comprehensive spending review is only for three years. It was on this ground that the Treasury made such a fuss over the funding for the new Forth bridge in Scotland, effectively trying to tell the Scottish Government to do it by PFI or not at all. Of course the idea that Wales and Scotland might not get any money in the next CSR was laughable, and the report poured scorn on it.

So what is being recommended is that borrowing should be allowed only for capital expenditure. Holtham envisages that this would be on the same basis as local authorities can borrow now, namely through the National Loans Fund or Public Works Loan Board because (at Treasury rates) this is the cheapest way of doing it. I won't question that this is cheaper than borrowing commercially, but it fails to take account of the Treasury's eagerness to cut back on all borrowing. It may well be that other sources will be the only way of actually getting money, so I'd urge Westminster not to prevent us going to commercial lenders. We might well be able to devise new methods of borrowing that are similar to PFI in that the borrowing is not classed as public borrowing, but ensure that what would otherwise have been private profit for the PFI consortia is recycled back to the public purse instead.

 
3. Setting tax rates as well as spending money

Where this final report breaks new ground is on the ways in which the Welsh Government can be made responsible for not just spending money, but for how the money it spends is raised. The point of principle is that any body that spends large sums of public money should also be at least partly responsible for justifying how that money is provided.

After considering the pros and cons of each form of existing tax, it draws very much the same conclusions as Calman: that income tax is the best tax to be devolved. In two respects what Holtham proposes is better than Calman (and in my opinion should therefore apply to Scotland as well, though the report doesn't say that). The first improvement is that instead of "everything but 10p" applied to both tax bands (basic and higher ... but I guess also the new rate as well) it should be half of each tax band. The second improvement would be that the Welsh Government could set different rates for each tax band.

I have to say again that there is a basic flaw in one of the premises in the report, which I first commented on in this post. Holtham takes it for granted that a person's tax rate would be based on residence. I believe it would be much better to base it on workplace. I find Holtham's idea that Wales might set a lower higher rate in order to encourage high earners to live in Wales rather bizarre.

I'm also slightly disturbed by the idea that the differential of either rate form England should be no greater than 3p. I say that based on what happened in Scotland when the SNP (with LibDem support) wanted to abolish Council Tax and replace it with a Local Income Tax. As I read it, they would have done so if they could do it within the 3p variable rate ... but the sums didn't quite add up. They would probably have worked with 4p. So the proposed 3p limitation very much ties the hands of any government that wants to do something radical with the tax system.

As with Calman, there are several more minor taxes that could be devolved, but the big question is over corporation tax. This is where I find the report rather too tepid. It's definitely a candidate tax, but the final recommendation is a rather weak:

The Assembly Government should seek discussions with the UK Government and the other devolved administrations about the feasibility of devolving corporation tax.

But I suppose it's better than ruling it out altogether. We know that the ConDem coalition wants to reduce CT in Northern Ireland, and therefore it must make sense to establish a mechanism for a variation in Wales and Scotland too.

 
4. Contol of more than one lever

But the big criticism I have of the report is that it appears to me to be missing the point of what taxes can be used for. The whole section on tax is predicated on the idea that if a government puts up rates of tax it will have more to spend on services, and that if it lowers rates of tax it will have correspondingly less to spend ... but that treats the economy as something static.

I see tax as a tool to give the Welsh economy an international advantage. So if we, for example, by lowering business taxes encourage more companies to locate in Wales, or to expand their existing operations in Wales rather than in another country, we will have more jobs. What we lose in company taxation we gain by having more people paying income tax and fewer people out of work and on benefits.

So, at a minimum we need control over at least over two levers in order to gain an overall benefit. Control of some income tax alone just results in the one-dimensional:

higher tax rates
= more to spend on services (or vice-versa)

Adding the extra lever results in the two dimensional:

lower business tax rates
= more jobs
= more income tax
= the same to spend on services

But the vital third dimension is:

lower business tax rates
= more jobs
= more income tax and fewer people on benefits
= more to spend on other services

Holtham says yes to the first lever, maybe to the second, but doesn't even contemplate us getting any benefit from the third. That's what I find so disappointing about it. Yes, I've presented it in a simplified way, and I don't want to imply that it's as easy as that. Like flying a plane, you need a lot of skill and coordination to keep it in the air, let alone to get it to fly in the direction in which you want to go.

In this context it is worth asking why the Scottish government has never used its one lever to vary the basic rate of income tax by 3p. To my mind it is only because there is nothing with which to balance that variation. You can't get a plane to turn using just the rudder, you need control of the ailerons and elevators as well.

 
5. Political reality

OK, so it's not as much as I would have wanted, but it's probably a good reflexion of what any current UK government is likely to give us. It would be unrealistic to expect Wales to get much more fiscal autonomy than is currently being proposed for Scotland on income tax or Northern Ireland on corporation tax. But there really is no reason why we should expect less than they are getting.

But how do we implement these proposals? Or are we not going to implement them at all ... since there is a feeling among some commentators that this report will simply be kicked into the long grass? My feeling is that we must implement these recommendations in some form.

The report runs through what things can be implemented simply by agreement between Westminster and the devolved administrations, and concludes that nearly everything can be done by agreement; but that tax setting powers is a change that will require ratification in a referendum in the same way as the Scots were asked a separate question on tax-varying powers in the 1997 referendum.

I have to say that I question the need for this. There is no suggestion that the Scots are going to have to approve Calman in a referendum, so why should we have to go through it in Wales? As I said before, the previous tax varying powers for Scotland were so inadequate that they were never used, and could never realistically be used. What the Holtham Commission are proposing will give Wales broadly similar fiscal responsibilities as are (according to the ConDem coalition) now going to be given to Scotland without a referendum. Nor is anyone suggesting a referendum in Northern Ireland to set a mechanism to vary the rate of corporation tax there. Why treat Wales differently?

In the end, the over-riding principle is No representation without taxation. Spending cannot be done in isolation from the responsibility of having to justify to taxpayers why their money is being spent. This set of proposals is way short of the fiscal responsibilities I want us in Wales to have. So let's not set another hurdle for us to jump over before we can take this first step towards fiscal responsibility.

It's always nice to be agreed with

On 21 June, I wrote this paragraph in a post entitled The Beginning of a Regional Tax Policy?

Yet it is undoubtedly a good decision, because the UK has a much greater inequality of wealth between its richest and poorest parts than any other EU member, as we can see on this map. As I have said on many occasions, this is a structural problem with the UK economy (indeed the UK as a whole, for over-centralization of the economy goes hand-in-hand with political over-centralization) and therefore needs to be addressed in more radical ways than have been attempted up to now. This will be the first time—so far as I'm aware—that different tax rules will apply to different regions of the UK. It will be a ground-breaking departure from previous policy.

On 23 June, Russell Lawson of the Federation of Small Businesses wrote this on a post on Wales Home:

Certainly the mechanism of applying the NI holiday to only some of the nations and regions of the UK is a significant policy. On the one hand the UK has a much greater inequality of wealth between its richest and poorest parts than any other EU member which this is a structural problem with the UK economy and therefore needs to be addressed in more radical ways than have been attempted up to now. This will be the first time that different tax rules will apply to different regions of the UK, and is therefore a ground-breaking departure from previous policy.

His next paragraph was this:

On the other hand, however, businesspeople in one of those regions in the south east corner of England might well be pretty angry that the new party in power had gone back on its election promise ("any new business will pay no Employers National Insurance on the first ten employees it hires during its first year," Conservative Party manifesto).

My preceding paragraph had been:

If I were a Tory businessman in one of those regions in the south east corner of England, I might well be pretty angry that my party had not only gone back on its promise, but done so in a selective, arbitrary way.

And before that I had quoted the relevant line from the Tory manifesto.

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I learned some years ago not to be upset when someone takes your ideas and presents them as their own. Though when that happens I normally expect the idea to be presented back to me in slightly different words. On the contrary, I welcome it as a sign that the person not only agrees, but has taken the idea on board for themselves.

The reason I blog is to try and give others good ideas. So I'm delighted that Russell agrees with me on this matter. I wonder if he agrees with me on other things? Perhaps we should exchange a few emails.

The Budget

I suppose I can hardly escape making some comment about yesterday's budget, but the comment is a simple one: that we got what we expected.

I can't believe that anyone, other than those who were persuaded to vote Tory because of it, believed the Tories when they said they had no intention of raising VAT. People who would have voted Tory anyway knew they would, as did those that would never vote Tory. But VAT isn't the big issue.

Nobody doubts that we are in a financial hole. The Tory and LibDem mantra is that it is a hole of Labour's making, but that's just a soundbite. I think it's a hole that Labour could have done more to help us avoid—by less reckless spending and by better management of the economy and regulation of the banks—but the main reason for the mess is that the Western World had a banking crisis which involved governments having to bail out the banks to stop them collapsing, and then pump cheap money into them to persuade them to start trading again, most of which they pocketed. Nobody can blame Labour for all of that ... not least because the other parties would have done pretty much the same.

No, the bigger picture is that we are in a hole and that we have to pay to get out of it. The choice is how we get out of it. The Tories went into the election on the platform of doing it by drastically cutting public services (whatever euphemisms they use to disguise it) rather than raising taxes. That is what they duly delivered in yesterday's budget: the ratio is about 80% cuts in services to 20% increases in taxes. In my opinion that is precisely the wrong way round. Yes, there are cuts that can be made, but we should have looked to increase taxes as the main way out.

Which taxes? For me, the answer should be to increase direct taxes, because these are directly linked to the ability to pay. That means income tax and employees' national insurance. It means that those who are still in work pay, but those that are thrown out of work by the recession (whether first or second dip) do not. The diagram below, from the Budget Statement (download it from here) shows just how large a proportion of government income comes from these two sources.
 

     

So a modest increase in income tax (employees' NI is in effect income tax by another name, but it does not cover those whose income is unearned, which is why it is better to increase income tax) would be the most effective way to pay for getting us out of the mess. Income tax is now ludicrously low. When the Tories last came to power in 1979 the basic rate was 33% ... since then it has been reduced all the way down to 20%. But it seems that no government, either Labour or Tory, will contemplate increasing it again. Gordon Brown even took away the 10p starter rate simply in order to reduce the basic rate by 2p, announcing it as if he had pulled a rabbit out of a hat and expecting praise for it. When he realized that he had made the poor poorer, he corrected it by giving not only the working poor, but everyone else who paid income tax as well, a further tax break ... which was paid for out of borrowing. Borrowing money to give people tax breaks is obscene.

It should be pretty obvious that because the level of borrowing is such a problem, the only sane thing to do is put the basic rate up again. But of course the Tories won't do that on principle, and the LibDems wanted to go even further and give every basic rate taxpayer a bonus by increasing the threshold to £10,000. At least the LibDems proposal would have benefited more people on low wages by taking them out of tax, but to my mind that would only be fair if the basic rate of tax went up so that the net take was not reduced.

I can only conclude that increasing the basic rate of income tax has been taken off the political agenda by a right-wing press (and a few pressure groups) who have managed to convince the electorate that everything can be paid for if we attack "waste" and "bureaucracy" and "benefits scroungers" instead. It worked. Neither Labour nor the LibDems dared propose it because it would be a vote loser. We have ended up with what middle England voted for.

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So is that unfair to Wales? Make up your own minds. In the end it boils down to what sort of society we want to live in. We can have a low tax, low public services society or a society in which we pay for the public services we value.

But first we must value our public services. I'm certainly not saying that we should pay for all the things we pay for now, but I am saying we should decide what public services we want, and be prepared to pay for them and hold those we elect directly accountable for them. Public services should be public, rather than farmed out to the private sector or to quangos or "arms length" bodies.

To caricature, I would much rather we had what people usually think of as a Scandinavian model in which we pay higher taxes for the things which we as a society value as public services, than the more Anglo-Saxon model of as little as possible being public and as much as possible being private because private is somehow intrinsically better.

How do we get there? For me and every Plaid Cymru supporter the answer is obvious. But for a large number of those who regard themselves as Welsh Labour and who are troubled by what the Labour Party had to do to make itself electable in England (and will have to do again to have any hope of getting elected next time) the answer will require rather more soul searching. For if you believe that Wales does, or at least should, have different and better values ... if you fear that those values will be trampled down by what this budget will inevitably produce ... then start now to press for more fiscal responsibility for Wales. We need to be in control of the levers of our economy, to decide for ourselves how we tax ourselves to pay for what we believe we need, and how we become prosperous enough to pay for it.

This budget was never primarily about reducing the deficit ... it was about reducing public services. It about reducing the size of the state. I agree with that, because most of our public services are better provided at a more local level, and are that much more accountable because of it. So yes, I'm completely in favour of reducing the size of the state ...

... from 60 million to 3 million people.