Plaid Cymru proposal for more tax devolution rejected by Welsh Senedd

The motion proposed by Plaid said that:

• the Senedd should possess the devolved competence to set its own income tax bands, in line with the powers already devolved to the Scottish Parliament.
• the Welsh Government should initiate the process outlined in the Government of Wales Act 2006 to seek powers currently reserved to Westminster to enable the Senedd to set all rates and bands for Welsh Income Tax.
• the current tax-varying powers of the Welsh Government are limited and an impediment to effective policy-making in Wales (especially during the current cost of living crisis).

The debate

Plaid Cymru leader Adam Price began the debate by calling on the Welsh Government to press for greater income tax powers.

He argued that having greater fiscal powers would help to generate additional revenue for public spending and help Wales establish a more progressive tax system similar to measures already introduced by the SNP in Scotland. Price highlighted the difficulties posed by the current tax devolution system, saying it was difficult for Wales to increase revenue due to the inflexibility of the current tax powers it has, meaning it has to adhere to bands and thresholds set by the UK parliament.

He claimed Wales could raise additional revenue of £4-500 million next year if it has greater tax varying powers. Price added that the Welsh Government’s budget would be worth up to £3 billion less over the next three years as a result of ‘volatile and unpredictable’ system currently in place.

Peter Fox (Con) said the Senedd should first assess the tax base and its impact on people’s incomes in Wales before seeking more control over taxation policy. He said that over 90 per cent of taxpayers in Wales pay the basic rate of income tax, a figure ‘’higher than the UK average’’. Fox raised his concerns about the Welsh Government’s ‘’future tax plans’’, including the introduction of a tourism levy, suggesting that such ideas could be harmful to communities and the economy. ‘’The default position for Plaid and for Labour is to just tax, tax, tax’’, he said, while the Government should think more about innovation and how to better use the levers they have.

Luke Fletcher (Plaid Cymru), supported his party’s call for greater fiscal powers, in particular Welsh Government’s ability to borrow.

He referred to a report from Cardiff University’s Wales Fiscal Analysis unit during the Covid-19 pandemic in which they highlighted the limits of the Welsh Government’s fiscal powers, and the criticism that the Government received at that time for not fully utilising the funds provided by the UK Government.

He argued that strengthening the authority of the Senedd over devolved taxes would not only offer practical benefits, but it would also enhance the accountability of the Welsh Government., saying: ‘’Devolution of taxes was to bring responsibility for raising the funds, rather than just spending, closer to the people’’.

Labour backbencher Mike Hedges also was in favour of further tax devolution, agreeing with Plaid Cymru that ‘’we cannot continue with asymmetric devolution’’.

He acknowledged that the devolution of income tax in Wales has been positive, thanks primarily to the freezing of tax thresholds which has resulted in a larger portion of the population paying the higher rate of tax.

Hedges warned that despite its intent as a progressive tax system, income tax still has numerous loopholes that allow individuals to reduce their tax liabilities to zero – including dividend tax rates.

He emphasised  the need for a ‘’less complicated system’’ that ensures everybody pays their fair share, and suggested that  dividend rates should be levied at the same rate as income tax. Hedges then set out his aspirations for further fiscal devolution, telling the Senedd that “the best financial devolution you could have ’would be for dividends to be devolved and for powers over non-dom status and for tax-deductible items to be examined, (and) for pensions tax relief to be (set) only at the basic rate’’.

Sioned Williams (Plaid Cymru), echoed her other colleagues in calling for greater tax devolution and considered the motion as a ‘’completely logical step’’, especially in the current financial climate.

She cited an Organisation for Economic Co-operation and Development study, which suggests that the UK holds one of the ‘’most rigidly centralised tax systems in the world’’, saying every other G7 nation receives more taxes both at local and regional levels compared to the UK. She added that, according to the Institute of Welsh Affairs, Wales has a ‘’little control’’ over its developed budget and tax policies. Ms Williams argued that the notion that tax cannot be used to finance the necessary spending for a fairer, more prosperous Wales is absurd, in particular when considered in a global context. With the authority to set tax rates and bands, income tax can serve as a fair and appropriate means of acquiring the resources needed to address poverty and inadequacies in public services. She stated that ‘’Westminster way of doing things is not a good model for Wales to follow’’ and encouraged members to support the motion.

Delyth Jewell (Plaid Cymru), urged the Senedd not to miss the opportunity to create a more progressive income tax system.. She said approximately 43 per cent of people in Wales pay income tax, the majority at the basic rate, and that existing tax powers limited the government’s ability to fund public services.

Jewell added that tax can only be considered as a ‘’burden’’ in a society where services are insufficiently funded to ensure a decent quality of life to all citizens. She also expressed her disappointment that councils in Wales  had been allowed to increase council tax putting more and more pressure on residents. She said this was ‘’not a fair or progressive way of raising revenue’’. In her final remarks, she said that  a larger share of revenue was raised in Wales from VAT than income tax which was a concern to her as lower income households pay a disproportionate amount of indirect taxes like VAT, burdening  those who can least afford it.

Rebecca Evans (Lab), Minister for Finance and Local Government said the government regularly reviewed its approach to setting income tax rates in Wales She added that any significant increase in Welsh income tax rates would mean raising the basic rate, which would negatively impact the lowest earners. Evans said that it was not ‘’the right time’’ to increase income tax in Wales.

She went on to say that in the long term, the government’s approach to tax policy would be guided principles including the creation of ‘’clear and stable’’ taxes that deliver the government’s ‘’progressive agenda’’.

The ability to adjust income tax thresholds would provide additional policy tools for the Welsh Government, but these would need to be  evaluated against specific requirements and associated risks, such as the risk of a much greater exposure to relative tax base growth between Wales and other parts of the UK.  Evans acknowledged the expectation of net additional revenue in Wales due to the ‘’block grant adjustment’’ and once again stressed the importance of considering risks before further devolution of powers.

She said that she was looking forward to reading the tax recommendations in the final report of the Independent Commission on the Constitutional Future of Wales. In its interim report, the commission had recognised the imbalances in the current constitutional arrangements, which Evans said have contributed to the current impasse in seeking further tax powers.

Adam Price (Plaid Cymru) was dissatisfied with the Government’s response and concluded the debate by reiterating the need to have more tax powers in Wales. He said that until ‘’we actually have full devolution, we are not going to be able to meet the challenge that we have set ourselves in creating the kind of decent society’’. The Government should talk more about tax levers and tax tools and taxation is an important way to generate the basis for public expenditure.

The original Plaid Cymru motion calling for further income tax devolution was rejected by 40 votes to 11. An amendment from Labour, recognising the government’s ‘responsible’ use of existing tax powers and approach to tax devolution within the United Kingdom, was agreed by 26 votes to 25.

You can read the full debate here.