The future of devolved taxation in Wales

The question of devolved taxation in Wales has been a long-standing one. As the Welsh Government and the Senedd / Welsh Parliament have consistently gained further powers and responsibilities, so has the continued transition of, albeit limited, powers over taxation, most notably as established in the 2014 Wales Act, which gave tax powers to Wales for the first time in some 800 years. 

The 2014 Wales Act represented the starting point in devolving tax powers to a Welsh level. The Act gave the Welsh Government the powers to legislate in areas where Stamp Duty and Landfill Tax were applied, which were replaced by new Welsh taxation: the Land Transaction Tax and the Landfill Disposals Tax, both of which are collected by the Welsh Revenue Authority. The 2024 financial year saw £300 million collected cumulatively for both taxes (notably down a quarter on the prior year), not a huge contributor to a Welsh Government budget of around £23 million at last count. 

The fact that social security isn’t devolved in Wales, as it is in all other UK nations, is also relevant here. Particularly when we consider the departures taken by the Scottish Government in introducing progressive reallocation of resources, like the Scottish Child Payment, a notable example. Increased tax powers provide further room for flexibility and divergence of the tax and benefits system as a whole.

Ahead of what polls suggest will be a hotly contested Senedd election in 2026, the first under a newly proportional voting system, electing a Senedd that is over 50% larger than its predecessors, is now the time to start having an informed conversation about tax and spend at the devolved level? Particularly with the Labour party now in government at both ends of the M4, is there now space for change? Discussions with Bangor University Economists Dr Edward Jones and Dr Rhys ap Gwilym for a forthcoming IWA podcast, got me thinking about what could and should come next.

Current tax approach 

Further to the creation of two new taxes in Wales, albeit ones that replace prior UK-wide taxes, the Welsh Government is also seeking to set in place some divergences from other UK nations. This can be seen through the Government enabling councils to increase council tax premium for empty and second homes, proposals to introduce a visitor levy and ambitious plans to reconfigure Council Tax (albeit now delayed). As such, the Welsh Government has over recent years considered how it can use its existing set of powers to create new taxation or reform existing taxation in a manner which intends to be progressive in nature.

Additionally, universalism has been a key principle under the Drakeford administration. This can be seen in the Welsh Government’s Universal Basic Income pilot for care leavers. A meaningful and seemingly impactful policy intervention for a specific, and particularly disadvantaged, population, which doesn’t seem likely to be broadened in scope and is undeliverable under current powers and budgets at any larger scale. The pilot does, however, display the willingness of the Welsh Government to consider radical alternatives to existing social security policy initiatives. Whether such an approach would be replicated by the new Welsh Government remains to be seen.

What these taxes and changes do not do, however, is make a considerable difference to the Welsh Government’s budget, which is under considerable strain. Under current tax powers attempting to grow the size of the Welsh budget is a challenge, especially without introducing policies which are regressive in nature.

It is a well trodden path in Wales of pointing out the inadequacies of the Welsh Government’s tax powers. The Welsh Government has the ability to deviate income tax rates by 10%. Nevertheless, this power has, to date, never been utilised, which is hardly surprising, primarily because of the paucity of additional and higher rate taxpayers in Wales. The Welsh tax base is particularly bottom heavy. Indeed, any steps to create a more progressive form of income tax, including increasing it for higher earners, would generate little income, and may even cause more harm than good to the tax base. Due to the porousness of the border between England and Wales, with a high percentage of the population living or working in close proximity to England, the risks of capital flight and emigration are more challenging than in Scotland, for example. As such, attempts to redesign the tax system may lie in the ability to meaningfully deviate tax bands, rather than solely rates. Existing powers to deviate from the UK on income tax rates, therefore, remain unused, and will likely remain so. Even reforming tax bands is a considerably politically unpalatable proposition, with such a move bringing significant consequences, such as higher taxation for low-and-middle income workers.

Yet, for all of this, should we expect more responsibilities over taxation to be devolved to Wales in the short-to-medium term? Whilst it’s always dangerous to make predictions, at this point this seems unlikely. The reasons for this are both political and practical. The administration of social security, benefits and taxation would be expected to follow a similar process to devolution in Wales itself, that of a journey, not an event, whereby powers and responsibilities have gradually increased as capacity and resources have done the same. These are similar arguments for the potential of devolution of justice to Wales in the future, with the UK Labour policy focusing on devolving youth justice as a starting point to a potentially larger scale transition of powers.

The Welsh Labour party approach appears to be that having a Labour Government in office at a UK level, committed as they are to growing the UK economy, will result in an increase in productivity, growth and investment in the Welsh economy, through pan-UK measures. Such growth could lead to a bigger Welsh budget to meet burgeoning funding requirements. Whether such endeavours will fix long-term economic challenges in the Welsh economy remains to be seen, and the Welsh Labour party will hope that the prospect of fairer economic weather is felt by voters in Wales ahead of 2026.

Enabling localisation

The future of devolution of taxation also means considering devolution to Wales as much as devolution within Wales. Any meaningful devolution of powers to the Welsh Government should be replicated with an ambitious plan to devolve further power over economic levers to local authorities. Measures that could enable greater tax revenue for local authorities are badly needed, with many looking to be under considerable financial strain in the short-to-medium term. 

There has also been intermittent interest in novel local authority taxation, such as road user charges being continually flagged by Cardiff Council, for instance (as well as part of the Welsh Government’s transport delivery plan). Such policies, including the decision to raise potential taxation on empty and second homes, have gained much media attention. This sees local authorities across Wales now able to set council tax premiums 300% above the standard rate of council tax. 

The mechanics of this is to remove barriers for local authorities in Wales to alter their local taxation. Yet, when it comes to the second homes tax and a potential visitor levy, such measures remain of limited value in supporting local government finances and are better understood as mechanisms to compensate for industries which have had a distinct negative impact on local housing markets, like tourism. 

This has enabled local authorities to diverge their tax strategies. As we have seen, some local authorities have taken up the ability to raise tax revenue this way. This has attempted to achieve two outcomes: to suppress the sale of local housing stock, and to some extent, compensate residents for the increasing reliance of the local economy on tourism. Raising revenue is but one of many drivers in these instances.

The Welsh Government, and those seeking election to the Senedd in 2026, may aim to make the most of existing powers to increase devolved taxes, much like those noted above. In terms of the potential contribution of Welsh taxation to the Welsh Government or local authorities’ strained budgets, such interventions will have a relatively small impact.

Tax and spend: A much needed conversation

Much like the conversation on tax and spending (or lack thereof) at the recent general election, labelled a conspiracy of silence by the Institute of Fiscal Studies (IFS), there is a lack of realism over the long-term outlook of the Welsh Government’s tax and spending.

Public services in Wales are all struggling to deliver, particularly in health and social care, where need is higher than the rest of the UK. Current shifts suggest that such services face considerable challenges to delivery in the medium to long term. With more than half of the Welsh Government’s budget going on this area, this is an existential question. More funding seems inevitable and with 82% of the Welsh Government’s budget coming from the Wales Block Grant, the solution doesn’t appear to be achievable at a Welsh level.

Proposals for new taxation in Wales have, over recent years, revolved around taxation which does not meaningfully impact the public purse. Indeed, proposals for a Visitor Levy or Road User Charging make a degree of sense, especially in attempting to be progressive in nature and in regard to their intention to compensate, to some degree, local residents for the adverse effects of the tourism sector or traffic.

Yet, such proposals represent mechanisms to enable positive behavioural change rather than taxation which would enable much needed spending on Wales’ ailing public services. That’s not to say that such taxation isn’t required. Using existing devolved tax powers effectively will form a vital part of the transition towards a net zero economy. For this to be effective, certain behaviours will need financial incentives and disincentives which shape markets. Using existing powers, both in relation to taxation and spending will be much needed.

Additionally, proposals for these new Welsh forms of taxation also come with an added cost, in the need for adequate resourcing of the Welsh Revenue Authority, which would require further investment for all new additional taxation.

As for taxation which would make a difference to the public purse in Wales, such as income tax, business rates or council tax, solutions seem thin on the ground. Uncomfortable conversations around taxing people more, in order to support ailing public services, aren’t being had at a Welsh level, as they aren’t at a UK level. With a bottom heavy income spectrum, low levels of wealth and a high proportion of Wales’ business being SMEs, pushback from fiddling with the tax levers which could result in a meaningfully enlarged budget would come at a considerable cost.

Until we grapple with the necessary, evidence-based conversation around funding public services to the required extent, nothing is likely to change. As with any tax policy, this means the creation of losers as much as winners. Politically speaking, this is clearly dangerous territory.

This is also not touching upon the larger issues with the inflexible nature of Wales’ budget as set out in the IWA’s fiscal firepower paper. The paper set out how the vast majority of the Welsh Government’s budget is pre-committed to public service delivery, leaving very little to invest in order to change the course of the Welsh economy. Annual budget setting processes, and a £1 billion borrowing limit (which has barely been used, in part, due to the lack of certainty that such borrowing can be repaid), leaves the Welsh Government with little flexibility to act to alter its economic outcomes, which have perennially been poorer than that of our UK counterparts (let alone comparative European nations). Being able to grow the size of the tax base is yet another challenge.

With a Senedd election already on the horizon in 2026, a conversation about the future options for taxation in Wales is sorely needed. One that is evidence-informed and speaks of the genuine costs and benefits of reform to taxation and its implications. For 2026 then, we need to see campaigns which tread on the territory so often overlooked in the recent UK election. Importantly in a Welsh context, this means identifying ways to use existing powers over taxation, but also identifying ways in which greater powers and flexibility of powers would enable more equal outcomes and better, more sustainable public services for future generations.

The views expressed in guest blogs are those of the writer and are not necessarily shared by CIOT.