Welsh Government stands firm on no changes to income tax

During the debate members discussed topics including income tax, providing more funding for public services (in particular NHS services), investing more in education, freezing council tax and devolution.

Plaid’s amendment called on the Welsh Government “to increase the basic rate of tax by 1 pence, the higher rate of tax by 2 pence, and the additional rate of tax by 3 pence for the purpose of increasing the budget available to deal with the health and care crisis and provide financial help for people in the greatest need.” It was rejected by 11 votes to 40.

A Conservative amendment expressing the view “that the Welsh Government’s Draft Budget 2023-24 fails to deliver on the priorities of the people of Wales” was rejected by 13 votes to 38.

The Labour Government’s draft Budget was approved by 27 votes to 13 with Plaid Cymru Senedd members (MS’s) abstaining. Labour’s minority government is possible because the party has a Co-Operation Agreement with Plaid.

On income tax

Rebecca Evans (Lab), Minister for Finance and Local Government, explained why the Government was opposing Plaid Cymru’s amendment, saying that due to the high tax burden, rising inflation, and the cost-of-living crisis, ‘’this is not the time to raise the rates’’. She argued that higher rates of income tax would not generate enough revenue to make a dramatic difference to the Government’s spending plans and instead would impact the lowest-paid workers, who are already struggling with household expenses.

In response, Peredur Owen Griffiths (Plaid Cymru), chair of the Senedd’s Finance Committee, expressed his disappointment that the Government had not seriously considered changing the rates and noted that ‘’the Welsh Government had not carried out detailed work on the behavioural impact of varying Welsh rates of income tax across all bands’’. He argued that the Government needs to conduct foundational work into the advantages and disadvantages of devolving powers to modify Welsh rates of income tax band and threshold.

Adam Price, Leader of Plaid Cymru, moved his party’s amendment calling for higher income tax rates, and also making reference to a debate on tax powers which his party was sponsoring in the Senedd the following day. “We wish we had the powers they have in Scotland, so that we could have a starter rate, which would be lower, we could have intermediate rates, and that's what we're focusing on tomorrow. But we have to work within the constraints that we're under.”

“[W]hen we look across the world, we have a lower rate of tax than the Organisation for Economic Co-operation and Development average,” he observed, “and yet we keep on telling people that you can get Scandinavian-level quality of public services and expect to pay an American level of taxation. We have to be honest with the people, we have to do it now, and we have to do it urgently, because there are no cost-free options here”.

Price added: ‘’as soon as we become an independent nation we [will] have all of the tools and levers available to us to create that society we want to see’’.

Labour backbencher Mike Hedges said that he was ‘intellectually in favour’ of increasing the rate of income tax on the top two bands, but he felt that implementing this change alone would present practical challenges. For example, he said, there are several methods for high-income individuals to evade income tax: ‘’the easiest and simplest is to be paid in dividends, as dividend income is taxed at a lower rate.’’ Regrettably, this is not within the jurisdiction of the Senedd, but rather a concern that must be tackled by the Westminster Government, he said. Adding 1p to the basic rate of income tax during the current climate would not be a progressive move, as people are struggling with a huge cost of living crisis, he argued.

Responding to the members’ comments, Evans said the Government published an income tax ready-reckoner along with the draft budget, and that considers the behavioural impact of tax changes. The report uses HMRC estimates for certain elements, but also includes some additional estimates for the potential migration effect of varying income tax rates in the UK, she explained. The additional estimates were based on a Swiss academic study, which was considered to be the best proxy for the situation in Wales.

In reference to the devolution of tax powers, the minister said ‘’without the full devolution of all income tax on non-savings and non-dividend income’’ it would be very difficult to achieve it. This would require a significant changes and results in ‘’much greater exposure to the relative tax-base growth risk within Wales and the rest of the UK’’.

On council tax

Regarding council tax, members across the parties were broadly on the same page, favouring a freeze. Hefin David (Lab), said ‘’a council tax rise cannot be justified and bills should be frozen for residents’’. Peter Fox (Con) agreed and Sam Rowlands (Con) stated that local authorities up and down Wales are ‘’sitting on massive reserves’’ whilst planning to increase taxes. In his opinion, raising council tax is not a ‘’right thing to do’’ as many residents face financial difficulties.

Adam Price called council tax “the most regressive tax of all” and said the Government needed to get on with reform of it as soon as possible.

On tourism tax

Tom Giffard (Con) was the only member who raised the issue of a tourism tax, arguing that proposing this levy at this point, along with amendments to self-catering accommodation rules would not help Wales tourism. He added that the industry is still recovering from the Covid-19 pandemic and in order to continue investing in this sector, it is necessary to ‘’receive the returns’’.

The Welsh Government will publish its final Budget 2023-24 on 28 February 2023, following this scrutiny.

You can read the full debate here.