Taxes in the draft Welsh Budget – Wales’ first ‘rabbit-out-of-hat’ moment?

George Osborne’s Chancellorship was famously littered with headline-grabbing tax reforms, tax-hikes and give-aways. In style and politics, the ex-Chancellor may have very little in common with the Welsh Government’s Cabinet Secretary for Finance and Local Government, Mark Drakeford, but he would have been proud of one particular announcement in the latter’s budget speech last week.

Reflective of an historical landmark in the history of devolution, we perhaps saw the first Welsh budget ‘rabbit-out-of-hat’ moment – Mark Drakeford decided to put the newly-devolved tax powers at his disposal to use.

As shown in figure 1, taxes paid by homebuyers in Wales will vary from the rest of the UK from April 2018. The devolved Land Transaction Tax (LTT) being introduced in Wales to replace Stamp Duty Land Tax (SDLT) will have a higher starting price threshold of £150,000, lowering taxes for transactions between £125,000 and £250,000. In 2018-19, it is estimated that 69% of transactions (around 25,000) will be subject to less tax under LTT than would have been the case under SDLT.

Overall revenues will be maintained with higher taxes on transactions worth over £400,000 – an estimated 8% of total transactions in Wales next year. This measure is set to increase revenues by around £10 million, even after the slight anticipated fall in the number of transactions worth over £400,000. This will give LTT a more progressive tax structure than SDLT, though less so than the Scottish Government’s Land and Buildings Transaction Tax, which has a higher rate for properties over £325,000.

Figure 1: Average tax rate for property values across the UK from April 2018

The budget also introduces changes in the bands and rates of tax for non-residential transactions – transactions between £150,000 and £250,000 will now be subject to a lower tax rate, with a higher rate for transactions over £1,000,000.

Meanwhile, the Cabinet Secretary maintained the more cautious approach to devolved income tax powers, restating that rates will not change when they come under devolved control in 2019-20. There will also be little change in the devolved Landfill Disposal Tax which will replace the Landfill Tax in Wales from 2018-19.

He did however outline a shortlist of four possible candidates for new devolved taxes in Wales. These include a tourist tax (to be introduced by local government), a disposable plastics tax, a vacant land tax (to bring land into productive use) and a social care levy. The latter has been proposed as a system of social insurance, where Welsh residents would make contributions to fund their future social care needs. If brought about, this innovative idea could place social care funding on a more sustainable footing in Wales in the longer term without having to wait for the spending taps to be turned on by the UK government.

However, any new tax would need approval from the National Assembly and both Houses of Parliament, under rather stringent criteria. It’s likely the Welsh Government will propose a new tax soon to ‘test this legislative machinery’.

On the spending side of the budget, increasing health spending in real terms over the next two years will again put pressure on other areas, particularly local government budgets. Although full details of local government funding will follow in coming weeks, this has already prompted warnings of further increases in council tax bills.

This has been the pattern in Wales over recent years, with the Welsh Government allowing councils to increase council tax bills faster than elsewhere in the UK. This was in stark contrast to the Scottish Government policy of freezing council tax bills for nearly ten years from 2007-08, as can be seen in figure 2.

Figure 2: Average band D council tax in Wales and Scotland, 1999-00 to 2017-18

Increasing council tax does allow Local Authorities to offset cuts in their funding. However, the ability to offset cuts via council tax increases varies significantly across Wales – some councils have much smaller tax bases and are more reliant on grant funding from the Welsh Government. Council tax is also a relatively regressive tax, and as a share of income places a greater burden on poorer households.

The Welsh Tax Policy Report accompanying the budget does mention possible changes to make council tax fairer, which will be put to consultation in early 2018. However, just like any possible variation in devolved income tax rates, we will probably have to wait until after the next Assembly elections to see more fundamental reforms of local government taxation.