{"id":851,"date":"2019-09-25T12:34:37","date_gmt":"2019-09-25T11:34:37","guid":{"rendered":"http:\/\/blogs.cardiff.ac.uk\/thinking-wales\/?p=851"},"modified":"2022-04-13T17:25:10","modified_gmt":"2022-04-13T16:25:10","slug":"devolved-taxes-no-deal-brexit","status":"publish","type":"post","link":"https:\/\/blogs.cardiff.ac.uk\/thinking-wales\/devolved-taxes-no-deal-brexit\/","title":{"rendered":"Devolved taxes, the Welsh budget and a no-deal Brexit"},"content":{"rendered":"\n
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Over the\npast two years, responsibility over three taxes have been devolved to the Welsh\nGovernment: Land Transaction Tax (replacing Stamp Duty), Landfill Disposals Tax\nand 10 pence on each rate of Income Tax paid on non-savings, non-dividend\n(NS-ND) earnings.<\/p>\n\n\n\n

In Spring,\nthe Wales Fiscal Analysis team published a briefing paper<\/a> suggesting that tax devolution could have a\nrelatively modest, but positive net effect on the Welsh budget over the next\nfive years. <\/p>\n\n\n\n

However, these projections were underpinned by forecasts<\/a> published by the Office for Budget Responsibility (OBR). The OBR had assumed that the UK would leave the European Union with a deal at the end of March 2019. <\/p>\n\n\n\n

Despite the UK parliament\u2019s attempts to legislate against a no-deal exit, there remains a real possibility that the UK could leave the European Union without securing a deal.<\/p>\n\n\n\n

A no-deal Brexit would affect the Welsh budget in various ways, likely reducing future growth in spending and creating extra pressures on the spending side of the budget. In this blog post, we explore another channel through which the Welsh budget may be affected by a no-deal Brexit \u2013 through the effect on devolved tax revenues <\/p>\n\n\n\n

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Devolved taxes and a no-deal Brexit<\/h2>\n\n\n\n

As a result of the Fiscal Framework (2016)<\/a> agreement reached by the Welsh and UK governments, the relative <\/em>performance of Welsh revenues from the three newly-devolved taxes compared to England and Northern Ireland has a direct effect on the size of the Welsh budget.<\/p>\n\n\n\n

If, as expected, a no-deal Brexit reduces devolved Income Tax revenues and revenues from property taxes in Wales, the Welsh budget may not necessarily be worse-off.<\/p>\n\n\n\n

The extent to which the Welsh budget is exposed to risks associated with tax devolution in a no-deal scenario depends on whether the shock to tax revenues is asymmetrically felt across the UK. <\/p><\/blockquote>\n\n\n\n

If devolved\nWelsh tax revenues are relatively more<\/em> adversely affected as a result of\na no-deal Brexit compared to equivalent revenues in England and Northern\nIreland, tax devolution could have a negative<\/em> net effect on the Welsh\nbudget. <\/p>\n\n\n\n

On the other\nhand, if devolved Welsh tax revenues are relatively less<\/em> adversely\naffected as a result of a no-deal Brexit compared to equivalent revenues in\nEngland and Northern Ireland, tax devolution could have a positive<\/em> net\neffect on the Welsh budget. <\/p>\n\n\n\n

Let’s\nexplore what this means in relation to two of the devolved taxes:<\/p>\n\n\n\n

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Welsh Rates of Income Tax (WRIT)<\/h3>\n\n\n\n

Using data from the OBR’s Fiscal Risks Report<\/a>, we have modelled the net effect of tax devolution (i.e. whether it will have a positive or negative impact on the Welsh budget) under three no-deal scenarios:<\/p>\n\n\n\n

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