I’m a lifelong Conservative – but I’m agreeing with Plaid Cymru on the ‘Kami-Kwasi’ tax cuts

Andrew Potts

As a lifelong Conservative (if you count voting for Tony Blair and the odd foray with LibDems in local elections) you can imagine my surprise at agreeing with Plaid Cymru this week, after the normally fiscally responsible Conservatives put Britain’s economy on a ‘Kami-Kwasi’ bombing run.

During the leadership campaign, much was made by Liz Truss about challenging ‘Treasury orthodoxy’. She claimed that economic growth was stifled by risk-averse career civil servants.

Kwasi Kwarteng’s first action on becoming the new Chancellor of the Exchequer was to fire the Permanent Secretary to The Treasury, the department’s most senior civil servant. A good move perhaps. If these are the people stopping the economy booming, then change them for someone else more in tune.

But what if the removal of one form of groupthink is simply being replaced by another? Truss’s cabinet is stuffed full of people who backed her leadership campaign, where the danger is that loyalty trumps competence. The reaction of the markets says what most outside the Cabinet Room think of the announcements.

Policy contradictions are already starting to appear. So-called ‘targeted interventions’ funded by heavy borrowing, ostensibly to put more money in taxpayers’ pockets, are now leading to higher costs elsewhere, not least for those with mortgages. And what are being sold as tax cuts now will inevitably be paid for by tax rises in the future.

The UK government is borrowing money to increase growth and demand while at the same time the Bank of England is trying to reduce inflation by, er, raising interest rates to stifle growth.

Billions are put aside to fund a stamp duty (or land transaction tax in Wales) reduction while said interest rate rises will push up mortgage costs for tens of thousands of people. And a reversal of Rishi Sunak’s National Insurance (NI) increase will skip pensioners who don’t pay NI as well as the workers with low-paid, low-skilled jobs who dominate the Welsh economy. In other words, those that need a tax cut most will not benefit.

Welsh taxpayers

With the economy in turmoil public services will inevitably need to be cut, which typically affects society’s most vulnerable first. So, and this is a new area for me, I agree with Plaid Cymru’s call for the Welsh Government to utilise its tax-varying powers.

Income tax is already partially devolved and has been for the last three-and-a-half years. Unlike Scotland, tax policy is not fully devolved in Wales, meaning that the Welsh Government cannot change the tax bands themselves so can’t reverse the removal of the highest or ‘additional’ tax band announced in the recent mini-budget. But it is able to vary the rates in the remaining bands.

In this way, Plaid’s call for the Welsh Government to increase taxes on the lowest paid (about 90% of Wales’ working population, or 1.3 million people) to make up for ‘tax cuts for the rich’ (less than 1% or 4,300 people) made by the UK Government runs contrary to common sense, but it does make some economic sense.

Of the tax bands, an amount (10p) from each is set by and paid directly to Welsh Government with the remainder set by and paid directly to the UK Government. Welsh Government has been free to vary this rate since April 2019 but has so far chosen not to, such that rates set in London are reflected this side of the Severn.

But what if Cardiff Bay chose to be bold, and vary the rates it collects to run public services? According to the Office for Budget Responsibility (OBR), every additional penny in basic rate tax equates to around £200 million which could be spent to support public services in Wales. For those on the higher rate an extra penny means another £30 million for the collective pot.

Raising an additional ‘Welsh penny’ to counteract the UK’s penny fall would mean that Welsh taxpayers’ would continue to pay the same amount as before the mini budget, but it would mean a greater proportion was available to spend in Wales.

Scotland has had full income tax powers since April 2016, with five tax bands completely distinct to those set in Westminster. It means that, generally speaking, people living in Scotland pay more than those living in England.

But the Scots also see this as having greater control over their present and future, and a step in their road to independence. And Mark Drakeford has said it would be ‘worthwhile’ for Welsh Government to have the same powers as Scotland.

Right now, the best part of a quarter of a billion pounds could easily be utilised to better effect, and a push for greater tax-raising powers in Wales would be a move towards greater devolution, as well as play a part in the Tory ‘levelling up’ or whatever-we-call-it-this-week agenda.

Following the Scotland model would likely lead to higher taxation rates overall but would put Wales on a more solid financial footing, helping sustain services that so many rely on.

Rump

I am pro-Union, no longer devo-sceptic, but worry a bit about independence. In simple terms, I’m concerned that tax would go through the roof, services would plummet, and moving to Hungary would improve my lifestyle.

So new research suggesting the gap in public finances (the difference between tax revenues received and the amount spent on public services) would be smaller than Cardiff University’s 2019 estimate of £13.5bn caught my eye.

Those in favour of independence are still a minority (about 25%), but to win over voters like me requires a fiscal, rather than physical (or emotional), argument.

The new estimate of closer to £2.6bn may well be one of the “wild predictions” according to Welsh Conservatives. And in this I feel the report does paint a rosy picture for nationalists.

It argues that an independent Wales could save on defence spending. I suppose we could go Swiss, declare neutrality and spend 1% of GDP. But UK defence comes from a central budget, so ‘spending less’ would actually mean having to spend more.

Which is another thought. Wales disproportionately contributes people to the Armed Forces, so would an independent Wales be able to employ them all as part of a Wales Defence Force, would they be kept on – as ‘foreign nationals’- by the rump of UK military, or would 18,000 people be made redundant, sent home and need to be retrained?

At £5.9bn, pensions represent the largest part of UK government spending for Wales. The report’s author argues that the UK government would continue to pay these liabilities, but the report also says that “it may well be overly optimistic to expect the UK to fully honour these costs.”

The Welsh Government could insist on this, but the UK was left with a Brexit divorce bill after cessation from the EU, so ‘insisting’ might not be an optimistic strategy.

Similarly, the Welsh share of UK public debt – increasing at a high rate of knots thanks to Trussonomics – would need to be “agreed voluntarily”, which is an academic way of describing tough lengthy negotiations without any guarantee of getting what you want.

In a scene from Yes, Prime Minister, reference is made to Sir Humphrey’s statistics as being facts, while Hacker’s facts are merely statistics. So while Plaid Cymru’s Adam Price describes the report as a “game changer”, I’d like us all to be clear of what the rules of the game actually are.

The most recent YouGov poll findings show that 52% would vote against independence, while 46% do not want to see the Senedd abolished. As interesting as the new report is, for many of us it would be useful to see the Senedd walk before it attempts to run and start utilising the tax powers it already has.

In this case, tax has to be taxing.