The Welsh Government is actively considering putting up income tax in Wales to manage the shortfalls in their budgets. Though the UK Government sets the rate of income tax the Welsh Government have free range on setting rates over their devolved slice of income tax – so the Welsh tax on each income band could be eliminated entirely (i.e. cut by 10p) or raised without (theoretical) limit
Mark Drakeford was recently criticised by Plaid leader Adam Price for not increasing public sector pay to match inflation. The First Minister argued that this wasn’t possible due to inflation and a reduction in the amount of money they were receiving from the UK Government. Mr Price responded that the Welsh Government should use their tax-raising powers to make up the shortfall and the First Minister responded that he was “powerfully considering” it.
But what could Wales raise through income tax and what would that mean for public finances? In First Minister’s Questions Mr Drakeford said that “every 1% rise in the pay bill across the public service in Wales costs another £100m”. So if the Welsh Government want to increased public sector pay by 4% more than currently possible through their block grant how much would they have to increase income tax to hit that £400m figure?
Well let’s take a look because it depends on which income tax band they increase. Using Welsh Government estimates from the last financial year (for 2023-24) we can say that:
For every 1p they add to the basic rate of income tax Wales will receive an extra £220m.
For every 1p they add to the higher rate of income tax Wales will receive an extra £33m.
For every 1p they add to the additional rate of income tax Wales will receive an extra £5m.
So if Wales raised the additional rate and the higher rate by 5p (a massive increase) they would make £25m from the additional rate and £165m from the higher rate. This total of £190m wouldn’t be enough for even a 2% rise in public sector pay. Wales has proportionally fewer additional rate taxpayers so large windfalls from taxing the highest earners is a non-starter.
But what about the basic rate? The UK Government had been planning on reducing the basic rate next year from 20p in the pound to 19p. If the Welsh Government were simply to keep it at the same rate (effectively adding 1p) then this would raise £209m. However reports now indicate that expected UK Government change will be delayed until April 2024 after Jeremy Hunt replaced Kwasi Kwarteng as chancellor following the disastrous mini-budget.
Cardiff University lecturer in politics and international relations Guto Ifan, part of the Wales Fiscal Analysis team, said an increase in the basic rate could prevent the needs for increases things like council tax. He said: “The block grant settlement for the Welsh Government has been substantially hit by higher-than-expected inflation and, by prioritising tax cuts and eroding fiscal credibility, the mini-budget paved the way for a return to a period of austerity budgets.
"Unlike the initial period of austerity we saw during the 2010s the Welsh Government does have the power to vary the size of its budget at the margin. The whole point of tax devolution was to enable the Welsh Government to offer different policies on tax and spend in Wales. An increase in the devolved basic rate of income tax... would provide some protection for public services, as well as the possibility of avoiding more regressive increases in council tax."
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