The main aim of Plaid Cymru’s proposals is “to create a fairer, greener and more prosperous Wales”. According to the party’s manifesto, the key fiscal reforms include fairer and more progressive taxation, fairer allocation and distribution of public expenditure, adjustment of the threshold levels of national insurance contributions (NIC), regulation of fuel duty and VAT exemption on housing services and tourism. These reforms are expected to generate more employment in Wales and improve the standard of living and welfare of the Welsh population.
Wales’ productivity problem
It is difficult to establish if and how the proposed fiscal reforms will contribute to productivity-led growth in the Welsh economy. The key indicators of productivity in Wales show very poor prospects of economic growth. According to the Office for National Statistics (ONS), the productivity of the Welsh labour force – measured by Gross Value Added (GVA) per hour worked – is 15% less than that of the UK labour force.
Currently, just 68.5% of the Welsh working-age population is employed, contributing only 4.2% of the UK’s Gross Disposable Income. The ONS reports that Wales has the lowest GVA per head, the lowest average income tax paid by households and the lowest spending on research and development by businesses and other organisations in the UK.
Unfortunately, Plaid’s proposed fiscal reforms are not aimed at resolving these productivity problems in the Welsh economy. Rather, they are likely to add to these issues.
The manifesto aims to impose a high tax rate on the top income level and increase the upper earning limits of national insurance contributions. These would be complemented by an increase in the personal allowance threshold at which national insurance is paid. While such reforms will make the tax system more progressive, they will also create serious incentive problems for the workforce.
In an economy with low labour productivity, higher tax burden at the top income level will destroy the incentive for Welsh workers to work harder and earn more by producing more. Because of the proposed generous benefits package and higher public spending per head, more Welsh workers could prefer to remain on low income levels.
And because of the comparatively low standard of living in Wales, the relatively more capable and productive workers are likely to migrate away from Wales. Given the current state of the Welsh economy, the proposed progressiveness in the tax policy therefore will add to Wales’ productivity problems. The proposed higher education policy also lacks an incentive package designed to improve labour productivity.
The proposed income tax and NIC reforms are also likely to open more incentives for evading taxes. Although the manifesto proposes to reverse the 25% cut in staff to HMRC, it does not specify how this will resolve potential tax avoidance and evasion issues.
The proposed cut in VAT for certified housing renovations and tourism are expected to generate more employment in these sectors. But the majority of the Welsh population belongs to the low income group, which means they are less likely to spend money on housing renovations. So, it remains unclear how this reform will re-energise the sluggish growth in residential property prices in Wales.
The cut in VAT for tourism is a welcome change. But the ultimate outcome will depend on – among other things – the level of skill and efficiency in managing tourism, and the development of tourism infrastructure.
Plaid Cymru also calls for corporation tax to be devolved to Wales, but the manifesto lacks sufficient detail to make an assessment of this reform.
A fairer Barnett formula
The growth in Welsh GVA per head can certainly benefit from higher provision of public expenditure and better quality of public services. To this end, the proposed reforms to the provision of public expenditure based on the Barnett Formula is a commendable feature of Plaid Cymru’s manifesto.
The Barnett Formula for the allocation of extra public expenditure has come under considerable criticism. This is primarily because of the weight it attaches to the population proportion compared to England and the lack of importance attached to the contribution of tax revenue by regions.
An independent commission – as suggested in Plaid Cymru’s manifesto – would clearly accelerate the process of revising the formula, to achieve a fairer distribution of public funding. If the commission could help to remove the (rather illogical) population component from the formula and attach some weight to the total contribution of tax revenue, it is likely that the devolved countries would be able to access a fairer amount of resources.
The Conversation’s Manifesto Check deploys academic expertise to scrutinise the parties’ plans.