The next item will be the debate on Welsh rates of income tax for 2023-24, and I call on the Minister for finance to move the motion. Rebecca Evans.

Motion NDM8215 Lesley Griffiths

To propose that the Senedd in accordance with section 116D of the Government of Wales Act 2006, agrees the Welsh rate resolution for the 2023-24 Welsh rates of income tax as follows:

a) the Welsh rate for the purpose of calculating the basic rate of income tax is 10p in the pound;

b) the Welsh rate for the purpose of calculating the higher rate of income tax is 10p in the pound; and

c) the Welsh rate for the purpose of calculating the additional rate of income tax is 10p in the pound.

Motion moved.

Llywydd, thank you for the opportunity to open this debate on the Welsh rates of income tax resolution for the 2023-24. Welsh rates of income tax were introduced in April 2019 and apply to non-savings, non-dividend income tax payers resident in Wales. Welsh rates of income tax raise well over £2.5 billion each year towards the funding of the Welsh Government's budget. The Welsh rates for the next financial year were announced at the draft budget. The motion to set Welsh rates of income tax for 2023-24 will mean that Welsh taxpayers will continue to pay the same income tax as their English and Northern Irish counterparts.

Our approach to setting income tax rates for next year is set squarely within the context in which we operate as a fiscally responsible Government. We face considerable pressure on our public services due to high levels of inflation, and our residents are challenged every day with the cost-of-living crisis. Our income tax base is relatively weak, which mean that any significant change to our resources through income tax rises would require an increase to the basic rate, all while our residents are struggling to pay their energy and food bills.

I have been very clear that now is not the right time to increase income tax in Wales. The UK Government's decision to freeze income tax thresholds means that our lowest earners have now been dragged into the income tax system. Raising the rates or making any changes now would add an additional contribution on those least able to afford it, and at a time when the overall tax contribution is at its highest level for 70 years. The context we have faced during this budget process has been incredibly challenging. Inflation has eroded our budget to worryingly low levels, and the UK Government has failed to lift our budgets to address that funding gap. The reality has been that we could not meet all of the pressures identified within the funding available. Despite this, our 2023-24 budget was designed to maximise the impact of our available resources through balancing the short-term needs associated with the ongoing cost-of-living crisis whilst also continuing to make longer term change and deliver on our programme for government ambitions.

We have a responsibility to deliver a budget that is fully costed and balances spending needs with the financial pressures people in Wales are already facing, and retaining Welsh rates of income tax for each band at 10p in the pound allows us to do that. Based on the Office for Budget Responsibility's forecasts, setting the rate at 10p for all bands is expected to raise £2.795 billion in 2023-24. Although rates haven't changed, WRIT is expected to have provided an additional £89 million to the Welsh Government budget since it was devolved. Together with the funding received through the block grant, Welsh income tax contributions are a vital part of the budget, and I strongly recommend that Members support the motion today so that we can continue to support public services in Wales at this very challenging time. The motion today also ensures that we continue to deliver our programme for government commitment not to take more in Welsh rates of income tax from Welsh families for at least as long as the economic impact of coronavirus lasts.

Looking further ahead, we'll be guided by our tax principles, which commit us to designing clear and stable taxes that deliver our progressive agenda. Those with the broadest shoulders should pay a greater share. Ensuring that we make the most of our devolved tax responsibilities also means working closely with His Majesty's Revenue and Customs on the administration of WRIT. As highlighted in the National Audit Office's most recent report, the robust processes and governance arrangements with HMRC provide a strong basis for the effective and efficient collection and administration of WRIT, going forward. The WRIT out turn for 2020-21 was published by HMRC last year. The outturn was fairly close to forecasts, given the exceptional economic conditions at the time. A positive reconciliation amount has been added to the budget for 2023-24. I look forward to the debate today, and the Senedd is asked to agree the Welsh rates resolution that will set the Welsh rates of income tax for 2023-24, and I ask Members for their support this afternoon.

Thank you, Minister, for that statement. As I'm sure you know, Minister, Welsh workers take home the lowest pay packets in the United Kingdom—an astonishing £3,000 less than their counterparts in Scotland. The simple fact is that any rise in income tax would be a direct attack on hard-working people. So, I'm glad that the Welsh Government has chosen not to increase the Welsh rate of income tax this year. As it stands, around £2.8 billion of the Welsh Government's budget is raised through income tax alone. This is no small amount, as we know, and the people of Wales have trusted the Government with this money to deliver vital public services. With Welsh workers on the lowest wages in the United Kingdom, the last thing they need is to be dealing with politicians looking to take more of their hard-earned money. As many of us in the Chamber know, Wales has a large percentage of taxpayers who pay the basic rate—more than anywhere else in the United Kingdom. Whilst the basic rate taxpayers account for 92 per cent in Wales, that figure sits at 87 per cent across the rest of the UK.

I know there are some in this Chamber who would like to hike up income tax on the hard-working people of Wales, and I'm incredibly glad to see that they are in the minority. Such a move does not take into account the fact that this would disproportionately hit those who are struggling the most in society. It's also important to consider the very real implications that making changes to the additional rate of income tax would have to the tax base. We know that those paying the additional rate of income tax are most likely to migrate due to tax changes. Therefore, an increase to the additional rate would just result in fewer people paying taxes in Wales. I firmly believe that we should be looking to cut taxes whenever possible, not raise them, especially during a difficult time. We on the Welsh Conservative benches would certainly not raise income tax over the course of this Senedd term, yet Labour have made no such pledge, choosing instead to say that they would not raise income tax, as we've just heard, as long as the economic impact of coronavirus lasts. I would hope that, going forward, we see more of a concrete pledge from Labour Ministers so that people in Wales have more certainty surrounding the level of taxes they can expect to be paying.

On the wider point of devolved taxes, I want to stress the point that if the Welsh Government wants to introduce other taxes on the people of Wales, they must really consider what the economic and financial impacts would be on communities across the country. Minister, businesses in Wales are currently facing a cost-of-doing-business crisis due to global inflationary pressures as a result of Putin's barbaric invasion of Ukraine. I therefore strongly encourage you to urgently reconsider implementing a tourism tax by your Government.

To conclude, while I welcome the decision by Labour Ministers not to look to raise income tax this year, we need to be taking a hard look at current tax policies, ensuring the Welsh Government uses devolved powers to help foster business growth, increase wages and ensure that hard work pays off across the country for everyone. Thank you.

May I thank the Minister for opening the debate? It seems that we've had this debate three or four times already in the past month or two, and I make no apology for the fact that the thanks for that is to Plaid Cymru, because we have been willing to grapple with this issue, rather than just nodding it through as perhaps would have happened usually. It's us as a party that have made the case for using these powers that we have. And what purpose is there in having those powers unless there is a real willingness to use them when circumstances require, of course, and not just under any circumstances? I have to say that if the Government don't feel that now is the time to do that, then look at the trajectory: the more austerity that comes from the Conservatives and the more cuts that are forced on Wales, the stronger the argument for using these powers will become, ultimately, so we must prepare the ground so that, when the time comes, Wales is ready to go if needs be. But I don't want to be back here in a year's time hearing the Minister saying once again, 'Well, we don't know what the implications of varying tax levels would be, so it's difficult for us to do anything about it.'

I do understand, of course, that it's a difficult decision, but what has disappointed me about the general debate around all of this so far is the monochrome nature of the debate: raising income tax, and that's it. Well, no—we can look at this more creatively, in a multifaceted way, and perhaps with the use of council tax as a counterpoint in terms of the impact on people who aren't on higher salaries. But, there we are—we are here today with one motion before us and one issue to decide upon.

Now, during the recent debate on the further devolution of income tax powers to Wales, the finance Minister mentioned in her response that understanding the behavioural changes is key to developing a maturing Welsh tax policy agenda, and I agree with that, of course; Plaid Cymru agrees with that. It is an important factor to look at these things through a Welsh-specific context. But it is apparent that the evidence base is lacking. Indeed, the report from the Finance Committee on the draft budget expressed disappointment that the Welsh Government hasn't undertaken a comprehensive analysis of the impact of behavioural changes that would arise from a change in policy. Now, the Minister referred to the Swiss study, of course, of behavioural change, which has been built in to the Welsh Government's ready reckoner, and we believe maybe that that is the closest available proxy for Wales. But I'm sure you do agree that it isn't the best that it could be, and certainly it doesn't reflect the particularities of the Welsh tax base and, therefore, a tailored Welsh-specific piece of work to feed directly into future Government decisions on this is now imperative. So, I want to understand from the Minister exactly how that will now proceed and for us to understand, or to be reassured, that we won't be here back here again, as I said earlier, asking the same questions and listening to the same non-answers.

Now, Wales has possessed the power to vary the levels of income tax. It's never been used. Consistently, we've maintained the same rates as have been set by the UK Government for England and Northern Ireland. It's interesting, though, the First Minister did, in response to some of the decisions made by the Truss administration, suggest that might be a scenario where we could and maybe should look at varying the rate of income tax in Wales. But, of course, even then, that evidence base wouldn't be there, so are you suggesting that, if the First Minister thinks it needs doing, we can do it without an evidence base? Is it one rule for the Welsh Government and another one for Plaid Cymru? Because, surely we need to get on with doing that work, so that when the Government feels they need to act in that way, then they're able to do so.

Now, the fact that 85 per cent, or more even, of Welsh taxpayers are on the basic rate has been cited as a reason not to adjust the Welsh rates of income tax, but, as I said—and I fully sympathise with that difficulty—we have put forward here our case for allowing Wales to have the same powers as Scotland in terms of changing and setting our own income tax bands, so that we can more forensically target a variation in the rate of income tax.

Now, my fear is that the debate really isn't happening to the degree that it should be and grappling with some of these complexities to the extent that it should be. There is a consensus, if you look at the Wales Governance Centre, the Institute for Fiscal Studies and others. These are questions that need to be addressed, and the Welsh Government hasn't sufficiently, I believe, responded to that or to the challenge that we have set in needing to step up to have that discussion properly, and I hope, if anything, that our interventions over the last few weeks and months will at least lead to that. Diolch.

I'll start off by saying I'm ideologically supportive of increasing the tax rate on the two higher income bands. Higher paid people should pay more for the provision of public services. It's part of what we pay for living in a civilised society. The problem we have is, one, the partial devolution of income tax—it's only one part of the tax on income we have devolved. We don't have dividend income devolved and we don't have capital gains tax devolved. So, you've got two other taxes on income that are not devolved. We have no control at all over dividend taxation; we don't even get any of the benefit of it. And this goes to it simply: people who work for themselves can benefit from a range of perks. But the best for self-employed people is to set up a company, pay yourself a dividend not a wage, and then you will pay a substantially lower tax rate—8.75 per cent basic rate, 33.75 per cent higher rate, 39.35 per cent additional rate. So, what we've got is that people are using, now under the current system, a means of moving into dividend income rather than a wage, because that saves them, from the numbers I've just talked about, substantial sums of money.

Further, we have cross-border movement between England and Wales. There is no tax advantage or disadvantage of being a Welsh or an English taxpayer, and whilst some people are down for the wrong country some of the time, the net effect should be zero because there's no benefit of doing it. If you bring an advantage in, then people may well register in the lower taxing areas they can legally choose. Some people can not just move over the border; some people who have multiple properties can decide which property they wish to have as their major residence, and as such, change how much tax they pay. 

Then we have non-domiciled status to avoid income tax. This is something that I think is fundamentally wrong. We're not going to be able to change that today, but I think it's something we need to talk about. Capital gains tax is charged at a rate of 10 or 18 per cent for basic rate taxpayers, and 20 or 28 per cent for higher rates, all substantially lower than the tax rate. Increasing the lower tax rate would affect some of the most poorly paid in society. A 1p increase in income tax would mean for every £100 of tax currently paid, £105 would need to be paid. What does £5 mean? For those of who shop in Lidl, it means half a pound of butter, a loaf of bread and two pints of milk. To people who are on low incomes, that is an important £5 when they're buying food. When we talk about financial need, increasing the tax bill will not help.

The number of additional-rate taxpayers in Wales is shown by HMRC to be under 1,500 for this year. These are, of course, generally mobile. Raising the additional rate will raise very little money for Wales. My expectation would be a decrease in the income from it. I will be supporting the rates suggested. What I would urge the Welsh Government to do is partial devolution of all taxes on income, which would mean partial devolution of dividend rates and partial devolution of capital gains, so that we could actually tax them at the same level as income tax. That would be fair and that would mean that we could get substantial sums of money from people who found a way round the system. I'm glad the First Minister is nodding. I think this really is an area that we really ought to be giving some thought to.

I think Silk got it wrong, and I know, looking at the Chair of the Finance Committee, we're hoping to get Paul Silk in to discuss where we are with the devolution of taxation. I think there are some things here that were unintended consequences of the devolution of taxation, and we need to get it right. Taxing dividends and capital gains as we tax earned income would be a much fairer way of going forward.  

The Minister for finance to reply. Rebecca Evans. 

Thank you, and thank you to all Members for their contributions to the debate today. Of course, as we move further into Senedd term, we'll continue to keep under review the vital role that WRIT plays as a partially devolved tax here in Wales.

I think Llyr opened his comments this afternoon by saying we've discussed Welsh rates of income tax many times in the past few weeks, and I think that's a really good thing, because there's so much interest from across the Chamber, from Senedd committees, from academic bodies outside the Senedd. I think sometimes we just have to remind ourselves that we are at the start of a journey here. We only had Welsh rates of income tax introduced in April 2019, but it's absolutely right that we do have that eye on the future to consider where we go next. 

Just to respond to some of the specific points, behavioural impact I think was something that was raised very strongly in the debate. I would say behavioural change isn't the only thing that we consider when we consider Welsh rates of income tax. We obviously have to think of the overall economic picture, people's overall tax burden. I think the points that Mike Hedges was making then were quite powerful in that sense, setting out the real choices that many people are facing in Wales at the moment, and also, of course, the promises that we've made to people in our manifesto in respect of Welsh rates of income tax. 

To turn to the point about behavioural impacts, a change in tax rates is obviously likely to affect people's behaviour, and that will then have an impact on the amount of tax that is collected. Llyr Gruffydd referred to our ready reckoner, which takes account of what we understand the behavioural impacts to be, based on the Swiss study. Of course, we look closely at the experience of Scotland, where they have recently introduced higher rates for those on higher incomes. In the current year, the Scottish income tax revenues are actually expected to make a negative net contribution to the Scottish Government's budget. The Scottish Fiscal Commission is expecting a net negative impact of around £100 million on the Scottish budget this year, despite an additional tax effort by Scottish taxpayers of around £850 million from rate and threshold changes. That really does emphasise the need for us to go into this very clear-sightedly, with the evidence base we need. Where there are gaps in evidence, absolutely we will be looking to explore what more we can do to fill those gaps.

HMRC did analyse the earlier tax changes in Scotland, and they produced some estimates on behavioural impacts. They have been published, and they were presented at our tax conference last year. I thought that was a really important intervention. Those estimates, though, didn’t cover migration responses to tax changes, which would obviously be of interest to us here in Wales. HMRC is now progressing work on a longitudinal data set, which will hopefully allow some additional analysis of the behavioural impacts of tax changes, including migration responses. We’ll be looking very carefully at that, and our officials are in regular contact with HMRC.

On the points that were made about the further devolution of income tax, further powers to vary income tax thresholds would provide us with some additional policy tools in the Welsh Government. We do have to consider very carefully the needs and the risks, including the risk of much greater exposure to relative tax-based growth between Wales and elsewhere in the UK. I think that would be particularly of concern to us in relation to the higher and additional rates, where our exposure is currently only 10p in each band. Growth in revenues from these two bands does tend to be more volatile from year to year than the basic rate revenues, and tends to vary more between different parts of the UK. This affects, of course, the year-to-year net budgetary impact of income tax devolution via the block grant adjustment mechanism, so it's potentially a risky step for us to take. We would have to do that with clear sight, again.

When we’ve talked about this important agenda recently we have, I think, all looked forward to the final report of the constitutional commission to see what it has to say on our tax powers and the process for seeking the devolution of further tax powers. I’m sure that will be part of the mix. I just want to give colleagues my reassurance that I see this as an ongoing discussion. It’s an ongoing area where there does need to be greater evidence procured, and we will obviously continue to have those discussions in order to find a way forward.

I just want to remind colleagues, as I come to the end of my contribution here, that the WRIT resolution must be passed ahead of the final budget. Without WRIT revenues, up to £2.8 billion of financing within our final budget would be unavailable. That, of course, would render our 2023-24 final budget unaffordable. I hope colleagues would agree that that would not be an acceptable outcome. So, I think despite the extensive challenges that we face, we have taken some difficult decisions based on collaboration, transparency and sustainability, and I would commit to continuing to take that approach as we consider the role of income tax in future years.

The proposal is to agree the motion. Does any Member object? [Objection.] Yes, there is objection, and therefore we will defer voting until voting time. 

Voting deferred until voting time.