Income tax revenues in Wales well below peak, report says
AUSTERITY cuts in Wales have reduced public spending and therefore the country’s deficit significantly, a new report has shown.
But Income Tax revenues remain well below their pre-recession peak a decade ago.
Cardiff University’s Wales Governance Centre has published its latest analysis of Wales’ public finances.
Government Expenditure and Revenue Wales 2019 draws from recent Office for National Statistics Figures to present a comprehensive multi-year analysis of Wales’ public spending, public sector revenues and the nation’s overall fiscal balance.
The results show that since the first such report in 2016, the gap between tax revenue and public spending has decreased in Wales from £14.7bn, which is 24% of GDP, to the current figure of £13.7bn, which is 19.4% of GDP.
This figure compares with a deficit of 2% of GDP for the UK as a whole.
The report identifies how the tax base in Wales is different to the UK. Wales comprises 4.7% of the UK’s population but only generates 3.6% of UK tax revenues
Figures also show that unlike the UK as a whole, where Income Tax is the largest source of government revenue, in Wales it is VAT (Value Added Tax) that generates the largest amount.
Dr Ed Gareth Poole, academic lead of the Wales Fiscal Analysis project, said: “Today’s report provides a comprehensive picture of the state of
Wales’ public finances, which will be invaluable for policymakers faced with important questions about our constitutional future as well as the impact of Brexit.
“While these results are based on ONS estimates, there is no escaping the fact that historic factors have led to the Welsh economy and tax base being far weaker than that of the UK as a whole.
“The figures show that all of the UK’s nations and regions are in financial deficit outside of London and its immediate neighbours, with Wales having the second-highest deficit per person behind Northern Ireland.”
The report by the Wales Fiscal Analysis team finds that the reduction in the size of the deficit is the result of spending cuts restraint rather than increased revenues.
As a share of the economy, total spending has fallen by over 10 percentage points since 2009-10, and spending per person is still 4.2% below its 2011-12 peak.
Meanwhile, revenues have only grown in line with the economy. While VAT revenues have grown by almost a half since 2009-10, Income Tax revenues remain well below their pre-recession (200708) peak, a combination of slow growth in the tax base and the effects of UK Government policy, particularly the significant increases in the personal allowance which took many low earners below the tax threshold, in addition to stagnant real wages.
VAT raised £6.4bn in Wales in 2017-18, followed by Income Tax with £4.8bn and National Insurance contributions with £4.5bn.
Total Income Tax revenues peaked at £5.0bn in 2007-08, having previously steadily increased each year.
This means that Income Tax revenues in 2017-18 were 18% below their 2007-08 level in real terms.
On current projections, total public spending for Wales is set to reach its 2011-12 peak again in real terms by 2023-24, while Wales’ fiscal deficit is projected to continue to fall as a share of the economy. However, given the current political, economic and fiscal uncertainty, the future path of revenues and spending may well diverge from these projections.
In an international context, government spending per person for Wales is broadly in line with the average for developed countries, while total revenue per head in Wales is significantly lower than the average for developed countries.
Researchers have also detailed how Wales’ public finances have changed over recent years with the devolution of tax revenues.
The share of total revenue accounted for by devolved and local taxes will grow to 17.5% in 2019-20, or approximately £5.1bn. This compares with the approximately 55% of total spending made by Welsh and local government in Wales.
Earlier this month, First Minister Mark Drakeford told AMs that “closing the fiscal gap is a proper ambition for any Welsh Government”, and there is growing debate surrounding the potential implications of Welsh independence.
While the authors note that the figures contained in the report are not a reflection of the finances of an independent Wales, they say the findings provide a starting point for a discussion on Wales’ fiscal and economic future.
Guto Ifan, research associate at Wales Fiscal Analysis, said: “While our fiscal gap in comparison to the rest of the UK has been quite well discussed since our reports into Wales’ public finances began, there has been less debate about whether it could be reduced in any meaningful way. With this in mind, we are carrying out research to investigate how these disparities could be addressed.”
The findings of today’s report will be discussed in the coming weeks at the National Eisteddfod in Llanrwst.
A further report presenting potential options for reducing the fiscal gap is set to be published in the autumn.