Initial response to the Green Party’s Welsh manifesto

David Phillips, Head of Devolved and Local Government Finance at IFS, said:

“The Green Party’s Welsh manifesto offers a vision of a bigger state doing more for its citizens. But it lacks any plan for how to pay for that bigger state. In reality, the new entitlements pledged by the Green Party would require substantial increases in taxes or cuts to other services. The party has left this part of its vision unspoken. This manifesto may work as an opening gambit for potential negotiations with other parties. But it is clearly not a complete, costed plan for government.  

On the tax side of the budget, the most significant proposals are to replace both council tax and business rates with new taxes based on land value. Few details are provided on the structure of these taxes, nor whether the Green Party would plan for these taxes to raise less, the same, or more than the current council tax and business rates systems. The answer would be important to not only the impact of the reforms on taxpayers, but also the overall financial feasibility of the party’s plans. A key practical challenge would be to value land (separately from any buildings on it) to an acceptable level of accuracy in order to tax it. Recently published research commissioned by the Welsh Government suggests this could unfortunately be a particular issue for business land – where the economic case for land (as opposed to property) taxation is strongest.

The manifesto does say that the residential land value tax would mean ‘the average household pays less while owners of the most valuable properties contribute more’. At the very least, this suggests a less regressive rate structure than the current council tax (which is a substantially higher share of property value for low-value than high-value properties).  

The Green Party also proposes shifting the legal responsibility for paying the tax from the occupier of a property to its owner. In the absence of other reforms, this might not benefit private sector renters much in the long run. Both economic theory and evidence suggest that property taxes levied on occupiers are mostly shifted on to owners via lower rents. Shifting the legal responsibility for paying tax to the owner would therefore result in rents increasing over time, offsetting much of the benefit to tenants and of the hit to landlords.  

The manifesto says that the land-value-based replacement for business rates would mean ‘small businesses pay less while large corporations such as supermarkets contribute more’. Unlike council tax, business rates bills already represent a bigger share of property value for high-value properties than low-value properties – with the occupiers of properties with an estimated annual rental value of £6,000 or less paying no business rates at all. Given that land values are typically lower than average in out-of-town locations, where many supermarkets, warehouses and large factories are based, it is far from clear that simply replacing business rates with a land value tax would further shift tax bills from small to large businesses. To achieve this, therefore, either the rate schedule of the new land value tax would need to be made more progressive than the current business rates schedule or else different rates of tax would be needed for different locations or different types of occupier.

Varying a land value tax according to who makes use of the land would reduce one of the key economic benefits of land value tax – that it distorts business decisions less than property-based taxes. If the business land value tax were kept simple, though – and if the valuation can be done satisfactorily, as highlighted above – it would be a substantial improvement on the existing business rates system, avoiding the disincentive to build and improve business property that the current system creates.  

Sticking with matters related to property, the manifesto also proposes to introduce rent caps in an effort to reduce housing costs. There would be an initial one-year freeze on rents, including between tenancies. Following this, powers to introduce ‘Rent Pressure Zones’ would be introduced: designated local areas where rent caps would be in place. The manifesto says that ‘rent increases will only be permitted where landlords deliver genuine improvements to homes’.  

This would benefit many tenants and would-be tenants, especially in the short run; but with lower rents potentially increasing the demand for and reducing the supply of rental properties, other tenants could struggle to find suitable properties – and landlords could introduce much bigger rent increases when they do have the opportunity to do so. Evidence from other places where rent controls have been introduced suggests that, as well as reducing the supply of rental properties, there can be other unintended consequences, such as poorer maintenance and attempts by landlords and tenants to circumvent the regulations (e.g. via side payments).  

Turning to the spending side of the budget, three areas stand out.

First is childcare. The current Welsh system has overlapping entitlements for different types of families: at least 10 hours of funded early education per week for all 3- and 4-year-olds, an additional 20 hours of funded childcare per week for 3- and 4-year-olds in working families, and 12.5 hours per week for some 2-year-olds in poorer areas (with an ongoing expansion aimed at eventually covering all 2-year-olds). These entitlements are available for 48 weeks a year (rather than the 38 weeks a year in England).  

The Green Party proposes that ‘existing childcare schemes will be unified into a single, simpler system’, offering universal funded childcare of 20 hours per week 48 weeks of the year to all children aged 9 months to 4 years. The aim would be to increase provision to 30 hours per week for children aged 2 to 4. And additional subsidised hours on top of the universal provision would be available, with better-off families paying more per hour. The cost of this package would be significant – several hundred million pounds per year.

Moving to a universal system would remove the link between entitlement to fully funded hours and parents’ work status or income, significantly simplifying the existing system. And younger children (as well as some children in non-working families) would benefit from new entitlements. But if this proposal does replace all existing early education and childcare entitlements, then this reform would have losers as well as winners. Children aged 3 and 4 in working families would see their entitlements go down, from 30 hours a week to 20, at least in the short run.  

The second standout area is health and social care. The manifesto proposes expanding and improving almost every part of health and social care services. This includes more spending on the wider determinants of health (from housing quality to sports facilities), more funding for GP and dental services, a ‘properly funded’ public health system, expanded cancer screening and diagnostic access, faster access to mental health services, more district nursing and community care, social care investment and integration, pausing hospital bed reductions, and higher pay for NHS staff. The challenge of improving Welsh NHS performance should not be underestimated, and virtually no detail on how these changes would be achieved is provided. Achieving all of them would require big increases in both investment and day-to-day spending, not only in the health service – again, at the very least, in the order of hundreds of millions of pounds per year.  

Third, bus travel. The Green Party proposes a £1 bus fare cap for adults aged 22 to 59, and free bus travel for under-21s (alongside existing free travel for those aged 60 or older). This is substantially more generous than the £1 cap for under-25s and £2 cap for other adults aged up to 59 proposed by Welsh Labour which, alongside support for some additional bus routes, they costed at around £50 million per year. It is less generous than the Scottish Greens’ proposal for free bus travel for all, though.  

Taken together, these proposals – and other ambitions such as increased support for post-16 education and learners, universal free school meals in secondary schools, improved pay and conditions for school staff and substantial investment in social housing and energy efficiency – would represent a substantial expansion of the size and role of the state in Wales. This is a legitimate goal (as is a reduction in the size and role of the state, as others may prefer).  

The Green Party manifesto does not say how it would pay for this bigger, more active state. In the context of a Welsh budget already under significant strain, paying for these new entitlements would require either substantial tax rises or significant cuts to other areas of Welsh Government spending.”