WELSH INDEPENDENCE INVESTIGATED
Political editor Ruth Mosalski examines the facts and figures which have been published in a new report on Welsh independence
ANEW report has looked at the facts and figures behind Welsh independence. The report, by Wales Governance Centre researchers, looks at the position Wales is currently in, what could be changed to generate more money, and what impact independence would have in the long run.
In recent months there has been a growth in the Welsh independence movement, with marches taking place across the country.
This report, by Guto Ifan, Cian Sion and Ed Gareth Poole, looks at the financial position of Wales now, and what would be needed in the future.
They found:
■ Wales’ fiscal deficit – the difference between total public spending for Wales and public-sector revenues from Wales – amounted to £13.5bn in 2018–19, that is £4,300 per head, compared with the UK average of £620;
■ Estimates suggest the value of Wales’ imports exceed exports by some £13.1bn;
■ Wide-ranging changes to taxation and spending policies would need to be implemented;
■ Independence would need radical policy changes alongside massive investment in areas such as Wales’ education system, research and development spending and infrastructure;
■ “Particularly in the short term, transitioning to an independent Wales would come at a substantial cost”.
The gap between what Wales spends and makes is £13.5bn.
The gap between total public spending for Wales and public-sector revenues from Wales amounted to £13.5bn in 2018–19, that is £4,300 per head, compared with the UK average of £620.
Wales has the second-highest fiscal deficit per person of the UK countries and English regions, mainly due to making less money from tax.
Although no official data exists, our rough estimate suggests the value of Wales’ imports exceeds exports by some £13.1bn.
■ Graph A shows the biggest issue facing independence for Wales.
The 45-degree line represents where expenditure matches revenues and most countries are fairly close to that line. You’ll see Wales isn’t.
Wales’ total spending per person matches the level in Ireland, while revenues per person are close to the level in Portugal.
However, while some of the deficit could be financed via borrowing, Wales’ present position suggests wide-ranging changes to taxation and spending policies would need to be implemented after independence.
“To put it bluntly, this would arguably be the main challenge of independence,” the report reads.
So, how do you fill that £13.5bn gap?
Boosting tax revenues through economic growth “would be essential”.
GDP is the monetary measure of the market value of all the final goods and services produced in a specific time period.
If Wales could increase its GDP from its current level of 74% of the UK average to 80% by 2029–30, the report projects that deficit would fall from the 18% of GDP to 9.4% in 202930.
But this wouldn’t be enough. “Overturning decades of relative decline would still leave Wales with a substantial, albeit reduced, notional fiscal deficit.
“Given trends in the Welsh economy, such a substantial increase in productivity and/or employment growth would be a significant turnaround.
“It would require radical policy changes alongside massive investment in areas such as Wales’ education system, research and development spending and infrastructure, and a fundamental change in the UK’s current London-centric economic model,” the report warns.
The report warns it is likely a “wholesale reform” of the tax system would be needed to raise significantly more public-sector revenue.
If Wales put up tax revenues, it could generate an additional £4.7bn in revenue.
But the UK income tax system is heavily dependent on a small number of very high earners, but only a small share of whom reside in Wales.
An independent Wales would need to introduce an income tax system that better reflects the Welsh income distribution, potentially by imposing higher tax rates across the income distribution and not just on the highest earners.
Can’t we make money from electricity and water?
That’s unlikely, according to the report.
The report says: “Wales currently produces significantly more electricity and water than it consumes. However, the ability to raise additional public sector revenues from these sources would be constrained by any post-independence single market arrangements with the rest of the UK and Europe.
“Furthermore, based on the market value of these exports, it is unlikely that any possible additional revenue raised would make a material difference to Wales’ fiscal position.”
■ Graph B shows the difference between GDP and disposable income. ■ And Graph C shows the total revenues of OECD countries.
Wales’ tax to GDP ratio is in line with the OECD average at 40.4%, but markedly below the EU-area average at 46%.
Day one of independence
If Wales became independent, there would have already been negotiations between the Welsh and UK Government about assets and liabilities, as well as the decisions that would need to be made on day one.
They include:
■ Defence (Graph D)
An independent Welsh Government would decide how much to spend on defence.
Wales gets 4.7% of UK defence spending – about £1.9bn – even if the then-Government reduced it to the NATO target, it would only raise a mean saving of around £400 million, while spending 1% of GDP would bring spending down by £1.1 billion.
■ Government debt
Wales’ share of interest payments on historic UK government debt would be decided by negotiation between both governments.
Debt could be apportioned by population, or could reflect ability to repay, for example, by applying Wales’ GDP share. Decisions on the treatment of debt would shape how Wales was regarded as a financial actor internationally, its creditworthiness and resilience. This is one reason why the repudiation of a share of debt would be extremely difficult.
■ Pensions
Pension spending represents by far the largest part of UK Government spending for Wales. Currently, subject to meeting requirements, UK citizens are entitled to a UK state pension regardless of whether they choose to retire within the UK.
A continuation of this status postindependence could reduce the Welsh deficit by around £5 billion in the first year of independence.
However, it is likely the government of an independent Wales would wish to have responsibility over pension payments made to pensioners living in Wales:
“It is likely the Welsh Government would wish to have control over, and fund pension payments made to pensioners living in Wales as the UK government could change entitlements unilaterally by Act of Parliament. It is unlikely therefore that this
is an area which would yield significant savings for the Welsh budget barring a very favourable outcome from negotiations.”
Expenditure outside Wales
The fiscal deficit includes a population share of a range of UK Government non-identifiable expenditure. This may not accurately reflect the share of spending actually spent in Wales. Additionally, out-of-Wales spending (e.g. London-based civil servants) does not generate tax revenues for Wales. The repatriation of some of this spending could potentially reduce the deficit by around half a per cent of GDP for Wales.
A new currency
You can’t look at policy and sustainability without looking at a country’s currency arrangements. Informed by the debate in Scotland, the currency options available would be:
To use sterling, in a formal or informal currency union;
To use the euro, again by applying for Eurozone membership or by way of an informal currency union;
Wales could issue its own currency, with either a floating or fixed/ pegged exchange rate. However:
The downside of continuing the use of sterling would be having very little or no say over interest rates and exchange rates but a Welsh currency brings the “greatest degree of autonomy and flexibility over economic policy”.
However, it wouldn’t be costless and would require substantial investment in new institutions, including a payments system and local currency capital markets.
The banking system of an independent Wales would likely resemble that of New Zealand, where most banks are headquartered outside the country.
This would ease the regulatory burden and remove a potential fiscal liability that the government of an independent Wales could not afford.
A newly independent country with no track record and substantial debt levels would need to earn credibility.
What would it mean in the long run?
State separation can trigger economic shocks, some of which can be long-lasting, the report says, and the long-term economic performance of an independent Wales is unknown but there are some experiences from other countries to draw upon.
In the long run it has been argued that small nations can enjoy more advantages over the more populous.
So is this it for independence?
Researcher Guto Ifan said: “There is currently a gap between Wales’ total spending and its revenue of approximately £4,300 per person, significantly larger than the UK average of £620.
“Wales is by no means unique: the UK is a highly imbalanced state where nine of the 12 nations and regions have deficits that are funded by ‘fiscal transfers’ from the three ‘surplus’ regions.
“Whatever the UK Government’s rhetoric about ‘levelling up’ the UK’s underperforming regions, changing Wales’ economic fortunes, while remaining part of the UK, will require drastic action.
“Fiscal transfers from the rest of the UK are subsidising Wales’ revenue shortfall, but these transfers are not focused on investments – such as high-speed rail connections or government-funded research & development – that would enable a turnaround in the relative performance of the Welsh economy and our fiscal position.
“At the same time, although Welsh independence opens the possibility of building a more sustainable, equitable and – perhaps eventually – a more prosperous economy, an independent state would likely require wide-ranging and urgent changes to current tax, spending and economic policies. Particularly in the short term, transitioning to an independent Wales would come at a substantial cost.”
First Minister Mark Drakeford has said he thinks the fiscal gap has to be filled: “I think closing the fiscal gap is a proper ambition for any Welsh Government.”
But in the same plenary session, he made the point that Plaid Cymru, led by Adam Price, will need to find a way to plug that £13bn gap as it continues to advocate independence.
“He will have to find a way of explaining to the Welsh electorate how the £13bn that is spent in Wales above that which is raised in taxes here in Wales is to be filled by his Government when that £13bn is no longer available to spend on public services here in Wales,” Mr Drakeford told the Plaid Cymru leader.
Mr Price has said he wants a Welsh independence referendum “before 2030”, and said that the reason there is such a large gap in finances “is the way our economy has been mismanaged by successive centralised London governments”.
Plaid Cymru has its own commission looking at independence which is due to report back to Plaid Cymru’s annual conference in October 2020. The commission, headed by former AM Jocelyn Davies, is to look at “how Wales can become independent in the next decade”.