Gerald Holtham argues that building the economy must now precede more political autonomy for Wales

July 31st, 2012

There is little doubt that political and constitutional developments in Wales over the past couple of decades have been driven by Scotland. Would Wales have been offered devolved democratic government in the 1990s if the Scots had not been pushing hard for it? And would the Welsh public have voted for it if the Scots had not done so first? Both may be doubted.

I have developed a defence when Scottish friends tease me about Wales’ follower status and, as they see it, reluctance to stand up for itself. I point out that the only reason that Edward 1st did not conquer Scotland, and left it to his incompetent son to fail to do so, was because he was bankrupted by the conquest of Wales. All those castles in north Wales cost a staggering percentage of medieval GDP and were financed with loans from Lombardy bankers, leaving no money for an adequate army to take on the Scots. So, I assert, if Scotland is helping Wales now (which some would no doubt dispute) it is simply repaying an historic debt.

Be that as it may, many people in Wales are looking for this process to continue. They believe that as Scotland pushes on to greater autonomy, just possibly to ‘independence’, however defined, that will increase the scope for Wales too. Some think it may even lead to a federal UK.

However, that is far from clear. Indeed the main impetus from Scotland to the Welsh situation may now be peaking. The odds are that in future Scottish and Welsh developments will become more detached. The Silk Commission, set up to review the Welsh constitution and finances, was the UK government’s response to the Calman Commission for Scotland, which gave rise to the Scotland Act. Whatever Silk concludes could result in legislation but probably in the next Parliament. And wherever Scotland goes after 2015, I much doubt that there will be a Silk mark 2.

Whatever the Silk settlement results in could last for a very long time. Ron Davies’ remark, which became a cliché, that devolution is a process not an event, may be true but processes are not necessarily enduring. Like clockwork, they can run down.

The key difference between Scotland and Wales is not historical, cultural or psychological, though such differences patently exist. It is economic. The brute facts of pounds and pence are what will limit Welsh devolution now, whatever the Scots do.

To a close approximation, Scotland is in budgetary balance with the rest of the UK. If once you concede that the North Sea oilfields’ tax revenue should be allocated according to their geographical location, then that revenue very roughly balances out the fact that public spending per head in Scotland far exceeds the UK average. Right now Scotland is running a very large deficit but, given oil, it is proportionately not bigger than that of the UK as a whole.

Scotland would no doubt find it rather harder to finance its deficit outside the UK and might well pay higher interest rates, depending on how it managed its monetary affairs. If it appealed to remain in a currency union with the UK whereby the Bank of England continued to act as lender of last resort to Scottish financial institutions, it could probably limit additional borrowing costs. However, it would have to sacrifice some of its ‘independence’ to do that, certainly over domestic bank regulation and possibly even over its fiscal policy and the extent of its borrowing.

I believe on balance an independent Scotland would be rather worse off than it is at present but it would not face an enormous gulf in its budget greatly exceeding that of the UK as a whole.

Neither Wales nor Northern Ireland can say as much. The Welsh devolved government has an annual budget just under £15 billion.  Total government spending in Wales including social security payments is somewhere around £25 billion. Wales’ share, on a population basis, of general UK expenditures like defence, foreign embassies and aid and debt servicing costs would add a good £5 billion more. That is total spending of over £30 billion a year. Meanwhile Welsh tax revenues are in the £18-19 billion range. A deficit of some £12 billion is fully 25 per cent of Welsh GDP, proportionately more than double the UK deficit.

The table below, developed from official data by Bob Rowthorn of Cambridge University shows the estimated budget deficit in per capita terms for the countries of the UK in 2010.  While England and Scotland had a deficit of over £2000 for every resident, in Wales and Northern Ireland the deficit per head is over £6000.

Per Capita Expenditure and Income by Country:  2009-10

(North Sea Revenue geographic basis)

England

Wales

Scotland

NI

UK

Expenditure
Identifiable

8,514

9,705

9,927

10,549

8,749

Defence*

609

609

609

609

609

Public Sector Interest*

506

506

506

506

506

Other **

949

949

949

949

949

Total Expenditure

10,578

11,769

11,991

12,613

10,813

Revenue
Non-North Sea***

8,417

5,750

8,059

5,970

8,187

North Sea****

10

10

1140

10

105

Total Revenue

8427

5760

9199

5980

8292

Balance

-2151

-6008

-2791

-6633

-2521

*Assigned on a per capita basis.

**Includes other non-identifiable expenditures plus expenditure outside the UK and accounting adjustment.  Assigned on a per capita basis.

***Assigned on the basis of gross value-added (GVA) for NI and Wales(reduced by 4.5%); Scotland and UK GERS;

**** Assigned to Scotland on a geographical basis. The residual is assigned within the rest of the UK on a per capita basis.

Identifiable expenditure for each country is from PESA2011. UK expenditure on other items is from PESA2011 and is assigned to countries as indicated above. 

Moreover, the Welsh appeal for a better grant settlement is based explicitly on an appeal to fairness, which itself presupposes a political union. In a union, taxes are pooled and distributed according to need. On that basis Wales gets less than it needs, as that is normally assessed in England. Once you move to a federal system, there is a tendency for taxes to be considered as belonging to that part of the federation where they were generated. The focus moves from relative need to the size of inter-regional transfers. That shift suits the Scots, who get more than they should on the basis of relative need but are not receiving a very large net transfer. It does not suit Wales, which gets less than it needs but is receiving proportionately a massive transfer payment. Federation holds no financial charms for Wales.

The various schemes for ‘Devoplus’ in Scotland all depend on Scotland keeping more of some tax revenues in place of some proportion of the block grant. As we have seen, at the limit Scotland could just about forego any grant if it kept all its tax revenues, including oil. Wales, on the other hand, even if it kept all its tax revenue could not nearly finance its expenditure. It depends on a substantial transfer from the rest of the UK and therefore has to consider the collective interest of the UK. It cannot expect to follow beggar-my-neighbour policies like cutting corporation tax and continue to receive a large subsidy.For Scotland ‘Devomax’, involving fiscal autonomy inside the UK, is a rather silly idea since it gives up the benefit of a shared social security system with its greater robustness and the prospect of continued transfers to Scotland. But for Wales, ‘Devomax’ would entail a reduction in government spending of over third and a commensurate cut in public services and welfare benefits. There is no sign that the Welsh public would entertain such a proposition.

Naturally, I hope that the Silk Commission proposals resemble the recommendations of the Independent Commission on Finance and Funding for Wales, which I chaired.  We recommended that Wales take a half share of the income tax revenues generated here and the block grant be reduced accordingly. I now believe Wales could take all of its income tax revenues, which amount to just under £5 billion a year. That is no more than a third of Welsh government expenditure so the block grant would still account for two-thirds.

I cannot see there is much scope to go further, whatever Scotland does. Nationalists, or even simple patriots, who find this position limiting or even rather humiliating have to face up to a stark fact. The immediate requirements for further Welsh progress to self determination are not constitutional or legal, they are economic. We have to rebuild our economy. Only then will we have the capacity, and perhaps the public appetite for greater autonomy.

Tags: , , ,

Gerald Holtham chaired the Welsh Government’s Independent Commission on Funding and Finance for Wales and is a trustee of the IWA. The Commission’s report is available here. This article appears in the current issue of the IWA's journal, The Welsh Agenda.

21 Responses to:“Following Scotland has run its course”

  1. Billy Pilgrim says:

    Devolution has been an exclusive process. Devolution has not seen a greater rate of political participation nor has it seen greater involvement in civil society. Vernon Bogdanor described devolution as the transference of power from one elite to another, the next stage should see that power devolved downwards.

    (Report comment)

  2. Dave says:

    “We have to rebuild our economy”

    In short, what you’re saying is the same old mantra: Wales is too small, to weak, too poor, to govern itself. Tell us something new.

    We’ve been made poor and dependant, your point is to stick with it, we have no choice.

    We’ve heard it all before, Gerry. Being in the UK has bankrupted Wales, and there is no strategy for growth, there never has been, and there never will be as long as Wales remains part of this bloated failed Union dominated and run from London for the benefit of a privileged elite. Wales is on a par with Albania and Moldova when it comes to electrified railways, not to mention the rest of its infrastructure.

    Four hundred million pounds that should have come to Wales has been spent on rejuvenating East London for the Olympics, and has been squandered by a load of toffs.

    We know the facts as laid out above. They make hard reading. The fiscal transfers will increase to the point where tight-fisted Tory/Labour chancellors will decide to introduce regional pay, benefits and pensions. Cameron has already indicated his intention to go down that road, and Labour has hinted likewise. It looks like greater penury sooner or later, and then Wales will have to go its own way. My view is that it would be better to swallow the pill sooner, so that we can get on with the job of turning Wales around.

    It’s ironic that the Welsh Government’s first Bill is being held up by the Attorney General because of the crazy devolution settlement which gives it little or no real power. The stark reality is that England’s population of fifty million dominates the economic landscape of the UK. Wales, with five percent of the population, will never be a priority. Devolving income tax will be a simple book-keeping execise and won’t help Wales in any way at all.

    My advice to you is to stick to economics, which gives you a platform in the media for your views and leave off the rather snide demeaning political remarks about “nationalists and simple patriots”.

    Instead, advise the UK Government on how to “rebuild our economy” – if you can, and if they listen and act it’ll be a miracle because it’s never happened before. We’ll be waiting for Godot.

    As far as Scotland’s economy is concerned – once freed from the Westminster straitjacket it has a chance to develop and strengthen it’s economy. You’re assuming that after independence, the Scottish economy will continue at the same level of performance as in the past, but you omitted to point that out.

    My experience of life has taught me to beware of experts who stray beyond their field of expertise, and mix it in with opinion, which they are no more qualified to comment on than the rest of us.

    (Report comment)

  3. Siôn Eurfyl Jones says:

    Plaid Cymru, under Leanne Wood, have embraced the need for economic regeneration as a precursor to independence, and have accepted that it is up to us to achieve it though our own efforts, as waiting for external agencies to do it won’t work. As Adam Price explained here only recently, introducing the Offa’s Gap report, we are starting the work now. Passive acceptance of the status quo is no longer an option.

    (Report comment)

  4. Efrogwr says:

    As Sion Jobbins has pointed out here, it’s a common pattern for small nations to be told that they are too poor to be independent. It’s also a common pattern after independence for them – ups and downs accepted – to get along just fine, thanks very much.

    (Report comment)

  5. Howell Morgan says:

    This is a very good ‘technical’ exercise that clearly explains that Wales is in reality a ‘basket case’ and the idea that it could survive at any reasonable standard on its own is surely a joke. As someone who grew up in an industrial area with virtually full employment and when public services were run on a pragmatic basis, the future some 30 years ago looked OK. However today the world has changed and I genuinely wonder what is the point of Wales at all. By any objective analysis our performances are extremely poor and why are any of the top people necessary to change things going to a) stay here, or b) come here in the first place? The political/media world in Wales is quite frankly pathetic as it seems hell bent on turning Wales back to something like existed in 1800 rather than the dynamic/revolutionary changes needed to public services and more importantly that attitudes of a very large segment of Welsh society seem very negative to the real world. Where is the WEALTH in terms of personnel and capital that is necessary to move Wales back up the league tables in terms of economic/social well-being?

    (Report comment)

  6. Jeff Jones says:

    Perhaps we need the UK government to appoint a Recovery Board For Wales!

    (Report comment)

  7. Gerald Holtham says:

    As Sion Eurfyl Jones says, Plaid Cymru itself has accepted that economic regeneration in Wales is a pre-requisite for any meaningful move towards independence. If Dave and Efrogwr want to put things the other way around and go for autonomy first they have to explain two things: 1. What would Wales do when independent that would make such a vast difference that it cannot do now? 2. If you have to cut public spending or raise taxes by somewhere between £12 million and £18 million a year, what sort of state do you think the economy would be in then? If we could do wonderfully well on our own we should be able to do reasonably well as part of the UK when we have substantial devolved powers and a large subsidy. About time we started to prove it.

    (Report comment)

  8. Dave says:

    “What would Wales do when independent that would make such a vast difference that it cannot do now?”

    What can Wales do now? And if it could, why hasn’t it been done already? Why has Wales continued to decline suring the past two decades?

    “…we should be able to do reasonably well as part of the UK when we have substantial powers and a large subsidy”

    There are no substantial powers, and there is a (relative) decline in the subsidy because of Barnett convergence, which is already inadequate.

    I don’t disagree that Wales is between a rock and a hard place, that is self-evident. It doesn’t need an economist to tell us that, an afternoon drive though the Valleys and elsewhere will confirm it.

    “About time we started to prove it”

    Tell us how, Gerry. We know we’re in a mess.

    My suspicion is that future UK governments will cut the fiscal transfers by introducing regional wages/benefits/pensions, without regenerating Wales’ economy. It will create more low wage employment, but not a lot else. Eventually a political re-alignment will take place, and Wales will leave the Union.

    It’s clear that independence is not on the horizon, but sooner or later we’re going to have to swallow that pill. The longer we wait, the worse it’ll get.

    (Report comment)

  9. Gerald Holtham says:

    Dave, We both want the best thing for the people of Wales but I’m struggling with your argument. You may well be right that the subsidy will shrink in relative terms. But if that’s bad, why isn’t it even worse to have no subsidy at all? You ask what Wales can do now and it’s a good question – the right question. We should be focused on how we build a propsperous, sustainable economy. Anyone proposing independence has to explain what concretely it would enable us to do to build such an economy. What exactly would independence enable us to do that we couldn’t currently do? I cannot see that the main obstacle in Wales currently is a lack of constitutional power but perhaps I’m wrong. If so tell me specifically what constitutional power and how it could be used to promote prosperity.

    (Report comment)

  10. Owen Donovan says:

    Prof. Holtham, you deserve a proper answer. I have to apologise, this is a shorthand version. In reality, you could probably spend the best part of a decade trying to answer it. I hope you, and others, can bear with me.

    1. Foreign Affairs powers to create a joined-up approach to attracting inward investment & promoting Welsh exports directly to important foreign markets through Welsh ambassadors and High Commissioners. Wales’ great strength is our export in goods, albeit concentrating itself in very few sectors. Full access to things like the European Investment Bank, full membership of the European Council, an increase in the number of Welsh MEP’s, membership of the UN and international organisations – including the likes of the WTO and World Bank.

    2. The powers to depreciate the currency (if Wales adopted its own currency), or having a stake in monetary policy decisions at Sterling or Euro level. The ability to create legislation affecting the financial service sector, including the ability to create things like a “National Investment Bank”, “Welsh Stock Exchange” and set regulations and criteria for the cooperative and social enterprise sector. Does Wales have the power, currently, to create/regulate a state-enterprise like Vattenfall to take advantage of domestic energy resources (excuse the pun)? Or a Sovereign Wealth Fund?

    3. Powers to change the tax code (ideally streamlined and simplified), employment legislation, industrial relation matters, company law, competition law, consumer law/protection, health and safety regulations, private pensions, postal services & telecoms, professional regulation. Some could be liberalised, some could be made more stringent (within any international agreements obviously). Shouldn’t we shape it to work to Wales’ interests? Is that always the same as the UK’s?

    4. Overhaul the welfare system. Which would take a big, big hit post-independence on paper, but could be rebuilt from the ground-up. Perhaps targeting welfare towards practical help (i.e. free university tuition, energy retrofitting), topped up with payed-in, work-place-based co-operative welfare schemes – backed up by a streamlined “state income”.

    5. Overhaul the education system. Come up with completely new qualifications, new school/college/university arrangements, new teaching methods, new standards for curricula instead of being stuck thinking of things from an entirely British/England-and-Wales perspective because that’s “what we’re used to” (A-Levels, GCSE’s, three-year degrees). Why shouldn’t Wales establish a Welsh MIT? A Welsh baccalaureate based on the French one? A Welsh school system based entirely on Finland’s?

    6. Control of research budgets, scientific & research legislation and IP (within international agreements) which could open the Welsh economy more to advanced quaternary sector industries. Why shouldn’t Wales have contol over the space science sector?

    7. Wales would proportionately spend less on things like defence than is spent on us currently. We could have a defence services that meets Welsh strategic defence needs instead of being tied to British ones.

    8. Completely overhaul the way Wales is governed. Full control over the civil service. Could we establish a federal Wales (a la Switzerland)? Could we streamline the civil service? Could we establish some sort of “Civil Service Academy”? Have we not considered options on the way things are run, because we stop looking for possible policy solutions when we reach the Irish Sea and the North Sea?

    9. “Cost Benefit Analyses” for major infrastructure projects would likely be based on a Welsh national basis, instead of a UK-wide basis. This could lead to projects that have been written off as “not providing value for money” suddenly becoming more attractive. Look at the Republic of Ireland’s motorway network for example. If it were run the same as Wales, they would probably only have the M50 around Dublin and the M1 to Belfast.

    (Report comment)

  11. Llareggub says:

    Owen, you acknowledge that Wales would take a financial “big hit” post-independence, then produce a long list of expensive things – Welsh embassies, a “Welsh MIT”, new motorways, generous welfare subsidies…

    (Report comment)

  12. D Thomas says:

    Here is a route for Wales to get out of a union which hasn’t served it well. For Greece…read Wales.

    http://www.youtube.com/watch?v=Py3OOCRLYew&feature=player_embedded#

    Or are we to continue with this broken system in perpetuity? But the politicians won’t have it… as they won’t in Europe. Shameful!

    (Report comment)

  13. Owen Donovan says:

    Llareggub – Wales currently contributes, for example, towards the cost keeping British embassies open in Honora, Managua and Yaounde – part of that £11,729 per capita Prof. Holtham identified. A lot of this money is doing, well…Lla reggub…for Wales. Yes we’ll have less, but can we use it better?

    As for the things I listed, they don’t all have to be done in one go – if at all. It’s for governments to decide what needs doing, and governments to present their plans to the public. Let’s at least give those governments, at some point way off in the future, all the options to work with.

    It would, of course, help if existing governments did their job properly.

    (Report comment)

  14. Martin Jones says:

    I agree with a lot of what Holtham says. I consider myself a nationalist, but I don’t see the point in declaring independence BEFORE the economy is good enough. It wouldn’t be democratically possible, and the hit in living standards wouldn’t be worth independence. The only time I would digress from this would be if there was some kind of disaster or emergency. But in normal constitutional times, I can’t see the point in a political project that annihilates living standards and incomes in Wales. Still, as a nationalist, I agree also with what Owen Donovan is saying. The figures that show Wales “can’t sustain itself” also include spending on a lot of things Wales doesn’t really need. So it isn’t really a one sided story. We need fairness within the UK first of all and I do feel that only a strong electoral showing for Plaid Cymru can deliver that.

    (Report comment)

  15. Gerald Holtham says:

    Owen Donovan says all the things listed don’t have to be done in one go. But many of the things he listed could be done now – power over education is devolved, curricula and exams could be changed, there is no law agaisnt the Welsh government starting a development bank, as a private not-for-profit company, Wales has access to EIB funds already… I could go on. If we used the powers we had and made progress it would be easier for nationalists to argue that we then needed more powers to do even more. At present the public sees relatively little visible advantage from exercise of existing powers so it is not surprising it is not panting for more. Given what we have done with devolution, compared with Scotland for example, it is not obvious that independence would be an enormous success. I respect those who want independence for its own sake but most Welsh people do not; they need to be persuaded it is in their interest.

    (Report comment)

  16. Llareggub says:

    Owen, even if Wales became an independent state there would still be powerful constraints on the extent to which it could pursue an independent economic policy.

    The Welsh economy is closely integrated with the rest of the UK, by virtue of history, geography and a relatively long, open border. A single currency, common economic regulations and labour laws facilitate the free movement of people, goods and services across the UK. Radical changes could increase firms’ transaction costs and would likely be resisted by the business lobby. In some cases, as the Holtham report noted in the example of fuel duty, changes that Wales might like to make could be impractical to enforce (unless the border was closed).

    Your long list of potential investments suggests a world of possibilities, but while I have my doubts about their affordability, some are simply not within the state’s gift. For example, government cannot create a world-leading university just by administrative fiat. MIT, the example you suggest emulating, is a private sector institution with an endowment of nearly $10bn, some of the world’s leading (and best paid) academics, and a reputation for excellence created over many decades. Of course a future Welsh Government could spend billions on a research university if it wished, but while this may be a practical strategy in Saudi Arabia, I doubt that it would be financially or politically feasible in a future independent Wales.

    (Report comment)

  17. D Thomas says:

    It’s business as usual then…..with Labour at the helm. Yipee!

    (Report comment)

  18. Owen Donovan says:

    If there were a vote on independence within the next few Assembly terms, even I’d vote no. I accept I won’t even live to see it, something I’m reluctant to admit seeing as I’m 27. I’d be willing to sacrifice a “drop in living standards” in the present if it meant something better 30+ years in the future. I know the vast majority of people in Wales won’t though – politics and failure and all that.

    I 100% agree that Wales needs to build a more dynamic economy before then – you can’t argue with the economics of the situtation. The trouble is, we’ve been waiting the best part of 40 years (perhaps longer) for some sort of “miracle”. Now we’re going around in circles on the constitution – and I’m doing more than my fair bit in keeping that going, I’ll admit. Ultimately though, I suspect Prof. Holtham will “win”, so any points I make are moot. But what if we simply don’t improve the Welsh economy with the current framework? What then?

    One problem, as I see it, is we’re stuck doing the same things over and over again, then moaning when we have to change tact. Meanwhile, in the fallout, subvention rises until we have a state spending to GVA ratio that would make Kim Jong-Un blush. Who in their right mind would want to invest in a nation that is, for all inents and purposes, an outsourced UK government department? Some would like that no doubt, but all this extra money isn’t helping us off the bottom at the moment, is it?

    If education is devolved, why did Leighton Andrews and his NI counterpart contact Michael Gove over GCSE changes? Why aren’t the Welsh Government looking at Infrastructure Banks, for example? Would the Assembly be able to regulate it? “You can have the toy, but we’ll tell you how to play with it.”

    Llareggub – You’re right. Economies are interdependent, and I’d expect Wales to be outward looking in that regard. I’d be disappointed if Welsh economic policy boils down to a rather insular “England or bust”. Everything you’ve said would apply equally to the EU (free movement of people, capital, some employment legislation, and trade), or the Eurozone. The UK isn’t a pretty flower standing tall above the grass.

    I might have suggested a world of, largely implausable, possibilities at present. But a “Welsh MIT” doesn’t mean a competitor, just an emulation – a technical university starting off very small, probably with a lot of failures in the beginning – but able to grow at its own rate over time, specialising, attracting private and public investment and providing highly-skilled R&D jobs in Wales. That’s what all succesful businesses do, isn’t it?

    (Report comment)

  19. Martin Jones says:

    If I can leave a further comment, it is easy to criticise Owen Donovan’s “shopping list” but in my experience the people who want independence are the ones who care the most. I find myself agreeing with Owen that there is no point voting for independence at the moment. There is a problem though with Holtham’s argument that “If we used the powers we had and made progress it would be easier for nationalists to argue that we then needed more powers to do even more.” Well “we” aren’t in power. The Labour party alone is in power. I don’t sign up to the idea that they’re doing nothing at all, but surely Holtham’s logic suggests that the powers we have aren’t being used well enough. I agree with the idea that the best thing for Wales would be a better Union, where we are cushioned from outside shocks but also have our own autonomy. Who though is actually fighting for that? It seems to be that the best way of indirectly getting that is supporting the nationalists, whether they want independence or not. If you vote Plaid Cymru you are not in all likelihood going to get an independent Wales, even if Scotland votes ‘yes’. I simply cannot see it ever being democratically possible, considering how difficult it is in Scotland where they are fiscally neutral. But you might get a better settlement than we have now. Let’s not shout down the likes of Owen Donovan though, who clearly is thinking about Wales and has Wales’ interests at heart.

    (Report comment)

  20. R.Tredwyn says:

    This discussion has exposed a central dilemma. Holtham says we need to use existing powers to beef up our economy or the demand for independence isn’t credible. At least I think that’s what he’s saying. Donovan and Jones point out that that makes an implicit criticism of the Labour government which hasn’t successfully used those powers up to now. And since we have every prospect of continued complacent Labour government, why should anything change? Seems to me Holtham has a point but Donovan and Jones are right too. So nothing will get better! How do we get out of that, someone, anyone?

    (Report comment)

  21. David says:

    It’s a classical Catch 22 situation R Tredwyn.

    (Report comment)

Have your say

Please let us know in your message if you do not want the IWA to contact you in future or related IWA activity.