Can Wales afford independence?

Independence might sound like an appealing idea, but will it work in practice? Can Wales afford to stand on its own two feet?

One argument that is mentioned regularly is that Wales has a large fiscal deficit.

However, the important point to make is that this fiscal deficit is not inevitable. Wales is currently running such a deficit due to the economic mismanagement of being a part of the UK. It is not preordained that Wales must suffer from such a shortfall in revenue, and there are no obstacles in terms of our abilities, education system, or our place in the world that would render us unable to address the issue as an independent nation.

Moreover, by looking at the estimated fiscal balance over the last two decades, we see that the deficit has fluctuated significantly from a low in 1999/00 to a high in 2009/10, following the global financial crisis. The fiscal deficit of the UK as a whole was as high as £167.4bn in 2009/10, while the UK Government is expected to borrow up to £372bn to cover the costs of the COVID-19 pandemic. It is also true that independent nations commonly  run long-term fiscal deficits. In fact, nearly all OECD countries have, on average, run budget deficits of between 3 and 8 per cent for the last decade. According to OECD figures, the last year the UK had a budget surplus was 2001, and it has only had six years of surplus since 1970! At the peak of the financial crisis Ireland ran a budget deficit of 30 per cent, from which it has now recovered with careful management of its economy.

As an independent nation, in the mid to the long term we can look to exploit all of our advantages and free ourselves from Westminster-imposed restrictions on the economy and taxation. Locked in the UK, we are suffering from the effects of a classic exploitative, extractive economy. By becoming independent, we can reshape the system.

The current situation

Despite being able to recognize the potential of Wales and the options open to us as a small independent nation, it is important to recognize the situation as it stands and understand the task facing us – especially with respect to Wales’ position in terms of relative wealth and public spending today. However, there is a large caveat attached to any such considerations, namely that there is a certain amount of guesswork attached to many of the figures that are used as indicators. For example, although we do know what our exports outside of the UK are to the EU, USA and other trade partners, we do not know what the internal UK exports from Wales are. GDP should therefore be described as an estimate only, with no known error margin for that estimate either.

With respect to the fiscal balance, in March 2020, Cardiff University’s Wales Governance Centre published an update on public spending in Wales and the potential impact of independence. This report is to be particularly welcomed given the absence of information regarding Wales’ fiscal affairs . It found that while some  £29.5bn in taxes was raised in Wales in 2018-19 , public expenditure was some £43bn.

Those opposed to independence argue that these figures put an end to any talk of independence. Wales has a fiscal gap of £13.5bn, and unless we can close that gap, independence means either massive tax hikes, or cuts in public services.

But is this really the case?

It is important to recognize that our deficit at the moment is about 18 per cent of GDP. Before the COVID-19 pandemic this deficit was coming down, and it should be noted that £5 billion of the deficit is a result of state pensions – reflecting the current imbalance in our ageing population. The figures included in the Wales Governance Centre report include money that is being spent in Wales, but they also include allocations for UK-wide spending that are arguably disproportionately high. Much of this money is spent in other parts of the UK, with Wales seeing none of the benefits.

Take, for instance, the HS2 high-speed rail link between London and Birmingham (currently under construction), the proposed HS3 link in the North of England, and Crossrail in London. Despite the fact that all of these projects are based entirely in England, the UK government says that Welsh people will benefit from them, so they count part of the cost against Welsh public spending. Likewise, the UK government sets £1.9bn of defence spending against the Welsh budget - a figure that could also be greatly reduced in an independent Wales (see the section on Defence). Westminster MPs have approved the refurbishing of the Houses of Parliament in London, at a cost of £4bn, and a part of that cost will be counted against Welsh public expenditure. It seems there is plenty we could cut from “Welsh” public expenditure without it making a significant difference to Wales.

When considering government expenditure and revenue in Wales it is also instructive to look to Scotland where reports, similar to the one produced by the Wales Governance Centre, have been produced for many years and there is some debate about how they should bear upon the debate about independence. Economists Jim and Margaret Cuthbert have studied GERS (Government Expenditure and Revenue in Scotland) over a number of years and provided criticism that has driven the evolution of the report, and in one of their more recent publications it has been argued that despite improvements these reports can only provide a partial view of the situation regarding finances. In particular we should consider that they cannot include information on capital and investment flows that inform the annual ‘Pink Book’ published by the Office of National Statistics for the UK economy – and that this data can potentially make a very significant difference to the overall picture.

There are also outstanding questions about the limits and shortcomings of the data that is used for these reports, including the fact that numerous sums must be estimated from UK expenditure as Westminster effectively refuses to provide the more accurate data that is required. Richard Murphy from the University of London is one economist who has taken up these questions recently to challenge some of the underlying assumptions in the debate.

‘England and Wales’ means no Welsh data

Moreover, in Wales at present, all companies here are registered in England & Wales, as we have a single legal jurisdiction. As a consequence, companies that often have more than one factory or office site will register in England and all taxes are collated in the English Headquarters with no clear distinction of what taxes (especially corporation tax) are being raised by the Wales site. The Office of National Statistics simply does not have this information.

The key point is that the total of expenditure in reports like GERS says very little about the total public expenditure a Welsh government might deploy after independence. With respect to revenue, GERS describes the status quo and the consequences of tax decisions made at Westminster. In itself, the GERS revenue figures give some sense of the short term challenges, but they say relatively little about the tax revenues which could be available to a Welsh government under the different circumstances brought about through independence.