One of the most common arguments used by Unionists against Welsh independence is that Wales cannot afford to pay its own way. They repeat that Wales receives £18bn a year as a ‘handout’ from the UK, and cannot survive without this ‘subsidy’. They overlook that Wales also generates taxes and revenue, collected directly by the UK, and the £18bn is largely a return of that.

However, it’s been difficult to refute such claims as there was long a shortage of reliable data on the economic performance of Wales. There’s a huge body of economic statistics and data published by the UK Government in its National Accounts – commonly referred to as ‘The Blue Book’ – but it’s difficult for the average person to follow, let alone extract the necessary data in a Welsh context.

Economic data for Wales

So it was a huge step forward when, in 2019, the Wales Governance Centre at Cardiff University analysed the available data and published the report Government Expenditure and Revenue Wales (or ‘GERW 2019’). The report attempted to present an objective estimate of how much is spent on public services in Wales, and how much tax revenue is generated to fund those services.

At first glance, the key findings were worrying. It was written that government expenditure in Wales exceeded revenue raised in Wales by £13.7bn, equivalent to 17% of the country’s gross domestic product (GDP). This is clearly unsustainable.

But while GERW 2019 was prepared with the best of intentions, it reflected a number of assumptions, which have since proven to be inappropriate or inaccurate. As a result, the report significantly underestimates the total tax revenue raised in Wales, while greatly overestimating the value of government expenditure.

The basic problem is that the report was based on UK Government accounting practices that don’t necessarily apportion costs where those costs were actually incurred. HS2 expenditure is a classic and well documented example of this, but there are many others. Nor was tax revenue correctly apportioned to where it was actually generated – for example, corporation tax.

A second problem is that the report outlined contemporary expenditure and revenue, not those of an independent Wales. GERW 2019 acknowledged that it described Wales as part of the UK, whereas an independent Wales would be free to set its own policies on expenditure and revenue, defence expenditure being one obvious example.

A fiscal deficit?

The Welsh Government established an Independent Commission on the Constitutional Future of Wales in 2021, to consider various options for the future governance of Wales, including independence. In 2022, a paper was commissioned by Plaid Cymru from Professor John Doyle of Dublin City University on the so-called fiscal deficit in Wales.

Doyle’s research challenged the findings of GERW 2019, concluding that the fiscal gap (or budget deficit) in the first few years of an independent Wales would be around £2.6bn. This would be equivalent to 3.4% of GDP, not the 17% stated in GERW.

The UK as a whole runs a budget deficit, which has varied from 2% to 5% in recent years, and nobody is suggesting that the UK cannot be independent because of this. Indeed the average budget deficit across the OECD group of developed countries is currently 3.2%, comparable to that of an independent Wales.

Doyle concluded that much of the discrepancy between the two findings is due to UK government accounting practices, which don’t reflect how revenue and expenditure would be accounted for between two independent countries. The Welsh Independent Commission took the Doyle Report into account in concluding that independence is a viable option for Wales.

There is also the matter of restrained economic policy. Both Ireland and Singapore were ridiculed at the time of their independence from the UK as being unsustainable. But they flourished once they were free to develop their own economies, and today are among the richest economies in the world. So an initial deficit of 3.4% could easily disappear if we implement realistic economic policies.

An independent Wales would not need to rely on a huge subsidy to survive. We would simply need to manage our finances as most other independent countries do.

The trouble with Tesco

Tesco is a successful supermarket chain operating across the UK. In 2018–19 it reported net UK profits of £1.716bn and paid tax of £413mn, including corporation tax of £302mn. All its tax revenue was recorded as being generated at its head office at Cheshunt in Hertfordshire.

Yet Tesco operates more than 20 supermarkets in Wales, all generating income and profits towards the corporate total. Assuming that Tesco’s activities are generally distributed in line with population, it’s fair to assume that a share of Tesco’s profits and tax liabilities would be generated in Wales.

Wales’s population in 2018–19 was 3.1mn, compared to the UK total of 66.2mn, or proportionally 4.7% by population. Wales’s GDP then was £72.7bn compared to the UK total of £2,230bn, proportionally 3.3% by GDP. Based on Wales having a 4.7% share of the UK population, it’s reasonable to assume that around £80mn of net profits would have been created by ‘Tesco Wales’, with a corresponding tax liability of £19mn in tax payments.

But none of this profit is attributed to Wales. It’s all recorded as being created in SE England. The same is true of almost all other companies operating on a UK-wide basis with their headquarters in England – usually London or SE England. The notable exception is Admiral Insurance, which is headquartered in Cardiff.

Expenditure and revenue

According to GERW 2019, Wales contributed £1,306mn in corporation tax in 2018–19, equivalent to 2.3% of the UK total. This is significantly less than would be expected if considered as a proportion of GDP (3.4%) or population (4.7%). The reason for this apparent shortfall is not lack of tax generation, but the accounting practice of assigning profit by head office location.

Based on the example of Tesco, Wales generates far more corporation tax than was declared in GERW. I estimate this to be somewhere between £1.93bn (if shared on a GDP basis) or £2.668bn (on a population basis). For sake of argument, I’ll split the difference and assume realistic Welsh corporation tax receipts of £2.3bn – an increase of £1bn on the GERW value.

GERW stated that Welsh taxpayers paid £4.93bn in income tax in 2018–19, equivalent to 2.7% of the UK total. While this is significantly less than the proportionate value for the UK, this may be a fair reflection of the low wages paid in Wales relative to the UK. Income tax is allocated based on the registered address of individual taxpayers, so I assume the GERW figures are a reasonable reflection of revenue generated in Wales.

In that same period, Welsh taxpayers paid £4.547bn in National Insurance (NI) contributions, equivalent to 3.5% of the UK value. The Welsh share is more proportionate than income tax, highlighting the regressive nature of NI, which is capped at higher salaries.

Economic geography and Welsh independence

While an individual’s NI contributions are allocated to the address of that individual and could be accepted as accurate, this isn’t the case for employer NI contributions, which again are allocated to their head office. These should be reallocated on a geographical basis to the address of individual employees. On that basis I estimate it would increase Welsh NI contributions by £600mn to around £5.2bn.

Similarly, the figures for capital gains tax and stamp duty associated with corporate activities are assigned on the basis of HQ location and understate the tax revenue generated in Wales. However, these are relatively small amounts and difficult to estimate.

GERW reported that Welsh taxpayers paid £6.389bn in VAT in 2018–19, equivalent to 4.5% of the UK total. VAT is assigned based on the geographical location of the activity conducted, which is in a similar proportion to population and therefore seems a realistic measure of economic activity.

Based on the data and assumptions above, I estimate that the government revenue generated by Wales in 2018–19 was actually around £28.750bn, an increase of £1.6bn compared to GERW figures. This is simply based on a reassessment of accounting practice, and doesn’t identify how an independent Wales may choose to adopt different tax policies and regimes in the future. I’ll examine such issues in part three of this series.

Michael Murphy, YesCymru Director

(This article was originally published on bylines.cymru)