The Big Independence Question

It’s the issue all of us who support independence want to sidestep, yet equally confront head-on. It’s summed up in one simple question – Can Wales afford independence?

When analysing the issue, there are at least two questions:
1. Can Wales support itself based on its tax income?
2. Could current public spending levels be maintained post-independence?

The answer to the first question is yes. Every independent nation is run on its own tax income, macroeconomic and monetary policy, combined with public borrowing. Welsh tax revenues were estimated to be £19.3billion in 2007, a figure that’s probably higher now.
An independent Wales would also be able to borrow like any other nation. Public borrowing is hardly in vogue at the moment, but if we want a master class in using the national credit card, we needn’t look further than the UK. For 2012-13 the UK has a borrowing target of £120billion – adding to the £1trillion public debt. In simplest terms, every year the UK borrows the equivalent of over two and a half times the entire Welsh economy.
The second question is more commonly associated with the “affordability” argument. It’s also a far more complicated one to answer.
Estimates for the difference between tax revenue and public spending – the Welsh “national deficit” – vary. The Holtham Commission found that in 2007-08, £6billion more was spent in Wales than raised in taxes. The figure has been quoted at £9billion, and even as high as £16billion by Peter Hain in 2011. That’s an unacceptable margin for error in a place that prides itself on record keeping. But where does this “national deficit” actually go? If we take the UK’s borrowing figures at face value, some £6billion of it is borrowed money. There are also proportional shares of spending on UK-wide areas like defence, welfare and foreign affairs. Does this spending produce tangible benefits for Wales?
Let’s look at defence spending.
For 2011-12, £1.68billion will be spent, proportionally, on Wales’s behalf. That’s more than the Welsh government’s annual budget for rural affairs, business & enterprise, the environment, housing, heritage and regeneration combined, or 86% of the Welsh government’s education & skills budget. If Wales had a defence budget similar to the Republic of Ireland for example (0.7% of GDP), it would be around £300million.
Unless Welsh leaders have ambitions of playing Blofeld, it’s not a great leap of logic to suggest that Wales could spend significantly less on defence, as an independent nation, than the UK currently spends on our behalf. That’s £1.38billion of national deficit wiped out.
The UK currently maintains 240 or so diplomatic missions. The “Welsh proportion” of Foreign Office and International Development spending is approximately £490million – at least one and a third times the Welsh government’s business & enterprise budget. That figure includes spending on BBC World Service (until 2014) and the British Council. Would Wales need to maintain diplomatic missions in Eritrea, Kyrgyzstan and the Solomon Islands?
Wales no doubt benefits from bodies such as UK Trade & Investment, but the most successful foreign-oriented brand Wales has had in a generation was our own Welsh Development Agency. Could a streamlined Welsh diplomatic service, with a joined-up approach to foreign investment and foreign aid, not only significantly boost Wales’s international profile – out from under the shadow of the Union Flag – but cost less than £490million? Perhaps £200million? Then there’s the possible overestimates of public spending in Wales. In 2009-10, StatsWales listed out turn policing expenditure as £671million, compared to Treasury figures of £762million – a difference of £91million. The difference for fire services was £45million. Despite only having five prisons, two of them low-security, the Welsh prisons budget is listed as £228million – roughly £78,000 for every prison space in Wales, more than twice the average £37,000 cost in 2010. On paper, this looks like a £250million overestimate in only a few parts of a single UK government department – very significant if you’re dealing with a £6billion deficit. Can similar “overestimates” be found elsewhere?
According to official data, in 2010-11 some £8.8billion was spent in Wales across 20 different benefits, including state pensions, and approximately £1.34billion on tax credits. Due to higher proportions of pensioners and disabled people, Wales is on the front lines of change. Major reforms, such as the introduction of the Universal Credit, are due in the coming years. A Welsh share of the £10billion welfare cuts by 2016 will be £125million per year, perhaps higher.
We must also factor in the relative poverty line. At 60% of median income, it’s a UK-wide measure, distorted, like economic data, by London and southern England. As Welsh median income is lower than the UK, levels of relative poverty in Wales at a national level, are likely to be lower too.
Independence could reduce levels of relative poverty instantaneously – statistically at least.
There’s also an opportunity to build a new welfare state from the ground up. Could a smaller Welsh state reduce administration costs?
Could Wales underpin welfare with dividends from natural resources, sovereign wealth funds or state-run enterprises? Could friendly societies, or cooperative welfare, make a return? A Welsh welfare state should still ensure work pays and is likely to be less generous in financial terms. However there could be a new ethos based on communitarian values – seeing benefits recipients as people who need a “leg up”, instead of being browbeaten as scroungers.
How much of the : £2.2billion Border Agency budget, £2.5billion Cabinet Office budget, £3billion Energy & Climate Change budget, £4.1billion Treasury budget – is being “spent on Wales”? There’s at least £595million of “national deficit” in there somewhere.
It’s important to remember subsidy sometimes cuts both ways. Anything flagged as a “UK” or “England and Wales” project, will have a proportional Welsh contribution. These could include: Crossrail – £115million (via Network Rail), new aircraft carriers – £350million, London Olympics – at least £460million (almost the cost of the main stadium), Iraq and Afghanistan wars – £1billion, High Speed 2 – £1.9billion, Trident replacement – potentially £1.25billion.
In 2010, it was revealed that the Housing Revenue Account Subsidy (scrapped this year) resulted in Welsh local authorities paying back up to £2billion of surplus rent money to the Treasury since the scheme was established.
More recently, it was revealed that Welsh taxpayers could be paying £100million towards reductions in water bills for south west England and an upgrade to London’s sewerage system.
In most cases, Wales won’t see any extra “Barnett consequential” from this spending, but it’ll be counted as part of the national deficit all the same. That’s a lot of empty, mostly borrowed money, spent on Wales’s behalf. Is it any wonder how public spending in Wales keeps rising, but there seems to be very little to show for it?
Some fiscal levers could be on the way to Wales, dependant on the Silk Commission’s findings. It’s a sensible development. We won’t know what our AM’s are made of until they take decisions that directly affect personal or business incomes. But are Welsh economic problems too big to be solved by mere tinkering? Independence brings with it unequivocal responsibility.
The wider macroeconomic powers over taxation and fiscal policy would have a greater impact on the Welsh economy than anything devolution or federalism can deliver or promise. It’s something every single nation uses to its advantage, but something Wales shies away from.
Adam Price and Ben Levinger’s The Flotilla Effect highlighted four core advantages small nations possess: increased openness to trade, greater social cohesion, adaptability and big government’s acting as a stabiliser. In the 12 months to June 2011, Wales had a trade surplus of £5.72billion. On paper, Wales would be pushing into the top ten net-exporters of the EU. Would independence enable Wales to exploit this further? Can we shape Welsh economic policy to closely match our exporter role, as opposed to being a bit part of the UK’s global financial service machine?
The value of exports rose dramatically over the period (+31.4%) because of a statistical change. Exports were counted from the place they were produced, not where the company producing them was head-quartered. Is a significant chunk of our wealth actually accounted as having come from elsewhere? If that’s true, could Welsh business taxes or VAT revenues rise by a similar amount? We simply don’t know. The Scottish Government produces the “Government Expenditure and Revenues Scotland” (GERS) report which analyses revenues and expenditure. Wales has nothing similar, other than political anoraks armed with calculators and too much time on their hands.
If it is true, it could have a big impact on the affordability argument – increasing tax revenues and chipping away at the national deficit, which has fallen by at least £2billion since the start of this article – one third of the way to a balanced budget, notionally. If an amateur like me can do it, imagine what an economist, or a UK government hellbent on swingeing cuts could do?
Employment law, competition law, industrial relations, consumer protection, the tax code, VAT, monetary policy, research councils, international trade, financial regulation – all things that could be reformed for the better in Wales, and powerful tools only available to us via independence.
I accept that independence is, at present, a minority position. For many, the “I-word” nauseates. If Wales can’t afford anything, it’s to let cynicism cloud the potential for a economy that’s allowed to work to its strengths, taxed fairly, and possesses every single tool necessary to unleash Welsh enterprise. To enable this, we’ll need to make big decisions on the constitutional direction of Wales, and its economic future. Do we want to tinker, or do we want to take control?

Owen Donovan, a life scientist from Bridgend, blogs regularly on Welsh affairs, nationalism and Welsh independence at Oggy Bloggy Ogwr.

Published in Cambria Magazine Summer 2012