Following Scotland has run its course

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






The-Silk-commission-meeting-in-November-2011

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.

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.