Independence Debate

Dr John Ball analyses the main economic issues associated with an independent Wales.

Earlier this year Dafydd Trystan suggested that there was greater support for independence than had been the case hitherto.

In an interesting response, Mike Hedges suggested that there were structural and technical issues that need to be addressed. In that he is quite correct; any debate on independence must be an informed debate in advance of any potential campaign or referendum.  He raised a number of issues and I address here the main economic issues.

The first is currency. There may well be some longing for the pound sterling or a desire (Brexit notwithstanding) for the Euro or the US dollar; or indeed for a new, separate Welsh currency. Whilst in might be fun to indulge in what name such a new currency would carry, this may be impractical, certainly in the short term. The reality is that there is no reason why, in an independent state, the pound (or for that matter the Euro), could not continue to be used. It is a fallacy to suggest that this is not possible.   

The countries of the British Isles could form a currency union based on the pound. Despite the doubtful arguments of the Better Together campaign during the Scottish referendum, to a great extent such a currency union already exists. The Scottish and Northern Ireland pound, the Isle of Man, the three Channel Islands and British Overseas Territories all of whom to a greater or larger extent issue their own bank notes. The downside – if downside it is – the Bank of England would remain as the Central Bank and thus lender of last resort. In terms of economic stability this would be the best, current option, certainly until any turbulence following independence settles.

The use of a non-domestic currency is not unusual. Six countries outside the Eurozone use the Euro, nine countries the US dollar and seven countries share the East Caribbean Dollar. If you think about it, the 19 countries using the Euro by definition do not have a domestic currency and ultimately rely on a “foreign” bank (ECB) as lender of last resort.

There are of course other options. In the absence of a currency union so-called sterlingisation would be an alternative, certainly in the short term. In this scenario the pound would remain the currency but used without the consent of the Bank of England. The major weakness would be no Central Bank to act as lender of last resort and no control over interest rates – although the latter would still apply with a currency union. Interestingly, there is an argument that such an arrangement would work over the longer term, as is the case with some Latin American countries that use the US Dollar. Since there is no lender of last resort, such a system requires discipline from the banks, which need to be more prudent and far less likely to indulge in the reckless activities that led to the crash of 2007/08.

There is in addition the use of seigniorage, essentially a system where the pound continues to be used on the basis of a “fee” to the Bank of England. Interestingly, the Bank of England’s latest accounts show a seigniorage income for the year of £432million.

There is of course the option of a new, separate currency. This is not as fanciful as it may seem. Wales would be fully responsible for its own future, policy priorities and choices.  Such a system would allow control of both fiscal and monetary policy (instruments fundamental to driving economic growth and heaven knows we need that!), macroeconomic policy, control of inflation and address current deflationary pressures. Many small countries that have emerged over the past century – and for that matter only since the end of empire and the Soviet Union – developed and use their own currencies. In his contribution earlier this year, Mike Hedges pointed to the relative ease with which the former two nations of Czechoslovakia launched their own, separate currencies.

There will be a need for a new central bank. Since the end of the second world war no fewer than 25 new central banks have been established, many in Europe. The role of a central bank – inter alia – is to set the interest rate and act as a lender of last resort. This latter responsibility of course requires that such a fund be available. Estimating the amount such a fund should hold is not easy; as an example at the time of the Scottish referendum the Governor of the Bank of England suggested that a new, Scottish Central Bank would require an initial fund equivalent to approximately one quarter of Scotland’s GDP. How this figure was arrived at is at best unclear (as indeed were his comments during that campaign). However an equivalent figure for a Welsh Central Bank would be approximately £22 billion.

Whilst there will be the need for such a fund, it will not of course be required from day one. The existing clearing banks – all of which are required to hold their own reserves – would be required to register as separate, Welsh businesses probably within a Wales Stock Exchange. As subsidiaries of larger banks, these would in any event have the “protection” of the parent bank. This is what happens in other European states.

Although not specifically addressed in the original Click on Wales article, the issue of Government funding needs to addressed. Funding comes from two sources. The first and obvious is taxation and a debate on the tax take in Wales is outside the point of this article. Suffice to say that although recent research has suggested a shortfall between tax and spending in Wales, there are a number of caveats. Not all the data on taxation is delineated by the different countries of the UK; many sources of taxation are earned within Wales by externally owned businesses which declare tax in their home areas and in any event, there may be relatively lucrative sources of tax currently untapped; for example tourist and bed taxes, common all over the world .

Governments also borrow. There is no country in the world that pays its way solely on taxation, although Norway comes close. Finance is raised by selling Government Bonds that carry an annual interest, a redemption rate and can be denominated in a currency other than the domestic currency. Although the life of such bonds varies, interestingly some countries (including Ireland) have successfully issued bonds with a one hundred year maturity. There is of course concern that this debt will be borne by future generations, although it can rightly be argued with such funds properly used in a new, exciting and innovative nation state, they will ultimately be the beneficiaries. Would there be a market for such Welsh Government Bonds? Government bonds of all types and all countries are sought after investments because of their relative security; even countries with (doubtful) economies successfully issue bonds. Recent bond issues have been taken up by investors in Argentina, despite that country defaulting more than once on repayments. Recent bond issues by European countries that suffered after 2008 have been in demand, notably Greece.

Mike Hedges raised a number of details which are perhaps outside the point of this reply intended to address some of the economic issues. Nevertheless a brief response is appropriate.

The future of particular government agencies was raised. The DVLA, ONS and Companies House would offer their services to the remaining nations in the British Isles and indeed elsewhere. All three (and for that matter other government bodies) have built up unique and saleable skills in (confidential) computing, data analysis, HT and information processing that would be both difficult and expensive for England (as the remaining UK state) to replicate – indeed pointless. All to some extent already sell their services and if an example is required of a successful “government” agency selling its wares outside the UK, look at the Royal Mint.

The question raised about social security, national insurance, tax rates, the share of the national debt, sea boundaries and cross border protocols are of course important and would clearly need to be addressed. However, so far as the economy is concerned, once a clear picture emerges of how much tax we actually currently collect, how new or existing forms of government finance can be raised (or lowered…), then these detailed matters may be tackled.

No one is suggesting, and certainly not me, that a move to independence will be easy – but the challenge of building a new and dynamic nation is exciting and challenging.

Let’s embrace it!

 

All articles published on Click on Wales are subject to IWA’s disclaimer.

Dr John Ball is a lecturer in economics on the School of Management, Swansea University.

15 thoughts on “Independence Debate

  1. This probably mirrors discussions held in Finland a hundred years ago, as well as many other states that have faced the same issues in the intervening years. We now take them all completely for granted, of course.

    Independence, as your article strongly implies – is not about how to be different, insular or disconnected (I intensely dislike the term ‘separatist’) – it is about growing ourselves, being in charge and connecting in the best most holistic way. The starting point is – how do we establish a system that does not put us at the very end of the queue in our own country?

    The current independence debate should be about where we start from and in which direction we travel, rather than about the constitutional arrangements – they’ll come as a consequence of independence of thought, of action and of intent. Currency is a useful sounding board for exploring those issues.

    Events yet to come – sooner, possibly, rather than later – will determine whether it is, in fact, the Euro that will be the currency that we will use, but that’s another story. Celtic Union anybody?

  2. Diolch John. Independence looks increasingly like a feasible option as the UK enters its death throes.

  3. If only… The article makes light of the fact that Wales collects about £18 billion in taxes annually while government spending, devolved and central in Wales is about £35 billion. A deficit of some £17 billion is over 25 per cent of Welsh GDP, a gap that cannot nearly be filled by a tourist tax, which would net a few hundred million at most. And borrowing on that scale would quickly become horrifically expensive as confidence in Welsh finances crashed. No, an independent Wales would need to cut government spending by about a third and raise taxes too. The Welsh people would be a lot poorer. They show little appetite for proud penury over mediocre dependence.
    It would be nice to think they and their government would rise to the challenge with a burst of energy, excitement and entrepreneurship. But many of us hoped that would happen after devolution. There has been no real disaster but not many triumphs either and certainly no radical economic transformation. I regret that as much as anyone but it hardly provides a platform for a leap into independence. The Welsh people voted for Brexit in the naive belief that Westminster would make good all the money they currently get from Europe so they are lined up for a major disappointment, not to say a real suck-in. That should disabuse them about London rule but they will need to see evidence that their own government is able to change things substantially for the better relative to England before they are remotely tempted to go for independence. There is no such evidence so I’m not holding my breath.

  4. According to this:

    http://www.bbc.co.uk/news/uk-wales-42265671

    Wales doesn’t just have a massive tax and spend deficit it also has a ‘balance of payments’ deficit. Notice how BBC spins the story as a Welsh export success not as a balance of trade failure… That’s what I call fake news and there is an awful lot of it behind claims that Wales has a hope in hell of becoming an independent state without joining Venezuela in street riots when everything that matters collapses in chaos with unpaid public sector salaries and bills…

    Meanwhile, the Chair of CBI Wales confirms what we already know – legislative devolution ain’t working…

    Independence – what a joke! But feel free to start the Ball rolling… At some point England will probably have to build a wall!

  5. @R. Tredwyn,

    Two things here:

    1. I’d be interested in knowing the source for your figures. If they came from ‘official’ sources, then I think a degree of scepticism is in order. I can’t imagine for one moment that the colonial state under which we live would permit for one moment the release of figures which might undermine their argument that we are “Too we-e-e-ak, too pooo-war, too stew-pid!”. I remember how, for all his determination and diligence, even Gwynfor Evans was unable to wring out of London any accurate or comprehensive figures about the imbalance between revenue collected here and mooney spent here.

    2. Even if we allow for the quoted figures to be somewhere near the mark, you make the same error as is constantly made by Unionists in Scotland when they quote the General Expenditure & Revenue Scotland (GERS) figures, with all their claims about “a £15bn black hole” in Scotland’s finances. These figures represent how things are now, under colonialist/assimilationist rule from London. They are of limited relevance (if of any relevance at all) to the finances of an independent Cymru.

    Consider what a nation of approximately 3 million people would need in terms of public spending, compared to the priorities that a supra-national state of some twenty times that size deems it necessary to have. Without our having to contribute to the perpetual over-reach of Greater England’s international pretensions; without having to help finance the military equivalent of a marital aid to the tune of billions each year; without having to help pay for projects which have absolutely no benefit to us at all (Crossrail, HS2, that giant sewer they’re constructing under London, and the refurbishment of its above-ground equivalent at Westminster); without these encumbrances, then our revenue and spending needs would be a fraction of what is taken from us now, and a fraction of what London thinks they can get away with giving us.

    On top of this, economic arguments are of limited validity when discussing whether a nation should exercise its inalienable right to self-determination (and it is inalienable, despite what Snr. Rajoy might think). If economic arguments were the be-all-and-end-all, then the people of Finland would not – only this past week – have been celebrating 100 years since they established their highly successful and prosperous republic (and the same arguments were used against them at the time).

    Unless, of course, you think – as Mr Walker seems to do – that the people of this land are uniquely dense and preternaturally lazy and so, in order to save them from themselves, they must have someone else make the decisions for them in perpetuity. I have a higher opinion of them than that.

  6. An increase in Welsh exports is somehow a failure and is “fake news”. Whatever next

  7. @Nigel Stapley,

    I think R. Tredwyn is quoting the work of the Holtham Commission a few years ago, which you can find summarised at the link.

    “In relation to tax revenues raised in Wales… £17 billion was raised in Wales during the financial year 2007-08 (rising to £19 billion when non-domestic rates and council tax are included). This is greater than the Welsh block of £13 billion for the same year. However, total expenditure in Wales for 2007-08 was in the region of £25 billion (creating a £6 billion deficit between tax receipts and expenditure).”

    https://goo.gl/UbcWc3

  8. @ Nigel Stapley

    If there are accusations against the Welsh of being a bit “twp”….let’s remember, Welsh education was on par with England before 1999. Then Tony Blair “steamrollered devolution for Wales” and handed the controls over to the Labour Party with it’s Cultural Marxist agenda of dumbing down the population by using education as a one of it’s tools.

    How much “clear red water” is there between British Labour and Welsh Labour these days? Have I missed the recent announcement by Welsh Labour on this matter?

    Apparently Cultural Marxism does work!…………

    http://www.returnofkings.com/116006/the-dysfunction-of-modern-society-is-proof-that-cultural-marxism-works

  9. Dr John Ball replies

    A brief response is I feel appropriate without necessarily addressing some of the minutiae or indeed inaccuracies – although some do need to be corrected!
    Two quite absolute issues need to be understood. The first is that we do not know with any degree of accuracy how much tax is actually collected within Wales, largely as a consequence of the external ownership of businesses operating in Wales. In all probability VAT, Income Tax and National Insurance payments (the three largest sources of taxation) are higher than the current best estimates. Indeed, it is worth noting that with a healthy economy these sources would in any event rise – The Economist no less has suggested that (in fairness in the UK as a whole) fully 40% of those in work are paid below the income tax threshold and consequently also the NI threshold.
    Secondly, and as a consequence of above, the actual budget deficit cannot be calculated with any degree of accuracy – Cardiff University say 25% of GDP and as Clifford pointed out, the Holtham Commission suggest 10% – a very substantial difference.
    It is worth repeating that no country in the world (except perhaps Norway) balances it’s books; all have a budget deficit to a greater or lesser extent; and a budget deficit of any percent DOES NOT mean a reduction in spending of a similar amount. Tredwyn has peddled this fairy tale before now – and Walker please note this is not a balance of payments issue!
    This is an important debate and is fundamental to the future of Wale. Mike Hedges has correctly pointed out that some of the issues raised here do indeed need to be addressed in advance (notwithstanding Tredwyn and Walker’s curious interpretation of economics).
    However, Nigel Stapely is right. It’s about much more than economics, its about looking to the future with pride in a dynamic and exciting nation state. Let’s embrace it!

  10. Many countries in the former Soviet Union found themselves independent when the communism ended. Most have made a great success of independence. Some now have a higher GDP than Wales. Wales is stagnating as part of the so-called United Kingdom. Eire was great effected by the financial crisis ten years ago but has recovered. Now the Eire GDP is twice that of Wales. These begging bowl statistics and mentalities come from a mindset that thinks we can not manage with out the so called wisdom of Westminster. Thinks that sending MPs and Lords to Westminster does Wales any good or serves any useful purpose. The slogan FREE WALES! say it all free us of this negative mindset. Free us of civil service controlled by London. Free us of London controlled media.Free us of useless policiticians only interested in seats in London.

  11. The debate here has focused on currency and taxes, but it’s actually said little about the wider economic dimension of independence.

    The UK is an economic as well as a political union, with a highly-integrated single market where goods and services (including labour) are traded freely across England, Scotland, Wales and Northern Ireland. This single market is underpinned by UK-wide laws and regulations governing most aspects of economic and monetary policy, trade, employment, social security etc.

    In the Scottish independence debate the ‘No’ side pointed out that 70% of Scotland’s exports go to the rest of the UK. I haven’t been able to identify equivalent figures for Wales but I would guess, given our relatively longer border and the higher levels of cross-border travel between England and Wales, that figure will be higher. I haven’t really heard any serious discussion of how the Welsh economy would continue to relate to England’s after independence. Leaving aside the currency question, would Wales have to – in the language of the Brexit negotiations – accept “regulatory alignment” with England? Would there be a trade-off between freedom of policy action and continued access to our nearest and biggest market?

    Business opinion was largely pro-union in Scotland in 2014, especially among larger companies, because of their concerns about currency, regulation, tax and cross-border complexities. I think that if the debate intensifies in Wales, independence advocates will have an even harder time winning around the influential business lobby.

  12. The negativity of some comments above is disappointing, though not unexpected. ‘We can’t possibly win, so we won’t even try’. The questions of income and expenditure in Wales have been tackled very well by Oggy (Owen Donovan) and others – for example we pay twice as much per head as Ireland for ‘defence’ (not including the nuclear nonsense).

    The UK is clearly an economic community, and it is simply time that these relationships are made equitable. But you must first believe in yourself.

    That’s what independence means.

  13. @Huw Meredydd

    You shouldn’t be surprised by the negative responses, because – frankly – there’s limited popular support for Welsh independence, and even less practical envisioning of how it might work (see my first comment above).

    A few people, like you and Dr Ball, are convinced that independence is right and you would probably hold that view regardless of the economic consequences. Plenty of others believe the opposite: that staying part of the UK is preferable come what may.

    The people you need to convince are the many in the middle who don’t have such clear convictions. If the debate started in earnest they would be trying to figure out what independence might practically mean for them and their families – their jobs, savings, taxes, pensions, public services, energy bills, rights to travel, work and conduct business in the rest of Britain and beyond. For most people, these things are the essentials of life rather than mere ‘technical details’ which can be ‘worked out’ as we go along.

    If you can’t present a convincing proposition, if you rely on the rosiest forecasts and gloss over the risks… refer to the outcome in Scotland in 2014.

  14. I suspect that this current on line debate is – for now – drawing to a close. However, as the originator of the article I think a brief response to Clifford is required.
    In one way Clifford is quite correct; the debate is not just and only about economics, taxes, pensions and so forth, it is ultimately about national identity and pride. Having said that, we do need to address the former and that is exactly what the original article attempted to address and perhaps Clifford might like to read it again – with an open mind.
    The response was interesting in that it reflected the whole and indeed only response from the Scottish No campaign – Fear.
    Trade between the nations of the British Isles would continue, just as it does between the countries of Scandinavia and within and between nations in mainland Europe, the idea that somehow international trade suddenly stops one random Monday morning is utterly ridiculous.
    Comments on pro-union support by business during the Scottish campaign need to be clarified. Whilst I do not necessarily subscribe to the idea that the entire (London based) media some how conspired in an anti-independence conspiracy, there is no doubt that any pro independence good news was tucked away and anything that helped the No campaign was given prominence. Such was the case with business news – many if not most Scottish business which expressed a view were either neutral or supportive of independence. The “big” news was a Scottish based bank that announced (or at least a senior member of staff told the press) that it was making “contingency” plans – plans, notice – in the event of a Yes vote. What and why the plans were remain vague.
    What the media did not report (although some in fairness did) was the reality and impracticality of shifting an entire, major operation a few miles south; buildings, technical investment, staff and all the trappings of a major operations. Really?
    The uncertainty and upheaval of such a move would have have been seen as neither worthwhile nor acceptable to the bank’s shareholders and investors.
    Similar arguments about the risk of businesses moving from Wales have often been presented – frankly, the same applies. Will Tata close Port Talbot steelworks and spend billions on a new plan in Bristol? Airbus take its (very expensive) equipment and highly trained staff elsewhere? Tesco close all its shops and Sainsbury rush back to London?
    A message for Clifford and friends – let’s have a sensible, honest and factual debate and leave fear where it belongs, oout of the debate.

  15. John, my apologies for missing your reply to my final comment – I’ve only just seen it. I realise the debate here has died down, and many other articles have since featured on the site. However, on the off-chance that you or someone else does check this thread again, I just have to respond to some of your final comments.

    On trade, of course it would continue between the nations of the British Isles post-independence – but will it continue at the same *level* over the long-term? There’s a well-evidenced phenomena in economics called the ‘border effect’: trade *within* countries tends to be greater than trade *between* countries. This is the case even within the EU, and the more barriers you create through political and regulatory divergence, the more difficult trade becomes. This is why the Treasury’s recently leaked modelling suggests a drop in UK GDP of increasing severity the ‘harder’ the potential Brexit outcomes (remaining in the single market, a free trade deal or WTO terms).

    Speaking of the single market, this is of course the key reason why trade between the countries of Scandinavia is so easy – an example you cite as an apparent future model for the British Isles. Yet even in this case Norway, which is in the single market but not the customs union, has border checkpoints with Sweden and Finland and doing business across the frontiers is not completely frictionless. Besides, post-Brexit Scandinavia looks unlikely to offer a model for the British Isles.

    I’m not suggesting that after independence we’d lose Tata or Airbus (which use Wales as a base to serve the international market) or Tesco and Sainsbury’s (which are in Wales to serve the local market). However, depending on the final shape that independence takes we may well lose some firms that trade mainly with customers and/or suppliers in England; what’s more I can’t see how we could possibly retain UK Government agencies like the DVLA, ONS or Royal Mint, which were essentially moved here as an act of regional development policy.

    You mention Scotland. There’s little doubt that most Scottish business opinion was at the very least sceptical of independence – although the Yes campaign and the Scottish Government succeeded brilliantly in neutering any formal campaigning by the large business membership organisations (remember the CBI fiasco?) Senior executives from the Weir Group, Kingfisher, HSBC and BP all came out for ‘No’, while Standard Life and Alliance Trust registered companies in England as a hedge against a ‘Yes’ vote. There were of course pro-independence business voices but the main pro-Yes Business for Scotland group was chiefly comprised of SMEs with very localised commercial interests.

    Finally, I’m all in favour of “a sensible, honest and factual debate” about independence – but let’s not delude ourselves, as far too many people are doing with Brexit, that it would be easy or cost-free: people deserve better than “cake and eat it” wishful thinking. That said ultimately independence probably is, just like Brexit, a question of identity rather than economics.

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