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!
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