The economics of an independent Wales pt.2

The challenges held up as a barrier to an independent Wales are easily surmountable and our economy could be just like any other country’s economy, writes Dr John Ball

Dr John Ball is a former lecturer in economics at Swansea University.


This is a response to Mike Hedges’ article in September 2019, which called for Welsh independence to be negotiated before being put to a referendum. This is the second of a two-part response and the first response can be read here.

 

In Mike Hedges’ original article he suggests without any evidence that an independent Wales would lead to higher taxes; and this negative mantra needs to be addressed.

 

The recent reports by Cardiff University on taxation and spending suggested there is a deficit of some £13billion, a figure eagerly leapt upon by those desperate to prove how poor we are and without any thought as to how this number was reached.

 

The deficit is often referred to as a percentage of GDP (which in itself is totally misleading); in 2016 it was apparently 24%; in 2019 it was 17% an illuminating illustration of the dynamic nature of the economy.

 

To address this in detail will make this response far too long – in summary; both revenue and spending are best estimates, the former is almost seriously understated because business taxes in particular are reported at the business’ headquarters, invariably not in Wales. The latter is overstated; the approach taken by the researchers was the “who benefits” approach (an entirely correct approach to such research), which in this case meant the entire UK.

 

Thus there are questionable expenditure allocations; for example £2bn each on defence and non- domestic pensions, £5bn on “non-identifiable expenditure” and of late (though not in the Cardiff report) an announcement that Wales’s contribution to High Speed 2 will be a staggering £6bn.

 

The revenue side is also misleading; 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.

 

In addition to the existing tax base there may be relatively lucrative sources of tax currently untapped; exported water and electricity, tourist and land value taxes for example. In reality, the deficit is almost certainly much less and allowing for adjustments is probably nearer some 6% of GDP.

 

The naysayers may not like to be reminded that Gordon Brown’s insane policy of allowing the clearing banks to act as casinos led to a UK budget deficit of 10% followed by the equally insane policy of austerity. Incidentally, all countries run a deficit, such deficits mount up and if not reduced are added to the overall national debt; currently standing at £2trillion (£2,000,000,000,000) for the UK.

 

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, 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.

 

There would be a market for Welsh Government Bonds, they 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. So safe are such bonds that some currently carry a negative interest rate.

 

Mike Hedges raised a number of details, many of which in reality will obviously form the basis of negotiation; 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 or Scotland and Ireland to replicate – and indeed pointless.

 

All to some extent already sell their services and could expand that activity – if an example is required of a successful “government” agency selling its wares outside the UK, look at the Royal Mint, which creates currencies for 60 countries each year. If there is a threat to civil service jobs in Wales, it comes from advances in technology and the policies of the UK government, not from independence. 

 

It is perfectly clear that trade would continue seamlessly between the nations of the British Isles just as would issues of security and defence, as in Europe. Questions raised about the share of the national debt, sea boundaries and cross border protocols are of course important and would clearly need to be addressed.  

 

The original article was styled in pointing to the need not simply for pre-negotiation detail, but in the approach to such negotiations. I am not naïve enough to believe that these will be easy, but the very real difference with the current Brexit fiasco is that we will not enter them by starting with insults and taking a mightier than thou approach.

 

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.

While you’re here, we’ve got something to ask you: will you join us?

We’re working every day to bring the right people together and generate the ideas to make Wales a world-leading force.

We’re independent of government and political parties. We provide a much-needed space for open, transparent debate about the ideas that can make Wales better.

To continue to do this, we need people like you to join us.

Join us today and you’ll be supporting vital work that’s making our country better than ever.

Find out more