Mon. Aug 19th, 2019

Lost opportunities – Let’s not keep making the same mistake

I’m still convinced that the best argument against independence for Wales is that it would mean giving up our territorial claim to the rest of the UK, and delay the introduction of Welsh-language road signs in Essex.

The second-best, and of course much more serious, argument against it is the so-called ‘fiscal deficit’ – the fact that, according to all the figures we have available, government spending in Wales exceeds the total of taxes raised in Wales, so that Wales receives a subsidy from the rest of the UK. It would be madness, people say, for an already-poor country to choose to slide deeper into poverty by giving up one of its main sources of income.

An ever-shifting picture

This argument would carry some weight if Wales’s poverty were some immutable property of this land: a tough, unyielding landscape populated by a genetically inferior people with low IQs and an aversion to hard work. And it’s true that over the years there have been all too many people – sometimes even Welsh people themselves, when it’s suited them – that have claimed this actually to be the case. “Too small, too poor, too stupid…” – we’ve all heard it said.

Yet as I’ve shown elsewhere, it simply isn’t the case that Wales has always been poorer than the rest of the UK.  There is compelling evidence (in the form of the Nevin reports) that until the early 1960s Wales’s taxes were subsidising the rest of the UK to the equivalent of over £1 billion a year in today’s money.

A reminder of a moment in time when Welsh independence was there for the taking, but no-one was listening.

Two things in the last week have got me thinking about this issue once again. The first was reading H.W.J. Edwards’ masterful exposition of the case for Welsh independence dating from 1953, reviewed in my article last week. The second was seeing the deficit in the news again, with a new revision of the Government Expenditure and Revenue Wales (GERW) report issued by Cardiff University’s Welsh Governance Centre. This uses figures from the Office of National Statistics (ONS) to make an estimate of the size of the deficit – no-one knows the actual size, since the figures simply aren’t collated in a systematic way. The latest report indicates, essentially, that the trend is in the right direction but for the wrong reasons. The size of the deficit is down since their previous report in 2016, from £14.7 billion to £13.7 billion; but this isn’t because of increased prosperity leading to more tax being raised, but to government cutbacks leading to less spending. Incredibly, receipts from income tax are still below their 2008 levels.

Even £13.7 billion is a shocking figure – equivalent to 19.4% of all Welsh GDP. Although there are very few countries in the world that have no deficit, it’s hard to find an independent country anywhere in the world that manages a deficit on this scale. For comparison, the UK as a whole has a deficit of around 2%.

I’ll come back in a minute to consider how things have got this bad, and what can be done to make them better; but first let’s pause to think what might have happened if people had paid more attention to H.W.J. Edwards and his fellow Plaid Cymru activists in 1953, and taken the opportunity to seize independence at a time when Wales had a substantial tax surplus.

What could have been

If Wales had achieved independence in the 1950s it could have done so at a time when there was no fiscal deficit and it could easily have paid its way. For sure the economy had its vulnerabilities, with its relative over-dependence on the coal and steel industries. Even so, with a respectable budget surplus which we wouldn’t have had to send to 11 Downing Street every year, we’d have had the resources to restructure our economy at our own pace – very much like Luxembourg was able to do with its steel industry, which once completely dominated its economy and has now all but vanished, with very little rancour.

We’d have been spared Harold Wilson’s programme of peremptory pit closures during the 1960s, and could have heeded the warnings that were being given about the slag heap above Aberfan in time to take action. If the coal and steel industries had been denationalised and put into the hands of workers’ co-operatives, as had been Plaid Cymru policy in the 1950s and was subsequently proved to work well in the case of Tower Colliery, there’d have been no need for Wales to get sucked into Joe Gormley’s miners’ strike in the early 1970s, and no three-day week (which would have given Welsh businesses an immediate 67% productivity advantage over their English competitors). Needless to say there’d have been no second wave of pit closures under Margaret Thatcher and no need to get sucked in to Arthur Scargill’s attempt at overthrowing the government.

With our own currency, we’d have been spared the effects of the spike in the value of Sterling that occurred in the 1980s as a result of North Sea Oil, which proved so damaging to British manufacturing in general.

We’d probably have joined the EEC (as it then was) in due course, but like Ireland we’d have been in a much stronger position to negotiate a programme of structural investment, and to spend it wisely on developing infrastructure rather than frittering it away on heaven knows what [it appals me that West Wales and the Valleys have received almost as much EU funding per head over the last 20 years as Poland, yet we have pitifully little to show for it].

But all of that opportunity was squandered – from a mixture of lack of confidence, post-war attachment to the union flag, mutual suspicion between North and South, and the iron hegemony of the Labour party. We are still paying the harsh price for that today, and it sometimes feels that we still haven’t learned.

The miracle of compound interest

While a deficit of £13.7 billion or 19.4% of GDP is indeed dreadful, it hasn’t happened overnight. Hard figures are notoriously hard to come by, but the likelihood is that even in 1997 when Wales voted for devolution it was still modest by today’s standards. Professor Phil Williams made an estimate in 1998 of around £3 billion. It’s only since then, under the incontinent leadership of the Welsh Labour Party, that the deficit has ballooned.

All sorts of ways of closing this gap could be considered, some more draconian than others, but like with most problems in the economic sphere the best solution is economic growth. If that sounds fanciful, and if the gap between tax receipts and spending in Wales looks like too big a chasm to cross, then consider this: if the Welsh economy were growing at the same rate as that of the Republic of Ireland (6.7% per annum, according to the World Bank), we’d close that deficit in just three years. In fact, thanks to the miracle of compound interest, even if we could grow our economy at just 2% a year then it would be closed in 8-9 years. That is not particularly ambitious – in fact, if we look at the World Bank’s growth statistics, it’s easy to find countries roughly the size of Wales, or even far smaller ones, growing at well above that rate:

Country Growth Rate (%) Years needed to close a 19.4% deficit (if they had one)
Estonia 3.9 5
Finland 2.3 8
Iceland 4.6 4
Ireland 6.7 3
Israel 3.3 6
Malta 6.6 3
Slovenia 4.5 4
Slovakia 4.1 5
Switzerland 2.5 8

For a country’s economy to show zero growth over a ten year period despite having money poured into it from outside is virtually unheard of unless there’s been war or famine. Yet that’s been the story in Wales, and the weirdest thing about it is: why on earth have we been prepared to put up with this?

One of my frequent sayings is what’s known as ‘Hanlon’s Razor’ – “never attribute to malice what can adequately be explained by incompetence” – but there comes a point when that charitable view becomes less and less tenable. In our case, we’ve recently seen the endearing honesty of Lee Waters, pleading the case that it is in fact incompetence alone which has got us to where we are today. I don’t know, perhaps we are uniquely stupid and lazy among the peoples of the earth, ripe to become extinct. But I don’t think so. It’s hard to avoid the conclusion that this has been deliberate policy – both to keep Wales poor so that Welsh people can be persuaded to carry on voting for ‘the party of the poor’ (even though in reality they have been the party of upper-middle-class public-sector employees for a long time now), and so that they can claim credit for “winning more money from the Treasury for Wales”.

The advantage enjoyed by each of the countries listed above is of course independence. Even the ones locked into the Eurozone have far more freedom-of-manoeuvre than Wales currently has. Yet there are still tried and tested actions that could be taken by a Welsh government that was serious about promoting growth, even within the constraints of the current devolution settlement:

As I’ve argued elsewhere, I believe that the Welsh economy can only really prosper with independence. This is the great dilemma of Welsh politics: it’s hard for us to prosper without independence, and yet independence is hard to achieve without a measure of prosperity beyond where we are today. Hence it’s in the Unionists’ interest to keep us poor for as long as they can.  The only way to break this vicious circle is to throw out the Labour Party and elect a Welsh government which is serious about independence, serious about economic growth, and has the nous, experience and determination to do what’s needed.

Even so, it will be harder now that it would be have been if we’d taken the plunge in the 1950s or 60s. But the longer we leave it the harder it will get.

Leave a Reply