The Welsh Economy III: Economic Policy Since Devolution

(Title Image: Visit Cardiff)

This article will give you an idea of what economic development policies have been introduced by successive Welsh governments within areas devolved to Wales since 1997-1999. Also, this looks at the major economic challenges Wales has faced down since then and the major economic powers that don’t belong to the Welsh Government.


There’s a clear link between good infrastructure and high economic development so it’s no surprise that large swathes of Wales suffer from long-term under-investment in infrastructure. Following a new Infrastructure Plan in 2012, the Welsh Government have sought to balance investment between social infrastructure (schools, hospitals, flood defences) and economic infrastructure (roads, enterprise zones, broadband etc).

The Welsh Government have been relatively conservative when it comes to building new roads and railways, with an emphasis put on improving capacity on the existing network wherever possible (A465 dualling, A40 & A470 improvements) and only building bypasses/completely new stretches of road where there’s a proven local need (Church Village, Newtown, Caernarfon-Bontnewydd and the proposed Newport bypass). Some of these schemes have been challenging in engineering terms with dubious returns on investment – particularly A465 dualling.

Wales was hamstrung by the Labour UK Government’s awarding of a “no growth” rail franchise to Arriva in 2003. This meant an extended life for an out-of-date, loathed and wholly inadequate pre-existing train fleet. The new 15-year rail franchise – which started in October 2018 and was the first to be awarded by the Welsh Government – will see eventual major investments in new trains and the part-conversion of the Cardiff Valley Lines to a tram-train Metro.

The increased necessity of digital connectivity (another area where Wales has long lagged behind) led to the establishment of one of Labour’s flagship infrastructure projects, Superfast Cymru – a £425million programme with BT which ran between 2013-2017. Its goal was to ensure 96% of Welsh homes and businesses had access to high-speed broadband (of at least 30Mbps). The target was narrowly missed but the digital connectivity gap was closed with the rest of the UK and a £80million successor scheme aims to reach the remaining 4-5% of properties, as well as boost access to ultra high-speed 100Mbps connections.

“Clear Red Water”


The A55 cross Anglesey is one of the few large scale PFI contracts in Wales (Pic: Daily Post)

One key economic policy instituted since devolution was the abandonment of the Private Finance Initiative (PFI) by Rhodri Morgan.

PFI works by a government and a private partner setting up a company to construct and maintain a new piece of infrastructure – whether that’s a road, housing development, school, hospital etc.

The cost of construction is mainly met by the company, while the public partner pays off the cost (with interest) usually over 30 years. While the initial investment is very low for the public partner, it does mean the public partner will almost certainly pay far more than the up-front cost and accrue a large debt (which may or may not be off the balance sheet).

That debt is now coming back to haunt England, having partly led to the collapse of Carillion in January 2018 after they took on many public contracts which were often unprofitable. The Welsh Government have introduced the Mutual Investment Model (MIM), which is similar to PFI in principle, but the public partner can claim a share in any profits generated.

Despite the abandonment of PFI in Wales, many public authorities are locked into repayments until the 2030s worth around £2.8billion over their lifetime. They’re a legacy of the WDA, other bodies like the Cardiff Bay Corporation or one-off projects like the A55 dualling on Anglesey – most of which pre-date devolution.

Business Support & Entrepreneurship

The WDA may have wound-up in 2006, but one legacy policy which continues to this day is the awarding of grants to businesses to expand, recruit, retain or open a branch operation in Wales.

On the one hand you can argue it’s a relatively small investment which is recouped via extra taxes and employment; on the other hand, it’s often subsidising profitable (often foreign) multinationals at the expense of local businesses, while the jobs are usually (but not always – there are exceptions) low-skilled and relatively low-paid.

After the Great Recession, there were moves to shift from grants to repayable loans and equity investments via the Welsh Government’s Finance Wales arm – investments that have, to date, totalled £1.2billion. This later developed into a Development Bank of Wales (Banc) which began operations in October 2017. Banc’s target market is smaller and medium-sized businesses. Larger companies can often access more flexible and direct funding from the Welsh Government, particularly if it involves significant inward investment.

While there’s a range of support grants and schemes for start-ups, entrepreneurship policy has often focused on young people through the likes of Big Ideas Wales. The Global Entrepreneurship Monitor 2016 (pdf) showed that while early-stage entrepreneurship in Wales was higher than Scotland and Northern Ireland, it remained below the UK average – though the rate of graduate start-ups and university spin-outs is relatively high (Part VII).

Sectoral Support

(Pic: Business News Wales)

Pre-Great Recession there was no recognisable sector-based support for businesses in Wales – it was generally done on a case-by-case basis. Following the Recession, that shifted to prioritising key sectors – an approach that was criticised by economic commentators as exclusionary as high-growth businesses could theoretically come from any sector.

The Economic Renewal Plan focused on sectors that had an ingrained strength in Wales or provided anchor companies which, after 2016, was expanded to cover advanced manufacturing, energy & environment, construction, creative industries, financial services, food & farming, information technology, life sciences and tourism.

A Council for Economic Development – which includes representatives from priority sector businesses, social enterprises and trade unions – meets three times a year to discuss economic development priorities and progress.

In 2012, a number of enterprise zones were established across Wales, with businesses operating (or considering operating) within them offered favourable planning, utilities and tax incentives. Some were focused on a specific sector (i.e. St Athan – aerospace, Ebbw Vale – automotive) but their success has been patchy, with around 10,700 jobs created or saved off the back of more than £221million of Welsh Government investment (£~£20,700 per job). Some zones are to be wound-up through 2018-19; the creation of more zones has been hinted at with nothing confirmed at the time of publication.

The Welsh Government have also pro-actively attempted to sell Wales abroad through trade missions to boost exports. For a long time, Wales was a net-exporter of goods but this shifted towards net-imports around 2015 (Part X). Foreign direct investment increased to levels not seen since the WDA days and during 2016-17; Wales secured 11% of all jobs created or safeguarded by foreign companies in the UK compared to a population share of 4.9%.

Skills, Training & Employment Support (Part XIII)

Wales’ historically high levels of long-term and youth unemployment have meant devolved policy has often focused on “jobs at any cost” over the quality of jobs, leading to relatively high levels of in-work poverty and mass under-employment (employees working in jobs with entry requirements below their qualifications or training level).

External/UK Government factors which have influenced this include UK-led welfare reforms, the introduction of disability capability assessments by Labour in 2008 and the rise of the “gig economy” under the Conservatives and Lib Dems, which introduced concepts such as phony self-employment (doing work for a company as a self-employed contractor – often with minimum employment rights) and zero hour contracts.

Many employment schemes are run through Job Centre Plus – which is non-devolved – but there have been a number of schemes run by the Welsh Government including Jobs Growth Wales (for 16-24-year-olds), the expansion of apprenticeships, ReAct (a legacy scheme from the Recession focused on re-training newly-redundant employees) and ProAct (retraining employees who were not at risk of redundancy but in preparedness for an economic upturn).

There are also a number of programmes provided with joint EU-Welsh Government funding like those which have historically been delivered by the (soon to be defunct) Communities First programme and other Third Sector providers.

Some of these programmes and schemes – including associated ones like Young Enterprise and Careers Wales – have either had their funding cut or been scrapped completely as the economy “recovered” in the first half of the 2010s.

As of 2018, Wales is near enough in full employment (an unemployment rate of less than 5%).

Major Economic Challenges since 1999

(Pic: Coflein Mapping)

Foot & Mouth Outbreak (2001)
– Probably the first national crisis the Senedd faced. Large parts of open countryside were closed off for several months, which impacted agriculture and tourism. More than 1 million animals were culled in Wales and the economic impact was estimated at up to £8billion across the UK (Welsh share: ~£400million). Lessons were learned and a smaller outbreak in Sussex during 2007 was quickly contained.

The collapse of Hyder (2001) – At one point Hyder was the largest private company in Wales and perhaps our only genuine American-style corporation, dipping its toes into everything: water, gas, electricity, cable TV, IT, commercial investments, hotels and construction. It was subject to a hostile takeover bid by an American company, Western (owners of Western Power Distribution and now known as PPL) and Japanese bank Nomura in 2000 after Labour’s Kim Howells refused to refer it to the Competition Commission despite a request from the Assembly. The company – which had over-extended itself, leading to financial difficulties – was either broken up or absorbed into Western Power, with key brands such as Welsh Water (the founding company of Hyder) sold to not-for-dividend company Glas Cymru and SWALEC (eventually) sold to Scottish Power.

Closure of Ebbw Vale Steelworks (2001-2002) – Steel production at Ebbw Vale was being wound down as early as 1995, but after British Steel and Hoogovens merged to form Corus in 1999, the closure of the works was accelerated. There was a glut of steelmaking capacity in the European market and the decision was taken to close the Ebbw Vale works with the loss of up to 800 relatively well-paid jobs. The area has subsequently been socially regenerated with new health, leisure, education and housing developments (“The Works”) – but Blaenau Gwent has never fully recovered economically.

The End of the WDA (2006) – In 2004, the then First Minister, Rhodri Morgan, promised what he called a “Bonfire of the Quangos” (taken from “Bonfire of the Vanities”). Quangos had developed a reputation for cronyism, while the fact that many key powers in Wales were handled by unelected appointees instead of ministers and civil servants was said by Ron Davies to amount to “a democratic deficit”. The Welsh Development Agency (WDA) was one of the organisations to have its functions folded into the Welsh Government. It’s still debated to this day whether the loss of arms-length expertise and recognised brand like the WDA has helped or hindered the Welsh economy.

The Great Recession (2007-2010) – Probably the closest we’ve come to a complete collapse of the financial system since the 1930s, mainly due to banks at home and abroad lending people (who they knew they shouldn’t lend to) large sums of money to buy homes at over-inflated prices, in part due to 1980s deregulation by free marketeers. Restrictions on bank lending led to business collapses and mass redundancies, with unemployment hitting close to 10% in Wales. The Welsh Government – then with a Plaid Cymru economy minister, Ieuan Wyn Jones – attempted to firefight through initiatives to retrain and reemploy redundant workers (ReAct & ProAct) as well as focusing Welsh Government business support on key sectors – both mentioned earlier. Considering the scale of the crisis, Wales weathered it relatively well and much better than previous crises in the 1980s and 1990s

Closure of Anglesey Aluminium (2009) – Once one of the largest employers in north Wales, the aluminium smelting plant near Holyhead was perfectly positioned near the sea and Wylfa nuclear power station for ready supplies of ore and cheap electricity (the plant, by itself, using 12% of Welsh domestic energy). The failure to negotiate a subsidised energy deal with the UK Government led to the owners, Rio Tinto, closing the plant instead of pursuing an option to build a biomass power station (as Wylfa A was being wound down). Plans to redevelop the site have consistently fallen through.

Steel Crisis (2016-2017) – Following the Great Recession, a glut of steel on the market combined with low demand, led to price falls and big producers like China selling low-quality excess steel in Europe (“steel dumping”) – which the UK Government did nothing to prevent. Port Talbot steelworks was running at a sizable loss. Things came to a head in 2016-17, when Indian conglomerate, Tata, announced its intention to sell its UK business. Tata eventually did a U-turn after a deal was agreed on controversial pension changes, while in June 2018 Tata and European steel-maker, ThyssenKrupp, were set to merge, safeguarding jobs until 2026. The steel industry is in the clear for the time being, but longer-term concerns remain over energy supplies to Port Talbot steelworks and the possible impact of tariffs and US economic protectionism on steel exports.

Brexit (2016-2021+) – After 43 years of membership, the UK voted to leave the EU on June 26th 2016, with Wales voting 52.5% to 47.5% in favour of leaving. While the vote was at least in part because of the increasing political influence the EU was having over domestic policy areas (particularly immigration), it remains, as a bloc, the most important export market for Welsh products, with 60.3% of Welsh exports going to EU member states in 2017 (Part X). The impact this will have on the Welsh economy largely depends on what deal the UK Government negotiates (if they negotiate a deal at all) and whether any trade deals made by the UK after Brexit are beneficial to Welsh economic interests. Look at the UK’s track record to work out the answer to that.

What the Welsh Government can’t do

Some of these reserved powers are so significant, the UK Government still plays a major role – perhaps the dominant role – in the Welsh economy.

The most obvious example is tax, as most taxes are set in London (including corporation tax and VAT) – though business rates and stamp duty are devolved.

Monetary policy, currency, trade agreements, natural resources, telecoms, employment law, consumer protection etc. will all have far more sway on how the Welsh economy performs than business support and training. You can even argue that instead of having a full toolbox to turn around the Welsh economy, the Welsh Government have a screwdriver and a hammer.

What has the UK Government done for the Welsh economy since devolution?

(Pic: Independent)

You would expect me to say “nothing”, but while their economic record in Wales – under Labour, Lib Dems and Conservatives alike – hasn’t been a resounding vote of confidence, they haven’t completely ignored us and Wales has benefited indirectly from policies introduced for the UK as a whole.

Independence for the Bank of England – Relinquishing political control over setting interest rates and monetary policy (within fixed guidelines) has led to more stable rates of inflation over a longer period of time. Decisions could be made with a long-term vision in mind, not just short-term political considerations (i.e. cutting interest rates to boost the economy and borrowing).

Minimum Wage & Living Wage – The minimum wage was introduced in the UK in 1999 with the aim of setting an income floor for people working at the bottom end of the labour market (including part-time workers and low-paid branch operation workers – as often is the case in Wales). This has gradually involved taking into account the cost of living to become a living wage for the over-25s which is being phased in between 2016-2020.

Wylfa Newydd – Although it’s yet to be given formal planning permission, the UK Government has agreed to a £13.3billion financial package to allow the Japanese company, Hitachi, to construct a second nuclear power station on Anglesey. It’ll generate around 6% of the UK’s electricity supply when it’s expected to start operating in 2025 (though I should point out I personally oppose it). Wylfa Newydd was indefinitely postponed during 2019.

Funding floor & borrowing powers – A deal was agreed between the Welsh and UK governments to set the Welsh block grant at no less than 115% of equivalent spending in England until 2020. The agreement will also enable the Welsh Government to borrow up to £1billion to fund infrastructure projects, with the M4 Newport bypass expected to be the beneficiary. These borrowing powers could be expanded as projected costs rise. Wales has also had several economically-important taxes devolved including (part) devolution of income tax, stamp duty and landfill disposals tax. A vacant land tax may be introduced in the near future.

Cardiff & Swansea City Deals – Worth a combined ~£2.5billion, the two city deals – funded by co-investment from member local authorities, UK Government and Welsh Government – have been established to promote economic development, such as the South Wales Metro, the life science sector, energy, digital infrastructure and advanced manufacturing.