(Title Image: Cardiff University)
After all that, it’s time to sum up what conclusions to draw, put forward the main challenges facing the Welsh economy in the medium to long-term and also possible ideas on how Wales would be able to meet those challenges and adapt accordingly using the powers that are already at our disposal and those that would come through independence.
The whole point of State of Wales is to explain complicated issues relating to independence in an as easy to understand way as possible without being patronising, so while I would like to go into all of this in more detail, it’s probably best left to people smarter and with more resources than myself.
What I’ve decided to do is group together some of the major challenges facing the Welsh economy and outlining (briefly) what sort of policies an independent Wales, with all economic tools at its disposal, could consider doing to address them.
This isn’t an exhaustive list as there are areas I want to return to in more detail at a later date, including the welfare system, tax & spending, transport/infrastructure, housing, planning, spatial/regional policy and a number of things I listed in Part I such as industrial relations and employment law.
The Problem: While Wales’ productivity (measured by GVA/GVA-per-head) is relatively high by global standards, there’s clear room for improvement. But this is compounded by an over-reliance on English and Scottish-based financial services providers, as well as too much focus on producing intermediate goods (which don’t count towards GVA calculations). However, by chasing growth and jobs at all costs, we’re neglecting other equally important measures of socio-economic wellbeing and underplaying both the role of the Foundational Economy as well as unpaid or under-valued “useful work”.
Focus on the public spending “deficit” and the tax base, not growth – If there are any hard targets we should set (re. independence) it’s reducing the public spending deficit and increase the (proportional) amount raised in taxes – you do that by changing taxes (i.e. creating new tax bands or cutting personal allowances), raising overall incomes and improving business profitability, not necessarily by chasing growth. The signs are that the deficit is coming down; the latest estimate put it at £13.2billion (compared to GERW’s £14.7billion). We need hard figures for what we would intend to spend in an independent Wales (effectively setting a theoretical budget prior to independence) and then set the tax and economic growth projections around that instead of chasing growth for its own sake.
Develop a new measure of socio-economic wellbeing – GVA should only be one weighted measure in a basket of measures to determine how well the economy is working. We also have to consider:
- wage growth and average wages
- gender, disability and race pay gaps
- job satisfaction & working conditions
- resource stress (how economic activity pressures the environment and contributes to emissions)
- the value of “hidden work” (voluntary activity, unpaid care, social enterprises & non-profits)
- job and GVA displacement (by automation, off-shoring/outsourcing and takeovers)
It would be for people smarter than myself to work out how to do this, but under this measure you could theoretically end up with something like a new supermarket or roadbuilding exercise being worked out as having a negative impact on the economy and something like a new local childcare provider or graduate tech start-up having a positive impact.
End the sector-based approach to business support – We ought to recognise all businesses equally for what they contribute to the Welsh economy on their own merits. The “next Admiral” could come from any sector at any time. There’ll always be certain economic sectors and sub-sectors that play a disproportionate role – the big three in Wales (public sector aside) being automotive, aerospace and retail. However, we shouldn’t try and predict the future by backing “the next big thing” (though proper trend recognition and business intelligence is important) and should, perhaps, be looking again at enhancing the potential of what we’ve already got.
Make more use of our own money (and repatriate it wherever possible) – The only element of the City of London I would actually want to see in Wales, purely for practical reasons, is the establishment of at least one headquartered bank; whether that’s a traditional high street type, an investment bank, a life insurance or pensions company or an online-only challenger bank. While it probably won’t do much to solve all the problems that have to be solved in terms of inequalities, it would be the quickest way to close the growth gap – whether it’s a government-backed buy-out of an existing bank’s operations in Wales or some other way. Making more use of Welsh public pension funds to support economic growth in our own communities (whether through the Development Bank or other vehicles) is also important, as is much stronger financial service regulations.
No ideas off the table – One of the main advantages Wales has as a small nation (as outlined in The Flotilla Effect) is an element of flexibility. Despite Welsh Labour and the Welsh civil service’s best attempts to prove otherwise, decision-making in a small country is supposed to be faster and more adaptive to changing circumstances than larger nations because the socio-political centre of gravity is lower. We shouldn’t be afraid to experiment or consider “out there” ideas to boost the economy or take advantage of emerging trends. For example, legalising recreational drugs (Wales on Drugs), free public transport or even things like vertical farming and urban farms to improve food security and provide locally-sourced food (such as hydroponic/climate controlled farms in presently empty industrial units in the Valleys and elsewhere).
The Income & Inequality Problem: Developing a Social Market
The Problem: The free market lite approach that’s been in place since the election of Margaret Thatcher and revived under New Labour and the Tory-Lib Dem coalition has let down those at the bottom. For the sake of lower unemployment figures, they’ve been hit by botched welfare reforms, are stuck on low pay which doesn’t keep up with the cost of living – doing what some might consider unrewarding or easily automated work – while ordinary workers have had their trade union rights gradually eroded and their needs ignored by management and shareholders. With planned economics presently unsuitable due to resource scarcity and its perennial failure as a socio-political system, it’s time to make the market work for Wales, not the other way around.
State-backed non-profits to take over and run critical infrastructure – As explained in Part XI, where there’s a natural monopoly – or a service for the public good that can’t be allowed to fail in the market – the government should either run it directly or, where some element of business acumen is needed, as arms-length state-backed companies (i.e. Cardiff Airport, Transport for Wales) or stand-alone not-for-profits (i.e. Glas Cymru). Any nationalisation or repatriation process is likely to be gradual, but there are obvious candidates including the railways, electricity generation & supply, postal services etc. Where a critical industry is threatened, the model could be used as well – as was suggested during the steel crisis.
Shift the tax burden from income to consumption – Adam Price has hinted towards this with his proposal to cut income tax and introduce a land value tax. If you tax consumption (land value tax, carbon tax, VAT, local sales tax, wealth tax), there are fewer opportunities to hide assets or move them offshore. Keeping a lid on consumption might also take some of the heat out of the property market and be a step towards a “steady state” economy – with exemptions for behaviours that are either economically beneficial (i.e. investment in R&D) or promote sustainable development (i.e. green energy).
A higher minimum wage tied to increasing automation – Whether this is a living wage or just a higher minimum wage, it’s likely to increase unemployment in the short term, but long-term might lead to increased flexible working, job-sharing and a shorter working week as we gradually shift to automation and augmented working. This would probably have to be combined with….
Citizens Income – In essence, an obligation-free sum paid to all citizens to provide an income floor. I’ll almost certainly come back to this in more detail another time, but it would have to be enough to survive on, but low enough to combat inflation and providing an incentive to do some labour (even if it’s only a few hours a week, at a higher minimum wage). In practice it probably wouldn’t be completely universal; for example, it could form the income tax personal allowance for people in high-earning jobs and a negative income tax for those earning below a certain wage. There could also be graduated top-ups for the disabled, pensioners and it could replace student support.
Constitutional protection for labour organisations and a return to collective bargaining – The right to form and be a member of trade unions should be guaranteed in any Welsh Constitution. This is a subject to return to in its own right, but Wales has traditionally seen a good working relationship between employers, unions and government – something you would hope would continue. Collective agreements should also be legally recognised (my understanding is at the moment in the UK they’re not enforceable unless written into an employment contract). Doing so would mean pay – perhaps even including a pay ratio cap (i.e the highest-paid person can only be paid X times more than the lowest paid) – could generally be decided at an all industry level rather than by individual employers. German-style work councils and unions would be able to discuss matters with employers that aren’t covered by a collective agreement.
Employment Contracts: Short-term flexibility, long-term security – While employers should generally be in control of their employee’s working hours (up to the max limit), there needs to be a balance between flexibility, fair working practices and job security. Everyone starting a job for the first time could be awarded a probationary contract with no set working hours that can be terminated with two week’s notice. However, once someone has worked with the same employer for at least 6-12 months they have to be offered, in law, either a full-time or part-time time contract with set working hours or flexible working. This will hopefully clamp down on phoney self-employment in the gig economy whilst allowing an element of flexibility and choice.
Job matching – There needs to be an overhaul of employment and training services so employers only receive qualified candidates, while people looking for work are moved towards either a job that matches their skills or the pre-requisite training to do so. The Job Centre should, therefore, act as a jobs broker or state recruitment agency not solely a welfare administrator (with a lot of the burden taken off them if a citizen’s income were introduced).
Friendly Societies & Co-operatives – An alternative to re-patriating money via new Welsh banks would be to revisit a relic of our collectivist past (which formed the foundations for the likes of the NHS). We could support the development of membership-based friendly/provident societies and co-operatives to become social interest corporations. They could provide or cross-subsidise services such as mutual saving/credit unions, housing, home care, primary care (i.e. pharmacies, dentistry, opticians, GPs), private pensions/investments, replace or supplement some welfare benefits (if a basic income is introduced) and even offer basic insurance. As mutuals they wouldn’t be beholden to shareholders and would be owned and controlled by members, which could be via individual sign-ups, forming associations with entire industries, or collective sign-ups by an employer; one representing the NHS or teachers would probably carry significant economic clout, for example.
Supporting Businesses, Trade & Investment
The Problem: While Wales has historically enjoyed relatively high levels of foreign direct investment, we’ve become over-reliant on single one-off projects. There are also question marks over the amount of support levelled at anchor companies and multinationals when compared to Welsh SMEs – particularly when it comes to no/few strings attached grant schemes supported by the Welsh Government.
“One Stop Business Shop” – While Business Wales has (kind of) brought most of the advice and support for businesses under one banner already, it might be worth bringing absolutely everything related to business support (including finance, export support, inward investment and tourism) under one single entity – similarly to how Enterprise Scotland and Enterprise Ireland operate. The obvious choice would be the Development Bank. In terms of foreign relations and trade, for example, a number of regional “fixers” could be employed (perhaps one per global economic region -i.e. SE Asia, North America) and the Development Bank could have a presence in every major embassy/consulate.
Operational independence for the Development Bank – This might be a controversial suggestion, but while the Development Bank should probably remain in majority public ownership, all business finance decisions – including big agreements between the public sector and anchor companies, like the recent deal with Aston Martin – should perhaps be taken away from politicians and civil servants and decided by the Bank to ensure decisions are made based on expected returns and on a commercial basis instead of politically-expedient grants. The obvious risk is a lack of oversight, but there’s no reason why the Senedd’s Public Accounts Committee wouldn’t be able to intervene where appropriate and where the Welsh Government are directly approached for assistance they should still have a seat at the table.
Alternatives to grants – Grants for businesses should be phased out completely (though there might be cases where they would have to remain, like the Wales Books Council, seed capital or heritage grants). There may be some limited situations where the Welsh Government should provide material assistance without an expectation of repayment (i.e. funding towards infrastructure like roads, broadband, head leasings, building a business park). For all other cases there are loans and equity investments – as already offered by the Development Bank – contestable funds (an open competition to receive funding to meet a certain policy priority), match funding (which might be appropriate for big companies or relocations), share options and asset finance.
Welsh Exchange – This idea has been raised on-off for a decade or so, mostly as a way of stimulating debate into how to properly capitalise Welsh businesses and reduce their reliance on structural funds and Welsh Government grants. A 2004 study by Prof. Robert Huggins – from what was then called UWIC (pdf -p29) – explored the idea in more detail, claiming that if Wales had 60 extra listed companies it would boost our GVA by around 9% (in 2016 that would be around £5.4billion). This could be one part of a strategy to turn medium-sized companies into globally competitive ones.
Reform/replacement of business rates – A tax based on property values is inherently unfair, particularly for businesses who have to compete with location-less online retailers. There are several options for replacing business rates including a land value tax (where the value of the land a business is on is taxed instead of what’s built on it), a local sales tax (as in the United States; it would be arguably fairer, easier to administer and would cover digital sales too but might hurt the economy) or a return to set rates for particular services (i.e. waste collection, street cleaning, car parking spaces).
Ethical trade policy – There are some things we could and should do differently in an independent Wales and that includes trade, some of which could be written into our Constitution. Some measures towards an ethical trade policy could include: a ban on munitions exports, a ban on wild animal and exotic pet trading, tying some select trade deals and other types of bilateral agreements to a respect for workers’ and human rights (as guaranteed by the UN) and setting conditions to meet in order to receive government or Development Bank support.
The “Missing Mittelstand”
The Problem: Entrepreneurship levels and business survival rates in Wales aren’t that much different to the rest of the UK. However, one of the biggest problems Wales has faced in recent decades is a failure to turn successful Welsh small and medium-sized enterprises into rooted, independent businesses that have a long-term vision and don’t become easy targets for buy-outs (or eventual winding-down).
Improved business intelligence and enhanced support and advice for rapidly-growing SMEs – The first step to addressing this problem is properly identifying those companies which would (or do) form the Welsh “Mittelstand”. This area has improved as business intelligence is part of the Development Bank’s remit, but we should officially mark out an “elite” of home-grown companies who are either experiencing rapid year-on-year growth or are on the verge of becoming a significant regional, European or global player (and therefore ripe for an acquisition). If there are any companies in Wales that should have a “direct line” to the Development Bank and government officials its these ones.
Support for succession planning – One type of support as mentioned above could be in the form aiding the transition either from owner to employees (similarly to the recent Cwmni Da transfer) or to a new management team. Again, this should probably be undertaken by the Development Bank, not the government. It could also include a mentoring programme for junior managers or senior employees who could one day take over the company, graduate job-matching and university link-ups (to provide work placements for students and access to R&D) or even financing options to allow an employee buy-out.
In essence, the idea would be to show CEOs and owners that there are other options available to them than just selling the company and retiring, so we don’t end up with a situation like Cuddy Group – a mid-sized construction company that went pop because there was nobody deemed capable enough to take over from the owner.
Simplify the tax code – This is an entire topic in its own right but I don’t mean this as a way to let businesses off the hook or join a “race to the bottom” in terms of corporate taxes. It’s more about making the rules to operate a business in Wales simpler as well as cutting the number of loopholes to prevent tax avoidance or Facebook and Amazon-style tax minimising; so both a carrot and stick approach.
The Mondragon Model – Similar to the Basque co-operative, businesses and other frontline public service providers could come together under a single federation of worker-owned businesses all supporting each other whilst maintaining their independence. This communal solidarity might protect them from hostile takeovers and provide some resistance to sales. As mentioned earlier they could provide membership benefits via a friendly society type arrangement that complements state welfare and state services (like primary care). It’s easier said than done of course because it would have to be undertaken by the companies themselves and can’t really be forced on them by the government or Development Bank or whoever.
The Fourth Industrial Revolution
The Problem: While automation, 5G technology and low-carbon industries have fantastic potential – both in terms of hiking productivity and innovation – the issue perhaps isn’t being taken as seriously as it should be by either business or the Welsh Government. There are a number of challenges, not least the potential for automated production lines and algorithms to replace people, as well as how to up-skill the workforce for such a rapidly-changing shift in how the economy works.
Modular qualifications, one-year degrees & German-style apprenticeships – The rigid academic qualification model we currently use might not be flexible enough to meet the skills demands of the future. At the moment someone seeking serious professional work might expect to have up to a minimum of 10 GCSEs, 3/4 A-Levels and/or vocational qualifications. Why not adopt a modular system – similar to American community colleges – where you mix core subjects with optional ones to properly mix the academic and vocational. Why shouldn’t someone who wants to study medicine or law at university not also take a single semester course in basic coding or a language? There also has to a system that makes re-training attractive and done in way as to ensure as quick a turnaround time as possible.
Support a policy of augmented workplaces over full automation – By and large, we still don’t know to what extent or precisely how automation will be applied wholescale in the Welsh economy; the only examples I can think of are self-service checkouts and chatbots. No doubt other applications will come forward but instead of replacing jobs, Wales could put in place policies to ensure they enhance existing jobs wherever possible by either automating repetitive tasks (which already happens in many factories) or the introduction of “smart screens” and augmented reality (superimposing visuals, data, moving images, sounds etc. over real work objects -i.e. A diagnostics screen for a car).
E-Citizenship: Wales as a pilot/testing ground for new technologies in the public sector – There is a sense that some parts of the Welsh public sector may be a little reluctant to see new technologies introduced and that’s understandable. But there are a number of applications that could help address some of the serious policy issues we currently face. For example, using “virtual GPs” linked to pharmacies to treat and prescribe common/non-emergency illnesses and take pressure of GPs and out-of-hours services, setting up an Estonian style “e-residency/e-government” programme for ID and other public services like paying taxes or immediate access to medical records through the use of blockchain technology and maybe even completely replacing paper and books in schools with low-cost bespoke tablets (with online textbooks and assignments etc.).
Digital Currency – I mentioned this in my series of posts on currency, but could Wales become a completely cashless society? It looks like it’s heading in that direction anyway across the western world but a Welsh digital currency (an equivalent of Bitcoin etc.) could be introduced alongside a physical currency to help retain spending power within Wales; it was recently raised as a policy idea by both Adam Price and, subsequently, Labour’s Eluned Morgan.
“Robot Tax” – There have been calls for some quarters, notably Bill Gates, to charge tax for every machine that replaces a human worker, with the funds raised either going towards re-training or contributing towards a basic income. This isn’t as easy as it sounds because you would effectively have to consider robots and machines as a special category of “person”, while some machines have replaced human workers for generations or more (i.e. in car production lines).