Back in September, Plaid Cymru published a report they commissioned into the “Welsh deficit” (pdf).
The deficit is the difference between the amount a country raises in taxes (or other income) and the amount spent by its government (in our case by both the Welsh and UK governments). If spending is higher than the income it results in a deficit. It’s often presented as one of the main arguments against Welsh independence because it supposedly makes independence “unaffordable”.
The report was authored by Prof. John Doyle from Dublin City University’s social sciences department. Prof. Doyle is an expert in diplomacy and conflict resolution and has authored almost identical work on the fiscal impact of Irish reunification (pdf).
The report’s headline finding is that the deficit that would exist on day one of independence – previously estimated to be upwards of £13.5billion (in 2019-20) – could be far more modest at £2.6billion.
Plaid Cymru’s leader, Adam Price MS, has even gone so far as to describe the report as a “game changer” in the case for Welsh independence.
Any statement like that from a politician immediately gets my chin itching.
The most disappointing aspect is that – passing commentary aside – there’s been little to no (semi-serious, let alone serious) examination of the report or its claims. By December 2022 – when I’m publishing this – it’s been quietly buried under other stories.
So I guess it’s my job to be the bad guy again? Thanks.
The current deficit isn’t entirely relevant to discussions on independence
“The ONS fiscal gap is not an estimate of the deficit that would exist on day one of an independent Wales, even though it is frequently used as though it is. It is not calculated by the (ONS) for that purpose.”
The report goes on to say that the figures represent “a reasonable representation of the long-term trend” of pre-Covid 19 income and spending levels.
There’s an assumption that if the UK is spending money on something in Wales (or on our behalf) now, then that spending would have to continue after independence or we’d automatically have lower living standards and society would collapse or whatever. That’s a wrong assumption because….
UK and independent Wales spending priorities are likely to be different
“….an analysis of the possible impact of the deficit in the early years of an independent Wales requires a detailed consideration of the different elements within it, and also a political judgement as to which (spending commitments) would carry over to an independent Wales, what would be irrelevant, and what might be funded transitionally by the UK as an ongoing legacy commitment.”
Even the most hardline Unionist would probably concede that an independent Wales could, for example, spend less on defence than the UK currently spends each year on our behalf (around £2billion) – and that was one of the policy areas focused on by Prof. Doyle (more on that later).
Therefore, you can’t compare a Welsh deficit within the UK to the deficit an independent Wales would start with because there would likely be many such differences.
Before nationalists celebrate too hard though, we don’t currently know what an independent Wales’ spending priorities would be.
Does Plaid Cymru even have a defence or foreign policy? Have all these think tanks that have sprung up considered it? Unionists don’t have to think about it and can counter-argue that being a constituent part of a regional power in decline that spends big on defence is a benefit of the UK.
National finances aren’t the same as household finances; deficits are “normal”
“It is worth recalling that regional fiscal gaps are not only normal but an almost inevitable part of any economy with a significant level of central control over taxes and expenditure.”
There’s something scary about a deficit of £13.5billion or even £2.6 billion because we think of these in the same way as household finances (credit cards, mortgages, loans etc.) instead of macroeconomics and fiscal policy.
To put things in perspective, the UK Office for Budget Responsibility expects the UK deficit to be £177billion in the current 2022-23 financial year; that’s close to three times the size of the Welsh economy.
In a household or business, if you don’t keep up with your debt repayments then in the worst-case scenario things get repossessed and you may even go bankrupt. That doesn’t happen with countries.
While a high deficit isn’t “good” – and should be limited to save money on interest payments more than anything else – it’s not the same as taking out an unaffordable mortgage or falling behind on credit card payments.
In some cases – such as a central bank buying a bond issued by its own government – the country effectively borrows from itself and can create more money to partially cover its debts and deficits; though that carries the risk of higher inflation (as we’re experiencing now in 2022) and subsequent increases in interest rates which can slow the economy down.
So a deficit isn’t “bad” and it doesn’t make independence “unaffordable”. The issue is how to ensure Wales can manage its deficits in a way that balances economic credibility with ongoing investment in public services and people.
UK Government public spending figures for Wales are often a very good guess (at best)
“The ONS also regards these….figures as experimental statistics.
“Determining what revenue is raised in Wales and what public expenditure should be allocated to Wales is not a simple task and the ONS acknowledge that different methodologies will give different results.”
People would be surprised if they knew how many official government statistics are based on estimates, various extrapolation models and averages rather than what’s actually happening on the ground.
That doesn’t mean they’re inaccurate, but it could lead to underestimates or overestimates that are too small to matter at a UK level (adding or taking away a few extra hundred million pounds here and there) but would be noticeable at a Wales-only level because Wales is a twentieth of the size.
One example given in the report is a previous underestimate of VAT revenues in Northern Ireland. Also, some spending may be overestimated when UK and Welsh figures have been combined (i.e. health spending).
Ultimately, the only way you would know for certain how much tax income Wales raises is for all taxes levied in Wales to be collected in Wales.
It was right not to include “accounting adjustments” in the final deficit reduction figures
“While the net impact of such adjustments on both the revenue and expenditure side, is to increase the fiscal gap by just over £1billion, the detail of the balance is hard to untangle, and therefore no further reduction in the projected fiscal gap is made on this basis….and any additional saving to a future independent Wales are likely to be limited.”
Prof. Doyle says that “accounting adjustments” in the ONS accounts are mainly related to depreciation and VAT refunds. It would be tempting to write it off and make the deficit look even better, but it was right not to do so if there are any doubts.
There’s a “chicken and the egg”/circular argument over the economics of Welsh independence
“The underlying economy, taxation system and the type of public services that are provided will be the real determining factors of the costs and benefits of an independent Wales….The fiscal gap could be closed by relatively modest economic growth (convergence), and/or by a different tax policy. Those are the areas where the public debate on the public finances of an independent Wales should focus.”
Does the economy need to improve before Wales can become independent? Or does Wales need to become independent to improve the economy? There are other questions as well like, “Does Wales need a completely different economic model?”
The deficit may not be the main economic/fiscal stumbling block to independence; it’s the lack of a credible alternative economic plan that would make use of the new tools and policy options that independence would provide.
