Wednesday, 1 September 2010

Self-government dividend

We all know that salaries in Wales lag behind the UK average. The Welsh average is about 87% of the UK average. It's another indicator of the relative underperformance of the Welsh economy compared to the UK average. Low wages and low GVA per head are not exactly synonymous; but there's a clear relationship between the two sets of figures.

Those who are implacably opposed to any degree of Welsh autonomy will no doubt see it as yet another indicator that Wales cannot survive without 'subsidies' from across the border; but we need to look deeper than that. There's nothing inherent about being Welsh or living in Wales which dooms us to a lower level of salaries, a lower level of economic activity, or a lower GVA.

One of the usual responses has been to suggest more training provision, but it's not immediately obvious to me how continually upskilling the Welsh workforce actually addresses the issue. It might prepare Welsh workers for jobs in the future, but I have a feeling that we've already spent quite a lot on training people for jobs which somehow never seem to arrive. And I detect a growing feeling that people are turning against some training schemes, seeing them more as a means of hiding unemployment than of preparation for employment.

More relevant to me was the CBI comment some months ago that "We have insufficient head offices located here and there are not enough big corporations headquartered here." That's certainly one of the factors which keeps wages in Wales lower than the UK average. Far more companies choose to locate their higher-paid head office staff in England – predominantly the South-East of England – than in Wales. Changing that would certainly give us a higher proportion of high paid jobs; but is it really realistic?

It's been much talked-about for many years, but I don't see many footloose multinationals - or even UK corporates - being likely to move their headquarters to Wales any time soon. In fact, I think that the One Wales Government has got it right in saying that it intends to build future strategy around the development of indigenous companies rather than around attracting inward investment.

The nay-sayers like to claim that companies would head east over the border if Wales had more powers or even independence; I suspect the opposite. If Wales became a self-governing nation, with its own legal jurisdiction, wouldn't at least some companies see some benefit in creating at least a 'regional' presence in Wales as a result, with the knock-on effect of increasing average pay? And wouldn't self-government also mean that we'd have more senior public sector employees in Wales from all the organisations currently run from England?

Perhaps we could call it the 'self-government dividend'.

11 comments:

Anonymous said...

Do you mean an "independence" dividend, John? I'm sure you're right. Pity Plaid never seems to make such points on its website or its electoral literature. Don't we believe it's relevant?
Efrogwr

John Dixon said...

"Do you mean an 'independence' dividend"

I do indeed. I regard the two words as meaning essentially the same thing, and use them both at different times.

I certainly believe it to be releavnt, and have never been afraid to say so.

Plaid Panteg said...

Brilliant post John, good effort.

Siônnyn said...

Of course, even under devolution, if we could offer reduced corporate tax rates, it would be an incentive for companies to re-locate HQ here.

If it's good enough for NI, why not Wales?

John Dixon said...

Siônnyn,

It would certainly help, but any reduction in corporation tax would only apply to business activity within Wales. That would make it attractive for a company to establish and invest in Wales compared to other areas, but would be more marginal as a factor in moving headquarters activity.

James D said...

I very much agree that there is an economic case for independence, but a large amount of Wales' economic success after independence would be predicated on sensible economic policies:
1) Rather counterintuitively, we would have to accept the "D" word: devaluation. This would make Welsh exports competitive again after successive English colonial administrations since Winston Churchill's Gold Standard disaster have overvalued the currency. (In other words, the key to increasing the average wage is to reduce the shocking economic inactivity rate.) This would mean at least in the short term having a Welsh currency (I would favour the name "Swllt", but that is another discussion). This is not as much of a problem as Euro-enthusiasts would like to make out: we only need to look as far as Switzerland to see a successful independent economy. Naturally we would need laws to prevent usorious exchange rates and commissions being charged.
2) We would need to make our tax system more business-friendly. There are two basic strands to this. Firstly, it needs to be significantly less complex than the English colonial regime: time and money spent on avoiding accidental non-compliance with tax law (and avoiding accidental over-payment) is time and money not invested in the core business. Secondly, we must move away from taxing success to taxing resources: the key resource being in this case what economists call "land", but in popular parlance we should remember this also includes natural resources. The goal should be to abolish all taxes based on profits and incomes to provide an environment in which efficient businesses have an incentive to locate. The parallel disincentive would be against the acknowledged problem of people whose lives are based in England undermining communities by using Wales as a source of cheap dormitory and holiday housing, as they would be paying tax according to their income in England and according to their landholdings in Wales.

We cannot afford to sleepwalk into independence with large parts of the country backing parties whose economic policies are merely a more hardline version of Gordon Brown's big-state English colonial nightmare. There will be a boost associated with independence, but green shoots need to be watered lest they shrivel.

John Dixon said...

James,

Economic success is always predicated on following sensible economic policies; the hard bit is in deciding what is sensible.

The ability to devalue the currency is dependent, as you identify, on there being a separate currency in the first place. That's a point on which I'm not convinced. If, at the time of Independence, the UK has already joined the Euro, then opting out of that to create a currency of our own seems to me to be swimming against the tide, and an unnecessary complication of the process. If it has not, than an independent Wales has three options - remain part of the sterling zone, create a new currency of our own, or join the Euro. The first of those seems to me to be perverse; why seek Independence form London and then allow them to continue setting key elements of economic policy? Of the remaining two, I prefer the option of joining the Euro. So, on the question of devaluation, I'll have to disagree with you.

Tax, however, is another matter. I'm attracted to the idea of a 'land' tax, taking the word land in its wider economic context, but like so much in politics, there's a danger that it becomes a simplistic slogan. There is a need for a great deal more definition on how it would work in practice, because it seems to me that not all those who espouse the idea are saying the same thing.

More widely though, we do need to think about whether we want Wales to be an attractive place for businesses which serve a much wider customer base to "locate", or whether we want to build the economy on a more localised basis.

There is also a question about how different the tax regimes in Wales and England can be given that the border is extremely porous, and that, as far as I am aware, none of us want to start making it less so. Personally, I think that the extent to which both companies and individuals are 'mobile' based on such purely economic factors is exaggerated. Economists always start from the assumption that people will behave in the way that is most economically advantageous to them, but I tend to the view that treating people as purely economic entities is a huge mistake; in reality, motivations are much more complex.

"We cannot afford to sleepwalk into independence"

Would that it were so easy...

Anonymous said...

John,

Ireland is now being crucified by not being able to devalue. In fact, European interest rates have been set to suit the needs of Germany. The currency has been to strong for the Irish, Greeks, Spanish, Italians and Portuguese. On the other hand, it's also been argued that the pounds has really been too strong for areas like the North East and also Scotland and Wales who are more realiant on manufacturing exports. It has suited the city though. Well, the city is really or should I say has been the Golden goose for so many years. Anyway, have you heard John, talk of a two tier Euro? One for the weaker economies and one for Germany and maybe France etc. That might work? It hasn't worked in it's present guise.

I also want to add that the wealth of the City holds us back....like a youngster not willing to leave a very wealthy all paying parent. In the same way, one of the worst things that could have happened to the UK was the North Sea Oil find. Another Golden Goose....but she is about to be roasted. There's no oil or a financial centre like the City of London in Germany. However, their economy is growing quickly at the moment by manufacturing things that others need. I wonder why they went down this route? :-)

PS Sorry my post isn't well written but I've been at work all day....from 5am 'til after 6 and I'm tired. Anyway, good post by you John.

John Dixon said...

Anon,

I accept that there are arguments for an independent Wales having its own currency; I just think that the arguments for joining the Euro are stronger. I also accept that membership of anything other than a sovereign currency zone means that some aspects of core economic policy (such as interest rates and the question of currency devaluation) are at worst decided elsewhere, and at best collectively, and that that constricts freedom of movement.

Taken over the long term (going back even before the establishment of the Euro), the European interest rate regime would, I believe, have served Wales better than the UK interest rate regime. Not served Wales perfectly, just better. The UK regime is far too dependent on the interests of the City, and that simply hasn't suited the needs of Wales.

I'm also not sure, in an era of converging economies, how much 'freedom' a sovereign Wales would really have in this area either. 'Freedom' can sometimes be more illusory than real.

t8 said...

'Write to be understood, speak to be heard, read to grow.' -Lawrence Clark Powell-

t8 said...

"A journey of a thousand miles begins with a single step. Lao-tzu"