Wednesday, 20 April 2016

Who subsidises who?

I referred yesterday to the impact of flows of people to and from Wales on the size of Wales’ fiscal gap.  It’s a point which is worth exploring further.  Movements of people are complex – not all movements at 65+ for instance are from England to Wales; the best we can say is that there is a net flow amongst that demographic.  Similarly, not all movement of young people goes the other way; again, the best we can do is talk about net movement.
But for the sake of simplicity, and to illustrate a point, let us take ‘Dan’ as a notional example.  Dan was born in Wales, received all his education in Wales, and graduated from a Welsh university.  Failing to find a suitable job in Wales, he took himself off to London, where he enjoyed a reasonable career, working his way up the greasy pole to a middle management rôle before retiring at 65.  He then moved back to Wales, and spent the next 20 years living here, although he was in declining health towards the end of his life and needed a lot of hospital treatment.  He died in a care home in the land of his birth.
Using the GERW methodology (and this is not a criticism; I don’t have a better one to use, and it helps to understand Wales' situation), the cost of Dan’s education was paid for entirely out of the Welsh current account, as was the child benefit paid to his parents.  And when he returned to Wales, his state pension, together with all his health costs in his declining years, were also all paid for out of the Welsh account.  From a purely Welsh perspective, Dan was, overall, something of a net burden on the taxpayer.
However, during his working years, all Dan’s income tax and national insurance, as well as the stamp duty when he bought his various homes and the VAT and fuel duty he paid when he spent his earnings, all went into the English current account.  From a purely English perspective, Dan was very much a net contributor to the state’s revenues.
In a very real sense, in this example, Wales gave England a massive subsidy to pay to train Dan and make him work-ready, and then to look after him when he was no longer productive.  English GDP gained at the direct expense of Wales.  Yet, when a notional fiscal transfer was made from England to Wales to cover the Welsh fiscal gap, many people chose to call that transfer a subsidy to Wales as a result of the largesse of English taxpayers.  It’s a perverse way of talking about what looks to me more like a payment for services rendered.
Of course I’ve over-simplified, and even if the whole of the fiscal gap created in this particular way were to be eliminated, there is reason to believe that there would still be a large gap facing Wales.  But what the example illustrates is the cost to Wales of not having the jobs and salaries which would enable those who choose to do so to stay here and contribute to Wales.  Even if we had those jobs, some would still choose to go elsewhere, and some from elsewhere would still choose to come here.  But surely a reasonable aim of policy would be for the net movement to be at or close to zero?
All the parties in the Assembly elections are talking about creating more jobs, and more highly-paid jobs, in Wales, and it’s impossible to argue with that.  Empirical evidence over recent decades, however, would suggest that it’s a great deal easier to talk about it than to do it.  The question for nationalists is whether we believe that this can ever be achieved under current arrangements or whether independence is in fact, not an impossibility until this problem is resolved but rather a key part of resolving the problem.


Anonymous said...

Absolutely correct. It's not subsidy. It's fiscal transfer based on where the production of GDP takes place.

But tax receipts are generated in the same place as well.

What you illustrate is that the main problem for Wales is on the revenue generation side, not the expenditure side.

Wales is also bringing in some workers who other countries have paid to have educated; but not nearly enough for our economy. More working age people in Wales equals more prosperity. So does that mean city regions or what?

"The question for nationalists is whether we believe that this can ever be achieved under current arrangements or whether independence is in fact, not an impossibility until this problem is resolved but rather a key part of resolving the problem."

That is exactly the question but there is alot between current arrangements and independence. Scotland is not an ideal example but is trying to secede from the same state as us. They have improved their economy and finances *before* independence. But their arrangements are not the same as ours.

As an example, a properly developed legal sector, which Scotland has prior to independence, would keep several thousand extra graduates in Wales, showing up on our balance sheet (and we need them to help run a justice system).

This is the debate we should be having John.

Anonymous said...

I feel very sorry for Dan. He like so many others in Wales has paid tax and national insurance for most of his life to England. And yet upon returning to Wales he is largely prohibited by the Welsh government from accessing those public services such as healthcare he has paid for all his working life..

It's absolutely disgusting. If you pay tax and NI in England you should be guaranteed access to the English NHS and you should receive a cast iron guarantee that your pension is under the control of the "English' Exchequer.

As for Dan being a burden on the Welsh taxpayer I think you'd do well to count up the number of people working in the Welsh public sector simply because there are so many people gainfully employed in England and Scotland.

Anonymous said...

Excellent points made here.

John Dixon said...

Anon 10:36:

1. On what basis do you claim that Dan is "largely prohibited by the Welsh government from accessing those public services such as healthcare" That is complete and utter nonsense.

2. You seem to be drawing a wholly artificial and invalid distinction between public sector jobs and 'gainful employment'.

Debate is welcome here, but this is just assertion based on your own preconceptions.

John Dixon said...

Anon 10:36:

Your further comment better explains what you were driving at, but it also underlines that you've entirely missed the point of the original post which was about the impact of demographic flows on the size of the notional fiscal gap under a methodology which tries to separate out expenditure and revenue on a geographical basis within a unitary state. Your comment is more to do with your usual perception of all things Welsh being second rate, of Wales depending on handouts from England, the population being uneducated, and the Welsh language. Please keep to the point.

Pragmatic Nationalist said...

The challenge I see is that in an independent Wales some of the trans-national or cross border features of our relationship with England and Scotland would mean it would still feel like a unitary state on the ground.

Mainly a common market, passport-free movement of people and goods (including pensioners), and currency.

Economically we would still look and feel like a unitary state and this would constrain our policy choices regarding immigration, influencing demographics and raising revenue.

We'd still have more control over our own affairs than now, of course.