Confused and confusing

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Given the unpopularity of politicians in general, proposing a large pay rise for any of them is never going to be a vote winner.  And in proposing to stop the planned pay rise for AMs, the Lib Dems are obviously trying to adopt a populist approach.  Whether it will make any difference to their vote remains to be seen.

It doesn’t look like a terribly honest or thought-through policy though.  In the first place, they signed up, along with the other parties, to the idea of taking AMs’ pay out of the hands of the AMs themselves, and giving the job to an independent panel.  Worse, as I understand it, they also signed up to the guidance and direction given to the panel about the approach that should be adopted.  Complaining about the outcome looks like trying to bolt the stable door.

Having said that, there is something in the basic point that they are making, which is that rises in AMs’ pay should be linked to public sector pay by some formula; but it doesn’t go far enough.  They’re only talking about a formula to determine the size of any pay rise – I’d prefer to see a direct linkage between the salary paid to AMs and the average salary in Wales.  But what I really don’t understand about their proposal is that they seem to want to both have a clear formula linking pay rises to those in the public sector, and to retain the independent panel to determine the level of pay.  What’s the point of retaining a panel of independent members simply to apply an agreed formula?  It makes it sound as though they want to keep the door open for higher pay rises at some future point.  Or is that overly cynical?

Setting the 'right' level

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I’ve talked a couple of times recently about pensions in the context of the GERW study, and the way in which the total apparent revenue and expenditure in Wales in such an approach is impacted by demographic flows.  But the issue raises another question as well because whilst the level of pension is consistent across the UK, the level of wages is not.

The new state pension is currently set at £155.65 per week (although not everyone will get that, of course).  The average wage in Wales is £473.40 per week and that in the UK as a whole is £528 per week (source).  So in Wales, the pension represents around 33% of average earnings, but in the UK as a whole it represents around 29% of average earnings.  This makes it look superficially more generous in Wales than in the UK as a whole.  (And much of what I say in this post could also be said about other benefits.)  But in the context of GERW, this is another factor which inflates the size of the fiscal gap in Wales compared to the UK as a whole.

Is this an argument for ‘regional’ levels of pension?  No doubt some would see it as such, but for me it raises two other, rather different issues.  The first is this: ‘at what proportion of average salary should the state pension be set?’.  It would be nice to believe that that question had been answered – or even asked – in setting the current level of the pension, but it doesn’t seem to have been.  It’s been more a question of starting where we are and determining the basis on which any rise in pensions has been calculated, usually with political advantage more to the forefront of the mind than any rational consideration about the ‘right’ level of pensions. 

It is, however, an issue that an independent Wales would need to consider, even if many nationalists would prefer not to think about it at present.  I’d like to believe that an independent Wales would be aiming to ensure that the average income of retirees was higher than the 33% level rather than lower; but the underlying point here is that there’s nothing particularly special about the position in England.  An independent Wales would not be bound by what has happened or will happen across the border.  And whilst making international comparisons is never straightforward because of differences in other factors, most EU member states pay pensions at a higher rate compared to average earnings than the UK.

But it’s the second issue which concerns me more, and that is that the apparently more generous level of pensions in Wales is actually more to do with the low level of wages than the high level of pensions.  Because the highest-paid jobs are elsewhere, partly because of the centralised nature of the UK, Wales ends up as a (comparatively) low-wage economy compared to the UK as a whole.  But there’s nothing necessary or inevitable about that; it’s a direct result of our status and role within the UK.  It follows that changing that status is key to changing the nature of our economy.  And changing the nature of the economy is the key to setting the level of pensions.

It's not just about tactics

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It seems all but inevitable that UKIP will have a significant foothold in the National Assembly by the end of next week.  I’d prefer that it didn’t happen, but appealing to Labour voters to vote Lib Dem in order to prevent it, as the Lib Dems have done this week, seems to me to be avoiding the real issue rather then confronting it.  The stated objective – of keeping UKIP out – is a worthy one, although whether the call is a truly honest one or just a sly means of maintaining a Lib Dem presence is a rather different question.

But the real issue that it avoids is the simple fact that a sizable number of Welsh voters seem set to vote for UKIP in constituencies across Wales.  The original purpose of the additional members in the regions was to rebalance the total membership of the Assembly to take account of the lack of proportionality in the first-past-the-post part of the election, which is exactly why UKIP are likely to win seats.  The Lib Dems seem to want to use the regional list system as some sort of separate election which can be used tactically to deny representation to a party whose support will be hopelessly under-represented in the constituency part of the vote.  It’s a strange position for a party which claims to believe in proportional representation to take.

I’d prefer a single class of Assembly members elected by Single Transferable Vote from multi-member constituencies (which is coincidentally, as I understand it, the formal policy of the Lib Dems), but if we are going to have a system of additional members as a second-best option, then I’d prefer to see that part of the election used as intended, to ensure proportionality (even if that helps parties that I don’t like) rather than see parties trying to game the system.  Such a system would probably work better if there was only one election – in the constituencies – and the proportion of votes in that election was then applied to national party lists to select the additional members.

Whatever, the real problem – which the Lib Dems seem not to want to face up to directly (although, in fairness, they’re not the only ones) - is that so many people in Wales intend to vote for UKIP in the constituency ballot.  This isn’t limited to in-migrants to Wales; many of the constituencies where UKIP have previously attracted – and are likely to attract again – their strongest votes are also the constituencies with the highest proportion of Welsh-born voters. 

It’s too easy to dismiss this as a protest vote or an anti-politics vote, but I suspect that it is an expression of an underlying current of opinion which is far more common that I’d like to believe.  Perhaps UKIP simply will disappear after the EU referendum on 23^rd June.  That would be too late to stop them making progress in the Assembly elections, but it might justify treating them as a one-off aberration for this particular election.  But even if that turns out to be true, a disappearing party is not the same as a disappearing opinion, and there’s a lot more than antipathy to ‘Europe’ behind the rise in the UKIP vote.  The problem seems to be that other parties are too afraid of losing support from electors who sympathise with much of what UKIP says (but don’t intend actually to vote for UKIP) to directly deal with the prejudices and half-truths underlying the rise of UKIP.  Treating it as a question of tactical voting simply isn’t good enough.

Pots claim kettle is "just too black"

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I’ve referred previously to the confidence trick which the words ‘efficiency savings’ actually represent.  Whilst all organisations always have some potential to improve their efficiency, unless the savings are specifically identified, an imposed target for efficiency savings is merely a euphemism for a budget cut.  In many cases it will result in cuts to services in one way or another.  Even if those ‘savings’ are re-invested elsewhere in the same organisation, arbitrarily imposed ‘efficiency savings’ are still cuts in the parts of the organisation where they apply.

There was a spat between the parties this week on the subject.  Labour, who are currently implementing an arbitrary requirement for a 3% level of ‘savings’ in the NHS, the Lib Dems, who want a further 3% ‘savings’, and Plaid, who want a further 4% of ‘savings’, ganged up on the Tories who want a further 14% of ‘savings’ with all three claiming that the Tories’ proposal amounts to a vicious cut to budgets.  All of the figures seem to have been plucked from the air, and all of them seem to be saying that they wouldn’t cut the overall total budget; they’d simply redirect the money elsewhere in the NHS. 

But if they’re all going to pull arbitrary figures out of the air, there is no way of knowing whether any of them are right.  And there’s an argument which says that if you’re going to do that, you may as well be ambitious about it.  Especially if you have zero expectation of having to deliver.

Who subsidises who?

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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.

Problems and opportunities

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Last week, one Labour MP told us that we should leave the EU because the shrinking working age population in the Eurozone is a “ticking time bomb” which means that taxation inside the Eurozone will need to rise to pay for an ‘army of retired people’.  She’s right on the demographic issue, that’s undeniable, but what is unclear to me is why anyone would not understand that the UK faces exactly the same issue, or why leaving the EU makes any difference.  It is a simple fact that a falling birth rate coupled with increased longevity will create a problem for any country, including the UK, where the state pension is paid for out of current revenue rather than out of past savings.

Such a pension fund has some similarity with a giant, state-sponsored, Ponzi scheme, where payments to the increasing numbers of pensioners depend on recruiting ever more people to contribute to the scheme.  The logic of that is that maintaining the level of the state pension requires that the population continues to grow (which is, incidentally, one of the ways in which immigration by people of working age brings a net fiscal benefit); that the level of taxes paid by those of working age continues to increase; or that the age at which people can claim their pensions continues to rise.  The real question should be about how we move away from a Ponzi scheme towards a properly funded pensions system, but that would be a major project requiring long term political consensus rather than the regular chopping and changing which characterises UK Government pension policy – under both parties.

The issue of population growth, or lack of, was also referred to in the recent Government Expenditure and Revenue Wales (GERW) report.  The report drew attention to the disparity between the population growth in Wales since 2008, at 2.2%, and that of the UK as a whole, which was 4.5%.  This has a number of impacts for those of us concerned about the fiscal gap in Wales.  A higher proportion of pensioners coupled with a lower proportion of people of working age means both that the demand for public expenditure (on pensions and health) is disproportionately high, whilst the revenue raised from people in employment is disproportionately low (without even considering the wage differential). 

The fiscal problem in Wales is exacerbated by a flow of retirees into Wales and a flow of young people out.  Some claim that we cannot be independent until we have resolved that issue; but I’m in the other camp which is inclined to believe that independence is actually a key part of the solution.

Given the impact of humanity on the planet, and the aspiration for ever-higher material living standards, an overall policy which depends on continual population growth is pure folly.  I’m not alone in believing that the falling birth rate in developed countries is a good thing rather than a bad thing; stabilising the world population is a sensible, not to say necessary, aim.  But much of what passes for economic policy seems to be ignoring the demographic, and implicitly assuming that falling population growth is a temporary problem.  In reality, it’s a long term opportunity, but it requires adaptation.

Never unknowingly undersold

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It seems that I may have been a little unfair to the leader of the Conservatives in Wales the other day, when I said that “His faith in the power of a penny off tax to turn round an economy is touching”.  From today’s news, it appears that I undersold him by a penny, and omitted the proposed 5p cut for the more well-off taxpayers.

Coming hot on the heels of a report drawing attention to the huge fiscal deficit which Wales has, promising to maintain spending on health and increase spending on schools along with a host of other costly pledges, and at the same time cutting the income available to pay for it looks more than a little reckless.  He talks about turning Wales into the ‘low-tax capital of the UK’, but where is the evidence that doing so will bring any economic benefit in the long term, let alone the short term?

I suppose that deliberately proposing to increase Wales’ fiscal gap will allow unionists such as himself to continue to argue that Wales can’t be independent because of the ever larger fiscal transfer from the rest of the UK, but it doesn’t look like the action of anyone who seriously wants Wales to take more responsibility for its own financial future.

Faster isn't necessarily better

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Some years ago, one manager for whom I worked was always late for meetings.  His ‘reason’ was that he already had 9 points on his licence for previous speeding offences, and therefore it was impossible for him to get to meetings on time.  He was invariably at least half an hour late, leaving the rest of us sitting around for half an hour waiting for him.  It used to irritate me, but it didn’t seem to have occurred to him either that it was possible to get to meetings on time by setting out earlier, nor that the time taken to get from A to B could not be calculated by simply dividing the number of miles by 70, because there would invariably be congestion, or road works, at some point along the route.

The Conservatives in Wales seem to be suffering from a similar inability to comprehend the reality of travelling by road, with their announcement today that they would raise the speed limit on the M4 from 70 to 80 mph.  They argue that this “could play a vital role in getting our economy moving and offering invaluable support to hard-pressed motorists, commuters and businesses”.  Leaving aside the words ‘hard-pressed’ which seem to be a mandatory requirement of any press release on any topic from any party these days, how, exactly, would it achieve that result?

On my calculation, the M4 in Wales runs for a little under 80 miles from end to end.  Assuming that it were possible to travel at the maximum legal speed along the whole length, then at 80 mph it would take one hour, and at 70 mph it would take around 1 hour and 8 minutes.  That 8 minutes is, of course, the absolute maximum time difference between the two speeds; we also need to factor in the stretch around Port Talbot where the speed limit is 50 mph, and the almost inevitable congestion at other points which reduces the maximum attainable speed.  For most journeys for most drivers, the effective speed limit (and therefore duration of journey) is set by traffic conditions, not by the law.  And let’s not forget that most journeys by most drivers don’t actually use the whole length of the M4 either.

Taking that absolute maximum of 8 minutes as a theoretical saving, do they really believe that that is enough to ‘get the economy moving’?  And in what way does it offer ’invaluable support to … motorists, commuters and businesses’?  The argument doesn’t stand up to a moment’s examination, and I’m afraid that I really don’t believe that Andrew RT Davies is stupid enough to believe it himself either.  (I think I just paid him a compliment, of sorts, there.)

If it is not going to have the effect that he claims, then why is he proposing it?  Only the man himself can know what’s in his own mind, I suppose, but I suspect that he’s actually trying to make a populist appeal to people like the manager whom I mentioned in the opening paragraph; people who believe that speed limits are somehow unfair, and that enforcing them is some sort of stealth tax on ‘innocent’ motorists, or means of preventing them going about their business.

There is room for debate about what the ‘correct’ speed limit should be.  The improved safety of modern vehicles might suggest that it could be increased, whereas the increasing volume of traffic on our roads, and the need to reduce carbon emissions, might suggest a decrease, given the evidence that slower speeds increase the overall carrying capacity of roads and reduce total carbon costs.  But a simplistic appeal to those who simply want to be allowed to drive faster isn’t the place to start that debate. 

Still, irresponsible and half-baked proposals are another indication of a party which doesn’t expect to be part of the government in Wales any time soon.

Do they think we're stupid?

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The party currently calling itself the “Welsh Conservatives” have kindly sent me a leaflet this week urging me to vote for the ‘Local Candidate’ on one ballot and ‘Welsh Conservatives’ on the other.  They don’t, however, seem to think it either necessary or appropriate to tell me who any of these people are. 

There are lots of photos in the leaflet, although it’s far from clear whether any of them are candidates in the election.  There are four pictures that I recognise - David Cameron, Jeremy Corbyn, Andrew RT Davies and Carwyn Jones – but the rest look like stock photos.  Of the four, only two are actually named.  Apparently, Jeremy Corbyn wants me to vote for him for another five years to make the same mistakes, whereas David Cameron is delivering economic security.  But neither of them are actually in power at the moment nor will they be on the ballot paper for the election. 

The leaflet also proclaims rather boldly that Labour hold 30 seats in the Assembly and that if they lose just one seat they lose power.  Do they really believe that themselves?  Two possibilities strike me; the first is that they really do, in which case their understanding of Welsh politics and the electoral system is, shall we say, a little shaky; and the second is that they don’t believe it, but they think that I (and other electors) will be stupid enough to fall for the lie.

Still, credit where credit’s due – at least it’s bilingual nonsense, which is a huge step forward from a lot of the past efforts of the Tories.

Tax returns - who cares?

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In refusing to release his income tax details, UKIP’s leader in Wales said that he thought that the rush by other leaders to release theirs was a bit of ‘grandstanding’.  His refusal succeeds in making him look a little shady, but the comment is one of the few things he’s ever said with which I agree.  A question about whether the Prime Minister has gained from the tax avoidance benefits of an off-shore arrangement has been diverted into a competition between politicians to see who can appear to be the whitest.  And the original question has been completely lost in the process.

I’m not particularly interested in seeing politicians’ tax returns.  All they really tell us is that the individuals concerned have paid the correct amount of tax on the income that they’ve declared.  That should surprise no-one; it’s actually very difficult to avoid paying tax on income once it’s declared.  HMRC may have its faults, and they may sometimes struggle with the arithmetic, but the formula for calculating tax is straightforward, and once the income is properly declared, they will eventually get it right.  It strikes me as highly unlikely that any tax return published by any politician is ever going to get that wrong.

But the question asked of Cameron wasn’t whether he had paid tax on the income received; it was whether he’d ever benefited from a tax avoidance scheme.  Whilst it seems clear that he has paid all the tax due by him personally on the monies received, it remains the case that a company incorporated off-shore was able to avoid paying a penny in corporation tax for many years (even if, as the PM claims, that was never the prime objective of the off-shore arrangement).  It is probably reasonable to assume that not having to pay tax on company profits allows a company to accumulate profit at a faster rate than an equivalent company incorporated elsewhere, and therefore that the beneficiaries of the arrangement ultimately gain from the tax-free status.  That, I thought, was the original question, but it seems to have been lost in the rumpus over tax returns – a good indicator of why ‘hue and cry’ is not the best way of dealing with complex issues.

But let’s get back to the question of tax returns.  ‘Tax returns’ is being used as some sort of cypher to assess the openness and transparency of politicians (which is why, although he may have a good point, the refusal of UKIP’s Welsh leader to release his makes him look dodgy).  But what do we really need to know about politicians and money?  Fundamentally, it seems to me that there is only one relevant issue.  In essence, that is the source of their income and wealth, so that we can judge whether any decisions that they take are likely to be influenced by considerations of personal advantage, or to what extent, as a corollary, they are able to benefit personally from the rules that they change (or fail to change) whilst others are not.  If the rules on declarations of interest aren’t good enough to ensure that, then they need to be changed; tax returns don’t actually add much useful information.  And anyway, if someone is dishonest enough to make an incomplete declaration of interest, why would anyone expect that they’d then tell HMRC the truth?

Legality and morality

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The Panama Papers have highlighted for me an increasing trend amongst politicians, bankers etc. to transfer all responsibility for deciding on the morality of a given action to the legislators in parliament.  Anything which isn’t specifically illegal is thus automatically deemed acceptable.  The phrase “no wrongdoing” is glibly equated with “no criminal activity”. 

The law company at the centre of the scandal has gone one step further in defending itself by drawing attention to the fact that it’s never been charged with any offences in 40 years of activity.  True, but the parallel which came to mind was with a very successful bank robber who’s never been caught.  Never having been caught isn’t at all the same thing as never having committed any criminal acts, yet that seems to be the essence of their defence.

Cameron in particular is squirming under the pressure, and rightly so given his previous condemnation of others for similar activities.  His latest line – that the infamous trust wasn’t set up to avoid tax, merely to allow trading in dollar-denominated securities – is an attempt to tell us that the tax-avoiding consequences of the decision to set up the trust in that way are merely some sort of ‘incidental’ result of an action taken for an otherwise entirely proper reason.  Perhaps from his perspective that sounds credible, but I doubt that many will be convinced. 

It’s bad enough when the bankers fall back on the simplistic equation of morality and law, but for ministers and legislators, it’s a much bigger problem – because, after all, they’re the ones who make the law.  For them to defend an action on the basis that they themselves haven’t actually legislated to outlaw it simply doesn’t wash; rather, it makes the offence worse.

It’s probably unreasonable to expect that legislators and ministers, drawn as they are on an almost random basis from the population, will be on average any more honest or less venal than those outside parliament.  And given the electoral processes, there is no easy way for the electors to keep them honest, not least because there can never be any guarantee that any replacements will be any better than those they replace.  But we can and should challenge the simplistic assumption that morality and legality are one and the same thing.  And especially so in the case of those making the laws.

Digging an efficient hole

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I’ve referred to the question of “efficiency savings” in the past.  It’s invariably a political euphemism for “budget cuts”, because it’s a top-down exercise telling people what they must save rather than a bottom-up exercise based on real identified savings.  I’ve also previously referred to a report by the Auditor General, which highlighted concerns that 'efficiency savings' have all too often resulted in cuts to services rather than any real improvement in efficiency, and to a report which identified that one of the outsourcing companies more honestly explained how efficiency savings wouldn’t affect profits, because they’d just cut the services.

It’s not that I don’t believe that large organisations can always find ways of running themselves more efficiently – I’m convinced that they can.  (Whether that’s always a good thing or not is another question – getting the cheapest supplies from elsewhere may look like ‘efficiency’ but may not be the best thing for the local economy.)  It’s more that I don’t believe that simply imposing cuts to budgets and telling managers to do more with less will achieve that aim without affecting services in any way.  To pretend that it will is to be blind to the way things will actually happen as a consequence of demanding such savings.

It was disappointing this week to see Plaid joining the “efficiency savings” bandwagon.  For sure, assuming efficiency savings of £300 million makes the figures add up; but it doesn’t make them actually happen.  One person’s £300 million of unidentified savings is another person’s £300 million of budget cuts.  I can’t really blame Plaid’s opponents for jumping on the figure in the way that they have (although it’s totally disingenuous from parties who’ve done exactly the same on a regular basis); and I find Plaid’s defence of the figure no more convincing than the arguments put forward by other parties in the past.  In a manifesto which contains many good things (and I’ll probably come back to manifestos when I’ve had time to read and digest them), it’s an unfortunate hole to have dug.

Comparing apples and pears

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One of the difficulties faced by the authors of the Government Expenditure and Revenues Wales study (GERW) was that information on many items of expenditure and revenue was not available separately for Wales, so they had to make estimates.  And any estimate will always be based on one or more assumptions.  There’s nothing at all wrong with that; it’s the only way of producing even an outline idea of Wales’ position.  The problem arises in deciding which assumptions to make; different people would make different assumptions – and I suspect that the same people might make different assumptions as well, if the context were different. 

That question of context is one of the reasons why a study aimed at analysing Wales’ position in the past (2014/2015) within the UK will never produce the same answers as a study aimed at considering Wales’ position in the future as an independent nation.  GERW was clearly aimed at doing the former not the latter, and it seems to me that the assumptions made are reasonable in that context, and that the document therefore helps a great deal to aid understanding in that context. 

If we were to attempt to look to the future rather than the past, even within the context of the continuation of the union, we would need to make a range of additional assumptions about future policies and their impact on revenues and expenditures, and we would also need to change some of the existing assumptions on apportionment of revenue and expenditure.  I won’t cover all of those, but it’s worth considering a few just to give a flavour of the differences which would emerge.

Firstly, what would be the position in relation to the national debt?  What would Wales’ share be?  At the time of the Scottish referendum, the UK Treasury indicated at one stage that it would continue to be responsible for the whole of the debt, even if Scotland became independent.  That was more about reassuring the lenders than about establishing a start position for negotiation; and the SNP’s response (that Scotland would take a share) was similarly about establishing and maintaining international credibility.

But on what basis should we estimate Wales’ share of the debt?  GERW uses a per capita basis, but there are other approaches.  Part of the reason for the debt is current expenditure, so if Wales receives more in benefits should we take a larger share?  But part of it is also about funding infrastructure projects, where Wales receives less money than our fair share, so should our share of the debt be less than on a per capita basis?  And even after establishing a base line (difficult enough in itself) at the point of independence, if we want to project forward we need to make assumptions about future budget deficits or surpluses, borrowing patterns and rates of interest.  None of these factors is entirely straightforward or uncontroversial.

Or take defence spending.  GERW uses a per capita basis – entirely reasonable to estimate Wales’ share of current spending.  But the UK spends around 2% of GDP on defence – other countries spend less (Germany, for instance, spends around 1.1%).  What would an independent Wales spend on defence?  And GERW draws a clear distinction between spending for Wales and spending in Wales; much of the current spending on defence goes outside Wales, which means that we pick up the cost in the GERW figures, but don’t get the whole GVA benefit, or the multiplier effect.  In an independent Wales, whatever we spend on defence would be in Wales as well as for Wales.

Or take pensions.  How do we assign the costs of pensions?  Wales has a higher proportion of pensioners than the rest of the UK taken as a whole.  Part of the reason for that is that people choose to retire to Wales.  Who should pay their pensions?  In a unitary UK, the question doesn’t arise, but in the scenario of an independent Wales, it most certainly does.  When citizens of the UK retire to France or Spain for example, their pensions are paid by the state in which they contributed when they were working, i.e. the UK.  France and Spain do not pay those pensions.  So, in an independent Wales, would Wales be expected to bear the cost, or would the arrangements be the same as they are for any other member country of the EU?  The latter seems likely, but even then there is a further complication – does that apply to existing retirees or only to new ones?  The latter would seem to me to be easier to implement and manage, but the historical commitment might well be a factor which those negotiating a share of the national debt would wish to take into account.

My purpose in all the above is in no way to disparage the work of those who have produced GERW; indeed, we should be grateful to them.  It is, rather, to give a flavour (there are many more points which could be made) of why a study of Wales’ current position cannot simply be extrapolated without significant change to a conclusion about the position of an independent Wales at some future date.  And that's a project which will require a lot more work.

Truth, proof, and piffle

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The Government Expenditure and Revenue Wales 2016 report produced by the Wales Governance Centre makes for interesting reading and is a valuable contribution to discussion about the fiscal position of Wales.  There’s a lot of detail in it and a few general reservations, and I’ll return to some of both of those categories in the coming days.  But overall, I’m glad that someone has committed the time and effort to doing this work.

The document was always going to be misinterpreted, and deliberately so, by those with an agenda.  WalesOnline gave us the screaming headline “The five figures that show how indebted Wales would be as an independent country”, which is precisely what the report does not tell us.  The report makes no attempt whatsoever to predict what the situation of an independent Wales would be; indeed, as far as I can see, it makes no mention of the question at all.  The closest that a rational reader could get to a statement like the headline would be to say that if we make the following four assumptions:

·         Wales had become independent at some time prior to 2014/2015

·         All the estimates of the apportionment of income and expenditure set out in the paper turned out to be correct

·         Independence changed nothing

·         The ‘independent’ Welsh government decided to keep to the same taxation and spending decisions as the then UK government

then Wales would have had a budget deficit (not at all the same thing as being ‘indebted’, by the way) of close to £15 billion in 2014/2015.  The first assumption is patently untrue, the second may or may not be true, the third is extremely unlikely to be true, and the fourth is plain daft.  Still, why let mere facts interfere with a good headline?

There was no surprise at all in the way that some Labour politicians pounced on the report claiming that it ‘proves’ that Wales cannot be independent.  The report proves no such thing, but one has only to look at the awful figures themselves to realise that Labour’s grasp of economics is shaky to say the least.  I could equally claim that the report ‘proves’ how badly Wales is served by the current arrangements, but in truth I’m not sure that it ‘proves’ that either.  There are too many factors and assumptions involved to jump to such simplistic conclusions. 

But insofar as any figures looking at what has happened in the past can act as evidence for either of those hypotheses, it is inevitably the case that figures from the past are more likely to tell us something about the effects of what has been done in the past than about what might happen under a different scenario in the future.  So I think my claim would be the more accurate – or perhaps merely less inaccurate – of the two.  But arguing the toss over those two hypotheses is akin to arguing about the number of angels dancing on a pinhead – an interesting diversion, but not adding a great deal to the sum of human knowledge.  On the other hand, I suppose that ‘adding to human knowledge’ is not exactly the prime function of Labour politicians, especially when there’s an election in the offing.

I was taken aback a little by the reaction of the Tories’ Assembly leader, though.  Faced with a headline telling us that there is a very, very, very big gap between taxes raised and money being spent, his response has been to argue for reducing the rate of income tax and thereby making the gap even larger.  His faith in the power of a penny off tax to turn round an economy is touching, even if more than a little lacking in evidence.  Perhaps there were just too many noughts at the end of the number for him to cope with.

Competition is ideological

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Economists can face difficulties in analysing what happened in the past before records became as detailed as they are today, and often depend on extrapolation from other data.  Despite that, there is a general agreement that India was responsible for around 25% of the world’s industrial output in 1750 and that the proportion fell to around 2% by 1900.  If the detail of the figures is inevitably subject to debate, the cause of the fall is even more so (there’s an interesting analysis of both the figures and the causes here).

But as the history of the British Empire shows, globalisation of trade is not as new as it sometimes appears, and the balance can swing from one country or region to another over time.  For India, the imposition of Imperial rule, at the same time as the Industrial Revolution in Britain, coincided with a switch of manufacturing from India to Britain as the Indian economy became one supplying raw materials rather than finished goods.  It's not hard to see a causal relationship there.

In short, India lost much of its industry and the key economic decisions leading to that were taken elsewhere.  It’s tempting to see last week’s announcement on the future of steel-making in the UK as a sort of mirror image of that process – de-industrialization of the UK as a result of decisions taken in India.  That’s a bit over-simplistic, of course, but there is a more general parallel.  In the 18^th and 19^th centuries, there was a flow of economic power from places such as India and China to Western Europe in particular – and that flow is now increasingly moving in the opposite direction.  And just as others seemed to be powerless to prevent the flow in the past, governments here seem to believe themselves largely impotent in the face of the reverse threat today.

Does it have to be so?  The rebalancing of the world’s economy, with wealth shared more equally, which is underway is certainly long overdue, and those of us supporting such a move have to recognise that any such readjustment is likely to involve a certain amount of pain.  But that pain is exaggerated by the insistence – shared by all parties – that the size of the respective shares must be decided by competition rather than by co-operation.  Our politicians seem mostly unable to conceive of a world where countries and peoples work together for a fair distribution of the world’s finite resources rather than a world full of cut-throat competition in which all participants seek to maximise their own share.  But that’s an ideological driver, not an economic one.

Mirror, mirror on the wall...

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… who is the blandest of them all?

When the scriptwriters of VEEP coined the phrase ‘Continuity with Change’, they were actually seeking the most meaningless political phrase they could come up with.  Little did they imagine that any politician would ever use anything similar for real.  Never overestimate a politician.

As the Welsh general election campaign struggles into some semblance of life, no doubt we can expect to hear many other meaningless slogans bandied around.  But who can be the blandest of them all?

The Lib Dems have bolted into an early lead this week with “Our priorities are your priorities” and “Putting People First” (as if any political party would ever come forward and say that they were going to put people last).  I really wish that I could say that I was not expecting keen competition from the others to trump the Lib Dems in the coming weeks…