Wednesday 6 April 2016

Comparing apples and pears

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.


Anonymous said...

Oh dear, no sooner have we all started to think about important matters for an independent Wales you now seem to be telling us that these matters are far too complicated for anyone to get their head around.

Come on, every day we make decisions to move issues forward. Gain a bit here, lose a bit there, it's all a fair part of reaching 'an agreement'. Try to take too much and you'll end up with egg on your face.

The Scots and English have managed things well. Are we in Wales so much less capable?

Time you started to get out into the real world a bit more.

John Dixon said...

Did you actually read the post before commenting? I doubt it, somehow. I'm not saying for one moment that the issues are too complex, merely that a set of figures produced for one purpose cannot be used to imply an answer to an entirely different question without considerable refinement and adjustment. Is that so hard to comprehend?

Anonymous said...

Look here, I give my wife £50 and tell her to go and buy herself something nice because she hasn't had a very good week. She comes back later that day with a rib of beef, £20 in change, a big smile on her face and she tells me it'll be nice for the family to have on Sunday.

Now, how do I account for all this? Do I reduce her weekly housekeeping/food allowance by the cost of the beef? Or just reduce it by the cost of any regular Sunday joint? Or do I just leave matters well alone? And what about he money I'd given her to buy herself a present. Do I keep the £20 in change or do I hand it back? Or do I give her another £50?

Complicated yes. But totally irrelevant if I just want to keep the relationship harmonious.

It is in entirely this spirit that we must approach independence. After all, we're not looking to make 'a profit' out of the transaction, now are we?

John Dixon said...

That's all very well, but what has it to do with the price of fish?

I think you've completely missed the point of the post, which wasn't actually about the details of who pays what to whom and when, but about a) rebutting the idea that the report published earlier this week had anything to do with the financial consequences of independence, and b) pointing out how difficult it actually is to lay out in simple clear terms what those consequences are.

The second of those points follows on from earlier debates on this blog over recent weeks where some commenters were demanding that those of us supporting independence produce a detailed and definitive set of figures. If you go back and read those you'll see that I have argued that the request is an impossible one to meet, and if providing that sort of detail and certainty is a pre-requisite to campaigning for independence, then independence will never happen. Ultimately, the question as to whether we want to be independent or not is not, and cannot be, a simple question of finance.

If that's the point that you're trying to make, then thee is no argument between us - but the post simply didn't say what you seem to have assumed it to say.

Anonymous said...

That was the point I was trying to make ..... independence cannot be a simple question of finance (because if it is it will never happen).

But then why would anyone vote for independence if it has nothing to do with 'life getting better' for each and every individual, ie. we have more money to spend on ourselves and as a consequence on our national services.

TheStone said...

This study is of interest but no one can tell what the economics of an independent Wales would be until it is established. Every state in the world balances its books, Freedom fighters tend to demamd independence first and worry about the economy afterwards. Dozens of states have emerged from English and Russian domination and have thrived. Plaid Cymru's put the economy right first and then campaign for independence is absurd.
But if this £14bn black hole is right it shows that London rule of Wales is a total failure and should be abolished as soon as possible.

John Dixon said...


That leaves me confused, rather, as to what your position really is. On the one hand you say that it can't be a simple matter of finance (I agree); on the other you want to erect a barrier of proving that people will be financially better off before they'll vote for independence (impossible).

The Stone,

"no one can tell what the economics of an independent Wales would be until it is established" I agree. All we can do is guess and speculate, and there will be a range of different guesses depending on one's preconceptions. Part of my objective in this post was to demonstrate why that is inevitably the case, because those 'nationalists' who are seeking certainty in advance are effectively arguing against independence, ever. The absurdity of that position needs to be examined and refuted. It's sad that so many 'nationalists' themselves are so taken in by the simplistic headlines and fear of putting a difficult argument that they find excuses not to do so.

Anonymous said...

Very fair comments John. I have taken you to task over GERS in previous posts you've done, and it's timely that some Welsh figures have now been produced.

GERW shows Wales' public finances (an estimate of them) inside the UK. The next debate is over how tax devolution will affect this. It is very important to get that right. For those who want independence, it is essential in my opinion to deal with the actual situation we'll be facing inside the British state. GERW does not show an independent Wales' finances. Let's deal with what happens next. A changing British state with taxes being farmed out to the Welsh and Scots. And possibly changes inside England.

The only part where I disagree with you John is where you again say that nationalists not wanting to make a difficult (impossible?) argument are "finding excuses". I won't tire from repeating this to you but the opinion that Wales is too economically weak to function as a state at the moment is completely valid and defensible.

John Dixon said...

I think we're going to continue to disagree on that!

But just to reiterate a point that I've made before - I'm not actually proposing that Wales should become an independent state at the moment. There is a fairly clear process to go through to get there - a party (or parties) has to stand for election to the Assembly on a platform of promoting independence (that is not happening this year and doesn't look terribly likely in 2021 either); it has to win a majority (2021 is now the earliest possible date for that); it then has to negotiate for and hold a referendum (probably two years later, in 2023 at the earliest); if the referendum is won, it has to negotiate the detailed terms and arrange the transfer of power; and then Wales becomes independent (probably 2-5 years later).

So independence before 2025-2028 looks wholly unrealistic to me, purely in process terms. That gives us time to make the argument, persuade people that it's a good idea in principle, and get Wales 'independence-ready'. My point about avoiding the argument is that every year that we fail to make the case or shift people's opinions in favour of the idea 'in principle' is another year added on to the end date. I'm not arguing that economics has no part in that debate (particularly when we get to the point of holding a referendum) but neither I nor anyone else has any chance at all of predicting the economic situation in 2023, and if we want to have an accurate prediction for that before we even start the process, we will never start it. What I am arguing is that the argument for wanting to be independent and take responsibility for our own affairs is independent of the argument about the economics at any point in time. It's better for people to want it and believe that it's currently impractical than to not want it even if they believe it to be practical.

I think that the key difference between us is whether that desire to become independent can only be kindled once the economics are right. I think the two are largely independent.

Ed Gareth Poole said...

Hi John,
Thanks a lot for taking the time to look through our report so thoroughly! Just like GERS, GERW is an assessment of the fiscal position of Wales under its current constitutional arrangements. As you say, Wales' negotiated share of the UK's public debt, social security, economic growth rates, and the monetary and fiscal policies that would be adopted by an independent Wales are unknowable. I would say though that with a 24% of GDP fiscal gap, Wales' fiscal condition is in a very weak state; and this is highly germane to the debate about next steps for devolution, in particular on how the Welsh block will be reduced to account for the new Welsh rates of income tax.

John Dixon said...


I don't disagree at all with your conclusion that Wales' current fiscal position is weak, and I hope that nothing that I've said suggested otherwise! Having a substantive and well-researched set of figures to debate is a really important contribution to any discussion of Wales' finances, and I'll be coming back to some other aspects of the report in future posts.

My main issue here was to refute the idea being put forward by some - who are being, I suspect, deliberately obtuse - that the report tells us what the position of an independent Wales would be. I think that's not only plain wrong, but does an injustice to the work which you and others have done.

Ed Gareth Poole said...

Absolutely! At the launch event on Monday we made the point that many of the assumptions regarding an independent Wales were unknowable (see > ). Of course, the reality of Wales' fiscal condition can't be entirely divorced from the constitutional debate as the Scottish referendum campaign showed. But we can emphasise in future reports that GERW is a reflection of Wales' fiscal condition under current constitutional arrangements. Either way, it's great to read such considered feedback on out work!