Tuesday, 26 April 2016

Setting the 'right' level

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.


Pragmatic Nationalist said...

It's not an argument for variable sub-state pensions- or at least not one worth making. In Scotland the SNP said pensions would not be reduced. What it clearly illustrates is that the problem for Wales is on the revenue and tax generation side of things. Low productivity, low wages and so on.

There is a way to make independence appear more affordable by driving down benefits and pensions to make the spending side of the balance sheet look better. This is also 'easier' in theory than increasing wages. But it wouldn't be democratically acceptable and wouldn't be the kind of independence a vast majority of Welsh nationalists want (a socially just independence). It also wouldn't be the kind of independence broadly desired by Scotland for the SNP let alone the parties to their left.

So we have to look at the revenue generating side, even though it is really difficult. In the short-term we might need far more spending and to accept an even worse deficit, in order to get better infrastructure or to pay for some kind of business tax cuts. Income tax cuts are really problematic as a way of fixing this, although there is an argument income tax cuts will stimulate business activity it's not very convincing to me yet. But let's have the debate.

Anonymous said...

On this point John- "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."

There's a point of caution I'd make. *Becoming independent* in a referendum will in my opinion depend on showing that some aspects of spending will be "no worse" than the UK or England. It's the only international comparison in town for most Welsh voters. Later, an independent Wales would have a full policy freedom. But winning the referendum would require pensions to be protected at the same level as UK/England and not to be cut. Pensions might actually be the most important item of public spending in that debate. Job seekers allowance and so on won't be held to the same sacred standard. The same point on pensions does apply in the Scottish case too.

John Dixon said...

I agree with both of you that the issue is, or should be, about the income side of the equation rather thna the expenditure side (although there may be a 'chicken-and-egg' issue about whether that can be resolved before independence or whether independence is a necessary pre-condition).

And I also agree with you that selling independence on a prospectus of changing levels of pensions and benefits might be more than a hard task.


1) the more commitments are made to change nothing in order to win an independence vote, the more we should be asking what is the point of independence. The whole point of independence is surely to break free from existing policy constraints and do what suits Wales?

2) I'm not actually suggesting cutting pensions; merely that there is a debate to be had about what our aim should be and how to achieve it. I'd like to see them increase not fall. But when we use terms like "protected at the same level" - we need to understand whether we mean absolute level (I think you do) or relative level? And if we mean 'absolute level', then we need to explain why that absolute level is right in the first place and why a difference in the relative level is acceptable.

3) I think there's something more than a little dishonest about debating the question of independence without asking ourselves some hard questions about what is or is not sacrosanct, and why.

I remember one old comrade (no longer with us, sadly) who said he'd be willing to eat grass if it meant Wales could be free. I never agreed with him, and don't now; and I certainly wouldn't want what I've said here to be misinterpreted along those lines. But there are consequences to being a low-wage economy, and we need to understand those consequences (which was part of my point in this post). And when people talk about 'black holes' in our fiscal arrangements, we need to understand why they are so large (which was another part of my point).

Bored of Labour said...

You've written extensively and interestingly about the GERW report and it associated problems, why aren't you and those opposed to it calling for a Welsh nationalist version of it to at least see the points of difference which will enable you to start challenging the dominant Wales is too poor narrative peddled by unionists with hard facts?

John Dixon said...

The GERW report is a really helpful tool for looking back at Wales' fiscal position in previous financial years and analysing revenue and expenditure, but precisely because it is, by its nature, looking at the past, the idea of producing a different 'version' simply won't fly. The report is looking at 'actuals', not projections; any similar type of report looking at the position of an independent Wales would have to be looking forward, not back. Predicting the future is an entirely different exercise to an analysis of the past, and involves making a huge range of assumptions, all of which would be open to challenge, since different people and parties would make diferent assumptions.

Pragmatic Nationalist said...

Bored of Labour's comments show the limitations of looking back at GERW and trying to wish the figures say something different. The figures reflect UK state spending and UK state revenue generation on Welsh territory. The "Wales is too poor narrative" isn't a fabrication, even if it is an exaggeration. It stems from a really existing problem which John's last few posts show is on the generation side, not the spending side.

Where nationalism comes in is when we make a different projection. GERW doesn't project, it's a record or archive. A Welsh nationalist projection would be the budget of an independent Wales in the first year; possibly the first three years as governments usually set out spending and tax plans in that way. Wales is simply not ready to sustain any kind of developed world social expenditure out of its own revenues.

There is an alternative which is gradually becoming more responsible for our own needs in a devolved and autonomous framework, then proposing independence later. This is, in fact, not a choice but the only way it can ever be done. In my opinion! This is the settled Plaid position but why don't others produce a budget for the first year of an independent Wales?