Devolution, independence and Wales’ fiscal deficit

A new academic publication argues that constitutional debates about the future of Wales must take into account the country’s long-standing economic underperformance as part of the UK union.

Fiscal transfers from the UK to Wales “do little or nothing” to improve Welsh economic fortunes, according to the researchers. But ending those transfers by becoming an independent country would almost certainly require Wales to make “significant tax and spending policy changes”.

In the academic article, published in the prestigious National Institute Economic Review, Guto Ifan, Cian Siôn and Daniel Wincott, of Cardiff University’s Wales Governance Centre, contextualise the notional ‘fiscal gap’ between taxation and expenditure in Wales. The stark assessment reveals a serious decline in Welsh incomes relative to the UK since the late 1970s, and an associated economic decline caused by the loss of productive industry.

The article narrates a recent history of constitutional developments in Wales, noting that bilateral relations between the Welsh and UK governments remain abrasive, and that the Welsh Government has increasingly advocated a more voluntary unionism. Meanwhile, a minority but growing movement for independence has established itself on the Welsh political landscape, posing implications for the future of the union and the direction of Welsh politics.

Linking the existence of the fiscal gap to the thus far limited threat of secession in Wales, the authors argue convincingly that ‘transformational’ levels of additional resource would likely be required to change the nation’s underlying economic conditions while it is part of the UK.

But an independent Wales would accumulate debt rapidly if it maintained the same tax and spending policies as it did as part of the UK. As an independent state, Wales would have to make significant and difficult choices over fiscal and monetary policy, including consideration of creating a new currency. The so far unknown role of cross-border trade relations with the remainder of the UK would also be critical to any post-independence scenario.