Wales needs real powers over economy

The decline and fall of the Welsh economy since the industrial revolution is well documented. Once the powerhouse of the world it has since suffered from decades of decline. Traditional industries such as mining and steel-working have disappeared and the investment by foreign manufacturers has vanished as it became more economically viable for them to invest in Eastern Europe and the Far East, where wage costs are substantially lower.

This economic history was one of the strongest reasons why people backed devolution in 1997. The sense that the Welsh economy needed attention from people that understood it was re-enforced by Wales’ experience of the Thatcher years. Thatcher’s economic policy bolstered the financial sector in London, but at the cost of traditional industries in areas like Wales.

Unfortunately, this economic decline has continued since the establishment of the National Assembly. The headline figure for measuring the Welsh economy is regional Gross Value Added (GVA), which compares Welsh economic output per head to the UK average. Since 1997, GVA has fallen from 78.1% to 75.2%1, although there have been rises in recent years, most likely due to the impact of the recession on UK economic output.

This has led some to question if Welsh devolution has the capacity to bring about the change required. Professor Kevin Morgan, who lectures in governance at Cardiff University and was a key figure in the 1997 referendum campaign, has openly stated that “there is no necessary economic dividend to political devolution.”2

Like Professor Morgan, I take the view that devolution needs to be strengthened to ensure the Welsh people receive this dividend. A good example of the divergent paths of economy under devolution is shown by the economic growth in different areas across the UK.3 Seven of the top 15 areas for economic growth in the UK between 1998 and 2008 were in Scotland and saw growth of over 70 per cent. These include rural, urban and deprived areas. None of the top 15 were in Wales.

Scotland has enjoyed a greater range of powers than Wales, including primary legislative powers from day one, based on a reserved power model that offers greater stability and clarity. In addition, Scotland benefits from the operation of the ‘Barnett formula’ – the Treasury adjustment of public expenditure allocated to the different areas within the UK – which has been shown to fund Wales less generously than if it were a region of England.4

The Scottish experience demonstrates that devolving responsibility for economic growth without significant powers to stimulate it is insufficient. Other federal models also demonstrate this. We must remember that one of the most successful economies in the history of the world, the American economy, is built around a federal system with a significant amount of tax decentralisation.

Of course, much of the blame for Welsh economic underperformance is about policy failure too. The Labour party in Wales has shown an inability to produce economic change due to a lack of vision, a lack of delivery and a lack of a financial incentive to improve. Further devolution will change some of this, but I am in no doubt that, as in any democracy, the government has sometimes pursued the wrong economic choices. However, while it is up to the electorate to change the government, it is up to politicians to develop the optimal constitutional arrangements within which government operates.

The Silk Commission5, whose first report recommends a significant shift in tax powers from Whitehall to Wales, has stimulated debate on these issues. The report recommends borrowing powers for the National Assembly and proposes the devolution of a series of taxes. Many of these are low-yield, such as air passenger duty and landfill tax. But its most radical recommendation is that the National Assembly should be responsible for a proportion of income tax. For the very first time, the amount of money a Welsh government spends will be directly linked to success in promoting economic development. That should sharpen minds in Cardiff Bay and would also bring the same level of accountability to Wales that exists in almost all national parliaments.

The Silk Commission proposals would devolve specific new economic powers to Wales and increase the ability of Welsh politicians to address economic decline. It is not just a constitutional reform; it is an economic reform too. The recommendations should be implemented by the UK government during this parliament.

However, this is not simply a Welsh issue and it is not only Welsh politicians who are making the intellectual case for greater autonomy in economic matters. Across England, the decentralisation of economic growth is beginning to occur. The ’City Deals’6, promoted by Nick Clegg and agreed between the UK government and some of England’s largest cities, represent a significant change in the relationship between central and local government and offer the opportunity for English cities to shape their own economic recovery. The more interesting ideas, however, are the proposals for regional equivalents.

Local authorities in the north-east of England are being encouraged to form a ’combined authority’ with powers over economic development, transport and planning.7 If these plans are carried out, it will represent a significant opportunity for the north-east to re-assert its economic identity.

These proposals are interesting because north-east England has similarities with Wales, especially regarding its economic legacy. The reasons given for the establishment of this proposed new authority are similar to some for the reasons for the establishment of the National Assembly – a recognition that a shared identity and shared economic problems can be better solved at a local level, rather than in Whitehall.

Likewise, Lord Heseltine’s 2013 report into economic growth, No stone unturned – in pursuit of growth, argued that huge swathes of the economic development budget should be devolved to a regional level8. To what extent this will be implemented is unknown, but the idea of devolution of economic powers is gaining traction.

The London Finance Commission has recommended that a series of taxes be devolved to the Greater London Authority.9 Specifically, it recommends that London be given control over property taxes such as council tax, business rates, stamp duty, land tax, annual tax on enveloped dwellings and capital gains property disposal tax. These proposals are valuable in themselves but they also represent a sea-change in political debate. Talk about taxes being levied by regional bodies in England, and by a Conservative Mayor of London, demonstrates that this kind of economic thinking is surpassing geographic and political boundaries.

The biggest obstacle for change is often Treasury officials or dogmatic unionists who insist that only central government can be relied upon to deliver economic growth. The Treasury is nervous about giving away powers to untested bodies. Centralists in government hang on to the belief that a benevolent central authority is best placed to run the country.

These are often the same people who tell us that constitutional reform is a distraction from the real issues of the day. But there is no tension between stimulating economic growth and constitutional reform. In fact, stimulating economic growth is reliant on constitutional reform.

The government of the day is elected mostly as a result of elections in marginal seats, usually in the south-east of England. As a result, any government will be overly focussed on an economic policy that benefits those areas. But a British economic recovery will only come about when every part of the UK’s economic machine is working properly. Every cog must be well-oiled.

The Treasury will realise this when it sees the benefits to itself of a UK-wide recovery. Its own revenue streams will be boosted if areas like Wales, or the north-east of England, or the Scottish central belt return to economic productivity. Decades of centralised government have shown us that this does not happen automatically. But recent experience suggests that devolution, when accompanied by real power to improve the economy, can make it happen.

Economic growth is improved when local units have control over economic levers and a radical approach to the distribution of power must recognise this. If the competitiveness of the UK economy is one of the biggest long-term challenges facing politicians, then we must make sure our constitution gives us the power to compete. 

Footnotes:

1. Source: Office of National Statistics, National assembly for Wales Research Service. The most recently available figures are from 2011.
2. Kevin Morgan, ‘Dirty Little Secret’ in Agenda vol. 39 (Institute of Welsh Affairs, 2009)
3. “Eluned Parrott: The magic bullet strategy has clearly not worked in Wales” in Western Mail, 10th August 2011.
4. See Independent Commission on Funding and Finance for Wales, ‘Funding devolved government in Wales: Barnett & beyond’, (Welsh Assembly Government, July 2009), p.18 [Accessed 23 August 2013]
5. Commission on Devolution in Wales, Empowerment and responsibility: financial powers to strengthen Wales (2012). The commission was established by the coalition government to examine the potential future growth in powers of the National Assembly. It is commonly referred to as the Silk Commission.
6. Deputy Prime Minister’s Office, ‘Giving more power back to cities through City Deals’ (29 April, 2013) [Accessed 9th August 2013]
7. Lord Adonis, Heidi Mottram, Don Curry, Will Hutton, Bridget Rosewell and Jonathan Ruffer, ‘North East Independent Economic Review Report‘ (North East Local Enterprise Partnership, April 2013) [Accessed 9th August, 2013].
8. Lord Heseltine, ‘No stone unturned: in pursuit of growth – Lord Heseltine review‘ (Department for Business, Innovation & Skills, 18 March 2013) [Accessed 9th August 2013]
9. London Finance Commission, ‘Raising the capital’ (May 2013) [Accessed 9th August, 2013]