Economic Intelligence and Fiscal Devolution in Wales

Welsh devolution looks set to continue apace with the nation will finally be given some form of fiscal autonomy. In light of this, some important provisions for these new powers must be made and at the top of this list must be good economic intelligence. Economic intelligence is access to detailed data as well as the capacity to build and integrate regionalised macroeconomic models, these are the requirements for making informed decisions with any new fiscal leavers.

As a result of recent announcements a flurry of interest has been shown towards tax changes as a means of economic development. However, a note of caution, without adequate data or modelling it would be difficult if not impossible to gauge the estimated impact on economic activity of any tax changes.

Currently economic intelligence in Wales is limited to some ad hoc analytical projects by different agencies with little coordination by the civil service. Data availability is a concern with little official data on the structure of the economy available, despite the wealth of statistics gathered at the ONS in Newport.

Compare this to Wales’ sister nation Scotland and the true extent of the limited economic intelligence becomes evident. For well over two decades there has been significant economic data gathering and interrogation done, first by academics but then by the Scottish Government.  Scotland has information on its economic inputs and outputs, its government expenditure and revenue, and most importantly a set of national accounts.

Added to this is the significant economic modelling work conducted at Strathclyde University, where sophisticated macroeconomic models for Scotland have utilised this data, delivering unique policy insights. For instance, in 2008 the Scottish Government could model the economic impact of reducing greenhouse gas emissions in Scotland in a level of detail that would be impossible in Wales.

For Wales to utilise any new fiscal powers in the most effective way there needs to be a step change in the way in which economic intelligence is gathered and analysed. There are two stages to building this capacity; first, delivering quality-disaggregated data for Wales and, secondly, using this data in the development of regionalised macroeconomic models to enable analysis.

To take these steps, Wales needs some form of national accounts, such as Input Output (IO) tables. The IO model gives a detailed breakdown of the structure and transactions of the economy. Effectively at its heart is an accounting framework that can be easily updated.

An IO model for Wales is not something new, and since 1995 there has been one in existence constructed by the Welsh Economic Research Unit (WERU) at Cardiff University. But this model has been constructed in an ad hoc way without support from the ONS or Welsh Government. But even with this initial model it only provides a starting point for improved analysis, more sophisticated modelling approaches are required to take this further.  The cost of undertaking more data analysis and modelling is not a high one, initial work could utilise existing allocations of funds but brought together under a unified approach. Future funds would be minimal and would simply be to update the work. The Welsh Government should recognise that investing in this capacity now will reap dividends when we debate tax changes in the future.

Scotland, as mentioned previously, has been leading the way in its approach to regional modelling and the close working of both the Scottish civil service and Strathclyde University is a fantastic example as to how this form of policy intelligence can be developed. Strathclyde has been producing detailed regional accounts with support from the civil service for over a decade, which has evolved into a sophisticated economic model of Scotland (AMOS). This tool has seen numerous uses over the years from economic environmental analysis to an assessment of the development of the tourist industry, as well as an analysis of potential Corporation Tax changes. Scotland’s approach has seen the Scottish Government working in tandem with Strathclyde University and other public bodies. This does not happen in Wales at the moment, and therefore the ability of either the civil service or academics to advise on the implications of proposed changes is greatly restricted.

Building modelling capacity need not be the concern only of economists. As the Scottish examples have shown, having the tools to provide detailed economic analysis should underpin a number of policy areas. For instance, modelling the impact of climate change on the economy would be a welcome addition to the debate around the Future Generations (Wales) Bill. Being able to model demographic change would provide an insight to both the Children and Older People’s Commissioners in their work. Or, we could use a Welsh model to understand the extent to which wider reform of non-domestic (business) rates could encourage economic growth.

Ideally, before any tax decisions are contemplated by the Welsh Government, a set of models for Wales should already be in place to allow the civil service as well as academics to provide meaningful evidence for debates on fiscal decision making.

The expertise from both government as well as universities inside and outside Wales should be pulled together to implement a sophisticated modelling framework capable of delivering the best intelligence on tax changes possible.

The current work of WERU can be used as a template with which new data can be added and used to input into models for Wales. However, for this level of informed debate to be achieved, the support of the Welsh Government and the ONS will be required.