The UK Economy and Wales: different levers, shared fates?

Background

The economic picture the next UK Government inherits is a particularly bleak and challenging one. The Resolution Foundation’s Ending Stagnation report clearly articulates the parlous state of the UK’s economic journey over recent decades. The results being: a significantly regionally unequal economy, an insufficient social safety net, and sustained low growth, with wages and living standards falling in comparison to our European neighbours. This is underpinned by an aversion to public (and private) investment, which has stymied public service delivery as well as keeping the UK at the starting line in the global race for the green industries of the future (as explored by the IPPR).

Wales’ economy faces equally profound challenges, which have stubbornly persisted since the dawn of devolution 25 years ago. Around one in three children in Wales today is growing up in poverty, whilst productivity and growth fall below most of the rest of the UK, as do household incomes, and economic inactivity rates have also stayed steadily around 20 percent.

Broadly speaking, Wales’ economy has followed UK-wide economic trends (when excluding London), albeit with weaker economic performance than most regions. Pan-UK economic challenges, then, have a distinct impact on people in Wales, with the Covid-19 pandemic and the cost of living crisis merely the latest examples of this.

Given this inheritance, bold policy and investment are required to kick the UK out of its economic paralysis, and in doing so, deliver long-term benefits to households in Wales, who are at the sharp end of poverty, inequality and falling living standards.

Responsibility and powers

Powers and responsibilities for the economic management of Wales fall uncomfortably across those which are devolved to Wales and those which are reserved to Westminster.

What this results in is a tussle over who bears responsibility for the continued failure of economic policy over the recent decades to lift living standards for people in Wales.

Whilst government in Wales has a number of economic levers to pull, significant  policy areas are reserved to UK Government including fiscal and monetary policy, as well as most of employment legislation, trade policy and taxation. These represent levers which set the conditions for what is achievable in Wales’ economy.

Powers and responsibilities for the economic management of Wales fall uncomfortably across those which are devolved to Wales and those which are reserved to Westminster.

Around 80% of the Welsh Government’s Budget comes from the Welsh Block Grant (from UK Government, including UK taxes collected in Wales) and almost 20% comes from Welsh Government taxes. The vast majority of this budget is spent on public service delivery in Wales, such as health and social care, local government and education. In the last Welsh budget, less than three percent of the budget was spent directly on the economy. The means through which Wales can take a divergent course on the economy at a Welsh Government level is therefore severely restricted (as explored in more detail in the IWA’s Fiscal Firepower report). As such, what the next UK Government aims to achieve with their economic policy will have a strong impact on shaping the conditions for Wales’ economy.

A key issue in regards to powers continues to be the wider discussion on post-EU funding arrangements and the levelling up agenda. Whilst the UK and Welsh Governments have argued over the overall amount of funding given to Wales compared with EU funds, this pot of funding represents a major means through which Wales can invest in its economy. EU funds were previously overseen by Welsh Government, with their UK replacements, in the Shared Prosperity Fund and the Levelling Up Fund, dealing more directly with regional and local government. Whilst the Labour Party have previously indicated their intention to repatriate post-EU funds to Welsh Government level, however managed, these funds need to be put to work to rebalance Wales’ economy in the interests of low-and-middle income households. We believe that Welsh Government should clearly have a role in setting the economic direction of the nation, as well as supporting the vision for economic transformation which is different for different parts of Wales. Targeted investment in sectors which deliver wider benefits to regions in Wales will be vital. As an example, investing to ensure that communities in Wales truly gain long-term economic benefit from the renewable energy transformation, whether through jobs, shared ownership or cheaper energy bills. 

The parties’ perspectives

Both the Conservatives and the Labour Party are prioritising growth over the next parliament as the means to invest in public services and economic development. Managing to achieve the public sector investment required to unleash growth remains a challenge with both parties supporting tight fiscal rules and curtailing the prospect of tax changes over the next parliament. The Institute for Fiscal Studies have stated that both manifestos fail to highlight where the money would come from to reach their spending commitments (Labour and Conservative manifesto analysis).  

The Conservatives pledge to continue to roll out the Shared Prosperity Fund as well as supporting the development of freeports, two of which are located in Wales. Additionally, they aim to continue to deliver their existing funding pots for Towns and Community Ownership projects. They state that Welsh Government has the ‘right balance’ of powers to deliver for people in Wales.

Both Plaid Cymru and Labour manifestos highlight the need for change to the Welsh fiscal framework, with both stating it is out of date. Labour do not present a specific solution, whilst Plaid Cymru insist that the Barnett Formula should be replaced by a ‘new needs-based funding formula’. Plaid Cymru propose that Welsh Government should gain enhanced powers over taxation, with the ability to set income tax bands and thresholds devolved. They also commit to an ‘Economic Fairness Bill’, which they say will recognise wider regional impact of UK investment decisions. Meanwhile, Labour commit to the devolution of employment support funding, as well as ‘restoring decision-making over structural funds’ to ‘representatives’ of Wales, with Plaid Cymru calling for these decisions to be made by Welsh Government (note that this piece is written ahead of the expected publication of a Welsh Labour manifesto).

The Liberal Democrats pledge to increase borrowing powers of Welsh Government, and implement the remaining Silk Commission proposals, which include increased powers over taxation. They also state that they would seek to increase the Welsh Block Grant and create a joint council to work with devolved governments across the UK on post-EU funding spend.

It is important to state that all manifestos now launched highlight the need for UK Government to work more collaboratively with devolved governments.

The Green Party commit to give Welsh Government the same powers as Scottish Government, which would mean increased power over both borrowing and taxation. They also pledge to ramp up public spending on net zero, and increase taxation on higher earners. Both the Green Party and Plaid Cymru commit to the devolution of the Crown Estate to Wales, as is the case in Scotland. This would give Welsh Government more control over Wales’ coastline, maximising its potential for economic benefit from renewable energy generation (as set out in the IWA’s Re-energising Wales report).

At time of writing the Reform Party have yet to launch their manifesto.

It is important to state that all manifestos now launched highlight the need for UK Government to work more collaboratively with devolved governments. With relationships between UK and Welsh Governments coming under significant strain over the course of the last parliament, closer relationships are a must if people in Wales are to benefit from UK-wide economic policy. 

The IWA stance

At the IWA, we have been, and remain, a critical voice in Wales’ recent economic history, with our impact preceding devolution itself. Our work has been significant to the development of Wales’ distinct approach to economic development policy. Ideas which contribute to a successful, green and fair economy have therefore been incubated at the IWA: the vital role of renewable energy to Wales’ long-term economic development, the case for the South Wales Metro, the long-term value of strengthening the foundational economy, the need to reconfigure Wales’ fiscal formula and reimagine the relations between trade unions, employers and the workforce. 

The IWA have made the below recommendations to UK Government over recent years, in order to expand policies which speak to the distinct needs of communities in Wales. These include:

• The devolution of prudential borrowing powers to Wales – alongside providing greater flexibility in Wales’ budget
• Giving Welsh Government a key role in shaping post-EU funding arrangements
• Devolution of the Crown Estate to Wales, as a means to turbo-charge renewable energy projects. Contributing to Wales’ renewable energy generation targets and providing the conditions through which investment brings economic benefit to communities in Wales
• Consider the devolution to Wales of further powers to regulate trade unions, in order to support trade union membership and collective bargaining coverage – helping to rebalance the economy in favour of low and middle income earners.

We are, therefore, glad to see that the IWA is continuing to shape policy development on Wales’ economy, with a number of our recommendations taken on by political parties standing at this election.

At a devolved level, there is also a clear need for an immediate focus on delivering impact for the powers that Wales currently have. That’s why we are working on a report which dives into how we can set up government in Wales to truly deliver on the substantial set of challenges the nation faces.

Whilst the UK’s and Wales’ economic destinies are intertwined, much more can be done to ensure that the gap between economic performance between Wales and the rest of the UK is closed, and ensuring that Wales flourishes as part of a successful UK economy. But beyond that, investment is vitally needed to contribute towards a fairer, greener and more successful economy, which serves the needs of people across the nation.