Welsh independence is easily affordable, with the gap between what the nation raises in taxes and its spending commitments much smaller than previously thought, according to independent research commissioned by Plaid Cymru.
The so-called “fiscal gap” has previously been estimated at £13.5bn, using estimates from the UK’s Office for National Statistics (ONS). But Professor John Doyle of Dublin City University, who has written a report for Plaid Cymru, claims the ONS-based calculation makes false assumptions and fails to take into account important factors that would reduce the gap to around £2.6bn.
The findings of the report were hailed as a “game changer” by Plaid leader Adam Price. Prof Doyle says his calculations are based on the 2019 estimate of total Welsh economic output at £77.5bn and would be equivalent to just under 3.4% of GDP. This compares with an average fiscal deficit across all OECD countries of 3.2% in 2019.
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As a result, argues the Irish academic, the fiscal deficit that an independent Wales would face would be normal for comparable countries and in no way presents the major obstacle which others have suggested. In his report, Prof Doyle analyses in detail the assumptions on which the claimed £13.5bn shortfall is based.
He says there are three main factors that push the figure up: the cost of the state pension, Wales’ share of the UK’s national debt and the cost of defence.
On pensions Prof Doyle argues that previous calculations of the fiscal gap have included the cost of pension payments, but have failed to take into account National Insurance Contributions made to the UK state by people working in Wales, specific pension contributions or the value of unpaid caring responsibilities.
In terms of Wales’ share of the UK’s national debt, Prof Doyle writes: “International precedent suggests that if in negotiations during transition, the UK government pushed to have Wales take over a share of UK debt, Wales would then be entitled to a proportionate share of UK assets outside of Wales - both national institutions based throughout the UK, and embassy and state properties outside the UK territory.
“While it is possible to value Wales’ share of UK assets outside of Wales, it is much more probable that some form of stand-still agreement would be reached, whereby the new independent Wales would waive its rights to a share of UK ‘national’ property, outside of Wales, and of UK assets abroad, and in return the UK would not seek to transfer a proportion of the UK national debt to an independent Wales.”
On defence spending, Prof Doyle makes the point that only a tiny amount of it takes place in Wales. He adds: “The level of defence spending in an independent Wales, is obviously a matter for a future government, but allocating [the EU average] of 1.3% of GDP would see a budget of around £980m which would represent a saving of £922m from the allocation included in the 2019 ONS fiscal gap data for Wales.
“Even so, 1.3% of GDP, would still be a very significant defence budget. For comparison, the current defence budget of Ireland is one billion euros - 0.5% of Gross National Income - with a population 42% higher and a much larger sea area to patrol.
“While the Irish Government has just agreed a significant increase in the defence budget it is likely to remain well below 1% of GNI/GDP – perhaps equivalent to Austria at 0.8% of GDP.”
Prof Doyle said: “It is not for me as an Irish academic to advise the people of Wales on their future constitutional choices, but the figure of £13.5bn, frequently quoted as representing the UK Government’s annual subvention to Wales, is a UK accounting exercise, and not a calculation of the fiscal gap that would exist in the early days of an independent Wales.
“My analysis has determined that the figure will be approximately £2.6bn, significantly lower than the figure of £13.5bn. The economic impact of an independent Wales is therefore not hugely constrained by the existing fiscal situation.
“The classic cautious approach has been to argue that the Welsh economy, Welsh productivity, and Welsh incomes need to grow in order to close the fiscal gap and to make independence more ‘practical’.
“But this is a classic ‘chicken and egg’ argument. What if it is not possible to grow Welsh productivity and the economy without the policy levers available to an independent state?
“For 50 years Welsh GDP per capita has remained relatively fixed at 75% of UK average GDP per capita, with little sign of the type of convergence seen in Europe between the income levels of EU member states.
“It would take a very radical policy change to make a credible argument that the next 20 years are likely to deliver a different outcome for Wales. It would certainly be worth exploring in some detail what policy instruments were deployed by small EU member states who have been the beneficiaries of such convergence with wealthier economies.
“The conclusion of my paper is that Wales’ fiscal gap is not sufficiently large to close off the possibility of a viable, independent Wales. The fiscal gap could be closed by relatively modest economic growth, together with a different tax policy. These are the areas where the public debate on the public finances of an independent Wales should focus.”
Prof Doyle said economic analysis needed to move on from a focus on the fiscal gap to an exploration of the reasons for the lower economic performance in Wales and the lack of convergence more generally between the different parts of the UK.
Mr Price said: “This research further debunks the argument that Wales is too small and too poor to thrive as an independent nation. Not only does Professor Doyle’s work further build the body of evidence that supports the case for an independent Wales, it is also a game-changer in the debate surrounding its viability.
“Time and again, we have heard wild estimates about the likely fiscal gap that would exist if we were to become independent that bear no relation to reality. This shows once and for all that “fantasy economics” is peddled by those against not for independence.”
“Independence will also present Wales with the opportunity to improve our economy through policies designed to create a more diversified economic base with more locally owned SMEs, improving productivity and innovation in the private and public sectors, maximising economic benefit through local procurement policies, and investing in the infrastructure of the future.”
Welsh Conservative leader Andrew RT Davies said the report "makes some wild predictions on what a future Welsh government would do if Wales became independent".
"In this scenario the Welsh government would forgo any responsibility in keeping us safe - abandoning defence spending and ending the current style of UK aid to developing nations. And apparently the Welsh state would be able to negotiate a deal with the UK government to avoid debt coming our way. This report is nothing but back of the envelope fantasy figures to justify Plaid's obsession."
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