Everyone knows what Margaret Thatcher did to Wales. Nearly 40 years on from the pit and steel closures, our former industrial communities still bear deep scars. And Wales remains the most vulnerable element of the UK economy. It’s home to some of the poorest communities in Europe. It has lower pay, higher levels of sickness, and an older population than the rest of the UK.
The UK is now in the throes of a deep economic crisis. It requires bold and imaginative policy initiatives to deal with a profound cost of living crisis accompanied by unprecedented falls in real household income. Of course, the economic weaknesses were there before Brexit. But Brexit – or more specifically, withdrawal from the Single Market and Customs Union – is at the root of the current crisis.
Don’t mention the Brexit
The loss of freedom of movement led to labour shortages. The end of frictionless movement of goods between the EU and UK caused massive increases in costs and delays (the latter meaning yet more increased costs) for importers. It is no coincidence that a country which has relied on food imports for centuries is witnessing significant rises in food costs.
Taken together, these factors produced the biggest supply-side shock to the UK economy since the 1973 oil crisis. This kick-started the stagflation that is currently working through it. But neither of the main parties in Westminster, with their commitments to Brexit, is willing to even acknowledge this, let alone talk about reversing it. This is why raising interest rates has been left as the only policy game in town.
But increasing interest is a policy lever designed to deal with a different kind of inflation: that caused when household income and spending grow too fast and the economy overheats. That is obviously not the case now for the vast majority of people. Real household incomes have been stagnant overall since 2008, and are now falling fast (although those on the highest incomes are doing rather well, especially since Covid; a clear case for increasing taxation). Household incomes in Wales, starting from a low base, continue to fall. They are the lowest in the UK, 20% lower on average than in 2019 England.
The effect on mortgage-holders will be devastating. The Institute of Fiscal Studies estimates more than a million households will lose a fifth of disposable income, with an average hit of around £280 per month. The effects on businesses will also be profound, as people cut back spending and the cost of the working capital businesses require rises.
Collateral damage
Labour’s Rachel Reeves has announced future measures she claims will ease pressure on mortgage holders. These include moving to interest-only mortgages for short periods and extending their terms. But that is of limited value to younger mortgage-holders, already heavily extended, as the bulk of their payments will be interest, not principal. Moreover, it does nothing to help those renting from buy-to-let landlords, who can expect soaring rents.
But the real problem with Labour’s approach lies elsewhere. Reeves announced that Labour will, come what may, be bound by a strict fiscal rule not to borrow to fund current expenditure. This unless the Office of Budget Responsibility declares the economy to be in “crisis”, whatever that means.
Increasing interest rates hit government too. The cost of servicing government debt rises. It means that in a recession, with falling tax revenues and increasing interest costs, the only option for government besides raising taxes is to make swingeing cuts. Far from providing impetus for the growth Reeves continually places at the heart of Labour’s economic policy, this will ensure that the economy deteriorates further. We will be caught in a vicious circle, because only the most vicious of recessions will end the inflationary spiral. Reeves’s current economic strategy would take us back to the 80s with a vengeance.
We know how that ended for Wales. We remember how, every Friday – job losses were always announced on Fridays – the evening news was a roll-call of further closures and job losses.
Keir Starmer has refused to commit to restoring lost EU funding, or reclassify the HS2 and Northern Powerhouse rail projects to ensure Wales gets the Barnett billions it should. Welsh jobs, public services, and living standards are the collateral damage of politicians’s inability to admit the truth about Brexit as the root of stagflation.
Wales and Westminster and the cost of living
But the problem is bigger than that. The Welsh economy’s structure is different from the rest of the UK. It is more dependent on manufacturing and agriculture. With lower incomes, and fewer people being of working age, taxation is different. The largest source of tax revenue in Wales is not income tax but the deeply regressive Value Added Tax.
A fair and sustainable Wales cannot afford to have its fiscal framework set in Whitehall, where priorities are different and decisions made for another kind of economy. The Welsh Government has limited powers to tax and borrow, remaining dependent on decisions made in London. With the number of Welsh MPs at Westminster set to fall by a fifth, we will have less influence there. Assuming Labour forms the next government, it seems likely Welsh Labour MPs will be required, and in some cases willing, to be loyal to Starmer, not Wales.
Unless something fundamental changes, and whatever the outcome of the election, Wales will be caught in a vicious recessionary spiral we will not have the fiscal powers to mitigate. Our public services will face another bout of Westminster austerity about which we can do nothing. Unless and until we get the powers to control our own fiscal destiny, we are destined to experience ceaseless Brexterity.
We cannot afford Westminster ideology and indifference. It is time to take control of our own economic fortunes, while we still have some.
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