Is levelling up in Wales just another way to prevent its prosperity?

On one level, it’s an obvious sham. There’s the failure by Westminster to replace EU funding, as the Tories promised to do, while doling out much smaller sums at a Whitehall whim. And there’s the decision that Wales will receive no Barnett consequentials from HS2, despite economic appraisals of the rail project suggesting that Wales will lose out if it’s ever completed.

These suggest quite the opposite of levelling up for Wales. They’re a radical defunding of the Welsh Government, matching the attacks on devolution in the Internal Market Act and the EU Retained Law Bill.

Labour’s version isn’t much better. While it has said it will scrap the Tory levelling up agenda its proposals still, for all the talk of devolution to the English regions (mostly of things that are already devolved to Wales), envisage the big economic decisions being taken at the centre. But there are much bigger questions over the whole concept of “levelling up” in Wales and what it means for policy-making.

Levelling limitations

The ways the Welsh economy lags behind the rest of the UK are well-documented. It has a lower per capita income and Gross Value Added (GVA) than the rest of the UK, and its population is generally older, with higher levels of chronic poor health. ONS figures show the mean full-time salary in Wales is some 20% lower than in England.

Its economy is more dependent on manufacturing and agriculture than the rest of the UK. Its tax system is less progressive; because incomes are lower, the largest single source of revenue is not – like the rest of the UK – income tax, but the deeply regressive Value Added Tax. And the Welsh budget and public services were far more dependent on EU funding.

Above all, Wales has been a low-investment economy, even more so than the rest of the UK. Lack of investment above all lies behind its low productivity and GVA figures.

The Welsh Government’s fiscal powers, its ability to use tax and borrowing to do anything about those problems, are limited. It can vary income tax bands (but not the thresholds, and only by a limited amount) and set local taxation and environmental charges, and has its own version of stamp duty. But the recent debate about whether varying income tax rates could fund public sector pay increases, and just how far the numbers fall short, showed just how limited those tax powers are.

It cannot set indirect taxation, or borrow prudentially beyond narrow limits. It cannot make the sort of changes that would make taxation in Wales genuinely progressive, nor borrow at levels that could fund significant investment. And the policy challenges remain stark.

In March 2020, the Wales Fiscal Analysis stated: “… overall economic growth since the great recession [2008] has been dire, and median weekly wages for Welsh employees remain below their pre-recession peak in real terms. The last nine years have seen the longest sustained period of public spending constraint in UK history and, as a result, the Welsh Government faces nearly two decades of no growth in its day-to-day public services … The fiscal transfer that Wales receives from the rest of the UK currently allows a higher level of consumption of goods and services than is currently produced in Wales. However, these fiscal transfers are not currently paying for investments in our infrastructure that would enable a turn-around in the relative performance of the Welsh economy and our fiscal position.”

In other words: Wales is poorer than the rest of the UK; the policies of the Westminster government are increasing the gap; and funding from Westminster is not giving Wales the means to close that gap. And, since that was written in 2020, we have had Covid, more austerity, and the loss of almost a billion pounds of EU funding.

Dependence, development, democracy

It’s difficult to avoid the question of whether the effect of Westminster’s largesse has been to increase economic dependence, rather than allowing the Welsh economy to develop in a way that would make it more resilient. Far from being, in the words of First Minister of Wales Mark Drakeford, an insurance policy, the relationship between Whitehall and Cardiff Bay looks much like a fiscal straitjacket. It’s a mechanism allowing Westminster – and politicians on the political right in both London and Cardiff – to complain that Wales is a subsidy-junkie, without ever allowing the economic autonomy that would lead to change.

Of course, it’s a democratic question too. Why should economic decisions about Wales be taken in London, rather than by Wales’s elected politicians? Why should a nation with its own distinctive values, history, culture, and economic structure, wait on crumbs from the Westminster table, within a political system in which the Welsh nation will always be a marginalised minority voice?

Real economic revival in Wales means controlling taxation and borrowing as well as spending. It means a Bank of Wales, able to borrow and to lend for investment. It means a tax system that reflects the balance between income and wealth in Wales, which is very different from that in England, and a recognition that the tax system imposed on Wales from Westminster, based on England’s economy, is in the Welsh context neither progressive nor fair.

It means acquiring the tools to make the concepts dominating economic debate in Wales – the foundational economy, green investment, breaking down inequality – a reality. It means having the freedom to innovate, and make the big decisions ourselves.

This goes beyond economic policy. With its ageing population, Welsh prosperity depends on ensuring that young people see an attractive future here, but also on attracting people who will power economic revival. We cannot afford to be held back by England’s immigration policy, or by a pusillanimous attitude towards Europe.

The economics of independence

The debate around economic autonomy begs questions about political independence. The two are different, and it is possible to imagine a confederal United Kingdom whose constituent parts exercise the kind of fiscal autonomy I’ve described. But it’s significant how the debate around the economics of independence has changed in recent years.

It used to be about whether Wales could afford independence. With the effects of a decade of unprecedented austerity and the unfolding economic catastrophe of Brexit – and since the antics of Truss and Kwarteng took the UK to the brink of financial collapse – the question has become whether Wales can afford to be economically joined to a UK economy in long-term but accelerating economic decline.

In 2020 the authors of Wales’ Fiscal Future argued that the financial and fiscal risks of remaining in the UK were higher than ever. Covid, hard Brexit and a clear Westminster consensus around austerity economics have made them all the greater.

The economic success stories of small nations like Estonia are salutary. We see small, young, confident democracies routinely out-performing their much bigger neighbours. They are big enough, rich enough, and clever enough. What we need in Wales to join that club is the opportunity to set our own economic agenda, with our own fiscal policy.

The obverse of levelling up in Wales is dependency, and that dependency has failed to deliver. From here, the language of levelling up looks like a trap: something that appears designed to sap our economic ambition and, politically, to keep us in our place. To take what we’re given and be grateful.

The current economic relationship with Westminster has left Wales as one of the poorest parts of Western Europe. Our economic future lies not in handouts in the name of levelling up in Wales, but in our ability to take the big decisions that will allow us to plot our own route to prosperity.