The Brexit time bomb ticking under Wales’ public finances

Across the political spectrum, there has been much discussion about what Brexit would mean for Wales, which has been a substantial beneficiary of structural funding from the EU and whose economy – more dependent than the rest of the UK on manufacturing and agriculture – is potentially much more exposed to the effects of Brexit than other parts of the UK (including Scotland, which voted to remain).

On the first point, the UK Government has given a partial commitment to ensuring that Wales will not lose out when EU funding ceases.  But that commitment expires in 2020 and, in any case, there is no guarantee on how that funding will be allocated – so, for example, the social care sector, which in Wales has been heavily supported by match-funding from EU Structural Funds, may have to fight its corner against the much more organised and influential agricultural lobby.  On the second point, the Westminster Government’s own figures suggest that the negative effect of Brexit on the GDP of Wales will be between a minimum of 2% for an EEA-style deal and potentially 10% for a WTO-type deal, emphasising that the greater an economy’s emphasis on manufacturing, the more damaging Brexit will be.  A report by the Senedd’s External Affairs and Additional Legislation committee concluded that frictionless trade with the EU was absolutely essential for the future of the EU.  And, as Carwyn Jones has pointed out, much of the strength of the Welsh economy derives from its ability to attract inward investment; and that investment is based on free access to the EU Single Market.  There is no doubt that any kind of Brexit has the potential to be seriously damaging to the Welsh economy.

But there is another serious problem for Wales, which lies in the changes to the arrangements for Welsh Government funding that come into effect in April 2019 – within days of the Brexit date.

Until 2019, Welsh Government funding has come almost entirely from Westminster, set according to the Barnett Formula; and more recently according to a formula based on Wales’ additional expenditure needs.  But from April 2019 that will change; the rate of income tax paid to Westminster will fall from 20% to 10%, with the other 10% being effectively raised by the Welsh Government, who will have powers to vary the rate.  The block grant from Westminster will be adjusted accordingly.  This means that, for the first time, the amount of tax raised in Wales – and therefore the amount of money available for public expenditure – will be directly dependent on the performance of the Welsh economy.  It’s a crucial step on the road to a fiscally-devolved Wales that manages its own economic policy, recognising that devolution is an ongoing process.

But the new regime raises some big issues when one considers the likely impact of Brexit in Wales.

A report prepared by the Wales Centre for Public Policy indicates that, although the difference between median taxpayer income between Wales and the rest of the UK is relatively small, there are significant differences in the structure of income that could have a profound effect on the future levels of revenue, and hence taxation.  One key finding is that around 22% of Wales’ tax base comes from employment in manufacturing industry – compared with 13% in the rest of the UK.  In other words, Wales’ fiscal position is far more dependent than the rest of the UK on precisely the sector that will be hit hardest by Brexit – especially a no-deal Brexit.

Additionally, the overall levels of revenue in Wales depend much more on income from basic rate taxpayers than from high-rate taxpayers than in the rest of the UK.  The top 1% of taxpayers contribute 12.3% of tax income in the UK as a whole, compared with 6.4% in Wales.  86% of tax revenues in Wales will be raised at the basic rate, compared with 70% in the rest of the UK.  In other words – any tax increases to meet shortfalls generated by a shrinking economy will almost certainly fall more heavily on basic rate taxpayers in Wales than they would in England.  And for tax revenues to keep pace with those in the rest of the UK, taxpayer incomes – especially at the upper end – will need to keep pace with those elsewhere.  But, as we have seen, Wales is starting from a structurally lower tax base, which is inherently more vulnerable to Brexit than the remainder of the UK.

Carwyn Jones’ economic strategy has been based around securing inward investment to Wales to create high-quality, decently-paid jobs in manufacturing and other high-technology sectors.  Under Wales’ new tax system, this should have brought significant fiscal benefits to Wales.  It would have allowed the country’s economic strengths to be reflected in growing tax revenues, allowing the provision of better services; in other words, a virtuous circle in a mature, sustainably-growing economy matching that growth to decent social provision.  But Brexit has precisely the opposite effect – instead of a virtuous circle it leads to the risk of a vicious cycle of falling tax revenues, declining services, and job losses in the public sector.  Put simply, it embeds austerity.  And the experience of local government in England – where the Tories in Westminster have argued that councils facing shortfalls should exploit their greater “freedoms” to raise revenue locally to maintain a bare minimum of statutory services – suggests that Westminster will use Wales’ new tax powers to wash its hands of Wales economic fate.  When have Westminster governments – of any political colour – prioritised the needs of Wales?

It follows from this that the only way to secure the kind of modern, progressive, economically strong Wales that Carwyn Jones has always advocated is to oppose any Brexit that gives Wales anything less than the benefits it already enjoys from the single market and the customs union – which means, in effect, given the options currently on the table, opposing Brexit completely.  For Welsh Labour, the only way in which the second of the Labour Party’s six tests – that there should be the “exact same benefits” as under membership of the Single Market and Customs Union –  can be met is by remaining in the EU.  Carwyn Jones’ position – that we need “full and unfettered access” has been, up to now, the right one; given the situation that Wales will soon face, his successor must go further.

So this is a particular issue for the candidates for the Welsh Labour leadership.  It simply isn’t good enough to stick to the Corbyn and Westminster line that we want a general election to allow us to negotiate a better Brexit – because the options Labour is proposing will be unacceptable to the EU for the same reasons as Theresa May’s Chequers proposals. The EU will not allow the UK to cherry pick.  At the absolute minimum, Labour politicians who are intellectually and politically serious about opposing austerity must  back a people’s vote on a deal, with a right to remain.  And they should have the courage of their convictions to be honest with the Welsh electorate:  Brexit means austerity, and the new tax system – itself a sign that Wales is ready to take its fiscal destiny into its own hands – increases the risk.  The only honest course of action for anyone who calls themselves a socialist is to oppose Brexit, unconditionally and unequivocally.


One thought on “The Brexit time bomb ticking under Wales’ public finances

  1. Pingback: Welsh Labour Leadership Election: if you’re serious about 21st Century Socialism, you have to back a People’s Vote | Notes from a Broken Society

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