What would be the central economic issues around independence for Wales?

While an independent Wales currently looks unlikely, the prospect of greater devolution or even future independence raises the issue of whether the different policy choices made so far in this part of the UK imply a different sort of Welsh economy.

As pro-independence politicians in Scotland push for a second referendum and questions around Irish reunification continue to be asked, a previously marginal debate about independence for Wales has become more prominent.

Polls have seen support for Welsh independence (‘Annibyniaeth’) reach as high as 39% (albeit excluding the undecided). This support seems to be driven by such issues as the possibility of Scotland leaving the UK, the implications of Brexit and the different responses to Covid-19 taken by the devolved nations.

But Wales is different from Scotland – its economy has significantly underperformed the UK average for generations – and from Northern Ireland in that it lacks an obvious new economic ‘home to go to’. As a result, independence for Wales seems like a greater economic leap than would be the case for the other devolved nations.

Yet views on the economic nature and functioning of an independent Wales can inform broader discussions about the sort of political future to which the nation should be aiming. As in wider debates about independence in the UK, consensus is likely to be hard to find.

What is the history of devolution in Wales?

Despite the recent rise in support for Welsh independence, as recently as 1997, much of the nation’s population was largely ambivalent about even very modest devolution. The referendum on the creation of a National Assembly for Wales, held in September 1997, was won with 50.3% of the vote on a 50.2% turnout. What’s more, there was a very distinct split in the electorate: East Wales versus West Wales and the Valleys (see Figure 1).

Figure 1: The 1997 devolution referendum result in Wales

Source: Map by MrPenguin20 CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=38675816)
Note: Question asked in referendum ‘Do you agree that there should be a Welsh Assembly as proposed by the government?’

Since then, and particularly since 2010, Wales has taken an increasingly different political path to England. Welsh Labour has been resilient in the Senedd, remaining easily the largest party; Conservative gains have been patchy; and fringe parties, such as the UK Independence Party (UKIP) and Brexit/Reform, no longer hold any seats in the Senedd. While Wales voted for Brexit, the factors that drove this vote are likely to be different from those in England – relating more to economic dissatisfaction than to cultural issues.

Welsh Labour remains largely unconvinced by arguments for independence (although not completely), but has consistently called for more devolved powers. Wales has spending control over health, economic development, the environment and education. Since 2011, the Welsh government has also gained the ability to make full law in these areas and, more recently, modest tax-raising powers – and it has pursued increasingly different policies to England in these spheres.

The Labour Party is now re-opening the constitutional debate in Wales and the UK as a whole, with the aim of finding a new devolution settlement acceptable to Wales, Scotland and Northern Ireland. At the same time, Westminster seems to be adopting a more ‘muscular unionism’ approach, weakening and dismantling elements of devolution via increased spending in devolved areas, unilaterally developed legislation, and refusing to countenance a second Scottish referendum.

The current settlement thus seems increasingly fragile. Tensions have arisen over the painfully slow pace of further devolution (for example, via the Wales Act of 2017, which eventually led to a Welsh Revenue Authority and increased borrowing powers for the Senedd), the control of post-Brexit ‘levelling-up’ funds and policies to control Covid-19. There currently seems little prospect of a rapprochement, at least between the two current governments in Cardiff and Westminster.

Why might independence debates in Wales differ from those in Scotland?

Economic issues are likely to be central to further debates about the future of the Union, as they were during the campaigns for both the 2014 Scottish independence referendum and the 2016 Brexit vote.

But questions around possible independence for Wales will be different from those in Scotland.

For example, despite comparable rates of unemployment, gross value added per head – a measure of the goods and services that an individual contributes to the economy – in Wales was 73% of the UK average in 2019. This compared with 92% in Scotland. In West Wales and the Valleys, the figure was as low as 63% of the UK average.

Lower average wage levels and a dearth of high earners are the main drivers of these differences. Along with lower house prices and a lack of headquartered large companies, this results in a big gap between the tax revenues raised in Wales and the level of public spending – at least as far as these can be geographically determined. The Wales Governance Centre estimated this fiscal gap (the difference between public spending and taxes raised) at £13.7 billion in 2017/18, a third of all public expenditure, compared with 8-10% in Scotland (excluding North Sea oil).

In addition to these economic differences, there are political and institutional differences between Scotland and Wales. For example, unlike Scotland, Wales does not have its own legal structures (and resulting distinct professional class). Its proximity to England also means that airport passenger tax has not been devolved to Cardiff, whereas it has to Edinburgh.

These differences indicate the relative underperformance of the Welsh economy over decades. This has real consequences: for example, Wales has long had a higher incidence of limiting long-term illness than any English region; and the former Welsh coalfields have been the worst performing area in the UK in terms of socio-economic outcomes. Yet the extent to which this is a ‘London and the South East versus the rest’ rather than a Welsh issue is underexplored.

Interpretation of these numbers is where those in favour of Welsh independence and those against diverge. Proponents of the Union argue that they are evidence that Wales could not ‘survive’ alone, or at least would suffer significant economic and wellbeing losses if it were to become independent.

In contrast, supporters of Annibyniaeth see Wales’s economic performance as evidence that the nation has been held back in an unequal, England-dominated union. They would argue that given economic and political autonomy, Wales would prosper, as have, for example, the small Baltic republics since the collapse of the Soviet Union.

These differing views cannot be tested and so remain hypothetical. Nevertheless, it is still important to consider how they affect perceptions of independence.

First, it is surprising just how much debates about devolution in the UK – or independence for Scotland or Wales – discount the extent to which longstanding choices by successive UK governments have affected the economic prospects of Wales, Scotland, Northern Ireland and many English regions.

Since the 1980s, policies such as those on deindustrialisation and union laws, interest rates and financial deregulation have combined with more subtle choices, such as spending on infrastructure, defence, and research and development to cement the political, economic and cultural centre of the UK in London and the South East. If the UK’s regions were in an ‘income per head English Premier League’, the same ‘team’ would have won in every season since 1985, and the same three would have been relegated. For poorer regions, there may seem no way to make progress, despite the levelling-up agenda introduced by the UK government in 2019.

Figure 2: GDP/GVA per capita ranking, 1985-2012

Source: Office for National Statistics

This longstanding inequality has political consequences too. For example, residents of former coalfields – home to Thatcher’s ‘enemy within’ – are more insular, less trusting of politicians and less likely to vote (or think voting matters) than even residents of other poor places (Abreu and Jones, 2021). This is important because around a third of the Welsh population lives in its former coalfields.

Among supporters of Welsh independence, an important argument for separating from the rest of the UK is that it would give the government in Wales full control of the country’s natural resources and the prosperity this may bring. The Scottish debate appears to be similar.

But this view does not account for the largely poor performance of most ‘resource-based’ economies since their political independence (for complex reasons including ‘Dutch disease’, governance quality in post-colonial states, the increased likelihood of conflict over resources and interference from outsiders – all inter-related).

Further, in terms of renewable energy, it is important to note that while the water, wind and tide may be Welsh, the pipes, turbines, wires and seabed – in other words, the economically important bits – almost never are. They are owned largely by non-Welsh companies or, in the case of the seabed, controlled by the Crown Estate.

Indeed, research specific to Wales highlights the inability of the energy sector to contribute significantly to employment or wider development due to the nation’s position in relevant global value chains. Investments in Wales narrowly exploit natural resources with the application of small amounts of specialised and often peripatetic workers, and value-capturing vertical integration has not developed.

The implications of independence for even more important and equally complex asset classes – for example, mobile human capital and future-valuable land – remain underexplored. The extent to which political independence would leave Wales enmeshed with the UK, European and international economic systems that have contributed to the country’s current position needs more thought.

Understanding these relationships, and how they would affect an independent Wales, will be important given the continuing presence of a close, highly cross-integrated and economically dominant neighbour beyond the (currently very porous) border.

On what future policies is the Welsh government focused?

There remains a gulf between the views of those on either side of the Welsh independence debate. What is also notable about current arguments about the economy of an independent Wales is that they are largely divorced from the wider and much more vibrant debate about what a future Wales will, and critically should, look like in terms of fairness, ecological sustainability and global responsibility.

In particular, climate change and the transition to net zero are shaping Welsh legislation, politics and society in ways that mean the economic debate is likely to be highly conceptual and values-oriented. One unique policy in Wales legally requires public authorities to plan and manage in a way that considers the wellbeing of future generations both within and outside Wales.

While implementation has been slow and difficult, this 2015 Act is helping to shape actions, for example, on the climate and nature emergencies. Wales has a moratorium on all new road-building projects and on fossil fuel exploration and development.

The Act’s call for responsibility and holism (the Act has seven ‘goal areas’ and requires five ways of working) is yet to have a significant effect economically, although the government would probably argue that the (now longstanding) focus on a ‘foundational’ economy is in line with (if not driven by) the Act, as is its wider Programme for Government. Here, the Welsh government is seeking not just to target high-growth firms, often inward-investors based in large population centres, but existing ‘everyday’ firms and sectors that provide important jobs and services across Welsh communities.

Moving to the medium term, the question then arises as to how far the Welsh economy (like all others) is structured to be fit for the future. Currently, around a third of children in Wales are suffering in poverty. The nation has failed to cut carbon emissions quickly enough (except from non-devolved grid electricity generation and waste) and has made no meaningful progress on the widespread regeneration of natural systems.

While many of the powers relevant here are devolved, including economic development, grants, transport and planning, many of the key socio-economic levers, such as welfare and (most) taxation are not. This places the vision of the economy at the heart of debates about devolution and independence.