Union or Independence?

Closing Wales’ fiscal gap will be a huge challenge – whatever the country’s constitutional future, new research concludes.

The report, from academics at Cardiff University’s Wales Governance Centre, assesses Wales’ current financial position as part of the UK, while exploring some of the fiscal implications of Welsh independence.

It concludes that closing that gap – or meeting the ‘levelling up’ ambitions of the UK government – will be extremely difficult, whatever Wales’ ultimate constitutional arrangements.

Researcher Guto Ifan said: “There is currently a gap between Wales’ total spending and its revenue of approximately £4,300 per person, significantly larger than the UK average of £620.

“Wales is by no means unique: the UK is a highly imbalanced state where 9 of the 12 nations and regions have deficits that are funded by ‘fiscal transfers’ from the three ‘surplus’ regions.

“Whatever the UK government’s rhetoric about ‘levelling up’ the UK’s underperforming regions, changing Wales’ economic fortunes, while remaining part of the UK, will require drastic action.

“Fiscal transfers from the rest of the UK are subsidising Wales’ revenue shortfall, but these transfers are not focused on investments – such as high speed rail connections or government-funded research & development – that would enable a turn-around in the relative performance of the Welsh economy and our fiscal position.

"Particularly in the short term, transitioning to an independent Wales would come at a substantial cost."

The report’s findings pose a challenge to both supporters of the Union and of independence alike.

For supporters of Wales remaining as a part of the UK, the report questions the likelihood of Wales’ deep economic, fiscal and social problems being alleviated under current economic governance arrangements.

For supporters of independence, the report argues that ambitions need to be tempered by the likelihood that an independent Wales would require significant tax increases or budget reductions, and lower levels of consumption of goods and services in the economy, at least in the short to medium term.

The report also considers a number of proposals that have been raised by advocates of independence since the Wales Governance Centre’s publication of Government Expenditure and Revenue Wales in 2016 and 2019, including expenditure on national defence, government debt, pensions, and potential fiscal and monetary policies of an independent Wales.

Even under the most generous assumptions about post-independence arrangements, Wales’ fiscal gap remains substantial.

Guto Ifan added: “It is hoped this report will stimulate an informed and wide-ranging debate about what type of economy and society we want to see in Wales and how that is best achieved.”