Bad, twice as bad, or three times as bad?

On Wednesday, Gerald Holtham said this in his evidence to a House of Lords Select Committee looking into the economic effects of Scottish independence on the remainder of the UK:

[Wales] is not economically in good shape. It is running a deficit of 25% of GDP.

Wales Online, 4 July 2012

A video of the session is here. At first I thought that he had made a simple mistake, and had meant to say that there was a deficit of 25% between public spending in Wales and taxation accounted as having been raised in Wales. This would be in line with the findings of the Holtham Commission, which (in round terms) produced these figures:

Tax collected by UK treasury ... £17bn
Tax collected locally ... £2bn
Total tax take ... £19bn
Total expenditure ... £25bn
Fiscal deficit ... £6bn

Holtham Report, Section 4.17 onwards

But in this report on Dragon's Eye on Thursday, he repeated the claim in terms which made it very clear that he was talking about Wales' total economic output, i.e. our GDP:


We don't have GDP figures for Wales, but GVA is broadly equivalent to it and we can see from this table that Wales' GVA is £45.5bn. So if Wales' fiscal deficit is 25% of this, it would mean it is somewhere in the region of £11bn or £12bn a year ... in other words that it is roughly twice as bad as had been previously reported.

Now of course things probably have got worse since the Holtham Report, based on 2007-08 figures, was published. Companies will be employing fewer workers and be less profitable, reducing the tax take; and more people will be out of work, increasing welfare expenditure. But it seems highly improbable that Wales' fiscal deficit could be almost twice what it was only a few years ago.

And the plausibility of what he's saying is cast into yet more doubt when he goes on to say that Wales' fiscal deficit is the equivalent of us borrowing some £6,000 for every man, woman and child in Wales. As there are roughly three million of us, this would put Wales' fiscal deficit at about £18bn a year ... which is roughly three times as bad as in the Holtham Report.


Although we don't always see eye-to-eye in political terms, I definitely have time for Gerry Holtham's economic opinions. But I have to say that on this occasion the statements he made at the House of Lords and on Dragon's Eye appear not only to be self-contradictory, but also to contradict the figures in the Holtham Report.

I hesitate to say this, but I wonder if he isn't being rather sloppy with his figures in order to make a political point. There is a huge difference between £6bn and £12bn a year, and an even bigger one between £6bn and £18bn a year.


I, and I'm sure everyone else in Wales, would like to know what our fiscal deficit is. We know we have a problem, but don't have a hope of effectively dealing with the problem unless we are realistic about how bad it is, which was one of the things the Holtham Commission was set up to do. So my challenge to Gerry is to clarify what he has said this week and how it relates to the figures in the Holtham Report; and if the figures in the Holtham Report are now wrong, to provide us with the evidence to support whichever new set of figures is correct.

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Anonymous said...

I was hoping that Eufyl ap Gwilym would've addressed these exact points on the programme, to be honest.

Holtham did seem to be making a political point about Wales. The worst thing about it, he basically said that Wales has no aces up her sleeve, and therefore our economy is poorer because of the political situation we are in now. Saying, on one hand, that we are ignored and we can't make the economy better, but on the other hand, he argues against Welsh independence because of the state of the economy. He can't have it both ways!

Hwb Cymru said...
This comment has been removed by the author.
Hwb Cymru said...

We have found the obvious lack of stats on the Welsh economy an utter hindrance when trying to develop economic policy. If Holtham himself has different stats, it shows how desperate we need official Wales figures.

Owen said...

On the surface of it, Welsh GVA has recovered to near enough the same levels as the time the Holtham Report was written. So presumably, depending on public spending decisions at a UK level, the deficit will have remained largely unchanged at near enough £6bn, probably rising during the height of the recession (due to increases in welfare payments etc), but nothing really dramatic.

You'll also have to factor in public spending cuts and tax rises (VAT for example). When you look at the wider range of economic indicies, Wales bore out the peak of the crisis relatively well judged against previous recessions.

Once you factor in things like bank bailouts, and interest repayments relating to that, maybe the deficit is significantly higher than that now. However, that should have no bearing on a "Welsh" deficit, especially if that money isn't spent in Wales. A bank bailout is money spent presumably on England ( and probably Scotland too) if that's where they are headquartered. 5% of that will have been aportioned to Wales no doubt as "UK spending".

MH said...

I wouldn't be too critical of Eurfyl, Anon. Arguing over figures would have been seen as quibbling about the scale of the problem (and therefore perhaps interpreted as denying there was a problem) rather than talking about what we need to do to turn things round. There can be no doubt that Wales does have a fiscal deficit and that we need to address it irrespective of how big it is and whether we are independent or not.

Perhaps it's worth reminding people that the Holtham Commission was unequivocally in favour of greater fiscal autonomy for Wales, in particular that Wales should have power to vary income tax. Neither Eurfyl, myself or anyone in Plaid would disagree with that (although we would want Wales to have control over a wider range of taxation powers, in order to balance them). Nor would the Tories or LibDems. Labour alone does not want Wales to have this power.

So Gerry does want Wales to move in the direction of greater fiscal autonomy as a way of improving our economic performance ... but just not very far. Gerry is a pragmatic man, and I suspect he feels that he could persuade Labour to take one small step, but would frighten them off completely if he proposed taking a bigger step.


I agree that we need an equivalent of GERS, Hwb Cymru. Calling it GERW might be a bit rough ... though, then again, that might be a very appropriate name for what it shows.


I agree (as I do so often) Owen. It is highly unlikely that the deficit could have changed by so dramatic a figure. The overall UK deficit figure for this year is £163bn, and spread over the UK population of 62m this works out at about £2,630 per person. That makes the figure of £2,000 for 92% of the population a little suspect in itself, but things are rapidly changing, so I won't quibble. It did cross my mind that he was adding £4,000 per head to a "UK base borrowing figure" of £2,000 per head, and that the £4,000 extra per head would roughly match his £12bn overall deficit figure for Wales. But I'd only be guessing. It's all too vague, and we need to see his figures.

Welsh not British said...

I recently asked Jonathon Edwards how we would go about getting our very own version of the GERS. He said that all Carwyn has to do is ask the office of national statistics.

So why hasn't he already done so? How can you do your job or be held accoutable if you have no way of measuring how well you are doing in that job?

MH said...

Precisely, WnB. GERS is produced by the Scottish Government, and Wales could easily do the same if the Welsh Government wanted to do it. It would be fair to say that the Holtham Commission produced a GERW for one financial year (though of course it did much more than that) and that the principles it established could easily be used to do the same every year. I'm fairly sure that the WG does indeed do this, and that Gerry himself (because I think he's working as an advisor to the WG) will know, or have a very good idea, what these figures are. All we need to do is publish them each year.


Having had a night to think over the figures, I think I should clarify what I wrote before. The UK's fiscal deficit has gone up massively since 2007-08 as a result of the bank bailout, debt crisis and subsequent recession(s). As a result, Wales' fiscal deficit will also have risen, simply because we are part of the UK. So I didn't mean to imply that the deficit of just over £6bn identified in the Holtham Report has not gone up, I was talking only about our underlying fiscal deficit, namely the degree to which the situation in Wales is worse than it is in the UK as a whole.

Perhaps it's best explained like this. Over the last 30 years or so the UK has usually run a fiscal deficit, as shown in this graphic, and on only a handful of years has the UK had a surplus. In the five years prior to 2008 the UK was running a deficit of about £35bn a year. Wales' pro-rata share of this would be £1.75bn, meaning that the part of our £6.25bn deficit due to Wales poor economic performance relative to the UK as a whole was only about £4.5bn a year, or £1,500 per person.

Things then changed dramatically in the latter half of 2008, but since 2009 the UK has had a fiscal deficit of around £150bn a year. It is currently still going up, but will eventually come down (it will have to) although it's anybody's guess how long it will take to reach "normal" levels again.

For the sake of easy-to-remember round numbers, we could say that the current additional fiscal deficit due to the financial crisis is about £120bn a year, which is an additional £2,000 per person for everybody in the UK, including Wales.

So before the financial crisis, Wales' fiscal deficit was about £1,500 per person because of Wales, and about £500 per person because of the UK as a whole ... a total of about £2,000 per person.

But Wales fiscal deficit is now about £4,000 per person. Roughly the same £1,500 per person because of Wales (I say that because our GVA has now recovered to the level it was at in 2007-08) plus about £2,500 per person common to the UK as a whole ... £500 of "normal" sustainable deficit, plus £2,000 of additional deficit due to the financial crisis.

So yes, Wales fiscal deficit has probably doubled from £6bn to £12bn a year (£4,000 per person x 3m = £12bn) but the lion's share of that is fiscal deficit that is common to the UK as a whole. The part which is due to Wales' poor economic performance relative to the UK as a whole is probably about the same as it was before.

Welsh not British said...

Welsh deficit might have doubled but UK deficit as a whole has gone up as much as five times. When you think that Wales has virtually zero ability to improve it's own economy (less than zero with Labour in charge) you have to wonder just how well we could do if we had full control.

Hwb Cymru said...

I see that Stats Wales tender is being advertised on Sell2Wales. Will be interesting if this will mean more stats on the Welsh economy being gathered.

Siônnyn said...

The debt (and deficit) due to the banking crisis is by convention (if not law) apportioned according to the country where the debt was incurred - the Scotst have argued this convincingly when the English have threatened to land then with the whole of the RBO and BOS debt pile. Most of the liabilities were incurred in London, on the London money markets. So we could argue that as Wales does not have an investment banking sector, the portion of the debt due to us would be small.

Gerald Holtham said...

Perhaps I might explain the difference between the figurs in the ICFFW report and those I cited to the House of Lords Committee and on Daragon's Eye. The Commission estimated the difference between tax revenues from Wales and public spending in Wales, devolved and non-devolved. The GERS figures for Scotland also include a third type of expenditure,namely Scotland's share of expenditures made in principle for the UK as a whole. That includes things like foreign affairs (embassies etc), foreign aid, debt servicing and military spending. GERS adds Scotland's population share of that spending to Scottish public expenditure. In other words they are counting public spending for Scotland not just in Scotland. I therefore quoted figures for Wales on a comparable basis. Wales' population share of those general expenditures is some £5 1/2 billion. That, plus some recession-induced deterioration, easily takes the £6 billion of the Commission report to £12 billion, which is more than one quarter of Welsh GVA.

The decision not to produce a GERW is not a decision I support. It is, I fear, partly born of a wish not to expose the full ugly picture.

I remain firmly in favour of more devolution and fiscal responsibility for Wales but independence at this stage would entail a substantial drop in the standard of living in our country. I am not defeatist about our economy but the first step in improving a bad situation is to recognise it for what it is and not be clouded by wishful thinking.


Gerald Holtham said...

We get almost to a £12 billion deficit if we merely add Wales share of non-allocated UK spending to the estimated deficit in Wales of £6billion on 2007-8 data. That is what I did when talking to the House of Lords committee. In fact, there are good reasons to think the situation is a lot worse than that. The ICFFW secretariat made a careful estimate of tax revenues from Wales for 2007-8. Subsequently we do not have data on tax revenues. However, they can be estimated and Bob Rowthorn of Cambridge University has done so, as follows. If you take total tax revenue for the UK and allocate Wales a share equal to its share of GVA you get an estimate for 2007-8 that was 4.5 per cent higher than the careful estimate made by the Commission. So we can take tax revenues for 2009-10, calculate a Wales share using relative GVA and then reduce it by 4.5 per cent. The deficit per head in 2007-8 was £2274, hence the £6 billion total. In 2009-10 the deficit per head was £3955, estimated in the rough and ready way described. That would give a deficit of nearly £12 billion on its own. If we now add in another £6 billion for Wales share of non-allocated expenditures we get to around £18 billion and hence my remark about £6000 per head. These are not official numbers but estimates since we have no GERW. They will be wrong no doubt but not wrong by orders of magnitude - they are in the ballpark. The deficit now is probably one third of Welsh GVA rather than one quarter. Rather than being alarmist I was erring very much on the conservative side by using old data when talking to their Lordships. In talking to Dragons Eye I used the updated estimate of £6000 for the per capita deficit but erroneously did not update the 25 per cent.

MH said...

Gerry, thank you very much for your comments, and I'm sorry I've only just got round to responding. Not many people will come back to a topic that's a week or so old, but I'll send out a tweet to draw attention to what you've said.


Using a similar "rough and ready" method, I had eventually worked out (in my 13:13, 8 July comment) that the annual fiscal deficit would be about £12bn simply due to Wales' pro-rata share of the increased UK deficit as a result of the present financial crisis, and that this is more than 25% of our GVA of £45.5bn. So I don't have any difficulty with the figures you gave to the Lords.

However I must say that I am finding it a little more difficult to get my head round the extra £6bn that would make it £18bn. To me this extra £6bn appears to be largely double counted, though I fully concede that you know much more about it than I do.

The 2007-08 £6bn (for Wales) was at a time when the UK deficit was at a relatively normal level of £35bn or so, which works out at a modest £560 a head, so in relative terms, using your £2,274 figure, Wales was worse off than the UK by about £1,710 per head. I don't see how that can have changed so dramatically. Of course Wales is likely to be producing less tax revenue because of the recession, and public expenditure is going to be higher because of the higher benefits bill ... but those factors are surely common to the whole of the UK, and Wales would have had to have suffered very disproportionately from the rest of the UK for there to be a significant change in our relative fiscal deficit.

So if Wales current deficit isn't £4,000 a head (£12bn), I can just about see how it could be, say, £4,500 per head (£13.5bn) – but £6,000 (£18bn) does seem over the top.


As for the need for a GERW, I'm glad you want to see one, and I wish you all the best in continuing to push for it. You can push harder than I'm able to. I can well imagine that the reason for the Welsh Government not doing so is that it would show "the full ugly picture". I couldn't agree more with you when you say:

"the first step in improving a bad situation is to recognize it for what it is and not be clouded by wishful thinking"

If I can speak for those of us who want independence, wishful thinking is the last thing we should indulge in. The picture is ugly. But for Wales, our key argument for independence is probably never going to be the same as it is in Scotland, Catalunya, Euskadi or Flanders. For us, it is not so much a question of being able to "afford to be independent" because we run a fiscal surplus relative to the state we are currently part of; but rather of not being able to improve our economic situation until we have our hands on the fiscal levers and can use them to make our economy competitive, by playing to our own strengths rather than the strengths of other parts of the UK.

As I see it, competitiveness is the crucial difference between fiscal autonomy in a devolved situation and independence. With the first, the state we are part of will not allow a subsidiary part of it to compete in a way that would damage the whole. With independence we could compete.

Once again, thanks for your reply.

Michael Haggett

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