A post on Brexit and Wales by Matthew, one of my Parliamentary team.
Infrastructure in Wales post-Brexit: The need for a ‘Red, White and Green’ Solution
On 23rd June 854, 572 people in Wales chose to leave the European Union.
The risks and opportunities arising from Brexit come on top of already significant challenges facing Wales, such as its economic performance, demographic changes, the pace of technological development and climate change, to name but a few.
The next few years will be a challenge. They will require a clear vision for a post-Brexit Wales, a new approach on many key policies and the ability to unite people in common cause.
In this time of uncertainty, it would be easy to opt for the status quo. But the referendum result was more than just a vote to leave the EU, it was a vote for control over our decision-making processes, and for a better quality of life. In Wales, it was a call for Welsh solutions to Welsh problems. It is time for a Red, White and Green Brexit.
Wales and its relationship with the EU
In 2014, EU funding for Wales from CAP and European structural Funds totaled £658m. During this time, Wales’s net contribution to the EU budget was £414m. This means the estimated net benefit to Wales of EU membership was £245m, approximately 0.4% of Welsh GDP.
While a small percentage of GDP, Gerald Holtham has pointed out that EU money accounts for 20% of the Capital budget. This will therefore, have a huge impact on investment in infrastructure projects.
Examples of EU-funded projects included upgrading major roads such as the A465, tourism initiatives and training schemes. Wales’ education system also benefits from EU funding, with financial support from Horizon 2020 and Erasmus. This support could be worth in the order of £20m a year.
There are now concerns that certain projects may be delayed, or in fact not happen at all. The South Wales Metro is one such project now potentially in jeopardy.
A Red, White and Green post-Brexit economy.
Foreign-owned businesses account for nearly 30% of Wales Gross Value Added with around 500 businesses whose ownership is in other EU countries providing more than 59,000 jobs. Export to the EU from Wales’s accounts for more than £1b of business each quarter. Additionally, the National Assembly for Wales’s research service estimates that 200,000 jobs in Wales depend on exports to the EU. That is approximately 14% of the Welsh workforce. Despite calls to abolish corporation tax and for full global free trade, this would be the wrong step for Wales. A race to the bottom must be avoided, as should mass tax breaks for companies who otherwise help to fund the mass infrastructure investment necessary in Wales to help its economic situation. Wales should look to foster indigenous growth, create durable transition plans for vulnerable sectors including agriculture, steel, automotive and aviation and focus on public procurement and mass infrastructure development to further the Welsh economy.
Whatever plans Wales has for growth post-Brexit, it must ensure that any such growth is secure. More than half the increase in employment since 2008 has been in self-employment and in part-time work. One in five new jobs are temporary. Meanwhile living standards have fallen, with gross weekly earning £30 less than they were in 2008. Public investment in Wales would ensure secure, well paid, full-time jobs and end the scourge of discrimination, low pay and insecure work.
According to Wales Public Services 2025, Wales is likely to see a shortage of construction workers due to the restrictions on immigration and free movement from EU countries. Whilst this will undoubtedly have an impact upon the construction of civil works, it will also have a knock-on effect on home building. Coupled with the difficulties that housing providers will have in accessing construction materials from Europe, alongside higher costs, meaning there is likely to be an ever greater shortage of housing. Disadvantaging inward investment in Wales.
‘A Red White and Green Brexit’: The possibilities for farming in Wales, post Brexit.
Power of agricultural policy
Agriculture is devolved to the National Assembly for Wales and as such the decisions made over agriculture in Wales, are usually made by Wales. However the powers over agriculture, which until now had been held by the EU with regards to Wales may now be treated differently. There are a number of reasons for this:
- The powers model currently being used by the National Assembly for Wales
- The current ‘conferred powers model’ ensures that the subject matter devolved to Wales is clearly stipulated in Schedule 7 of the Government of Wales Act 2006 (GOWA). It means that although agriculture is devolved, certain aspects of agricultural life are not. For example fox hunting, scientific experimentation and import and export control are excepted matters, and as such not devolved for Wales. As such, any new powers which returned from the EU would not return to Wales under this power model.
- The proposed ‘reserved powers model’ contained within the Wales Bill would make it more likely that powers once held by the EU over agriculture would return to Wales, as those powers are not expressly reserved by the UK Government. However, the EU is a reserved matter and as such it may be argued that as the repatriation of powers is a reserved matter then it is for the UK Government to decide who is to exercise the power.
- The UK Parliament can still legislate for Wales
- There is nothing stopping the UK Parliament from legislating in a devolved area such as agriculture. The convention is merely that the Assembly would consent to such a move.
- Much is dependent on the Grand Repeal Bill. If the UK Government merely reaffirm EU law in an EU statute there will be very little legislative space for the Assembly to legislate on the repatriated powers.
Welsh Specific agricultural policy making
The Welsh Government’s rural affairs secretary, Lesley Griffiths has stated that leaving the EU presents an opportunity for ‘very welsh specific policies’ on farming and the environment.
George Eustice, a UK farming Minister, has said that there is a need to work out a UK wide framework for an agricultural policy. He stated ‘broadly’ Westminster would be in charge of the agriculture cash, with the Welsh Government given its share, yet he wouldn’t want to have ‘distorting subsidies in place that affected one area more than another’.
Repatriation of funding
Even if powers are to return to Wales, there is a chance that the connected funding may not be repatriated alongside the powers. This would be the worst case scenario. Another scenario is that the powers are devolved alongside some funding, yet the funding is insufficient. Often when new areas of competence are devolved to the National Assembly, the connected operating finance is devolved alongside it. However, the cost of establishing regulatory and management bodies which already have a UK equivalent are often not devolved. Meaning that the Welsh Government may get the money for subsidies, yet not the funds to establish the body which distribute the subsidies themselves.
There is also the question of whether the existing Barnett formula is an appropriate mechanism for fund distribution post Brexit. Currently Wales receives 115% of funding per head compare to the same person in England. The UK Government has promised to pay the same rate of subsidies until 2020, at which point the picture becomes somewhat less clear. If after that point, the UK Government funds Welsh agriculture at merely the Barnett rate it is unlikely that there will be sufficient funding to subsidise Welsh farms to the level experienced in the EU.
Jo Hunt and Rachel Minto, of Cardiff University’s Wales Governance Centre, have in fact said that:
‘Allocating post Brexit agricultural spending through the Treasury’s established and much criticised Barnett Formula, for example, would leave Wales significantly out of pocket, and challenge the viability and competiveness of Welsh farming’.
In 2014, £240m was given to Welsh Farmers in direct payments alone. Half made a loss, or would have done so that year, without those payments.
Welsh Funding Post Brexit more generally.
(Extract from Wales Public Services 2025, report on the implications of Brexit)
To illustrate the possible impacts of Brexit on Welsh public finances we have generated a range of scenarios. These scenarios consider three key variables:
- What happens to the £13 billion the UK currently pays to the EU
- How the UK Government would replace the £4.5 billion spent by the EU in the UK, including the £520 million spent in Wales
- The impact of Brexit on the tax revenues of the UK government and any consequent impact on Welsh public finances.
In developing these scenarios we have used some assumptions. The first is that the EU would continue to provide Wales with structural funds after the current round which ends in 2020. While the funds are likely to change, Wales continues to be amongst the poorest parts of the EU and it is reasonable assumption, though by no means a certainty, that Wales will continue to receive support at similar levels. In considering the economic impacts we have drawn from the Treasury’s analysis. While this is contested by Leave campaigners, it is the most authoritative assessment available. It draws not only from HMT’s own analysis but also from projections by a range of other organisations including the accounting firms. Its assessments also reflect similar analysis by international organisations like the OECD.
However, we fully recognise that there are considerable uncertainties and some economists, notably Professor Patrick Mindford, have produced models showing economic benefits arising from Brexit. Before getting into the scenarios we need to deal with the key issue of the funding formula used to allocate the £13 billion ‘recouped’ from Europe. The default position would be for the funding to reach Wales through the block grant, via the Barnett formula.
The Barnett formula is used to allocate increases (or decreases) in spending across the four nations of the UK based on spending decisions for England. The Barnett formula does not set the underlying baseline of spending, just annual changes. Under the Barnett formula, any increase in funding is applied equally across the four nations. So, for example, if the UK Government decided to use money recouped from its EU contribution to raise spending on agriculture in England by £10 per head there would be a £10 per head rise in the block grants allocated to Wales, Scotland and Northern Ireland. Wales could lose out in this scenario because the Barnett formula would allocate the money equally, whereas the EU funding was previously unequally allocated in Wales’ favour. The alternative would be a one off deal that treats the EU funding as an exceptional re-adjustment that alters the baselines rather than allocating it via the Barnett formula.
Scenario 1: Barnett highly optimistic scenario
This scenario assumes that the UK Government has not made an agreement with the EU and has defaulted to a WTO relationship. What happens to the £13 billion EU contributions? Because there is no agreement, the UK has to make no contribution to the EU in a post Brexit agreement. In this optimistic scenario, the UK Government uses its share of the £13 billion recouped from Europe entirely for purposes that are devolved: so increasing spending on areas including agriculture, regional development, health and 12 education but not areas like defence and policing. Through the Barnett formula, Wales would get around £740 million. We have assumed no negative economic impact. The Treasury’s projections of a £45 million reduction in tax have not come about. So is Wales better off? In this most positive of scenarios, Wales would do better from Brexit by around £220 million.
Scenario 2: Barnett optimistic but plausible scenario
In this scenario, the UK Government strikes a post Brexit deal to stay in the EEA. What happens to the £13 billion EU contribution? In our scenario, under the terms of the agreement to join the EEA the UK contributes around £4 billion (just under half of the net contribution in 2015). This leaves around £9 billion. The UK Government spends £4.0 billion in areas matching existing EU spending (for example agriculture, regional development). This results in Wales getting around £230 million. The UK Government negotiates to retain access to funding for innovation and Higher Education, worth £20 million. What happens to the UK public finances? The Treasury predicts a loss of £20 billion. So the remaining funding recouped from the EU contribution is completely subsumed by the loss of revenue. To bridge the funding gap, the UK government makes cuts to spending, including £5 billion in devolved areas. That would result in a cut to the Welsh budget of £285 million. Is Wales better off? In this scenario, Wales is down by around £535 million.
Scenario 3: Barnett pessimistic but plausible scenario
In this scenario, the UK Government negotiates a bilateral arrangement with the EU. What happens to the £13 billion EU contribution? In our scenario, the EU plays hard ball to make the UK pay heavily to opt out of the principle of free movement with a contribution of £8.5 billion a year, matching its current net contribution. Due to funding pressures, the UK Government makes available a pot of just £1 billion for agricultural payments in England and does not replace other EU funding. That means just £60 million for Wales. What happens to the UK public finances? The remainder of the reclaimed EU contribution is more than offset by the £36 billion loss of tax receipts as predicted by HM Treasury. To help repair the public finances, alongside tax rises and other cuts the UK Government makes £7 billion cuts to devolved areas, including health, local government and education. That results in a cut of £400 million for Wales. Is Wales better off? Wales is worst off to the tune of £860 million.
Scenario 4: Re-adjust baseline optimistic but plausible scenario
This is a variation on scenario 2, which involves the UK entering the EEA and making a £4 billion contribution. The UK Government agrees with the devolved countries to ensure that the £4.5 billion spent by the EU across the UK is fully protected through an adjustment to each country’s underlying baseline. That is, the £4.5 billion is not allocated through the formula but simply replaces existing EU funding. This means Wales starts from a position of keeping the £520 million currently spent with no net loss 13 or gain. The remaining funding recouped is completely subsumed by the £20 billion loss of tax, as predicted by HM Treasury. To bridge this gap, the UK government makes cuts to spending, including £5 billion in devolved areas. That would result in a cut to the Welsh budget of £285 million. In this scenario, Wales is £285 million worse off.
Scenario 5: Re-adjust baseline pessimistic but plausible scenario
This is a variation on scenario 4 in which the UK Government negotiates a bilateral arrangement with the EU and pays around £8.5 billion a year. In this scenario, the UK Government agrees to adjust the baselines, but due to changing economic circumstances will only provide half of the funding (a total of £2.25 billion), meaning, Wales gets £260 million. The remaining funding is more than offset by the £36 billion loss of tax receipts as predicted by HM Treasury. To help repair the public finances, the UK Government makes £7 billion cuts to devolved areas, including health, local government and education. That results in a cut of £400 million for Wales. Wales is worse off by £660 million.