By stewartb – a long read

When the UK economy is in a poor state, can governments in Scotland or Wales with devolved powers counter UK economic performance in a substantive way given that key policy levers are ONLY available to Westminster and the UK’s central bank?

Proponents of the Union point to Scotland’s economic performance and allege: (i) it’s failing due to the political party that has governed in Edinburgh since 2007; and (ii) to have a successful economy, Scotland needs ‘change’, it needs to have the Labour Party (or the Tories) become the government in Edinburgh. Of course it’s possible to assess the economic management credentials of these Unionist aspirants for power in Holyrood as both parties have in recent times had extended periods in government, the Tories in Westminster since 2010 and Labour in Cardiff since 1999.

This blog post offers insights from outwith Scotland, specifically from the Labour Party government of Wales. After a quarter of a century in power in Cardiff, what is the state of the Welsh economy?

This post is motivated by remarks amplified recently by newspapers in Scotland: ‘One of Scotland’s richest men has blasted the SNP for “mismanaging” the country’s economy for more than a decade as high taxes and red tape has decimated growth’.

Acknowledging reality?

The following observations are taken directly from recent Welsh Government publications:

‘Wales’ economy is deeply embedded within the wider UK economy. Many of the general trends which affect the UK are likely to be reflected or heavily influence Welsh economic conditions.’

‘UK data trends generally apply to Wales due to its deep integration within the UK economy.’

Source: Welsh Government (December 2024) Wales Economic and Fiscal Report 2024. (https://www.gov.wales/sites/default/files/publications/2024-12/wales-economic-and-fiscal-report-2024.pdf )

‘Welsh economic prospects are heavily dependent on expectations for the UK.’

Source: Welsh Government (December 19, 2023) Chief Economist’s report and fiscal prospects (https://www.gov.wales/sites/default/files/publications/2023-12/welsh-budget-2023-chief-economists-report.pdf)

Context: UK economic performance

The Wales Economic and Fiscal Report 2024 (op. cit.) describes theUK economy:

• ‘… the level of UK output increased by 3.0% between the fourth quarter 2019 and the third quarter 2024 which translates to an average quarterly gain of 0.3%. …. the same as the average quarterly growth of 0.3% recorded between 2008 and 2019 which was the UK’s worst economic performance in post war economic history.’

• On GDP per person: ‘.. the average quarterly growth rate recorded between 2008 and 2019 was just 0.1%, underlining that the decade or so before the pandemic was the worst UK economic performance since the 1940s.’

• ‘..  UK (and Wales’) economic growth since the global financial crisis (GFC) of 2007-08 has been subdued and low compared to the previous forty years or more. Since the GFC, productivity growth has effectively stagnated for reasons debated amongst policy makers, with the phenomenon being termed a “productivity puzzle”.’

• ‘The OBR … estimates Brexit to reduce the size of the UK economy by around 4%, with the full effects materialising 15 years after the new trade agreement started in 2021.’

Noting the UK context and its influence on Wales, the Chief Economist’s 2023 report (op. cit.) states: ‘Taking a longer-term perspective, UK growth has been lacklustre since around the time of the financial crisis. Over the period since the beginning of the recovery from that crisis, on a per capita basis, UK growth has been below the average for the G7, and since the referendum on leaving the EU, the UK has had the lowest growth in the G7 (see Chart 2). Annual average growth over the period as a whole has been around one per cent, but this is flattered by a recovery in employment levels in early years of the recovery from the pandemic. Underlying productivity growth has been even more anaemic.’

Adding:: ‘… the OBR (UK Office for Budget Responsibility) has acknowledged that over recent years, and when expressed on a per capita basis, the short to medium term trend in GDP in Wales has been indistinguishable from that for the UK – although there is some random variation.’

There can be little doubt, based on these assessments that the UK economy – to say the least – has NOT been thriving. Arguably, it has not been well served by successive Westminster governments. Under such challenging circumstances, it is relevant to ask how the Welsh economy has performed under Labour governments in Cardiff. Has Labour been able to deliver a healthy, improving Welsh economy within the scope of its devolved powers despite the UK’s poor economic performance?

The state of the Welsh economy

From the Wales Economic and Fiscal Report 2024 (op. cit.):

• ‘Wales’ economic growth per person up to 2022 has been similar to other UK countries and English regions but remains lower than the UK average, comparable to the North East of England’ (i.e. comparable to an area which does not have devolved powers similar to Wales.)

• ‘The UK’s relatively low economic growth in recent years is partly due to slower productivity growth compared to the pre-global financial crisis period. Wales has been similarly affected, with lower productivity levels contributing to its lower economic output per head’

• ‘Living standards in the UK, measured by household incomes, have broadly tracked economic output but have grown more slowly in recent years compared to long-term trends’. And ‘Household incomes in Wales are estimated to be around 5% below the UK average when using the median after housing costs for 2020-21 to 2022-23.’

• ‘In 2022, which is the latest year of available data, GDP per person in Wales was £27,274, equivalent to 74.0% of the UK average. Of the 12 UK countries and English regions, only the North East of England had lower GDP per person than Wales. As Figure 6 shows, over the last quarter century Wales’ GDP per person relative to the UK has been consistently lower than several other parts of the UK, ..’

• ‘… Wales also faces the challenge that its level of productivity is lower than other UK countries and English regions. Regardless of the measure of labour productivity used, the level of Welsh productivity is significantly lower than the UK average’.

From the ‘Chief Economist’s report and fiscal prospects’ (2023: op. cit.)we learn this: 

• By Q3 2023, UK GDP per head had barely surpassed the pre- pandemic level, and household incomes remained below that level – ‘four years of lost growth’. And: ’This compounds a long period of poor performance for the UK economy, stretching back to around the time of the financial crisis. The available data indicates that the economy in Wales has followed essentially the same trajectory.’

• ‘incomes in Wales may recover pre-pandemic levels one year earlier than in the UK, in 2025-26. This would nevertheless represent an unprecedented seven lost years of income growth.’

Other characteristics of the Welsh economy are highlighted:

• ‘..  throughout the pandemic and the subsequent recovery the labour market in Wales has performed similarly to the UK as a whole.’

• ‘… the trend in Welsh goods export performance since around the time of the (EU) referendum has been very similar to that for the UK as a whole. Despite exceeding pre-pandemic levels of goods trade, both have experienced a recovery in trade that is weak in the international context. As with the UK as a whole, it is likely that Brexit is playing a role here.’

• ‘Following a sharp fall in 2022, average incomes in Wales are projected to fall in both 2023 and 2024’. And ‘The pre-pandemic level is projected to be recovered only in 2026-27. This would represent seven years of lost growth in incomes and follows a long period during which real incomes have grown only very sluggishly in historic terms …’

• ‘The projected reduction in real incomes is unprecedented, and much worse than experienced in the years following the financial crisis in 2008. Given lower income levels in Wales, an incidence of poverty that is higher than in some other parts of the UK, and houses which are on average less energy efficient, it is almost certain that people in Wales will be particularly badly affected.’

Longer-term economic trends in Wales are highlighted in the Chief Economist’s 2023 report:

• ‘Regional Accounts, shows a larger gap between incomes in Wales and the UK. The income measure used is Gross Domestic Household Income (GDHI)’ And: ’For the most recent available period, 2021, GDHI per head in Wales was the third lowest amongst UK countries and regions, but a little higher than the North-east of England and Northern Ireland. GDHI per head in Wales was 83.2 per cent of the figure for the UK – or, in other words, 16.7 per cent below the UK’.

• ‘The key driver of GDP and GVA (Gross Value Added) over the long run is productivity growth, and it is this which in turn supports higher pay, higher tax revenues and higher overall living standards.’
  • ‘The most recent data for GVA is for 2021, when GVA per head in Wales was 74.1 per cent of the figure for the UK as whole – the second lowest of all UK countries and regions.’

• on labour productivity: ‘After 2000, in the years prior to the financial crisis the UK again kept parity (with the G7 countries) . In the subsequent years the UK has very severely underperformed. Improving the UK’s productivity performance is key to increasing average living standards across the UK, including Wales.’

A broader view

The Labour government in Cardiff has recently published the latest annual review of progress in meeting its key economic, social and environmental objectives for Wales.

Source: Welsh Government (September 25, 2024) Wellbeing of Wales, 2024 (https://www.gov.wales/sites/default/files/pdf-versions/2024/9/4/1727339452/wellbeing-wales-2024.pdf)

Here are some of the key observations and conclusions in the report:

• ‘Underlying Welsh economic performance continues to be weaker than the UK as a whole in terms of economic output (gross value added) and household income (for both gross disposable household income and median household income), but is broadly similar to some other parts of the UK with similar features and characteristics’

• ‘While GVA per head of population in Wales has grown broadly in line with the UK since 1998, it remains lower than almost all other countries and regions of the UK. Latest data (for 2022) shows that GVA per head in Wales was 72.1% of the UK average, the second lowest of the 12 UK countries and English regions, ahead of the North East.’

(Gross value added represents the value of all goods and services produced in an area.’ It is both the source of the real incomes people earn and the base on which taxes can be levied to fund public services’.)

• ‘Productivity, measured as GVA per hour worked, is lower in Wales than in other UK countries and regions in England. In 2022 it was 82.7% of the UK figure. Since 2004, productivity in Wales has been in a range of 81.7% to 85.3% of the UK average.

• ‘The national indicator on income uses the measure gross disposable household income (GDHI).’ And: ‘.. Wales has the second lowest GDHI per head of the UK countries and regions, it is broadly comparable to areas of the UK with similar characteristics.’

• ‘Underlying Welsh economic performance continues to be weaker than the UK as a whole in terms of economic output (gross value added) and household income (for both gross disposable household income and median household income), but is broadly similar to some other parts of the UK with similar features and characteristics.

In the foreword to the same Welsh Government report: ‘In previous Well-being of Wales reports we have found that inequalities are widening, the cost-of-living crisis has hit people’s incomes, and children and young people are faring worse since the pandemic. … looking across the indicators which have been updated this year and at data from previous years, there is little evidence yet that these wider trends are changing.’

End note

So which is it:

• successive Labour governments in Cardiff should be “blasted” for “mismanaging” the Welsh economy over the long term

OR

• being within the UK – with its poorly performing economy – powers available under the devolution settlement are simply inadequate to make a substantive positive difference to the performance of the Welsh economy?

Arguably, it’s important to have answers: for the electorate in Scotland, they would shed more light on what being ‘better together’ within this Union means in reality!