The economy of an Independent Wales

                or.

Wales wealth, how to get it and how to use it,

Currency and the Federal Bank.

Before Currency and the Federal Bank, we need to look once again at Wales ‘ so called ‘ budget deficit, for they are connected.

Wales budget deficit. Does Wales have one, how much is it and does it really matter.

With regard to the first two, no one really knows.

As we have previously seen, but briefly repeat here, the data upon which Wales deficit is based is decidedly untrustworthy.

The deficit repeatedly cited is based on a financial report by the Wales Governance Centre.

That, in turn, uses the data of the Government Expenditure and Revenue Wales

[ GERW ]

The authors concede that very little financial data is collected on a Wales specific basis, but rather England/Wales, or UK wide.

GERW is not a conventional accountancy process, indeed it is argued that 90% of the figures used have no verifiable audit trail. 

Spending for Wales is generally allocated on a population share basis, whether or not that can be justified.

Revenue income is collected on a UK wide basis by HMRC. It is then disaggregated to get Wales figures by, in the words of HMRC, using estimates, assumptions and adjustments.

HMRC concedes that Wales revenue figures are an underestimate, as some taxes, mainly corporate taxes,of businesses in Wales, have been allocated to the HQs, many of whom are outside Wales.

They however have failed to estimate the loss to Wales revenues.

The government may argue that GERW is an approved system, but as Prof Murphy of Tax Research argues, if the figures used by the system are suspect, then the outcomes must be suspect.

In Wales' case, indeed they are.

The outcome frome Wales financial analysis, by these methods, find that Wales has a budget deficit of £13.7 billion.

In the same period the UK budget deficit was £39.7 billion.

This means that Wales, with 4.8% of the UK population, is responsible for 35% of the UK deficit.

It makes no sense.

Similarly Prof Doyle of Dublin University, when estimating Wales deficit in Independence, is also guilty of the same error.

He argued that the deficit of an Independent Wales would be about £3 billion.

He arrived at the figure by reassessing the data used to reach the original budget deficit projection.

He argued, quite legitimately, that the cost of some areas would be much less for an Independent Wales.

However, his calculations were still based on the suspect data and it follows that his outcomes too must be suspect.

So we must assume that to date, no one knows what Wales deficit, if any, really is.

Nor can we assist, for accurate data relative to Wales, is not available.

What we can be confident of, is that if Wales  has a deficit to carry into Independence, will be considerably less than that being touted as Wales present position.

Less even than Professor Doyle argues, for he too used the suspect data and he made no allowance that Wales revenues were understated.

Currency and a Central Bank.

If an Independent Wales had a budget deficit, would it matter, after all, every independent nation has one.

The two factors affecting that answer.

1. Why is there a deficit?

2. Whether Wales has its own currency.

A budget deficit, in itself, is not a bad thing. A government deficit means  there is a surplus in the general economy, the government's deficit is everyone else's surplus.

Government spending, in the right way, increases the nation's GDP and consumer spending from it, increases it even more

It is evident from previous posts that we have no high regard for GDP as a measure of a nation's wealth. It is a crude, blunt method that has little regard for well being, equality, and the environment. It is merely an economic measurement, nevertheless it is the method of choice of financial institutions and markets and it must be a consideration.  

The issue with the government deficit, is whether it can be managed and that's where the currency plays the major role.

Should an Independent Wales have its own currency and therefore its own Central Bank?

To return briefly to the deficit.

The deficit, the gap between income and expenditure, needs to be managed.

A deficit from Government infrastructure spending, hospitals, schools, housing, transport links, not only improves the welfare and well being of its people, but boosts the economy.

A little bit of Keynes.

Similarly directing government spending to the less wealthy, who are likely to spend it. Rather than the wealthy, who are more likely to save it, it is most beneficial to boost an economy.

 It is consumer spending, more than government or business, that is the main contributor to GDP.

However spending more than revenue will require the country to raise money from somewhere.

Here, nations with their own currency have an advantage.

They have the economic levers to manage debt and are more trusted not to default on loans. They can , if necessary, print money for payment.

So, Wales currency.

Some argue that Wales should continue to use the pound, or else fix it to a major currency.

Others argue that Wales should have its own currency, but only when the economic conditions are favourable.

Both these arguments cannot be reasonably sustained.

Continued use of another country's currency is not Independence.

Dame DeAnne Julius. Founding member of the Bank of England Monetary Committee { No radical she ], stated 

A parallel currency plan has never worked anywhere in the world. It is impossible I think, to find any place that is a success story, undertaking the route of Independence, using the currency issued by another country,

Scotland, In the run up to the 2014 referendum, decided that it would stay with the pound.

Such a decision was a major contributor to the loss of votes.

It caused widespread confusion and uncertainty among its supporters.

It was told by the UK government that it could not use the pound without the consent of the UK.

If such consent was to be given, it would be conditional on Scotland agreeing to take its full share of the UK liabilities.

The negotiating initiative was handed to the UK Treasury.

Scotland argued that it didn't need permission. An argument dismissed by the UK

It was a pointless battle to take on. To retain the pound meant that Scotland had no control over monetary matters. Money supply, interest rates, and exchange rates. Borrowing would be more problematic as it would be unable to offer the same security against default as a currency issuer nation.

The inability to enable monetary policy and control also limits the nation's fiscal policy.

Greece is an example. It gave up the drachma for the euro. As a result, when the Greek economy had troubles, it turned to borrowing. However as it was no longer an issuer of currency [ couldn't print it ]  the price it was required to pay in interest charges rose from under 4% to 35%, due to the increased risk of default.

Eventually the EU agreed financial help but on conditions that heaped hardship and austerity on Greek citizens.

Others advocate the course of holding off until the economic and financial conditions  are favourable.

The problem with this approach, is that continued use of another nation's currency, removes the use of the economic and financial levers that enable the more favourable conditions. 

Raising finance for investment becomes problematic and what finance can be raised becomes more expensive, borrowing in a money that the nation does not control.

It doesn't really work telling funders that we will have our own money some day.

Some raise the issue that commercial agreements will have to be rewritten to reflect the change of currency.

There is an issue, they say of mortgages and loans designated presently by the pound, which will be a foreign currency.

These are not problems of Independence, these are issues that the many commercial lawyers and multinational financial institutions are well able to resolve as they have done many times.

What about transition costs and exchange rates? Will the new currency cause confusion?

The new currency does not, in itself incur significant additional costs. 

Businesses in Wales that presently trade outside the sterling zone will see little additional change. The exchange rate of Wales' new currency will not necessarily be less advantageous than the pound they presently use. 

This will also be the case for the individual.

Purchases from Europe or the rest of the world are presently carried out seamlessly. The exchange rate, taxes, or transition costs, are calculated and enabled by the user's bank or Paypal etc.

The new Wales currency will just be added to the system.

What will be new is that the pound will now become a foreign currency.

Will it cause confusion?

People are well used to dealing with change.

When the UK joined the EU, although not the Euro, the values of both currencies were generally displayed.

The many thousands who holiday abroad  routinely deal with foreign currency.

The transition to decimalization did not cause the chaos that many had predicted , again for some time dual values were used.

What is also ignored, is the benefits that both the public and business will see from Wales sovereign currency,

The real advantage of Wales having its own currency will become clear in the next post.

Wales Central Bank.

Just like the currency, Wales having its own Central Bank is fundamental to the growth of a wealthy economy.

It regulates the money supply. It is instrumental in keeping the economy from fluctuating excessively. It controls interest rates. It is the reserve bank, holding the nations and domestic banks  reserve currencies.

In addition to the economic and financial areas, the international Central Banks are also involved in social and environmental issues.

The banks hold international conferences at which issues such as climate change and other social issues are discussed and policies recommended to be taken back to the national government.

Wales, with a Central Bank will have influence, which a nation of its size wouldn’t normally have.

Wales has suffered generations of financial under investment and social deprivation. These problems cannot be resolved under the present constitutional arrangements, or any system that relies on policy decisions made by another nation.

Next up. The Independent Wales economy, how to start.