Ben Lake MP, Plaid Cymru Spokesperson on the Treasury
Wales and the UK face an economic and political inflection point as we grapple not only with the devastating consequences of Covid-19, but also the economics of post-EU reality. In such circumstances, raising the Welsh government’s capital borrowing limit is essential to ensure Wales can afford not only the costs of the Covid crisis, but also to invest in a successful recovery.
Famously described as a “process, not an event”, the past decade of Welsh devolution has seen its institutions accept a growing body of responsibilities of which economic development, as well as health and education, are paramount. Yet despite increased responsibility, including the ability to raise revenue from a limited number of taxes, Whitehall has largely resisted calls to match new responsibilities with increased borrowing powers.
This that meant that Wales is only allowed to accumulate total debts of £1 billion, with borrowing capped each year to a meagre £150 million. In many respects, this has left Welsh devolution underpowered, under-resourced and unable to fulfil its mandate of achieving sustainable economic development in Wales.
The over-centralisation of fiscal power in Whitehall has long been the elephant in the room in the history of devolution, not only in Wales but across the UK. It is now time to address this issue, not only because our precarious circumstances demand that we do so, but because the terms on which we can currently borrow are too good to ignore.
At present the UK government can borrow over thirty years at less than 1 per cent in nominal terms, meaning that the locked-in servicing cost of a £1 billion loan would be less than £10 million a year. While accepting that the nation’s finances are far more complex, the nearest example in lay terms would be being able to take out a thirty-year mortgage for a house with a 1% fixed rate.
Quite rightly, the Treasury has been using these historic low interest rates to borrow itself out of this crisis, utilising funds to support households and businesses across the UK. Yet it denies the devolved nations the same ability, even at a much lower scale, introducing dangerous delays to devolved health and economic interventions.
That is why Plaid Cymru is urging the UK government to work with Wales to moderately increase our borrowing limit. This could be done responsibly using existing powers, institutions, and even the Conservative government’s own fiscal rules.
In the March 2020 Budget, the Chancellor reiterated three fiscal rules, the third of which in effect allowed the UK government to borrow more over the short term in order to bring about a sustained economic recovery.
To extend devolved nations the same opportunity, the UK government should consider granting them access to the Treasury’s Debt Management Office and the City of London’s world-leading financial markets. Facilitating increased borrowing limits for the devolved nations through these institutions would reduce the implementation period for borrowing and ensure effective governance by allowing the devolved nations access to the Debt Management Office’s world-leading expertise.
So what about the borrowing limit itself? In evidence to the OECD, economists noted that Wales raises approximately £2.4 billion itself from taxes including its share of income tax as well as land transaction tax.
Therefore, raising the borrowing limit to £5 billion over five years is well within the fiscal capacity of the Welsh government. This is because using the framework we have set out, servicing this debt would only cost the Welsh government approximately £50 million a year – a relatively small sum given the Welsh government’s own tax revenue.
The limitations of Wales’ fiscal powers were political issues before the pandemic, but the challenge of survival and reconstruction, let alone fixing the UK’s long-standing structural economic problems to better position ourselves post-EU has made this debate critical.
Both the Welsh and UK economy were in crisis before Covid-19, suffering from stagnating productivity and an entrenchment of severe regional inequity. Brexit and the loss of frictionless access to Wales’ largest export market for every sector from agriculture to aviation threatens to further hamper Wales’ economic prospects.
Equipping the Welsh government with an increased borrowing limit would signal that not only are we serious about building back better after Covid-19 through ambitious investment, but that Westminster, after a series of damaging pieces of legislation – most notably the Internal Market Bill – has confidence in devolution and in Wales.