The biggest challenge of all

This afternoon we will elect our new First Minister. 

I was pleased to hear the new Welsh Labour leader, Mark Drakeford, using his first broadcast interviews to emphasise the need to think harder about the long term. Hallelujah. Our politics, like all politics, are always dominated by the short-term. And it does none of us any good.

For me the biggest and least discussed, and certainly least understood, long-term challenge facing Wales is the future of our public finances. 

For the first ten years of devolved government we could answer every question over government decisions, policy, or even democratic legitimacy by spending money. For every challenge there was a spending commitment. The Welsh budget was doubled and the people appeared to be content. For the first, and only time, in recent history there was a reduction in child poverty in our most deprived communities. And then 2008 happened. During our second decade we have been able to protect core services in which we had invested in those golden years. The NHS budget has been protected and local government has been protected.

But that cannot go on forever. And it won’t. 

Theresa May was, I believe, deliberately obfuscating when she declared austerity to be at an end. Austerity has failed every test set for it. It has not paid off debt, it has not delivered improved economic performance and it has not delivered sustainable public services. In response the Tories have packed away their promises and preferred a misunderstood narrative about the economic crisis than finding a long-term solution to its consequences. Today, with Brexit weakening our economy still further, this means that the UK is probably at its most enfeebled and diminished at any time in our modern history and certainly in any international comparison. 

But pointing out the obvious is an inadequate response to this crisis. Since 2008 the centre-left has collectively failed to articulate a convincing response to austerity. The former Greek Finance Minister, Yanis Varoufakis, recently described 2008 as our generation’s 1929. And he was right. But we haven’t yet found our FDR. Protecting key services is not the same as challenging the fundamentals. This is not simply our failure in Wales and the UK. It is an international failure. And into this vacuum has stepped the hard right wing populists. And we all know what happened next. 

So far. So what?

It’s going to get worse. And in Wales especially so. For three very distinct, and Welsh, reasons. 

Firstly the decisions that the UK Government will take on the future of UK finances. Despite Theresa May’s warm and misleading words in Birmingham, austerity will continue and will worsen for most public services over the coming years. If we assume that NHS spending will continue to grow as predicted over the next five years or so then this growth will be paid for by significant reductions in all other spending areas. Every analysis of the last UK budget provided this same outlook. In five years time local government may well look back at this budget as the good years. 

Secondly the profound impact of Brexit reducing growth and weakening our economy in absolute terms and relative to our international competitors. We have already seen the impact of Brexit on our public finances. We have seen reductions in growth which has already led to a reduction in our ability to take tax out of the economy. It is not unreasonable to assume that, whatever happens over the coming weeks in the Palace by the Thames, there will be reduced economic growth and consequently a reduced ability to deliver taxation. From the Institute for Government’s examination of 14 different studies, to the UK Treasury forecasts and most recently the National Institute of Economic and Social Research report on the current Brexit deal, there is broad agreement on the conclusions. Most economists, and certainly within Welsh Government, we are looking at income potentially trailing this reduced growth by about 1%. And as a consequence of this the planned the reductions in public spending described above may well become the more optimistic scenario. 

And thirdly our own declining tax base. One of those issues which even politicians fail to fully grasp is the impact of Welsh taxation. Many of us have argued for many years for fiscal devolution to deliver the level of public accountability which is essential for good government and proper scrutiny. But there are consequences. To date the Welsh Government has essentially been a spending department. From next April income tax rates will be devolved and even without changes to rates of taxation the structure of taxation will change. And that means a fundamental change to our politics. And I’m not just talking about headed notepaper. 

If we change nothing then the Welsh tax base will decline relative to the wider UK tax base and in many ways this will crystallise the challenges facing us. It will mean that Wales will see a reduction in our ability to deliver tax income and therefore spending on public services as a consequence of the UK funding framework. And this reduction will be over and above the reductions that will be seen across the UK as a whole. The Wales Centre for Public Policy outlined the challenge facing us last July. And it should be required reading for anyone with an interest in the future of our politics.

Taken together these different pressures will deliver a perfect financial storm in the first half of the new decade. And who’s talking about it? Week after week we see both opposition parties in Cardiff Bay demanding increased spending on a different policy every week. Whilst we can marvel at the sheer creative hypocrisy of the Tories and enjoy the spectacle of Plaid spending the same money at the end of every speech or question, the hard reality is that Welsh Labour has to do better and more than simply enjoying an opposition out of its depth. Hubris doesn’t butter the bread. 

And this is the acid test of a longer-term approach. How to grow our tax base at a time of economic stress. How to do so in absolute terms and relative to the rest of the UK when we are starting from a position of relative weakness. And how do we structure our services and structures of governance at a time when it is unlikely that we will have the capacity to maintain the current structures? And to do all of this in a way which is rooted in our values and in a country where we do not have the policy communities to provide us with a range of policy choices and options which can be tested in a wide and deep political and public debate.

That’s quite an in-tray for the incoming First Minister.