Support for the Welsh Economy and Funding for the Devolved Institutions

Debate between Stephen Kinnock and Jonathan Edwards

Tuesday 5th July 2022 Commons Chamber

[Jonathan Edwards (Carmarthen East and Dinefwr) (Ind)]

It is a pleasure to speak in this debate on the Welsh estimates. Let me start by congratulating the right hon. Member for Preseli Pembrokeshire (Stephen Crabb) on securing this debate and on making a fine speech, which seemed to be a damning indictment of the failures of Westminster economic policy as it applies to Wales—I hope he will be sending a copy of his speech to YesCymru.

When we have discussed regional economic policy over the years, I have often equated the scale of the challenge facing the British state to that which faced the German state following reunification. That is itself a damming indictment of the state of matters in this disunited kingdom. Germany, of course, had literally been split in two, and not only in terms of political entities and economic systems; there was a physical barrier between east and west. The Prime Minister mentioned the German example when launching his levelling-up mission.

What lessons can be learned from Germany? Although it has not fully managed to close the gap between east and west, the east of Germany now outperforms most of the geographical parts of the British state outside the south-east of England. The first lesson that all political parties need to learn is that levelling up will not be a one-term or one-Government policy agenda; such is the scale of the challenge that it will take decades, and Governments of different colours will have to be committed to the agenda. Secondly, it will not come cheap and will require considerably more funds than have been allocated to date. The flagship fund, the levelling-up fund, has an allocation of £4.8 billion. The Centre for Cities estimates that the federal German Government have invested €2 trillion between 1990 and 2014, equating to £71 billion per annum. Of course, a large part of that sum represented fiscal transfers in the shape of pensions and benefits, but 21% was deliberate financial equalisation, 13% was infrastructure investment and 9% was business support. Redistribution in the context of the British state is mostly based on welfare payments, which are largely required as a result of a failed macroeconomic policy. Without serious investment, there will not be serious levelling up. Infrastructure investment should be redirected to low-productivity areas.

[Stephen Kinnock (Aberavon) (Lab)]

I am interested in the hon. Gentleman’s comparison with Germany. Does he agree that one secret of the German success is a radical devolution model, held together in a federal state—but very much together? It is interesting that he is making the case for the German model, which is based, by definition, on a federal state, not on separating. If the German Länder had separated from each other, it probably would have ended in disaster.

[Jonathan Edwards]

I will get to the point about government structures later, but there is a definitely a debate to be had about the constitutional question. In my view, the constitutional question in Wales is very much an economic one, which is why I ultimately support independence for my country.

Finally, the post-reunification German constitution is underpinned by a coherent political structure based on powerful Länder and local governments, as the hon. Gentleman said in his intervention. Levelling up cannot be delivered from Westminster alone. What English politicians want to do with regional governance in England is a matter for them, but the Welsh, Scottish and Northern Ireland Governments must be empowered with a full portfolio of fiscal powers. I was no Brexiteer, but I will say that if the British Government were genuinely interested in maximizing their new freedoms to boost levelling up, Wales should have full powers over income, corporation tax and VAT. Of course, not only are this British Government anti-European, but they are anti-devolving powers from Westminster, and that is leading to complete economic and political stasis.

Talking about ironing out Brexit teething problems will not solve the crisis either. I often consider political discourse in this place to be outside the paradigm of reality, but the truth is that Wales and the UK are in a state of limbo. The UK is facing an inflationary spiral not witnessed in my lifetime, and it is running the worst current account deficit since records began, at a staggering 8.3% of GDP. As Will Hutton wrote in The Observer over the weekend, this is the sort of deficit

“recorded by banana republics before they collapse”.

As a direct result of post-Brexit trade policy, real export volumes are down 4.4% and import volumes are up a staggering 10.4%. Within the EU single market and customs union, the UK was the leading destination for foreign direct investment, but that is no longer the case.

All that is leading to reduced investor confidence and a slump in the value of sterling, adding fuel to the inflationary fire, which hurts every one of our constituents. The Bank of America warns that sterling is facing an existential crisis. This place should be in complete panic mode, yet Westminster plods along sticking its fingers in its ears and whistling to itself in a happy bliss of ignorance. If the British Government are unwilling to provide economic levers for Wales to solve its own problem, the only sensible solution is to rejoin the safe harbour of the European Union economic frameworks. That would boost exports, help investment and, critically, return some much-needed economic confidence and strengthen sterling.

In the time left to me, I turn to capital projects associated with the city deals. Jonathan Burnes, the director of the Swansea Bay city region deal, has warned that construction costs were high as a result of inflationary pressures, which might endanger some of its proposed projects. Furthermore, there are worries that the promised private sector investment that makes up the vast majority of the Swansea deal could fall if economic conditions worsen as expected. The key plank of the British Government’s economic policy for the communities I represent is therefore at “red” risk level. It would be helpful if Ministers could outline, in winding up, what they will do to make up the expected shortfalls.

Lastly, I highlight the challenges facing the Welsh Government’s budget, as day-to-day funding for Wales remains slightly below the 2010 level. Furthermore, the rate of real-terms reduction is currently greater than the British Government’s departmental average. When Unionists speak of the dividend that Wales gets from being part of the British state, it clearly does not apply to the funding we receive as a nation.