In this part we assess the 3 constitutional options against the twelve criteria in the analysis framework. We have grouped them in 3 sections:
- Principles
- Practicalities
- Policies
The analysis underlines that each option has merits and disadvantages, each carries risk and opportunity. The choice between them depends on how much weight to give to each criterion. People will legitimately differ on the weight they attach to such criteria, and a variety of cultural, political and strategic affiliations will determine how the options are seen.
Section 1: principles
In our interim report we set out our values drawn from widely recognised standards of governance. This section considers how the 3 options fit with the values of accountability, agency, subsidiarity, and equality and inclusion.
Accountability
How far there is clarity about where and by whom decisions are made, and how decision-makers can be held to account.
Devolution, by definition, involves some shared or overlapping accountability. For example:
- the UK government determines overall public expenditure and thus the size of the Welsh Government’s budget, and the Welsh Government decides on spending priorities within it. Accountability for decisions on, for example, funding the NHS or local government is therefore shared between the 2 governments.
- The UK Parliament can legislate on devolved matters, with or without the consent of the Senedd. The number of occasions when the UK government has legislated despite the opposition of the Senedd has increased significantly since Brexit.
- Devolved and non-devolved services impact on each other. For example, entitlement to UK benefits acts as a passport to devolved benefits, and under-investment by the UK government in non-devolved areas such as legal aid or rail infrastructure can generate pressure on the Welsh Government to spend more in related areas.
- Devolution settlements include concurrent (shared) powers that can be exercised by both Welsh Ministers and UK ministers, with a variety of different mechanisms for each to consult the other. The number of concurrent powers increased substantially due to Brexit.
The changes required under enhanced devolution would reduce many of these problems, but there would still be a complex interplay between devolved and reserved powers, for example in respect of:
- taxation, where it is unlikely the Senedd would have significant flexibility to depart substantially from the fiscal policy of the UK government
- social security policy, which would remain reserved
- employment policy, with employment legislation reserved to the UK Parliament but with the devolved services continuing to employ a very significant proportion of the Welsh workforce.
A federal UK would require a written constitution. If sufficiently detailed and clearly drafted, a written constitution would undoubtedly enhance the clarity of responsibility and accountability. However, in most federal countries accountability for outcomes (such as prosperity, equality, poverty, health) is shared between the federal government and sub-state governments, but it is the federal government who usually controls fiscal and economic policy and benefit entitlements.
Where inter-governmental decisions are negotiated and where there are shared responsibilities between sub-state and federal governments, there will always be scope for overlapping layers of accountability. In Australia, where there are mixed competences there is provision in the constitution for the federal level to take precedence over the state level in certain circumstances. This would be one of the considerations were there to be a federal constitution for the UK.
Federal constitutions do not therefore provide total clarity of accountability, nor do they prevent disputes between the federal and sub-state level. Such disputes are a regular feature of countries with federal constitutions, but the constitution provides an authoritative rulebook for negotiation and dispute resolution.
An independent Wales would have the most clarity of accountability for decision making, though, should it join the EU (or another confederal structure), its autonomy would be curtailed in relation to matters within confederal competence. Clarity would depend on public understanding of the rules of the confederation and the scope for autonomous Welsh Government decisions within them.
In any structure of governance, how effectively decision-makers are held to account depends on the quality of scrutiny by elected representatives and by the media. No governance structure can guarantee high quality scrutiny, which depends on resourcing, prioritisation and politics, as evidenced by the Stirbu review of scrutiny in the Senedd and the Institute for Government’s research on scrutiny at Westminster (Parliamentary Monitor, 2021 and The Slow Death of Parliamentary Scrutiny, 2023).
The role of the citizen
Effective accountability requires the attention of citizens. As we discuss in earlier chapters, under current arrangements the extent of disengagement from the political process is a problem in Wales, as it is in the UK overall and in many other countries.
In Wales, this is the product of many factors: lack of knowledge and understanding about the role and workings of political institutions; cynicism about politicians due to the political culture, principally in Westminster; and the absence of strong media to provide information about the performance of institutions and services (we explore how these issues manifest in Wales in more depth in chapters 2 and 3). Improvement will require substantial initiatives in political education for all ages, as well as more deliberative and participative engagement, as we set out in chapter 3.
No constitutional structure can guarantee better citizen engagement. The extent that governments undertake such engagement is a policy choice, but each of the 3 options could enable better understanding and more participation than the current devolution settlement:
- enhanced devolution would increase clarity, stability, and certainty for the long-term, so that as the devolved institutions become more familiar over time to their electorate, their powers will be better understood, with more citizens having direct experience of them.
- a federal constitution would be likely to enhance the profile and permanence of the sub-state governments in Wales and the rest of the UK.
- an independent Wales would only come about with majority support, which would almost certainly be expressed in a referendum and grounded in a popular movement.
Agency
How far the people of Wales can exercise control or influence over the key decisions made in Wales that affect their lives, and have confidence that Wales’ voice is heard in decision-making outside Wales.
Citizen agency is exercised through the ballot box and through participation in engagement with the UK government, the Welsh Government, and local authorities, either directly or through third sector and other groups. As noted in chapter 3, effective citizen engagement requires investment. In any governance structure, the funding available will depend on the fiscal position of the government and its priorities.
Devolution gives Welsh citizens considerably greater agency than was the case when the UK was a unitary state. The devolved institutions exist solely to focus on the needs of Wales, and by virtue of size and culture they are more accessible than is possible for UK institutions with much broader responsibilities. Enhanced devolution would protect and strengthen their powers.
At the same time, the extent of citizen agency in relation to the budgets for devolved services is constrained by the lack of any significant influence by the Welsh Government on UK government decisions on tax and spending overall.
In a federal UK, fundamental reform of funding mechanisms would be required. In federal systems, sub-state governments have more control over taxes and spending at their level, which would almost certainly increase the agency of Welsh citizens. But for powers held at a federal level, the influence of Wales would be limited, relative to England, Scotland and Northern Ireland.
In an independent Wales, citizens would have complete agency over many more, and more significant decisions, than under devolution or a federal UK where their agency would be shared with citizens across the rest of the UK. This would depend on the degree of autonomy of the Welsh state and whether it chose to join confederal structures which constrain its decision-making.
It is difficult for small countries to exert any real control over global challenges such as climate change and environmental degradation, or key aspects of economic policy that depend on meeting the expectations of global financial markets. This is why many smaller nations see collective action through bodies such as the EU as a vital way of exercising at least some influence over such global issues.
Agency and inter-governmental relations
One aspect of agency is the scope for the Welsh Government to represent the people of Wales on inter-governmental issues. This depends on strong inter-governmental mechanisms, as we discuss in chapter 4. Enhanced devolution assumes that these mechanisms will be enhanced by statutory underpinning, but legislation alone is not enough to create a collaborative culture.
Federal constitutions provide a framework for inter-governmental relations and protect the powers of the constituent territories. In federal countries these constitutional protections are reinforced by a spirit of collaboration in the public interest.
In an independent Wales, inter-governmental relations would be a matter of international law and treaty obligations, and so would operate on a different basis entirely. The need for governments to work co-operatively across the border would remain, and constructive inter-governmental relations would be central to that.
Subsidiarity
How far does it ensure that decisions are taken as close as meaningfully possible to the people and communities they affect.
Subsidiarity involves a balancing of central and local powers. The principle requires that decisions are taken at the level of government where they can be most effectively implemented. Subsidiarity does not require every decision to be taken at the lowest tier of government, but there is a presumption in favour of local decision-making, wherever that is practically feasible.
Devolving legislative and executive powers from Westminster to the Senedd and Welsh Government significantly increased subsidiarity within the UK. Where matters were reserved to Westminster, this should have been based on a careful assessment of considerations such as efficiency, effectiveness and the UK’s national aspirations including its internal solidarity. This was not undertaken when devolution was planned and implemented, and the case for many reservations was contested.
At present, the 3 devolution settlements in the UK assume that the following responsibilities are best exercised at UK level:
- market regulation
- defence
- foreign policy
- macro-economic and fiscal policy
- immigration
This is consistent with the position in most federal systems and would be likely to be formalised in a federal constitution for the UK.
Where there is agreement that powers cannot be exercised effectively at a lower level, it is reasonable that decisions are made by a Westminster Parliament with equal representation of all citizens of the UK.
The inter-governmental machinery is designed to provide mechanisms for the concerns of the devolved governments to be considered in UK government decision making. This could be more easily achieved in a federal constitution with parity of sub-state and federal governments.
Under the current constitutional framework, the Sewel convention can be seen as a mechanism for subsidiarity, in that it seeks the consent of the devolved legislatures to the exercise of powers within their area of responsibility. However, the convention has been ignored repeatedly in recent years.
The line between federal and sub-state responsibilities would have to be considered in detail in drawing up a federal constitution for the UK. The draft Bill published by the Constitution Reform Group provides a possible template for a consistent set of powers for each of the devolved territories, with the reserved powers broadly reflecting the current system of devolution.
The EU approach to subsidiarity also offers a template to consider for the future governance of Wales. Subsidiarity in an EU context is defined in treaties and applied in shared areas of competence only. Some other federal states manage shared competence by the federal decision taking precedence over the state decision. Should a future form of UK governance feature shared legislative and/ or executive competence then the EU mechanisms might be a useful model to consider.
We discuss subsidiarity and local government in chapter 3. None of the 3 constitutional options would of itself enhance or constrain the powers of local authorities. All 3 models offer the opportunity to develop and strengthen the relationships between local authorities and the national tier. In general, the broader the powers of the Welsh Government, the greater the need to delegate significant responsibilities to local authorities and other agencies. Thus, a federal constitution that substantially enhanced the Welsh Government’s responsibilities, or independence which would transform its role, would be likely to require a substantially enhanced role for local government in Wales.
Equality and inclusion
How far does it ensure inclusion in the democratic process for all those who live in Wales, and more broadly enable policies to be put in place which ensure equality of treatment and access to services for all the people of Wales.
Of all the values of the commission, equality and inclusion is most susceptible to political choices and hardest to guarantee by constitutional form.
The more powers a nation has, the more opportunities it will have to incorporate equality and inclusion into its governance structures and policies, should it choose to do so. A written constitution can give security and clarity to equality and inclusion rights, but equally can give more authority to rescind or move away from equality protections. In any system political choices determine which rights, and whose rights, are given constitutional status.
In the same way, structures do not determine democratic participation or equality of treatment and access. Personal circumstances, resource constraints and geographic factors all play a part. The constitutional form of a country can help (or hinder) the realisation of equality and inclusion, but practical action will depend on political choices. That said, provisions in the constitution for proper checks and balances on the exercise of power, and for independent regulators with robust enforcement powers, can help deliver these practical steps.
Electoral systems illustrate the interaction between rights and political choices. The recently published Senedd Cymru (Members and Elections) Bill raises significant and pressing questions about equality and inclusion: votes for prisoners, requirements for voter ID, job sharing and mechanisms to ensure gender balance in the Senedd in the proposed closed list system.
There is an international dimension to inclusion and equality rights. Some are contained in Council of Europe conventions and the European Convention on Human Rights. An independent Wales would likely sign up to these treaties, which would require incorporating them into the law and constitution of Wales, in line with the great majority of European states.
Implications of constitutional options for citizens’ rights
Under the current settlement, matters of citizenship and rights of access to (certain) services are reserved to the UK government, but the Welsh Government has taken a different approach within some devolved policy areas. The Welsh Government has brought the socio-economic duty contained in the Equalities Act 2010 into force. This duty requires devolved public bodies in Wales to consider the impact of their plans on people who experience socio-economic disadvantage.
Under enhanced devolution, and to an even greater extent in a federal UK, the scope for policy variation between the nations of the UK on inclusion could increase, but this would depend on the balance of powers in the UK federation.
In an independent Wales, the definition of constitutional rights would form part of the constitution building process for the new state. An immediate question would be the determination of Welsh citizenship. Would it be open only to British citizens residing in Wales at the time of independence? Those who were born in Wales or have lived in Wales for a certain length of time? Would Welsh citizens be able to hold British citizenship as dual nationals? Would the Welsh diaspora in other parts of the UK or wider world be able to apply for citizenship?
Additionally, there would be a question as to how to secure the rights of residents who were not Welsh citizens. Some residents will not wish to, or be able to, claim Welsh citizenship - for example, people living in Wales on work or study visas, dependents of those who do have citizenship but are not eligible for citizenship themselves, refugees and asylum seekers, or EU citizens with settled status. The government of an independent Wales would need to determine its own immigration policies, and how immigration status would affect access to public funds, services and facilities, and be held to account for these by the Welsh legislature.
Section 2: practicalities
This section considers the practical implications of taking the 3 options from concept to implementation.
External dependencies
What would need to happen in terms of the agreement or goodwill of institutions outside Wales to enable this option to become a reality, recognising that any outcome depends on negotiation.
We said in our interim report (chapters 7 and 8) that the current system of devolution is vulnerable to change from outside of Wales, without the involvement or consent of the people of Wales, and this undermines the viability of devolution.
None of the 3 options is entirely within the gift of the people of Wales or the Senedd they elect. Enhancing devolution would require legislation in the Westminster Parliament; the creation of a federal UK or an independent Wales would need to be negotiated with the UK government. In the case of a federal structure, the other parts of the UK would also need to be involved in those negotiations. An enduring goodwill would be needed to make the negotiations a collaborative, and not a confrontational, experience especially as, until the new arrangements were ratified, the UK Parliament would remain sovereign and could implement change unilaterally.
The 3 options also depend on other institutions outside Wales, particularly the courts. We anticipate that under both enhanced devolution and a federal UK, the Supreme Court would have a role in determining constitutional disputes between Wales and the rest of the UK.
There appears no consensus in favour of changes to English governance, either for the creation of an English Parliament and Government or of powerful English regional structures with legislative, executive and financial powers equivalent to Wales or Scotland. These would be needed to bring about a federal structure. There would need to be a seismic shift in attitudes across the UK for a federal UK to come into being, even if it were the preferred option in Wales.
A federal UK would require a positive will of all parts of the UK to stay in the Union and reform its constitutional machinery. At present, Scotland is split as to whether its future is within the UK or outside it. Northern Ireland has a complex relationship with the Union. This has been stabilised by the Good Friday Agreement but has not been settled for good, while opinion elsewhere in the UK seems to favour Irish reunification (see chapter 4).
Enhanced devolution or independence would have a more limited impact on the constitutional structures of the UK. Both would require a shift in political culture and thinking to enable effective negotiation on these options. The present UK government has ruled out any further devolution to Wales and has, in Scotland’s case, blocked the referendum mechanism which would likely be a necessary precursor to any legally recognised move to independence.
Though it would be theoretically possible for Wales to make a unilateral declaration of independence, such a step would make it difficult for an independent Wales to secure international recognition. This could have devastating consequences for the government’s ability to finance itself.
Even if the UK government recognised the legitimacy of a decision by the people of Wales to become independent, the UK’s exit from the EU demonstrates that it is not simple for a country to cut ties with a neighbour. There would need to be a negotiation between Wales and its neighbours on a wide range of cross-border matters, such as the movement of people, goods, services and capital. And, as with the UK leaving the EU, Wales would be negotiating these with a much larger, wealthier and more powerful party. If negotiations were to become acrimonious, Wales could find itself facing the choice of a poor deal or international isolation.
Capacity and cost
What additional state capacity would Wales need to build (e.g. to manage policing and justice or welfare, or to ensure Wales’ place in the world was maintained and promoted), in order to make it a reality, and what would be the net financial impact of developing this capacity, relative to the costs implied by the status quo and the other options for change.
Our recommendations in relation to chapters 4 and 5 above would involve expanding Welsh Government policy capacity for justice and policing, and transport, over and above the resources transferred from the UK government. They would also require additional resources to be dedicated to formal intergovernmental relations.
An independent Wales would need to create new state institutions to exercise responsibilities including social security and pensions, public spending and taxes, immigration and border management, international trade, external relations and regulation of the utilities and broadcasting. This would entail substantial cost and recruitment challenges.
New policy capacity would also most probably be required under a federal UK, depending on which policies were allocated to the sub-state level. At the same time, in a federal UK it is not certain that the Senedd and Welsh Government would have responsibility for all policy areas which are currently devolved. Federation would require increased fiscal and financial capacity if, as expected, the sub-state governments acquired significant control over their own tax and spending.
Much would depend on the fiscal climate at the time of acquiring these new responsibilities. At present devolved services, and public services across the UK, are under severe pressure from a prolonged period of austerity. Constitutional change could occur while services are still experiencing or recovering from this.
Creating new government capacity involves recruiting staff, developing new facilities and repurposing buildings. In addition to the costs involved, recruiting staff with the necessary skills and expertise would take time. Any constitutional change more radical than enhanced devolution would require fundamental change in the structure of the Welsh public sector. At present, many of the most senior and influential public sector roles are based in London. In an independent Wales, and to some extent in a federal UK, more senior roles would be based in Wales. This gap could be filled by a mix of home-grown talent and secondments from elsewhere, as happened in the early stages of devolution.
There is currently a substantial UK government presence in Wales. The Driver and Vehicle Licensing Agency employs over 6000 staff at its headquarters in Swansea, the Office of National Statistics is based in Newport with around 3000 staff and Companies House has its headquarters in Cardiff. Other departments such as HM Revenue and Customs, Ministry of Justice and Department for Work and Pensions are also represented in Wales.
The number of civil servants based in Wales is greater than its population share would suggest (GOV.UK blog); approximately 35,000 civil servants compared to 3.1 million residents, while the UK has 552,000 civil servants for 67.7 million residents. It is reasonable to expect that these roles would remain while Wales remains part of the Union, but if Wales were to become independent it is likely that the Westminster government would relocate these functions outside of Wales. It seems likely that jobs created to manage the new functions of the Welsh state would be balanced by the loss of jobs currently providing UK government services in Wales and (in some cases) across the UK.
Scotland has established a range of bodies to exercise functions that would be needed in the event of independence. The experience of Social Security Scotland, for example, is that the cost and complexity of new bodies to carry out functions previously run on a UK-wide basis can easily be greater than expected. In this instance, the Scottish Government predicts that the implementation costs for Social Security Scotland will be £658 million to 2024/2025, more than double the initial 2017 estimate of £308 million for implementation costs over the life of the programme (Audit Scotland, 2022).
In the longer term, independence would create opportunities to simplify structures which could mitigate the loss of UK or GB wide economies of scale. For example, Estonia has created a simplified tax system with reduced compliance costs, that some see as an international model (International Tax Competitiveness Index 2022). At the same time, the transition to a new tax and benefit system would create gains and losses to individuals which could be substantial.
The challenge to system reform of this kind is that capacity needs to be built in advance of delivery, but capacity is gained through experience. One argument in favour of the gradualism implied by enhanced devolution is that it is possible to create capacity incrementally over time.
Under the federal option, capacity building in advance, or by step change, would be more challenging if it were to involve significant transfers of additional responsibilities. The sub-state institutions would need to take on new functions from the date of the adoption of the federal constitution, although it could be possible for these functions to be delivered on an interim basis under contract or agency agreement by a former UK-wide government organisation, for example using HM Revenue and Customs in the case of additional tax raising powers.
In summary, the most severe capacity issues are likely to be felt in the event of independence, because it is the option involving the most substantial change. The Scottish Government’s policy of state-building is a useful indicator of what would be required. Under a federal model, the degree of change would be less, because most of the major federal state institutions would remain central government functions, but there might need to be increased capacity to manage additional functions and new taxation regimes.
Enhanced devolution assumes additional Welsh Government capacity for justice and policing, rail infrastructure, and inter-governmental relations has already been created. There is reason to believe that in the medium term, there could be delivery gains which would mitigate extra costs.
Stability
How far does it provide a stable and sustainable model for government in Wales in the long term.
The UK famously has no written constitution, a status it shares with only a handful of other nations, notably New Zealand and Israel. The mechanism for reform of an unwritten constitution is less clearly defined but thus more flexible. Whether this is a good thing depends on your point of view. There is a trade-off between flexibility and stability and countries need both. However, a well-designed constitution can be both transparent and stable.
The development of Welsh devolution has been haphazard with a ‘Christmas tree’ approach where new elements are hung on the existing framework. As we said in chapter 8 of our interim report in our view this model is fundamentally unstable because it is vulnerable to unilateral amendment by the UK government. But politics and public opinion contribute to stability as much as the design of the settlement.
There has not been a settled political or public will about the extent of the autonomy of the Senedd and Welsh Government. Incremental devolution has enabled the settlement for Wales to develop in step with the expectations of the public. To be accepted, further changes will also need to reflect the public will and we hope that our report will help inform the debate on this.
Enhanced devolution would create greater stability by reducing the capacity of the UK Government to unilaterally vary the settlement. However, without fundamental reform of the UK constitution, it is hard to fully protect devolution because of the principle of UK Parliamentary sovereignty, which means that anything done by one Westminster Parliament can be undone by a future one (or even the same one, if the Government changes its mind). Given the Parliament Acts, the House of Lords cannot prevent a majority in the House of Commons from having its way, and the monarchy will not interfere in politics. This means that UK Parliamentary sovereignty effectively gives a government with a working majority at Westminster almost complete freedom to repeal or amend any legislation. In essence, unfettered UK Parliamentary sovereignty makes devolved governance fundamentally unstable.
In chapter 4 we recommend changes that would reduce this instability by creating significant obstacles to the UK Government over-riding the settlement. Should it wish to do so, the UK Government would be required to make this explicit in bringing legislation before Parliament. Our proposals include making the requirement to consult the devolved legislatures (the Sewel convention) more visible in parliamentary procedures.
Under enhanced devolution it is possible to envisage legislation which raises the bar for amending the devolution settlements (and other constitutional acts) even without a written constitution (such legislation is suggested in Brown, 2023 and Sargeant, 2023). An Act of Parliament creating a reformed second chamber with powers to block changes to constitutional legislation would represent a very significant change to the practical meaning of UK Parliamentary sovereignty and provide greater stability and certainty to the people of Wales about the machinery which governs them. But, without a written constitution, a government with a majority in both Houses of Parliament could still change (or even abolish) the devolution settlements. The legislation would have to prescribe mechanisms to resolve a stalemate between the 2 Houses, which would likely favour the Commons.
A federal option with a written constitution which included protections for sub-state governments would undoubtedly offer greater formal political and legal stability, because written constitutions are more difficult to change once in place. At the same time, this could reduce flexibility to adjust the settlement when agreed between governments, but such adjustments have not been easy to achieve under the devolution model. A federal constitution built on engagement with the public, civic society and all the political parties would derive stability from its consensual roots.
An independent state established on the basis of a written constitution co-produced by the political institutions and the people of Wales would enjoy a greater degree of legal and constitutional stability than is possible under devolution. However, the wider stability of an independent Wales would depend on external factors such as the assessment of the financial markets and rating agencies of its fiscal and financial stability, and the strength of its relationships with its neighbours and international partners.
Joined-up government
How far does it facilitate the necessary co-ordination between different policy areas and effective service delivery across the border with England.
There are 2 aspects to joined up government – coherence within Wales, and across the border with England. These are distinct but linked issues.
Joining up within Wales
Independence would offer the fullest scope for integration of government services within Wales, but in the context of international constraints such as the need to maintain cross-border movement into England and/or trade agreements with bodies such as the EU.
In an independent state, all the functions of government would be exercised by the Welsh Government, its agencies, and local authorities. Unified political control should enable greater coherence than under devolution or federation, but coherence does not automatically flow from control. For example, the UK government is not well-coordinated as it comprises large, powerful departments of state and government agencies which intervene directly in local public services in England.
Joining up within the UK
In chapter 5 we discuss areas where the boundaries of devolution are causing friction. A general point is that the allocation of responsibility to devolved administrations and to the Mayoral combined authorities in England is based on history and political negotiations. In the case of the devolved territories the allocation of powers assumed that the UK would always be within the EU, thus limiting the scope for divergence between the UK nations in areas such as environmental protection, agriculture and fisheries. In non-EU federal countries these policy areas are often exercised at federal level.
As there is no underlying logic to what is devolved and what is not, this has led to a haphazard system that varies widely between the nations. UK government officials in departments that operate in partially devolved areas, such as transport, must understand the nuances of the systems in 4 different nations and across different regions of England. It is not surprising that co-ordination across the devolution boundaries is not as strong as it could be.
For devolution to be sustainable there need to be strong inter-governmental processes, to minimise friction between governments. Enhanced devolution assumes that friction will be reduced by stronger mechanisms for co-operation and more coherent powers.
A federal system would imply a formal shared sovereignty, which opens potential for shared competence and stronger co-ordination. For example, transport networks such as rail could benefit from shared governance, given the cross-border nature of rail travel and the monopoly on heavy rail assets.
In the event of an independent Wales, there would be a need to negotiate agreements on how to manage cross-border service delivery. Such agreements are routine political considerations in other parts of the world and are dealt with in various ways in different countries with different constitutions. Plaid Cymru have submitted evidence to us on the possible implications of a national border between England and Wales (Hayward, K. and McEwan, N. Wales and its Borders: The implications of independence for managing Wales’ land and sea borders, 2023).
Many citizens live near the border and access core services such as schools, further education, and primary health care in the neighbouring country. Welsh patients rely on specialist health care services in England that provide for small numbers of patients across very large populations. It could be possible – though most likely expensive - to replicate these in Wales in the long term, but in the short to medium term it seems likely that provision on a cross-border basis would continue to be the best option.
Under any governance system, the governments of Wales and England would need to agree cross-border arrangements, including funding. This has worked effectively under the present settlement, for example the inter-governmental protocol on cross-border health care. Many nations across Europe have similar cross-border relationships.
Section 3: policies
Public Finances
How far does it provide for an adequate financial basis for maintaining and improving public services, relative to the status quo and the other options for change.
Each of the 3 options would require major change to the financing of public services in Wales.
In chapter 7 of our interim report we identified problems with the system for financing devolution as one of the key pressures on the settlement. We said that the objective of ‘an evidence-based, independently verified and transparent process for allocating resources between the nations and regions of the UK, remains essential and should underpin any proposals for constitutional change’.
The current Barnett formula system has some serious flaws, including a a lack of robust and clearly understood evaluation of spending levels in relation to need in each territory. The original concept is straightforward but, over the years, several adjustments and exceptions have been made leading to complexity which makes it very difficult for citizens to understand.
We explore this issue in chapter 4, which recommends greater borrowing powers and fiscal flexibilities to enable the Welsh Government to plan better for the long term. Building on this, enhanced devolution would involve a fundamental review of the Barnett mechanism and its replacement by a needs-based system, to be phased in to manage gains and losses over a time-period to be agreed.
In a federal system, it is highly unlikely that Barnett could continue. It is based on the decisions that the UK government takes for the funding of public services in England, but under a federal system the UK government would no longer have responsibility for determining detailed spending plans for England or its regions. Parliament(s) or assemblies in England (independent of the UK wide federal government) would determine these matters for their region(s). Benchmarking the nations’ funding allocations to the funding decisions of England/ English regions would not make sense in a federation where the sub-state entities were equal.
A different system would need to be created to finance public services in a federal UK. Most likely, this would be a reverse of the current system. Instead of taxes being raised centrally then allocated out to the sub-state institutions, taxes would be raised by the sub-state institutions. Federal responsibilities would be funded either by federal taxes or by contributions from the sub-state level.
Such a system would highlight differences in revenue and expenditure between the nations, which are not visible under the Barnett formula. Experts disagree about the scale of Wales’ fiscal deficit, but they agree that it is substantial. Public expenditure in Wales is supported by taxpayers elsewhere in the UK, as is the case for most regions of England outside the south-east. In the case of Wales, the deficit is largely the result of relatively low incomes and productivity which leads to lower-than-average taxation revenues, in contrast to Scotland where higher spending accounts for the deficit (this is covered in more detail in our interim report).
Should England be administered regionally, rather than as a single nation, then the sub-state governments of London and the southeast would raise considerably more in tax per capita than the other sub-state governments. Should all states be expected to contribute to the federal government at the same level per capita, there would be considerably less revenue left to spend on sub-state functions in Wales and its economic counterparts in England, than within the more prosperous parts of the UK.
A federal UK would need mechanisms to accommodate these regional disparities. In line with most federal systems (including the EU) there would very likely be mechanisms for redistributing resources between different parts of the UK reflecting need and the strength of the tax base.
To work comprehensively and fairly across the UK this would need to be rules-based and supported by all nations of the UK federation. Wales would be unlikely to gain any additional funding under such a system, given the benefit of the Barnett floor, but it is likely that Scotland would stand to see significantly reduced funding levels, with ‘their’ funding transferred to less prosperous English regions. While a federal funding system might be more predictable, it is unlikely to be more generous to Wales.
It is also possible that, Wales’ overall level of funding relative to the rest of the UK would not survive in a federal system, making it harder to fund the level of public services and taxation that currently exists under the Barnett formula. There might be some compensation in the form of greater consistency and sustainability of funding, if it were underpinned by agreed constitutional principles and operational rules.
For example, the German constitution, which has had to accommodate the vast economic difference between East and West Germany after reunification, contains a solidarity principle. Such a principle would be an option for those designing a constitution for the UK, and its effectiveness would depend on how it was enforced. Even in a federation where all states and nations had equal status, Wales alone would not be able to influence these matters without a coalition of governments in agreement.
In highlighting fiscal transfers between the regions/ nations of the UK, a federal system could undermine solidarity by stoking resentments between gainers and losers. With greater responsibilities, sub-state governments would also need more extensive borrowing powers and financial flexibility than are currently available to devolved governments.
It is widely accepted that an independent Wales would face a fiscal deficit, though experts disagree about its likely scale. We accept that the most recent fiscal deficit calculation of £14.4 billion by the Wales Governance Centre includes some costs that an independent Wales might choose not to incur. For example, an independent Wales, like Switzerland, could adopt a position of neutrality in international affairs and thus incur lower defence costs than a population share of UK spending.
Professor Doyle of Dublin University argues that the Wales Governance Centre figures overstate the likely Welsh deficit. His assumptions (including in relation to defence above) produce a reduction in the deficit of some £2-3 billion per annum. He makes other assumptions which are harder to accept. These include the Irish precedent in relation to sovereign debt applying to Wales. The UK’s debt when the Irish Free State was created was incurred during the First World War, which those elected to the new Irish Government had opposed. This is not comparable to the modern state debt to which expenditure in Wales has contributed.
Moreover, the SNP-led Scottish Government has accepted that an independent Scotland would have to take responsibility for meeting a share of the UK debt, which would undermine any attempt by the Welsh Government to argue the contrary. In the same way, it does not seem likely that a UK government would continue to pay the costs of pensions in Wales as these are funded from current taxation revenues and not from an accumulated National Insurance fund (though it could be reasonable to expect the UK government to either fund the pensions of those who have worked in England then chosen to retire in an independent Wales, or reciprocate by funding pensions for Welsh workers who retire to England).
The bald position is that the scale of the fiscal gap would depend on the terms of a negotiated independence settlement. These negotiations would include:
- decisions on state pensions
- the proportion of UK debt to be allocated to Wales
- whether Wales used its own currency or continued to use sterling
- decisions on defence and overseas presence.
There is no question that there would be a significant fiscal challenge, but its scale would depend on the circumstances in which Wales left and the terms negotiated.
The inherited deficit would mean that an independent Wales would face hard choices in the short to medium term. This is due to the structural reasons underlying Wales’ low tax revenues: it's the low wage, low productivity economy. It might be argued this is a legacy of Wales’ relative political and economic powerlessness in a UK context.
Additionally, it is not straightforward to model the real-world implications of independence on tax revenues. Businesses would make decisions on where to locate themselves, which could see more, or fewer, businesses located within Wales. A new taxation system tailored to Welsh conditions might raise more revenue than at present, but this is not guaranteed. As a newly independent country, Wales would likely face problems similar to those of post-independence Ireland with regard to borrowing and fiscal flexibility, because of the need to demonstrate creditworthiness to the international capital markets.
Should an independent Wales choose to use a different currency, there could be capital flows away from Wales. People might choose to keep their savings in England, or continue to use sterling where possible, particularly if there is a disparity between wages and the cost of living and purchasing power in each country.
This could mean citizens of an independent Wales facing higher taxes and lower public spending over an extended period while their government sought to realise the economic and social benefits of self-government. Plaid Cymru has submitted evidence to us on currency in an independent Wales (Laurentjoye, T. 2023. Currency Options for an Independent Wales).
This does not mean that an independent Wales could not be successful in the long term, given the potential to set an economic and fiscal policy designed specifically for Wales. But long-term benefits could be very far away – it took Ireland more than 50 years and EU membership to grow its economy to match the UK’s.
Appropriate economic policies
How far it is likely to enable macro- and micro-economic policies geared to sustainably meeting Wales’ needs, including the needs of future generations.
Under devolution, the economic interests of Wales and regions of England outside the south-east have been low on the priority list of successive UK governments. The scope for the Welsh Government to address the negative impacts of this is limited.
Some would argue the interests of Wales and the UK are aligned, so that UK government action for the UK must also be in Wales’ interests. In practice economic decisions taken in London have reinforced the economic dominance of the south-east of England, and this has not changed significantly over 50 years regardless of which party has been in power (we explore this issue in more detail in our interim report).
Economic development has been a devolved matter for Wales, Scotland and Northern Ireland since 1999, but the programmes that impact most significantly on economic inequality are reserved, such as social security payments and work incentives. The fiscal framework applied by the UK government to the Welsh Government constrains capital investment, including in transport systems which are essential to economic growth.
Following Brexit, investment in disadvantaged regions made possible by the rules and partnership-based EU structural funds has been removed from the UK’s economy and replaced with considerably less funding through the UK government’s Levelling Up Funds. These are allocated at the discretion of UK government ministers, in response to bids from public and private bodies, meaning funds have been allocated to one-off short-term initiatives rather than longer term strategic programmes (Funding for Levelling Up – Report Summary, 2023). This approach has created significant problems for the Welsh Government and its partners by sidestepping the usual rules of devolution and of the Barnett formula, as well as providing substantially less investment than was previously available.
Within the EU, the rules specified how much each region would get and how that funding must be used, but now funding is directed according to UK government priorities. As a result, the role of the established partnerships in Wales has been diminished. Respecting these partnerships, and the established relationship between local government and the Welsh Government, would have enhanced the strategic impact of these funds. As a result of the uncoordinated bidding process and lack of transparent decision making, the projects supported seem disconnected and short term, and lack compatibility with policies and interventions by the devolved governments in Wales, Scotland and Northern Ireland (Funding for Levelling Up – Report Summary, 2023).
In contrast, a rules-based system is always likely to benefit a smaller polity. In its absence, UK Government can and has departed from established principles of inter-governmental relations and respect for the devolved institutions.
Should enhanced devolution include a system of independent arbitration of disputed financial matters, such as the application of the Barnett formula, and proposals for new taxation, then the scope for conflict between governments would be reduced. However, this would be unlikely to result in significant change: there have been very few examples of significant disputes between governments, mainly in relation to the 2012 London Olympics and the HS2 rail investment programme. Both resulted from Treasury decisions on the geographic impact of the expenditure, claiming that Wales benefited even if the spending was incurred outside Wales.
A federal system would likely give Wales greater freedom on taxation and spending. But current arrangements have highlighted the (perhaps understandable) conservatism of Welsh governments in using their tax powers given the inter-connectedness of the Welsh and English economies and the ease with which ‘tax flight’ might take place. Though it is still very early days in terms of fiscal devolution, the Welsh Government has not made use of its powers to vary the income tax rates.
Even in a federal system, then, Welsh institutions might be deterred from exercising the political choices over taxation they would ideally wish to make because of the risk of such choices leading to the loss of investment and potentially people across the border to a lower tax environment.
It seems intuitive that the more fundamental economic decisions are taken in Wales, the more those decisions are likely to reflect Wales’ economic interests. Under a federal system (to a certain extent) and certainly with independence the Welsh Government would have greater freedom to shape macroeconomic policies, but its options would be constrained by markets, fiscal capacity, and agreements made with the Westminster government, EU, and other bodies.
Economic stability
How far (if at all) it risks destabilising the Welsh economy relative to the status quo and the other options for change.
There are different views about the extent to which the current constitutional settlement is delivering economic stability, and the extent to which the poor performance of the economy and falling living standards in Wales are the result of policy choices in Westminster (including the form of Brexit and the disastrous impact of the 2022 ‘mini-budget’) or of the numerous global crises (COVID-19, the invasion of Ukraine, climate change) which we are experiencing.
It does, however, seem true that the size and diversity of the UK economy does, to some extent, shield Wales from the most significant impacts of such global crises. An independent Wales would need to weather a crisis as a smaller economy, unless it benefited from the protection of a wider economic alliance.
Moreover, international markets prefer certainty, are wary of change and react badly to political instability and uncertainty. It is therefore likely that any major change in constitutional arrangements would generate economic instability in the short to medium term. The extent of this would be determined by the process of change. The assumption is that there will be a gap between any referendum on independence (or the creation of a federal UK) and implementing the outcome of that referendum.
Long term constitutional uncertainty can lead to economic instability. In Quebec and Catalonia such uncertainty has had a negative impact on business investment, along with people choosing not to migrate to those areas and residents choosing to move away. The uncertainty about currency and debt in an independent Wales is also likely to affect market confidence.
The UK’s experience of leaving the EU demonstrated the impact on investment, market confidence, and business confidence when a transition period is extended or becomes hostile, especially when there is the risk of constitutional change being implemented without mutual agreement. Were Wales to leave the UK, a hostile separation would benefit neither party, though Wales would be more substantially harmed. By contrast, a collaborative and mutually supportive approach to secession would minimise the economic instability for both parties while negotiations took place.
Additionally, a hostile negotiation period for independence, or even a negotiation based on the interests of England as the largest economy in a federation, could have negative impacts for economic stability in the future. Wales might struggle to gain international recognition, and markets might be more cautious in relation to the UK as a whole.
From this perspective, enhanced devolution would be more likely to provide economic stability, than the radical change involved in federalism or independence. At the same time, in a devolved or federal system, the Welsh Government has no choice but to work within the economic decisions taken by the UK government, which as we set out above risks continued problems of disadvantage and relatively weak economic performance.
Flow of people and goods across borders
How far it enhances or inhibits individuals and businesses working effectively across the border between Wales and England and how it might impact on Wales’ demographic challenge.
In the event that Wales had more autonomy, retaining a border as open as at present would require a great deal of work and concessions on both sides, and place limitations on how far the countries’ policies could diverge from each other.
The impact of independence on the Wales/England border would depend on the agreement between Wales and England. Ireland is part of a Common Travel Area with the UK, and it seems reasonable to expect that a similar arrangement would be made for a federal UK or an independent Wales, but this is not a certainty. There would need to be a negotiated agreement about how matters such as pensions and taxes were to be handled for people who resided in one country but worked (and were therefore paid) in another.
We have limited information about trade flows between Wales and England. For comparison, it is estimated Scotland’s trade with the rest of the UK is around 4 times larger than its trade with the EU (How might Scottish independence affect the costs of international trade? - Economics Observatory. More academic consideration has been given to trade between Scotland and the rest of the UK, compared to trade between Wales and the rest of the UK, as this was a significant point of debate during the 2014 referendum). It cannot be assumed that trade between England and Wales would remain as it is now under independence or a federal model. As set out in 'Wales and its Borders' (Hayward, K., McEwan, N. 2023, Wales and its Borders: The implications of independence for managing Wales’ land and sea borders, report commissioned by Plaid Cymru and shared with the commission), the closer that Wales aligns with the UK in terms of regulatory alignment, the lower the friction at the border. There is a progressively larger risk to the UK’s internal market the further along the spectrum of autonomy Wales goes. The current Internal Market Act would need to be revised and may not be fit for purpose if significant powers affecting the internal market were devolved to Wales.
The flow of goods across the border might become challenging if Wales introduced different standards, or had different import/ export/ sales taxes, or indeed opted to become a low tax haven. A federal government would need to have a role in maintaining a functioning internal market that prevented these policy choices translating into hard borders.
For an independent Wales, it might be a matter of political trade-off in the negotiations with the other parts of the UK: greater freedom to diverge from UK rules could only come at the price of more border controls. To achieve full freedom for people, goods, services and capital to cross the borders, there would need to be more than a free trade agreement with the other parts of the UK, there would need to be a single market which would inevitably constrain the freedom of the new Welsh state to diverge in many significant respects from the position in England.
Ironically, after voting to leave the EU to gain greater sovereignty, the fact that neither Wales nor England is part of the EU and its single market makes it harder for any nation of the UK to assert its own sovereignty by choosing independence. Even in the absence of a UK single market, any trade deal between Wales and the rest of the UK would need to specify common regulatory approaches, measures for retaining currency and so on. Most likely this would form part of exit negotiations between Wales and the rest of the UK.
The extent to which sovereignty is curtailed also depends on the political choices made during the period of secession. Independence is unlikely to be a binary choice between in and out of the UK as it is sometimes presented. In 2013 Alex Salmond, as leader of the SNP, gave a series of speeches on the 6 unions they had identified between Scotland and the rest of the UK: namely the currency union, the defence union, the European Union, the social union, the union of the Crowns, and the political and economic union. The SNP argued that they were seeking to end only the political and economic union in the 2014 referendum and retain the other 5 (The Impact of Brexit on the SNP’s narrative of independence).
Devolution enables complete freedom of movement of goods, people, capital and services across the UK, but at the expense of freedom to set rules for Wales’ specific situation. For example, Wales is subject to UK immigration policies, which affect the flow of people into Wales, and the workforce available to businesses and public services.
Under the federal option, much would depend on what powers are retained by the federal government and what would be held at sub-state level. One feature of federalism is that it could offer the opportunity for co-decision making on areas that affect cross-border flows. A federal constitution would at least make these decisions more transparent. The constitution could include an inter-sub-state commerce role for the UK government, as it does in the US. This would need to be rules-based and contain a dispute process with independent arbitration to counter the differences between the economic weight of certain parts of the federation, but this may not be sufficient to mitigate the greater economic contribution (and therefore influence) that the wealthier members of the federation could have.
Immigration and emigration
Immigration is a reserved matter in each of the devolution settlements. Having some powers in this area would enable tailored policies to meet the needs of each territory. Some of this could be done with little change to the devolution settlement, for example through fresh talent programmes, or tailored specialist occupation lists.
The further along the spectrum of autonomy Wales goes, then the more scope there would be for a distinct immigration policy. There would need to be a negotiated agreement with the rest of the UK about how this would affect freedom of movement across the UK’s borders. This need not be problematic: countries within the Schengen area have different immigration rules for people outside of the EU, and still maintain freedom of movement.
An independent Wales would be able to determine its own citizenship rules, which could be very different from UK citizenship. There is a risk that too great a divergence could undermine the remaining UK countries’ willingness to continue open borders with Wales. However, Ireland has operated a much less restrictive model of citizenship for decades without interference to the Common Travel Area.
Should an independent or federal Wales suffer economic decline or shocks, then the larger risk will be emigration as people seek to avoid the economic challenges facing Wales, to avoid the higher taxes required in this circumstance, or to access public services that Wales could no longer afford to provide. The Holtham report considered how many people might cross the border in the event of taxation changes and the impact that could have on public finances, concluding that the proximity of their home to the border was a factor in someone’s likelihood of leaving Wales. As 90% of the population of Wales live within 50 miles of the border this is potentially significant (Crossing the border: road and rail links between England and Wales, 2013).
The Scottish Government has made use of its income tax varying powers, and so there is a growing evidence base on the impact of income tax disparity on immigration and emigration within the UK. However, the population of Scotland is generally further away from the border, making regular commuting between England and Scotland less of a viable option and therefore of limited comparability for Wales.
Summary
The analysis above shows that in considering our 3 options, each has strengths and drawbacks. The trade-offs are mostly between the different criteria in our analysis framework rather than between the options.
Thus:
In terms of accountability, agency, constitutional stability, joined up government within Wales and appropriate economic policies, independence would in principle offer a significant advantage over protected or enhanced devolution, and would provide greatest clarity on who makes the decisions. But, in an inter-dependent world, formal ‘taking control’ is not the same as having complete freedom to shape policy: any independent country, particularly one with a small population and small economy, will face significant constraints from the expectations of global markets and the transnational nature of many of the most significant issues, particularly climate change and sustainability.
In contrast, in terms of capacity and cost, co-ordination of the planning and delivery of services across the (currently internal) borders in the UK, economic stability, flow of people and goods across borders, and (since the negotiation of the Barnett floor mentioned above), public finances, the current settlement protected and enhanced would offer significant advantages over the other options. These would maintain economic integration within the UK, and as we are discovering with Brexit, this would be extremely difficult to replicate in negotiations between two independent states. At the same time, financial markets invariably react negatively to constitutional change and instability and this reaction would be exacerbated by the uncertainty about the currency and the share of UK sovereign debt inherited by an independent Wales. Independence would require a redesign of the internal governance of Wales, including rebalancing responsibilities and capacity between the Welsh Government and local authorities. Many new national bodies would need to be established and recruited to operate functions previously run by the UK government on behalf of Wales. These risks need to be considered alongside the severe disadvantages of the current settlement overall which have led us to conclude that the current model of devolution is not a stable basis on which to move forward.
In many ways, a federal solution might seem to offer a desirable middle way which improves on devolution in relation to the first set of factors and offers less disruption than independence in relation to the second set. A federal structure would be based on a written constitution defining and guaranteeing the powers of the sub-state governments which would be a major step forward compared with devolution. But in terms of external dependencies a federal solution looks more challenging than either enhanced devolution or independence because it would require fundamental constitutional change in the way England is governed – for which there appears little appetite at present – and would require Scotland and Northern Ireland to make a much stronger commitment to a long-term future within the UK than seems likely in the foreseeable future.
Finally, in terms of subsidiarity and equality and inclusion, there is no clear pattern. The extent to which governments promote equality and inclusion is a matter of political choice, rather than constitutional form. A written constitution, either for an independent Wales, or a federal UK, could make it more difficult for a government to undermine or dilute the rights of minorities and could promote them through codification. In terms of subsidiarity any simple verdict is impossible: the principle of subsidiarity does not prescribe that every issue should be dealt with as close to the people affected as possible but rather at the lowest level at which they can be implemented effectively. For some critical policy areas, including climate change and responding to the financial markets, even the largest nation state cannot hope to a take effective action on its own.
