The recent Government Expenditure & Revenue Wales Report (GERW) published by the Wales Governance Centre indicated that Wales is currently running a large and unsustainable budget deficit. However, within the detail of the report it is clear that our devolved Wales is being forced to carry costs that an independent Wales would not need to carry, and some of these were highlighted in this recent article.
Another area where Wales appears to being overcharged is Social Protection – and pensions in particular.
The GERW report states that the costs of providing social protection in Wales in 2017/8 was £14.8 billion, and which includes the costs of housing; social services; income support & family benefits; incapacity & disability benefits; and state pensions.
The costs of social protection was originally supposed to be funded by National Insurance contributions, which in Wales came to a total of £4.5 billion, which at first glance appears to indicate that we are running a huge deficit in this area. However the direct linkage between National Insurance and Social Protection costs was broken a long time ago, with National Insurance becoming just another part of the overall tax base, and Social Protection being funded out of general taxation. At a UK level, Social Protection costs around £269 billion which is only partially funded by National Insurance contributions of around £126 billion, demonstrating that this is not a Welsh problem, but a UK issue.
Pensions represent 39.5% of the total cost of Social Protection, or £5.4 billion, which is paid to all pensioners residing in Wales irrespective of where they paid their National Insurance contributions. However, Wales has a particular problem with ‘Grey Settlers’ – people from England retiring to Wales – and while around 20% of the general population of Wales was born in England – this rises to an estimated 35-40% of those over 65.
The GERW data assigns the costs of all such pensioners living in Wales to the nominal Welsh budget, but does not share the national insurance contributions associated with those pensioners, which is grossly unfair.
National Insurance Numbers
Everybody born in UK is assigned a National Insurance Number at the age of 15 years and 9 months, which takes the form AB 12 34 56 X. When I received my number a long time ago, it started with the digits WL which at the time I thought represented Wales. However while NI prefixes were originally assigned geographically, this is no longer the case, and the prefix is no longer assigned on a geographical basis – unless you were born in Isle of Man, Guernsey or Jersey – in which case the prefix of your National Insurance number is MA, GY or JY respectively. This is to enable correct allocation of National Insurance contributions to the islands, and the same system could easily be applied to Wales (or Scotland).
Not all letter combinations are currently in use, for example CA, CB, CE, CG, CH, CK, CL & CR are currently used, but the remaining C-series are unused. I would suggest that with immediate effect:
- all remaining C-series prefixes are reserved for use only by Wales.
- all new NI numbers issued in Wales should be prefixed with CY
- all existing NI numbers previously issued in Wales should be changed to CW (and additional C-codes as necessary)
- new numbers issued to overseas born applicants or transferred from elsewhere in UK can be prefixed with another unique C-code as appropriate
The point of this is that all National Insurance contributions raised for Welsh residents could then be paid directly to a Welsh Exchequer (or Treasury). Contributions paid against ‘old’ codes which are transferred to new Welsh C-codes should also be accompanied by an appropriate transfer of funds from the UK treasury to Wales. In return Wales would take responsibility for funding of pensions and social protection for those with CY & CW National Insurance numbers – including those later residing in England or elsewhere
But at the same time, the UK (or English) treasury should accept responsibility for payment of pensions and all other social protection costs for Welsh residents not holding a Welsh NI code. In other words, the English treasury should pay pensions for English pensioners who choose to retire in Wales – in the same way as it does for those choosing to retire in Spain.
The Financial Impact
As outlined earlier, an estimated 35% of pensioners in Wales were born in England. With a correct allocation of National Insurance funds, the responsibility of payment of these pensions would be immediately borne by England. Even after making due allowance for Welsh pensioners living in England or overseas, it is clear that Wales could reduce its pension liabilities by at least 25% – equivalent to a cost saving of around £1.35 billion pa.
But the costs of English pensioners living in Wales is not limited to pensions alone. Pensioners also incur a disproportionate cost on the NHS. If the costs of health provision are also allocated on the basis of National Insurance number, then this would result in further savings to the Welsh budget. This is difficult to quantify accurately with available information, but considering the current Welsh NHS costs of £7.3 billion, it is probable that further nett cost reductions in the order of £1 billion are likely.
Similarly, social security claimants could have their costs allocated to their ‘home’ rather than to Wales, although the nett effect of this is probably cost neutral – at least in comparison to pensioners.
Domicile of Birth
One of the problems which is often quoted in respect to Wales is cross-border births – particularly in the north-east of Wales where many ‘Welsh’ births take place in Chester or Shrewsbury. This problem is not unique to Wales, and in Sweden and Switzerland, they adopt the principle of ‘Domicile of Birth’. Births are not registered to the child’s geographical birthplace, but rather to the normal domicile (i.e. home address) of the child’s mother. If we adopted a similar principle then a family living in Montgomeryshire but giving birth to a child in Shrewsbury could now have their child’s birth properly registered in Wales – with National Insurance registration and subsequent Social Protection liabilities and benefits following accordingly.
Lies, Damned Lies and Statistics
The team collating the GERW statistics have made an excellent job of trying to determine the current state of Welsh finances. But they have started from a false premise – in believing the data provided by the UK government, which has already been calculated in order to transfer as much liability to Wales as possible, but while holding onto the maximum revenue.
Some of the costs savings identified in the earlier article can not be realised until after independence – but a reform of the National Insurance system can be implemented immediately as a modification to our devolution settlement – and would provide a more accurate reflection of our current financial position.
Universal Basic Income
One of Gwlad Gwlad’s flagship policies is the adoption of a system of Universal Basic Income. A reform of the National Insurance system as outlined above would enable us to enact such a policy without leaving it open to abuse by ‘welfare tourists’.