On 23 June, the UK voted to leave the European Union. The process for leaving and the implications for Wales are uncertain, but broadly speaking there are three forms that Brexit could take:
- Soft Brexit: Retain membership of the single market through the European Economic Area (EEA). The closest type of relationship the UK could have with the EU without being a member of it (entailing free movement of goods, services, capital and people).
- Hard Brexit: Exit the EU without a new deal and trade in accordance with World Trade Organization rules – which would mean exports entering the EU would be subject to tariffs.
- A bespoke deal: Likely to involve some form of trade-off between the level of access to the single market and degree of control over the movement of people.
Each of these routes will have different, and as yet unpredictable, consequences for Wales. So in this uncertain environment we thought it would be useful to outline what we do and don’t know about what they could mean for funding, public services, trade and investment.
Funding: what will go?
One thing we can be fairly sure of is that EU structural funding and farming subsidies will no longer be available to Wales, even under a soft Brexit scenario. This is important because overall Wales receives substantially more EU funding per head than other UK countries:
|Country||Funding per person (2014 prices)|
Source: Joseph Rowntree Foundation
Between 2014 and 2020, Wales qualified for almost £2 billion of EU structural funding, with the majority going to West Wales and the Valleys. These funds can be used for a range of investments to make regions more competitive, improve skills, support businesses, and improve transport and connectivity. They support some high profile schemes such as the South Wales Metro. Brexit could have a significant impact both on planned projects and the long term level of assistance that is available to deprived communities.
Wales also receives EU funding for agriculture and fisheries. Under the current round of the Common Agricultural Policy (CAP), Welsh farmers receive around £250m a year in direct payments, with an additional £665m over the course of six years allocated for rural development. Producers in Wales also benefit from export tariff reductions and import quotas that are set as part of EU trade agreements. Even under a soft Brexit scenario, it’s likely that farming exports would be subject to tariffs or quotas as the CAP does not apply to EEA members. This is something policymakers will need to bear in mind. Although on the plus side there may be opportunities to tailor subsidies to support hill farming in Wales, farmers may require greater support to survive in a tougher export market.
So, can the UK and Welsh governments make up the shortfall in EU funding? While Wales has been a net beneficiary of EU funding, the UK as a whole has been a net contributor. It is therefore feasible, all other things being equal, for the UK government to make up the deficit Wales faces. However, analysis carried out by Wales Public Services 2025 shows that if the existing Barnett formula is used to replace EU structural funding, Wales would be significantly disadvantaged.
Funding: what might stay?
While structural funding and farming subsidies are important, they are not the only games in town. Wales has access to other EU funds including Horizon 2020 (to drive research and innovation), Erasmus (to promote studying opportunities abroad), and Creative Europe and MEDIA (for the creative industries). Wales has received more than €140m from the Horizon fund and its predecessor, and the Welsh Government has aimed to increase uptake in Wales to support research and innovation.
Unlike structural funding and farming subsidies, future access to these funds may still be available. Welsh businesses, universities, and creative enterprises might still have access to these programmes should the UK become a member of the EEA. To help quell the current uncertainty, the European Council issued a statement that until the UK leaves the EU, UK legal entities will still have access to such funding. However, it remains to be seen whether discussions about Brexit will affect funding applications from Wales.
The health of Welsh public finances following a Brexit will depend on a number of complex factors including what happens to trade and investment, the impact this has on tax revenue, and decisions by the UK government on spending and borrowing. It is also uncertain what Brexit will mean for the regulations that govern our public services and rules on procurement.
EU regulations would formally cease to apply following a repeal of the European Communities Act 1972 – although some experts argue that the UK would still be subject to them if access to the single market is retained. This could mean that EU rules on public procurement would apply to contracts from the Welsh public sector. The case for EU directives – such as that which governs working time – is more straightforward. These are implemented by national parliaments, and would continue to apply unless they are repealed or replaced.
The impact of migration on public services is another important consideration. The Migration Observatory estimates there are around 70,000 EU citizens of working age in Wales, with around a third of non-UK born people working in the public sector. Public services in Wales are reliant on overseas workers to fill staffing vacancies. The NHS, for example, employs doctors and nurses from across the EU (and further afield) to help fill staff shortages, while social care is heavily dependent on EU migrants.
If reduced migration from the rest of the EU were to happen, the impact on Welsh public services would not be straightforward. While it may ease demand on services such as education and housing, it would also mean less tax revenue going to the UK Treasury (and therefore less distributed to Wales to fund public services), and potentially fewer workers to fill the staff shortages.
Trade and investment
Around 40 per cent of Welsh exports go the EU. The CEBR (Centre for Economics and Business Research) estimates that around 200,000 jobs in Wales are directly or indirectly dependent on exporting to other EU countries. This does not mean that these jobs will be lost in the event of a Brexit but their security will depend, in part, on the UK’s level of access to the single market. Analysis by Frontier Economics suggests that agriculture, clothing and textile industries would be particularly vulnerable under a hard Brexit scenario given their dependence on the EU as an export destination, and the likelihood of these industries facing high tariffs. By remaining a member of the single market, firms in Wales would be able to export to other member states without facing trade tariffs. Welsh firms would lose the trade agreements that the EU has with the rest of the world, although the UK government would, of course, be free to pursue new deals.
By leaving the EU, Wales could also lose access to the European Investment Bank (EIB) – the largest publicly owned bank in the world. Its remit is to provide finance to EU member states to help meet policy goals that promote social cohesion and integration. In 2015, the EIB lent more than €7.5 billion to UK projects, and it has invested almost £2 billion in Wales over the last 10 years, including a €60m loan towards Swansea University’s new Bay campus. Like so much else, access to the EIB will depend on the type of deal that is struck following Brexit. All three EEA countries plus Switzerland have received funding from the bank.
Restrictions on state aid – and the potential to intervene to save the steel industry in Port Talbot – are also likely to depend on the type of deal struck. Access to the single market would mean that much of the EU’s restrictions on state aid would still apply, so there is only likely to be scope to provide more support under a hard Brexit scenario.
What happens next?
It is clear that the impacts for Wales of the UK’s exit from the EU are complex and uncertain. The full picture won’t become clear for years. However, we do know that much will depend on whether access to the single market is retained, and on whether the UK Government decides to make up any funding shortfall to Wales.
There is no getting away from the fact that the UK is likely to lose EU structural funds and farming subsidies which have been particularly important to Wales. Negotiations between the UK and Welsh governments about future funding are, therefore, likely to be as significant for Wales as whatever deal the UK government strikes with the EU.
About the author: Ian Jones is Senior Research Officer at the Public Policy Institute for Wales.