Select Committee on Treasury Minutes of Evidence

Memorandum by HM Treasury

  This memorandum responds to a request from the Clerk of the Sub-committee for a written submission in connection with the Sub-committee's inquiry into the technical issues of regional spending which is designed to pave the way for a subsequent inquiry by the main Committee into regional economic issues.

  The memorandum addresses the three issues highlighted in the Sub-committee's terms of reference, viz recent trends in regional spending levels, the factors behind regional disparities in economic performance and the mechanisms by which regional spending requirements are assessed and allocated.


  1.  The Government publishes figures on regional spending trends in Chapter 8 of Public Expenditure Statistical Analyses. The latest version of PESA was published in April 2001(Cm 5101). The next version will be published in May 2002. For convenience Chapter 8 is reproduced at annex A.[1] The spending figures show identifiable total managed spending by function and region based on information provided to the Treasury by departments. The methodology for constructing the figures is set out in PESA, which covers the period 1998-99 and 1999-2000, the latest available year. Earlier years were covered in previous versions of PESA.

  2.  The Department of Transport, Local Government and Regions is currently leading a feasibility study aimed at identifying the form and level of public expenditure (domestic and European) flowing into individual English regions and for each expenditure flow what determines the level of that expenditure. This will also work to develop and apply a methodology to estimate the flow of expenditure into the English regions.

  3.  ONS are presently undertaking a pilot project sponsored by Eurostat to regionalise the Government Accounts from ONS's "The National Accounts 2001(Blue Book)". This work will be undertaken for estimates for the calendar year 1998, and the estimates will be broken down to 37 areas within the UK (known as NUTS2 regions). There are to be separate regionalisations for central government and local government. This work is due to be completed in June 2002, concluding with a report to Eurostat and publication of an article in Economic Trends.

Factors behind regional disparities in economic performance

  4.  The factors behind regional disparities in economic performance were analysed in "Productivity in the UKC—the regional dimension" published at the time of the PBR by the Treasury and DTI in November 2001. For convenience the introduction and conclusions of the report are reproduced at Annex B attached.[2]

  5.  There are a number of potential sources of regional and local underperformance, including macroeconomic instability, market failures in the underlying productivity drivers, barriers to labour mobility and failures that affect the clustering of economic activity.

  6.  The paper set out the Government's policy framework for tackling the persistent differentials in economic performance across and within regions and countries of the UK. The framework builds upon macroeconomic stability to invest in tackling market failures at the geographical level at which they occurCbe it national, regional or local.

  7.  The framework is built around tackling market failures in the five productivity drivers: skills, investment, innovation, enterprise and competition. In England, the Regional Development Agencies are the key agents in driving forward this new regional economic policy.

  8.  The 2002 spending review will reflect the Government's emphasis on the regional agenda and build on the analysis in that paper.

  9.  A report was also produced by the Cabinet Office in December 1999 "Sharing the Nation's Prosperity: variations in economic and social conditions across the UK", which analysed the variation between regions and described the Government's policies aimed at tackling economic and social deprivation.

  10.  The Treasury is also part funding an academic study into regional productivity inequalities in the UK under its Evidence Based Policy Fund.

Mechanisms by which regional spending requirements are assessed and resources allocated

  11.  Public spending in the English regions is not determined by any single allocation mechanism. Rather spending is determined by Government departments through a variety of different mechanisms which reflect the differing nature of the spending programmes concerned.

  12.  For example some spending programmes are claimant based and the regional pattern of spending reflects the claimant eligibility criteria and demographic characteristics eg social security spending. Other spending is carried out by local authorities and the regional pattern of spending reflects the aggregation of local authority spending in that region. DTLR are responsible for allocating general revenue and capital support to local authorities in England, on behalf of several departments. Other spending (mainly ring-fenced grant) is allocated to local authorities by individual departments, according to rules and criteria that they set. Some is essentially project based and the regional pattern of this spending reflects the geographical location of projects eg trunk road schemes. Some spending is carried out by regionally based agencies and reflects the relevant regional allocation mechanisms eg the spending of the RDAs.

  13.  Details of department's spending plans can be found in the relevant department's departmental public expenditure reports. Some of the main allocation mechanisms are described in Annex C attached.

  14.  Because much of public spending is allocated according to other than regional criteria and because there are a variety of allocation mechanisms it follows that the pattern of regional spending is not determined by any single assessment of regional spending needs. However it is nevertheless the case that the various allocation mechanisms are based on assessment of circumstances and conditions, and therefore regional spending patterns reflect regional circumstances.

  15.  It is worth noting that the allocation mechanisms are not static over time. For example the Government is reviewing and replacing the current system for allocating revenue support to local authorities. This review is being co-ordinated by DTLR. Furthermore departments are committed to improving the performance of the public services in all regions through their PSAs, which are being reviewed in the 2002 spending review.

HM Treasury

1 May 2002

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