Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 140-159)

18 MAY 2004

PROFESSOR STEVE FOTHERGILL, DR PETER TYLER AND MR JOHN ADAMS

  Q140 Mr Fallon: How coherent do you think the Government's target is at the moment—and presumably, looking at the PSA target, it would still be possible for the south to grow as strongly as it is at the moment—and how likely is it for the target be met?

  Dr Tyler: It is a weak target. It can be met, but it will not necessarily make the sorts of step changes that we require if we are going to achieve all the objectives and the things which your Committee is looking at and which are so important to the UK.

  Q141 Mr Fallon: In this coming Spending Review, how would you like to see the target redefined?

  Dr Tyler We have positively to wish to narrow the gap between the existing levels of prosperity in the north relative to the south. We can do things with growth rates, but ultimately we need to see a step change in the rate of growth of the more depressed regions relative to the prosperous regions, otherwise convergence cannot occur. To bring about convergence anyway, from my experience of looking across the whole of Europe, is not an easy task. The countries that do use a whole series of concerted actions, which at the moment we are not doing.

  Q142 Mr Fallon: What part does this convergence that you seek play in determining our international competitiveness?

  Dr Tyler: My colleagues, in a number of the papers that you have been looking at, have made the point that the UK in its southern and eastern parts is now really at full employment. We now have a situation which has been a standard regional policy issue dating back for decades. We have a situation where the south is overheating and the UK's rate of economic growth is constrained by that. It seems to me almost a matter of common sense that the more we can bring resources underutilised in the north into the play of things, the more we are going to grow more nationally as a country. I think we are ultimately constrained by regional disposition.

  Q143 Mr Fallon: Who should really be directing the new target that you would like to see put in place? At the moment, we seem to have this slight confusion between the Treasury and Mr Prescott's department and the DTI. Who should be driving the target of the kind that you have just redefined?

  Dr Tyler: I find it difficult to answer on "driving". I do believe that if we are gong to make our regions the sorts of places where people want to say and invest, then we require concerted action across all the arms of government and we require co-ordinated action at the regional level from all the major ministries. I cannot believe that it should just be those that are principally economically driven. It seems to me that the whole physical and economic and social remit comes together to produce healthy and fast-growing places. That is what our competitors and colleagues in Europe do: they bring together all the arms of government to develop and deliver a satisfying place.

  Q144 Mr Fallon: Why is that not happening here? We have had the Treasury talking about regional productivity; we have had the DTI with its various schemes. Why are we so bad at that kind of co-ordination here?

  Dr Tyler: We tend to be driven down particular tramlines and I do not believe we co-ordinate very well. As a nation, I just do not believe we co-ordinate very well, centrally or locally, and particularly at the regional level. We do not have much of a history of that. I do believe that at the regional level we need to co-ordinate a lot more between what government does in the regions and what the RDAs are doing in the regions. It seems to me that the whole agenda needs to grow together. From my experience of looking at other countries, and some of the examples you mentioned, they are just a lot more adept, particularly in the States, at bringing those things together. Coming back to your original question, I am not sure who should lead but I am convinced that there needs to be a big party of people at the table.

  Q145 Mr Fallon: What is the role of the Treasury in all this? Should it be stronger than it is?

  Dr Tyler: Another issue which I would like to talk about at some stage today is how we get resources to bring about the sorts of changes required in some of our run-down regions. As I remarked earlier, in a way, it has been remarkable how much change has been brought about, particularly in many of our large cities, which have suffered hugely compared to anywhere else in Europe in the last 20 years. When you look at how much change has been brought about, it is impressive, but we require a lot more. The Treasury is always going to be involved with finance and I think we need lots of new financing solutions to allow the more rapid pace of change in our depressed regions. I think the Treasury is still pretty formative.

  Q146 Mr Fallon: The Treasury in its role as disburser of public money: is that what you mean?

  Dr Tyler: The Treasury in all sorts of ways. It is the Treasury in terms of looking at the big financing picture, but it is also, again from looking at some of the models I have looked at across the world, about coming up with new ways of financing infrastructure which we are so dreadfully short of, particularly in our backward regions.

  Mr Adams: May I make two very quick points? The first is that the ODP is an England-only body and the PSA target which we are discussing this afternoon applies only to England, but of course Scotland, Wales and Northern Ireland are part of the United Kingdom. Even post-devolution, central government has an interest in the economy of the UK as a whole. The second point I wanted to make is that the Treasury's role is not just confined to financial issues. The PSA process, the Spending Review process, does allocate money between different government departments, but it also creates the headline targets, which then feature in government policy, which is then the focus of work by government departments over the next few years. So the role of Treasury is, yes, as financial distributor, but also it is very much about becoming a driving force in domestic policy per se. I think the main reason why regional economic issues on productivity have risen up the agenda is because of the interests of the Treasury. For those of us who support regional economic policy, that is only to be welcomed.

  Professor Fothergill: Could I come back on this notion that has been mentioned, that somehow past regional policy has been a failure? I have seen that in ministerial speeches; I have seen it in all sorts of documents. Frankly, it is simply not true. If you look at the long history of regional policy—and, like Peter Tyler, I have been engaged in this game for many years—you can see that we had a number of periods of very intensive and rather successful regional policy in this country:in the immediate post-war years, and then there was a long period, from about the beginning of the Sixties through to about the end of the 1970s, when we spent a lot of money on regional policy and we did actually create a lot of jobs in the weaker regions, jobs that would not otherwise have been there. It is quite wrong to talk about failing in the past just because the problem areas are the same now as they were maybe 70 years ago. The problem is that regional policy has always had to be swimming against the tide. We have seen the complete erosion, indeed destruction, of the economic base of some of Britain's peripheral regions. Once upon a time, places like the North-East were built on coal, steel, shipbuilding and heavy engineering. Most of these industries have gone or been reduced to a shadow of their former selves. It is hardly surprising that there are still problems in these areas, even though regional policy has actually worked and worked very effectively at certain times. It has cost a lot of money but it has worked.

  Dr Tyler: I would like to reiterate one point. I can identify examples of areas which have turned around. I would like to reinforce this point. I believe regional policy, in its broadest sense, has been responsible for that. I do not accept that in general regional policy has been a failure.

  Q147 Mr Fallon: You seem to do a lot more of it?

  Dr Tyler: It is a question of the former; I do not think there is really a choice. If you argue that you wish to see a more even distribution of economic activity in the UK because you believe, on the grounds of national efficiency, that that is desirable, as well as regional equity, then you have to have some form of regional policy. In my note you can see how the Dutch and other countries in Europe have been very successful at doing just that. Until we get into a mindset that thinks especially about that, we are not going to achieve the sorts of national growth we want. I ought to say that another problem has emerged. We are now really short of regional identity in many places amongst entrepreneurs and others. I am increasingly interested in what I call regional entrepreneurs because I believe, going back to our Victorian forefathers, there was a lot more desire then to promote regions and make them grow for all sorts of reasons.

  Q148 Mr Heathcoat-Amory: The Treasury's paper on productivity estimates that about 60% of the regional difference in GDP per capita is attributable to productivity differentials. To be fair to the Treasury, it sees productivity as being important but not absolutely dominant. In tacking the productivity side of it, the Chancellor made a speech in January in which he played quite heavily on the market-based solution. He talked about better planning but also about encouraging local and regional pay flexibility and the virtues of competition. He also talked about the Treasury and the importance of remedying market failures. I would like to get an idea from our witnesses about the balance between where we could rely on better and more flexible, lower factor costs, lower rents, bringing in more investment and so on and the sort of market-based solution, which I think the Chancellor was on about in January, and secondly this idea about correcting market failures probably by direct intervention. What is a priority and what do we mean by correcting market failures? No-one has any idea what I am talking about?

  Dr Tyler: Perhaps I could start. There is a whole raft of market failures. The question of what is exactly a market failure is an interesting one. For many years since the 1930s, policy has played heavily to try to overcome market failures in property markets and land markets. I believe the UK should rightly be proud over 70 years of the sorts of initiatives that it has had to overcome dereliction, contamination and all sorts of land adjustment problems, which I believe have impeded the regeneration of our big cities, particularly in the northern areas. Certainly I would support fairly extensively the approach, taking land and property as an example, that that has been very useful in overcoming what are obvious market failures which impede economic growth. I feel as you move across the other drivers, then you start to see other examples of that.

  Q149 Mr Heathcoat-Amory: Surely, when a firm goes out of business or an industry dies, that releases a lot of cheap land which is attractive, given the enormous rental prices in the south-east? That is a market driver which makes the north or bits of other regions of Britain more attractive. That is a market solution. I am trying to get a feel for how the market would be seen to operate and what we mean by market failure, which seems to be just a posh term for grant intervention, which we have had a lot of in the past. What is new about correcting market failure? What do we mean by this rather attractive phrase? What are we talking about there?

  Professor Fothergill: Let me try to give an example, picking up on the property issue. You say that when a firm may close in the north, a large stock of cheap land becomes available for development and why does that not attract firms from the south. The fact is that the property market in large parts of the north still works so that even once you have redeveloped that land, the cost of redeveloping it actually exceeds the value of the completed development. There is a gap. That is simply because property values and rental levels are not sufficiently high in large parts of the north to justify the market undertaking normal, private property sector development activity. Traditionally, the way the government has overcome that problem, that market failure if you like, is by providing gap funding for property development, or, if you go back far enough in time, it was by direct development by the government itself in the pre-1980 days. That is one example of how the market fails where the economics simply do not stack and, without intervention, nothing at all will happen. Having said that, to characterise the failure of the economy of the north as being one simply of market failure is a little bit too glib. You have to look at different components of the overall economy. In the labour market, in many respects, the market works remarkably well in shifting skilled workers in short supply from the north down to the south. That ends up denuding the north of many of the people who might be needed to supply inward investors with a labour force. It is not simply that it is all market failure in one direction.

  Q150 Mr Heathcoat-Amory: Could I ask about the quality of the decision-making? If we are going to remedy market failures in the Treasury's terms, presumably this means that people, officials, regional development agencies, are going to be taking quite difficult decisions. Do our witnesses have confidence that their decision is going to be better than the long stream of picking winners for support of failing industries, modernisations, which we have had in the past? That has a very long history and, despite what Professor Fothergill said, I think certainly, at least in some cases, those are acknowledged failures. A lot of money was spent in a fruitless attempt to intervene in a way that did not bring the benefits we expected. Why do we think that modern market failure intervention is likely to be any more intelligent?

  Dr Tyler: Increasingly policy, certainly the policy we see these days, is concerned really to provide resources that local decision takers are supposed to put together to bring about effective solutions. In the   last 15 years, particularly through major regeneration initiatives like the Single Regeneration Budget, we have been seeing locally-based partnerships representing people from the private sector, the public sector, and other stakeholders coming together to decide how to spend this money. It is not a matter any more of some centralised states deciding who should spend the money. The money is increasingly being spent by those who know best what needs to be done with it. We do not need to confuse the matter with successive statements about what regional policy has done in whole different decades to where we currently are. We are now about developing regions that are quality places, and local people need the resources to do that. If one believes that the whole of the market can do it, I can show you plenty of statistics that will show you that once the market is just running without a regional policy of any sort, then the market concentrates again on existing areas of wellbeing. That is the reality. We need mechanisms to tackle that. I cannot but agree with you that we do not want people making the decisions that you might feel are less able to do so compared to the local industry. That policy is long gone.

  Professor Fothergill: May I ask almost a rhetorical question? What is the alternative to bringing administrative discretion into the process? If the alternative is to rely on the private sector and the market to do it all for itself, then, frankly, the private sector will not do it, for example, in the property market in certain areas. The other alterative might be to remove the discretion of civil servants and simply give automatic financial assistance to firms. The trouble with that is that you often end up giving a lot of money where it is not actually needed in what economists call "deadweight". I cannot really see any alternative to going down the route of introducing an element of administrative discretion into financial support in the regions, if on the one hand you want something to happen and, on the other hand, you do not want to make it inordinately expensive by spreading the money across just about everything.

  Q151 Mr Heathcoat-Amory: You have not answered my question. Professor Fothergill talked about local people being given resources. This sounds wonderful. We all want resources and businessmen locally in my constituency love being given resources, but who, and at what level, and how, and why, is going to work next time?

  Mr Adams: One of the instances which I have concerns about is where the state is intervening in the market in cluster policy. There are lots of criticisms of cluster policy but it seems to me that the main one is that it is, in effect, picking winners; it is picking sectors that it is hoped will succeed. That is intervention in the market and it is a risk that might pay off but, as you say, the state's role in picking winners in the past has not been hugely successful, but we wait and see. The main driver for cluster policy has been the DTI. The DTI has pressured RDAs to go down the role of having many, many clusters. The idea that the centre is better at determining the role between the market and the state than regional institutions is not borne out by all the evidence.

  Dr Tyler: I would probably like to stay away from cluster policy and just focus on the nitty-gritty of actually getting land and people back into use in our old industrial areas. As Professor Fothergill has mentioned, if you look at most of the land and property markets in relatively depressed regions, they do get into a sort of vicious circle whereby the market will not redevelop land speculatively because there is not an adequate rate of economic return. What happens therefore is absolutely nothing for many, many decades. The role of government, and it must surely be a role in this modern age—and all of our fellow competitors and colleagues across Europe do this—is actually to get that market working again. That is what our very successful land and property markets policies have done. It is not just a question of giving people at the local level the resources; it is a question really of devising the best solutions to regenerate local areas. That is not to say that Whitehall should not find some resources to allow that process to happen. I cannot see otherwise how local regeneration will come about, given the deadweight costs of the industrial legacy. By the way, I would also like to point out that many of our competitors and colleagues in Europe, like the Republic of Ireland, have adopted these sorts of approaches with massive success. I do not think it is a question of just giving people money at the local level and then in some sense wasting it. The regeneration of our big cities which is now underway is a tribute to 20 years or more of local decision-makers using money from government to enact change; without that resource, they could not do it.

  Professor Fothergill: Land and property can only be one part.

  Q152 Mr Heathcoat-Amory: I have one more question. I come from the county of Somerset, which is a victim of this system. The grants that South Wales gets draws firms and jobs across the Bristol Channel to South Wales. There are many documented examples from my own constituency. In a way, to correct a market failure in Wales, they are creating a market failure in Somerset. Are our witnesses at all worried that we are introducing a new distortion whereby a firm that wants to locate in my own constituency is, against its market judgment, drawn across to somewhere else? Is this an unintended consequence?

  Professor Fothergill: May I say that I do not think that is a fair view of regional policy in the present context. In the context that we had, let us say, in the 1980s when there was mass unemployment just about everywhere, then fair enough, I think you could certainly argue that if you were encouraging firms to go to South Wales instead of Somerset, or more likely somewhere along the M4 corridor nearer London, then it was a bit of a zero sum game, but in the fully employed parts of Britain, which is quite a large part of the south now, there is probably not the capacity to accommodate a great deal more of additional economic activity and a great deal of employment. If you can get jobs into the South Wales areas of this world and into the North-East areas of England, this will be a net addition to economic activity in the economy as a whole. I would now say that it also the principal way of working towards overall national full employment. If you pull the big levers of macro-economic policy, you tend to overheat the economy in the fully employed parts of the south and generate inflationary pressures. No, I do not think it is fair to say that this is a zero sum game. There are real net benefits to expenditure on regional policy to the national economy and to the taxpayer.

  Dr Tyler: May I add that a balanced settlement pattern where we have not got run-down inner cities and where we have more prosperous activity everywhere is in the interests of every area in the UK. I really cannot see that the argument is very strong these days for not doing something about the sorts of areas we are talking about. I admit you have to be aware, of course, of displacement effects, but we have become very good at being aware of those. We probably invented regional policies, so we ought to know what to do about those sorts of things.

  Q153 John Mann: Mr Adams, are cities the new clusters?

  Mr Adams: They certainly are very fashionable at the moment. If you look at the evidence, I think it is true to say that cities and possibly city regions have had faster economic growth than areas outwith cities. It would be wrong to focus on cities at the expense of other areas in our regions.

  Q154 John Mann: Why does government intervention, for example DTI intervention, focus so heavily on cities? For example, if we take the Small Business Service for Nottinghamshire, 35% of their activities are in the City of Nottingham?

  Mr Adams: I do not know why you could say that. It is true to say that those industries which do not operate in cities have not had the profile which they deserve. If you look at the area in which I live in the North-East, at Washington in Sunderland, which has the most efficient car plant in Europe, and if you look at the chemical industry on Teesside, it is one of the biggest, most impressive and productive plants in all of Europe, but Sunderland and Teesside are areas which do receive central government money. I do not think the government solely focuses on cities, but those are more fashionable at the moment. I would like to see a broader regional economic approach rather that the focus on cities and city regions, which we do see at the moment, that is true.

  Dr Tyler: I think the answer to that question is relatively straightforward. The greatest need is still in these areas, particularly Nottingham, which is an area that is slow to turn round.

  Q155 John Mann: What do you mean by "the greater need"?

  Dr Tyler: In terms of the inner city problems, the need to stimulate new businesses, the need to get activity going again.

  Q156 John Mann: Do you mean economic or social indicators?

  Dr Tyler: The two inter-play. If you look at our big cities, many years ago they were generators of people who started businesses; they therefore used to produce lots of jobs for the local population. They have found it difficult to replace the activities they have lost. Therefore, it is wholly appropriate that, since we see cities as economically efficient ways of concentrating production and bringing work to people and quality of life, it makes sense to try to enable those places again. I also would emphasise that I believe the relative improvement in our cities, the big cities, is a relatively recent thing and is still in many ways quite fragile. In terms of the different groups in society we are taking about, equally it is still not delivering those benefits to the individuals who may be experiencing local problems. I can quite see why in a place like Nottingham you would want disproportionately to concentrate the assistance.

  Mr Adams: I think I might disagree slightly with my colleague sitting to my left. To say that all need is based in cities is slightly over-egging the pudding, especially when you look at some of the coalfield communities and the seaside towns which exist in and around the United Kingdom.

  Q157 John Mann: Let me ask Professor Fothergill. Let me anticipate his question. I have a copy of Real Level of Unemployment, 2004. In that you state that real unemployment in my constituency is 14.2%. How do you calculate that 14.2%?

  Professor Fothergill: It is quite a sophisticated exercise. I think the general point you need to bear in mind about the current claimant unemployment figures is that in Britain we have become very good at, one, diverting people from unemployment benefits on to other benefits and, two, diverting people right out of the benefits system altogether. What we did in that particular exercise was to try to estimate the size.

  Q158 John Mann: Can you give an indication because 14.2% is a high figure? What does that 14.2% come from?

  Professor Fothergill: The biggest single distortion to the unemployment figures is that we divert large numbers of people who would like work and who are able to work on to incapacity benefit. You need to bear in mind that at the moment we have 900,000 people claiming to be unemployed and 2.7 million people of working age on sickness-related benefits, principally incapacity benefit. I am not saying all of those would be in work in a fully employed economy, but we have expended hundreds of thousands of pounds of public money trying to get a handle on what the scale of hidden unemployment is amongst that 2.7 million.

  Q159 John Mann: If we take those on incapacity benefit in my constituency, that figure is just over 4,000, so nothing vaguely like 14.2%?

  Professor Fothergill: Your constituency, Bassetlaw, will have a working age population of 30,000 to 35,000. The total population is probably round about double that. 4% of the working age population of, say, 35,000—I am guessing at the orders of magnitude—that certainly puts you at round about the 10 percentage point mark. We are not saying all of those are hidden unemployed. Some of them are and they need to be added to the claimant unemployed. In Britain we divert large numbers of women in particular right out of the benefits system, not on to IB. For example, if a woman has a partner in work and she does not have sufficient National Insurance credits but wants to work and is looking for work, she will not be counted in the unemployment figures.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 11 April 2005