Memorandum submitted by HM Treasury
INTRODUCTION AND
BACKGROUND
1. The Treasury Committee is conducting
an inquiry into regional productivity, exploring in particular
the approach that the Government is taking towards addressing
the regional productivity gap. The Government is committed to
allowing all regions to fulfil their economic potential and has
therefore given itself a Public Service Agreement (PSA) target
to:
"Make sustainable improvements in the economic
performance of all English regions and over the long term reduce
the persistent gap in growth rates between the regions, defining
measures to improve performance and reporting progress against
these measures by 2006."
This target is shared between HM Treasury (HMT),
the Department of Trade and Industry (DTI) and the Office of the
Deputy Prime Minister (ODPM), who have set up a joint cross-departmental
team to oversee project management and delivery of the target.
2. The Government welcomes this opportunity
to submit a written memorandum to the Committee, explaining how
it is delivering on this target and dealing with the other issues
of interest to the Committee. This memorandum follows on from
one submitted to a similar enquiry last year by the ODPM Select
Committee.
3. The rest of this memorandum sets out
the Government's broad analysis of the causes of regional disparities
and how it is responding to them. It then goes on to describe
a number of developments which have an impact on the regional
agenda.
THE REASONS
FOR VARIATIONS
IN REGIONAL
GROWTH
4. "Productivity in the UK: 3—the
regional dimension" published by HM Treasury and DTI in 2001
suggests that differences in productivity and employment markets
are the primary cause of discrepancies in regional economic performance.
It identified five key drivers of productivity—skills, investment,
innovation, enterprise and competition, which, together with employment,
gives six key drivers of economic growth. Over the past few months,
building on the 2001 report, the cross-departmental project team
has been looking closely at the scale and causes of disparities
within this framework, and is working with Government departments,
within the context of the 2004 Spending Review, to identify appropriate
policy responses.
Skills
5. There are significant regional variations
in skills levels between the top three performing regions and
the remaining six:
— The proportion of adults with no
qualifications is nearly 50% higher in the North East and West
Midlands compared to the South East;
— The proportion of adults with degree
level qualifications in 2002 was over 50% greater in the South
East and London than the North East;
— At the end of 2000 only 58% of 16
and 17 year olds in the North East remained in full-time education
compared with 70% in London.
6. These variations may be attributable
to:
— Concentrations in some regions of
individuals with particular characteristics, for instance their
skills or employment history. Such people are often subject to
market failures and resource constraints which make them less
likely to acquire skills than others, and these people tend to
be concentrated in particular areas.
— Place-based factors—Peer, intergenerational
and neighbourhood effects may make individuals in some regions
less likely to acquire skills than people with the same characteristics
living elsewhere.
— Weak demand for highly skilled labour—Regions
with few high productivity firms may find it difficult to attract
and develop the highly skilled people necessary for future growth.
7. Regional Skills Partnerships will be
established from April 2004 with the aim of better co-ordination
of the supply and demand for skills in each region and the ability
to tailor the provision of services to meet individual regional
needs. They will include representatives of employers, RDAs, the
Skills for Business Network, the Small Business Service, the local
Learning and Skills Councils, and Jobcentre Plus.
8. The Skills Strategy, published in July
2003, includes a number of policies designed to overcome many
of the market failures and other obstacles that inhibit skills
creation in the under performing regions. These measures include
Education Maintenance Allowances, Adult Learning Grants, a new
entitlement to free training for all at Level 2 and targeted support
at Level 3, Modern Apprenticeships, and Centres of Vocational
Excellence.
9. Employer Training Pilots (ETPs) are being
tested in a quarter of the country. Firms that offer their low-skilled
staff paid time-off to train are being provided with subsidies
of up to 150% of wage costs. They also receive free training courses
up to NVQ Level 2, as well as information and guidance on training.
Early evidence suggests that the pilots are proving successful
at engaging low skilled employees in training. At the end of their
first year, over 3,000 employers had signed up to the pilots and
approximately 14,000 employees had committed to basic skills or
NVQ Level 2 training.
Investment
10. A number of studies have identified
constraints on the ability of people and firms in certain localities
to access finance for investment. These include lack of information
about investment opportunities, and ignorance amongst firms in
geographically isolated localities about appropriate sources of
finance. Low property values also constrain firms' ability to
offer collateral for loans in certain areas.
11. Investment in physical capital and transport
infrastructure remains vital to raising the productivity of under-performing
regions. Road transport, particularly by car, is the primary means
by which people living outside London currently travel to their
place of work. But access to a car varies by region, with over
a third of households in the North East without a car, compared
to under 20% in the South East.
12. Investing in a modern, effective transport
system is crucial to UK economic performance. The Government's
10 Year Plan for Transport set out a programme of substantially
increased investment, amounting to over £180 billion of public
and private spending over the current decade. The Department for
Transport is currently reviewing the plan in the light of progress
so far and in conjunction with Spending Review 2004. The Department
has recently begun a review of the railways and intends to publish
proposals in the summer for a new structure and organisation for
Britain's railways. The Review will look at the structural and
organisation changes needed for the railways to operate more effectively
for customers. But in particular, the review will also explore
opportunities to devolve greater responsibility to Scotland, Wales
and the Regional PTEs.
13. The presence of an airport with good
business links may have an important role to play in driving regional
productivity, since it expands market size and can facilitate
foreign direct investment. The Government published the Air Transport
White Paper (ATWP) in December 2003 which set out the Government's
vision for the development of aviation throughout the UK over
the next 30 years. The White Paper addressed both the issue of
regional airport capacity and connections from the regions to
the major airports in the South East. The ATWP also discussed
Route Development Funds and Public Service Obligations as ideas
meriting further consideration.
Innovation
14. A number of indicators, such as levels
of expenditure on R&D and the number of firms in each region
which are introducing new products to their markets demonstrates
that there are significant regional disparities on innovation.
For example, R&D expenditure in the Eastern region amounted
to 3.4% of Gross Valued Added (GVA) per head, compared to only
0.4% in the North-East.
15. The Government already has a number
of policy measures in place at the national level to tackle market
failures that restrict innovation. These include the R&D tax
credit, measures to increase access to finance for innovative
firms, and programmes to promote knowledge transfer, such as the
Higher Education Innovation Fund, the PSRE Fund and Knowledge
Transfer Partnerships.
16. The RDAs' Regional Economic Strategies
also outline measures designed to increase the level of innovation
in their regions, and many have established, or are establishing,
Science and Industry Councils. The recent Education White Paper
also proposes that RDAs be given a greater role in the distribution
of knowledge-transfer funding, particularly in evaluating proposals
for regional appropriateness.
17. In addition, the Lambert Review of links
between business and universities looked at the role of RDAs in
promoting business-university collaboration. The Government broadly
welcomes the report and will respond in due course following consultations
with stakeholders. The DTI has itself published last December
the outcome of a wide-ranging review of business innovation and
its contribution to productivity growth. Amongst other things,
the review has considered how to boost innovation at the regional
level and DTI will take work forward on implementation through
reform of its own programmes as well as closer engagement with
regional bodies and other departments on a range of policy issues.
Enterprise
18. Entrepreneurs and their businesses play
a significant role in strengthening the other drivers of productivity
by creating demand for skilled labour, driving investment, and
furthering innovation. Many more firms are set up in London and
the South East each year than in other regions, particularly the
North East. Business creation rates in 2002 ranged from 21 new
VAT registrations per 10,000 adult residents in the North East,
to 57 per 10,000 in London.
19. These differences in start-up rates
might be attributable to a range of causes:
— entrepreneurial characteristics;
— low levels of mobility of existing
firms;
— poor access to finance in some
regions; and
— weak local demand, which might
discourage firms from setting up in some areas in favour of more
prosperous locations.
20. The Government has already put in place
a number of policies to support business in the regions and across
the UK. In addition it has in place the Small Firms Loan Guarantee
(SFLG), tax incentives for investments in high growth SMEs and
Enterprise Capital Funds. It has established RDA-led Business
Links pilots to explore the scope for more effective business
support at the local level, whilst the Local Authority Business
Growth Incentives Scheme will give Local Authorities a direct
financial incentive to maximise local economic growth in their
area.
Competition
21. Competition plays a central role in
driving productivity growth. It puts pressure on firms to innovate,
improve efficiency and better serve consumer needs in the search
for competitive advantage over rivals. The level of competition
in an economy may vary significantly across regions and localities.
Firms in large and densely populated regions are more likely to
experience higher levels of competition than those in poorer or
more remote regions. Demand within these markets supports a greater
number of competitors and firms and consumers are likely to have
comparatively easy access to a wide choice of suppliers. Such
regions may also have superior infrastructure that may support
these markets more effectively.
22. Although the market studies undertaken
to date under the Enterprise Act have been on national markets,
the OFT has been looking closely at the operation of these markets
at a regional and local level. It has also undertaken a series
of roadshows throughout the regions, with the aim of understanding
better how local markets are working in practice and to provide
seminars for businesses to promote compliance with competition
law.
Employment
23. While every region in England has experienced
falling unemployment and rising employment in recent years, there
are still some regions—most notably London and the North
East—where employment is persistently lower than elsewhere.
These differences in employment rates between regions primarily
reflect variations in inactivity, which has not been declining
in line with falling unemployment.
24. A potential cause of these differences
in inactivity rates is the industrial restructuring of the 1980s
and 1990s. Although many individuals who lost their jobs through
this industrial restructuring looked for different work, the system
of support was often insufficient to prevent them from losing
touch with the labour market altogether. As a result, many drifted
onto Incapacity Benefits, which carry a strong likelihood of prolonged
benefit duration.
25. Lone parents are another group who have
historically suffered labour market disadvantage for a number
of reasons. Lone parents are more likely than the population as
a whole to: have lower level skills; live in a deprived area;
suffer from health problems; and often have limited access to
childcare. Lone parents are concentrated in London, the North-East
and the North-West explaining some of the geographical variations
in employment rates.
26. In addition to the various personal
characteristics that may inhibit an individual's ability to enter
employment, there is also evidence to suggest that living in certain
disadvantaged areas may also reduce the ease of moving into a
job. These place-based factors may include:
— a lack of social networks to
open up job opportunities, postcode discrimination etc; and
— poor transport links, or the
areas where the jobs exist may be outside people's expectations—even
if these jobs are only actually a couple of miles away from high
levels of worklessness.
27. The Government has a range of measures
in place to raise employment in every region. The policies are
designed to:
— ensure that spells of unemployment
are as short as possible—for example, through JobCentre
Plus, New Deals for young people and those aged 25 and over, and
Employment Zones;
— to provide the support that
inactive people need to re-engage with the labour market—for
example, through New Deals for lone parents, disabled people and
those aged 50 and over; and
— to tackle inequalities affecting
particular neighbourhoods and groups—for example through
Action Teams and programmes of intensive support being piloted
in neighbourhoods with high concentrations of worklessness from
April 2004.
28. The Government intends to build upon
the success of the New Deal by learning from the best of current
provision and strengthening the New Deal's ability to help people
who face particular difficulties in moving into employment. The
Government will also examine the range and availability of provision
and the support needs of both unemployed and economically inactive
people, integrating services within the New Deal to ensure that
the full range of effective help is in place.
29. Alongside the New Deal, Employment Zones
are testing an innovative approach to helping the adult long-term
unemployed back into work. Currently operating in 15 of some of
the most disadvantaged areas of Britain, the Government is taking
this model further by extending it to people within these areas
who would otherwise return to the New Deal for a second or subsequent
time.
30. Measures in place to address the high
levels of inactivity that exist in some regions are being strengthened
further. In October 2003 the Government launched a series of pilots
that will test the effectiveness of a range of measures to provide
new recipients of Incapacity Benefit with greater support earlier
in the claim. The key elements of the pilots include more skilled
personal adviser support and early, frequent and sustained personal
adviser interventions; new rehabilitation provision; improved
financial incentives; and the engagement of other key stakeholders.
A full and robust evaluation of the pilots will help determine
the most effective approach to ensuring that Incapacity Benefit
claimants can realise their aspirations of finding and retaining
employment and will be necessary before making decisions on any
national extension.
31. The Government introduced Action Teams
in 63 of the most disadvantaged areas to help address specific
local barriers to work. Action Teams have helped move nearly 88,000
jobless people into work. Building on the place-based approach
of Action Teams, the Government will be piloting a programme of
intensive support to neighbourhoods with very high concentrations
of worklessness. Starting in April 2004, and focusing on 12 of
the most deprived neighbourhoods in the country, these pilots
will offer intensive and accelerated support to help local residents
access the jobs that are often found within travelling distance
of where they live.
GOVERNMENT OFFICES
32. Since 1997, the Government has developed
the role of the Government Offices in the regions. They are still
part of central government, accountable to Ministers, but they
bring a regional focus and in-depth knowledge of their own region
to the tasks that other Government departments have delegated
to them. The Government Offices now carry out activities on behalf
of ten departments, working closely with regional partners and
local people to maximise competitiveness and prosperity in the
regions, and to promote social inclusion. Most recently the Government
Offices have taken on the role of chairing the new Regional Housing
Board, on which the Regional Development Agencies, the regional
assemblies and the Housing Corporation are also represented.
REGIONAL DEVELOPMENT
AGENCIES
33. The Government set up the RDAs with
a primary role as strategic drivers of regional economic development
in England. They are a key element of the Government's strategy
for economic development and regeneration. As part of this each
RDA has drawn up in consultation with regional partners a Regional
Economic Strategy as a blueprint for the economic development
of their regions.
34. All of the RDAs are leading activities
to help businesses to improve their productivity and competitiveness
and to help small businesses to start up and to thrive. This is
in response to the priorities that each has established with partners
in its Regional Economic Strategies.
35. Recent notable achievements by the RDAs
include:
— South East England Development
Agency have brought 17 Enterprise Hubs into operation in their
area, in conjunction with local university and research centres.
East of England Development Agency have also helped establish
two operational hubs in the East of England. The London Development
Agency have set-up a programme of innovation centres for the capital.
One North East have helped establish five centres of excellence
to condition technologies arising from the research base in the
North East. Yorkshire Forward is continuing to develop the new
Advanced Manufacturing Park in Rotherham with its partners. South
West England Regional Development Agency have set up a project
to stimulate the market for broadband and the internet, specifically
aimed at small businesses in rural areas. Advantage West Midlands
have launched a manufacturing advisory service, which encourages
exchange of best practice and provides practical help for small
manufacturing businesses. East Midlands Development Agency is
pursuing an initiative to match the skills and aptitudes of recent
graduates to the specific requirements of small and medium sized
enterprises. The Northwest Development Agency have committed to
invest £130 million over the next three years in a broad
range of disciplines from biotechnology to microsystems, with
the aim of speeding up the transfer of cutting edge research into
the marketplace.
— RDAs have been involved in ongoing
restructuring and retraining where factories facing mass redundancies.
Major interventions include the Luton Vauxhall plant, Ingersoll
Rand in Burnley, Rolls Royce in Derby and the Selby Coalfield.
— RDAs offer a regional contribution
to national policy on skills. They have co-ordinated responses
to the Lambert Review, HE White Paper and the National Employment
Plan. RDAs have led the development of the first wave of Regional
Skills Partnerships scheduled for launch by April 2004 and are
implementing a pilot on work with the LSC/SBS in the North West.
— Emda launched Nottingham's 12,000
m2 BioCity, the largest Biomedical science park in the UK.
— RDAs were praised by a major
NAO report as having "exceeded what was asked of them".
They have also committed to work with DEFRA on the implementation
of Lord Haskin's Rural Delivery Review.
REGIONAL GOVERNMENT
36. The RDAs already play a crucial role
in the economic development of their regions. The Government believes
that successful solutions to regional problems need to be rooted
in the regions themselves. So in those regions that vote to have
elected regional assemblies the RDA would be accountable to and
get its funding from the assembly. The Government's proposals
for establishing elected assemblies in those English regions that
want them, and for improving existing arrangements in all regions,
were set out in Your Region, Your Choice, the White Paper
on regional governance, published in May 2002. The Deputy Prime
Minister announced in June 2003 that the North East, North West,
and Yorkshire and the Humber regions would be the first regions
to progress towards a referendum for an elected assembly. The
aim is to hold referendums in autumn 2004. If the referendum results
in a "Yes" vote in at least one region, primary legislation
would be required to provide for the establishment of elected
regional assemblies. This means that the first elected regional
assemblies could be up and running early in the next Parliament.
37. One of the regional assemblies' key
roles will be to improve economic performance through sponsorship
of the Regional Development Agencies and responsibility for the
regional economic strategy. An elected assembly will be expected
to agree with central government a target for improving its region's
economic performance. It will be expected to produce an annual
report for the regional electorate and the Government on its overall
progress.
REGIONAL INPUT
TO SPENDING
REVIEW 2004
38. The Treasury commissioned input to the
Spending Review from each of the nine English regions. The Government
Office, Regional Development Agency and regional chamber in each
region were asked to submit a document setting out their own region's
priorities for allocating resources in order to deliver improved
public services and regional performance.
39. The Government believes that this input
will be a useful contribution to the Spending Review. When the
review concludes in the summer the Government will set out as
part of the conclusions how this information has been taken into
account during the process.
SCOTLAND, WALES
AND NORTHERN
IRELAND
40. The regional PSA target does not apply
to Scotland, Wales and Northern Ireland because economic policies
are in part devolved and the Treasury does not agree PSA targets
with the devolved administrations. However, the devolved administrations
themselves have broadly similar targets and the Government works
in partnership with the devolved administrations to promote improved
productivity and growth across all regions and countries of the
UK. In devolved areas the devolved administrations are developing
and implementing their own economic development strategies. For
example, A Smart, Successful Scotland; A Winning Wales; and the
economic policies set out in the Northern Ireland Executive's
recent spending plans. The Treasury has recently published leaflets
explaining the impact of the Pre Budget Report on Scotland, Wales
and Northern Ireland as well as for each of the English regions.
IMPLICATIONS OF
THE LISBON
AGENDA
41. At the Lisbon European Council in March
2000, Europe's leaders committed themselves to a 10 year programme
of action by the EU and Member States to make Europe the most
competitive and dynamic knowledge-based economy in the world,
with full employment and social justice. In support of this objective,
Member States have agreed a variety of objectives to increase
growth, cohesion and sustainable development throughout the Union,
supported, where possible, by quantified targets for success.
These targets include:
— an increase in the EU employment
rate to 70% by 2010. Within this, there are targets to raise the
female employment rate to 60%, and the rate among older workers
to 50%;
— an increase in EU R&D spending
to 3% of total GDP by 2010, of which two-thirds should come from
business;
— a 50% reduction by 2010 in the number
of 18 to 24 year olds with only a basic secondary education; and
— a significant reduction in the number
of people at risk from poverty and social exclusion.
42. Meeting Lisbon's goals requires actions
to improve the economic performance of all Europe's regions. A
high productivity, high employment Europe can only be built on
improved productivity and employment in all of its constituent
parts. A modern regional policy must therefore focus on enabling
every nation and region to improve their economic performance,
by tackling the diverse market failures that are hindering their
performance.
43. That is why the Government has proposed
a robust EU framework for a modern outcome-based regional policy
for every region, domestically resourced where member states have
the financial and institutional strength to do so, with EU resources
targeted at the poorest member states. A framework of clear accountability,
common principles and shared objectives, and with delivery of
these policies substantially devolved—EU support being focused
on the new Member States where it can have the greatest effect.
IMPROVEMENTS IN
REGIONAL DATA
Allsopp Review
44. The Chancellor of the Exchequer asked
Christopher Allsopp to undertake a wide-ranging review of the
information and statistics needed for economic policy making.
The first report "Review of Statistics for Economic Policymaking"
was published on 10 December 2003 and looks in particular at the
statistics needed for regional policy.
45. The main recommendations are:
— the ONS Regional and UK National
Accounts production should be more closely integrated and the
availability of macro-regional data at regional level should be
extended;
— micro-regional data could be expanded
through the ONS' Neighbourhood Statistics Service—to become
a primary platform for area- based data;
— the ONS or GSS should have an explicit
presence in the English Regions in order to improve the information
flow into both its National and Regional Accounts and to improve
links with key users. This should also complement existing arrangements
in Scotland, Wales and Northern Ireland; and
— greater access for ONS to administrative
data, to improve regional and national data while offering important
savings in the compliance burden on business.
46. This report represents a valuable contribution
to the wider debate on the regional agenda and has been widely
welcomed. The ONS and Government will need time to consider all
the recommendations and determine how best to take them forward.
The review has invited comments on its conclusions and these comments
will help the team to formulate their final report.
ONS work on regional productivity
47. Notwithstanding the Allsopp Review,
the ONS have already taken steps to expand and improve regional
data. For example, the development of productivity indicators
culminated in the release of a new and improved measure of productivity
in the Quarterly Productivity publication which commenced in June
2001.
48. Currently, ONS only publishes nominal
measures of regional GDP. The Scottish Executive publishes real
GDP quarterly for Scotland and the Welsh Assembly has measures
of the real output of the production industries. In both cases
a methodology similar to the national measures of output used
in ONS estimates of GDP through the production approach is employed.
This GDP output method assumes changes in real turnover proxy
for the changes in real value added.
49. ONS's examination of the potential methods
for producing volume estimates of regional growth particularly
focus on using existing ONS datasets. This is partly to determine
whether measures can be provided in the interim pending longer
term improvements to source data. It is also because some of the
policy uses for such estimates (such as trend growth rates) would
need some back-history of regional growth rates, which would have
to be based on those sources that currently exist.
50. ONS published updated regional price
indices in November 2003. The statistics were published in an
article entitled Relative Regional Consumer Price Levels in
2003. The data represent part of a longer-term project to
develop regional price data, and reflect the Chancellor of the
Exchequer's request in his 2003 Budget Statement for better regional
price data. The next stage, due to take place in spring 2004,
will involve a further survey. The results of the 2004 survey
will be published in autumn 2004.
51. Regional Gross Value Added (GVA) in
current basic prices has been used as the numerator for the experimental
productivity estimates published in 2001 mentioned above. This
estimate will continue to be produced as one of the core regional
economic estimates, and ONS has already committed additional funding
to regional accounts work in recognition of the importance of
these statistics. For 2004 and beyond ONS's aim is to improve
the quality in terms of accuracy and timeliness of the regional
economic estimates (including GVA). Sub-national GVA figures were
published in August, October and December 2003, along with detailed
revisions analysis and supporting evidence on how ONS had overcome
quality issues with the data and systems.
52. By the end of 2004, ONS plans to return
to a "normal timetable" for the release of regional
accounts. This requires the publication of Regional (NUTS1) GVA
within a year of the reference period, and sub-regional (NUTS2
and 3) GVA within two years of the reference period (and following
approximately six months after the national accounts). This is
subject to data availability and quality.
Improvements in Regional Expenditure Statistics
53. Professor McLean's research on "Identifying
the flow of domestic and European expenditure into the English
regions" was published by ODPM in September 2003. This
research report made 10 key recommendations, most of them designed
to improve the quality of the regional spending statistics that
the Treasury publishes in Public Expenditure Statistical Analyses
(PESA). These regional spending statistics are collected by the
Treasury in an annual exercise, in which departments are asked
to use statistical methods for apportioning historical outturn
spending between regions, for public spending that can be identified
as benefiting the population of individual regions.
54. The government commissioned Professor
McLean's research in order to improve the quality of the its regional
spending statistics, and all of the research report's findings
were welcomed for this purpose. The report also found that the
research had already had the welcome side effect of improving
departments' statistical methodology underlying figures published
in PESA 2003.
55. Following the publication of this research
report, the Treasury has implemented an action plan to improve
the quality of regional spending statistics collected from departments,
building upon the McLean research project. The results will be
reflected in the regional spending statistics that will be published
in PESA 2004. This drive to improve the quality of the PESA regional
spending statistics implements all the recommendations from the
McLean research report that were directly concerned with these
analyses.
CONCLUDING REMARKS
56. The Government already has in place
a radical programme of macro and micro-economic reform to improve
the performance of the United Kingdom's economy. It has pursued
an active regional policy since 1997 as successful solutions to
regional problems need to be rooted in the regions themselves.
The Government remains committed to ensuring that all regions
can fulfil their economic potential.
HM Treasury
26 January 2004
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