Monday, 26 April 2010

Why Wales is the "least competitive" region in the UK

  
The below chart shows state spending as a percentage of GDP in the UK regions compared to a selection of OECD member countries:

click to enlarge 
(chart source: coffee house blog)

As you can see, state spending as a percentage of GDP in Wales is currently running at almost 70% - i.e. of every £10 spent in Wales, £7 is spent by the Government. This is approximately 25 percentage points above the OECD average and 20 percentage points above the Euro average. More remarkable still is the fact that Wales also eclipses both Sweden and Denmark - standard bearers of the Nordic big government model (with corresponding big taxes).

The consequences of having an over-large state sector in Wales is that the majority of resources (both financial and in terms of young talent) get sucked up by the public sector thus stunting private sector growth. We should therefore not be surprised when Wales is named as "the least competitive" region in the UK - as it was just last week by the UK Competitiveness Index.

This problem is compounded when you consider that we are increasingly governed by people who have had no private sector/wealth creating experience at all. The below chart shows the backgrounds of the Assembly Members who make up the current ruling Labour/Plaid Cymru coalition before they went into politics:

click to enlarge

Only a paltry 13% of Labour/Plaid Cymru AMs have ever worked in the wealth creating part of the economy (You can see more details here). Policies will of necessity reflect the beliefs, value systems and experience of the politicians who formulate and vote for them - therefore, when you consider the background of our legislators, the answer to any problem will always be more public spending thus making us even more uncompetitive as a nation.
    

16 comments:

Concerned Citizen said...

Yes we need a strong private sector to ensure the prosperity of Wales, as the Conservative leader David Cameron said we need to reduce the public/private ratio by growing the local economy (private sector.)

The Welsh Affairs Committee report:
Globalisation and its impact on Wales
see: http://tiny.cc/yq3le is also interesting

Anon 7 said...

"consider that we are increasingly governed by people who have had no private sector/wealth creating experience at all."

Which must be the explanation for the rise of all these idiotic box-ticking, self-justifying 'enterprises' that are supposed to help small businesses. Call a number, any number you get from the ever-greater number of government adverts about business support, and the first thing you'll encounter, after 20 minutes on the blower, is 'oh, you're in Wales? We don't provide the service to Wales. Let me get you the number for Wales'. You stupidly dial the number, only to get a south-Walian bloke on the other end who's just come out of uni with a 2:2 in home economics and happy to read a PC screen for 8 hours a day for £6 an hour.

Net result? More taxpayers' money down the pan for no good reason.

Welsh Ramblings said...

I disagree with this analysis, and seeing as nobody else it's going to bother challenging it, here we go.

Wales has lower identifiable government expenditure than London, actually.

http://www.hm-treasury.gov.uk/pesa2010_section4.htm

The old idea that 'Government spending makes up 70% of Welsh GDP' is a myth. 2 thirds of Welsh workers work in the private sector, 1 third in the public sector.

Neither of us are economists, but what I do know is that there are dozens of analyses and dozens of tables, and that nowadays the debate is more about GVA than GDP. I'd like to get a second opinion on this before I accept that Government expenditure makes up 70% of the Welsh economy.

As is the Spectator/Conservative stuff comparing us to 'the Eastern bloc' or 'the former Communist countries' when actually they are some of the most dynamic economies in Europe- and indeed where 'our' manufacturing jobs are mostly heading. It's semi-racist scaremongering.

The Spectator article even refers to them them as 'the Soviet Bloc' something which Polish, Hungarian and Romanian people would find deeply offensive. Is the Spectator including Germany in their Soviet analysis?

Nick Bourne followed the same strategy in comparing Welsh unemployment to 'the former Communist countries', when in fact they are doing very well, and Welsh employment is better than the United States, Ireland or France.

Concerned Citizen said...

I am no economist but extracts from a Institute of Fiscal Studies report says:

“In the fiscal year 2008–09 the UK government spent £618.6 billion, or 43.2 per cent of the UK’s national income. This translates into just over £10,100 for every person in the UK, or about £13,000 per adult

Public spending (TME) accounted for 43.2 per cent of national income in 2008–09, the highest share since the recession of the early 1990s. In part this reflects the current economic downturn, which has both increased social security spending and reduced national income. However, even before the recession, Labour had deliberately pushed spending significantly above the 38.2 per cent of national income that the party recorded in its first year in power in 1997–98. Between 2004–05 and 2007–08 TME had remained fairly stable at around 41 per cent of national income.

Total ‘identifiable’ public spending on services was £7,971 per capita in England, £9,162 in Wales, £9,538 in Scotland, and £10,003 in Northern Ireland.

As a result of the 1888 Goschen formula, the non-English territories of the UK have higher levels of spending per person than England has. To address this perceived inequity, since 1978 spending allocations for the various countries of the UK have been determined by the Barnett formula. The formula is designed to apply proportionate shares of any cash increase (or decrease) in comparable English spending automatically to Scotland, Wales and Northern Ireland as well. The proportions specified in the formula are currently updated annually on the basis of mid-year population estimates. One of the effects of this is that spending levels per capita will gradually converge across the UK (at least when cash spending per head is rising over time in England). Because the non-English territories in the UK began with higher levels of per-capita spending in most of the main spending areas, a budgetary increase that brings up England’s spending at a certain real-terms rate will, by the mechanical operation of the formula, bring up spending in the rest of the UK at a lower rate.”

See http://www.ifs.org.uk/bns/bn43.pdf

Anonymous said...

One problem that seems to be peculiar to Wales is the loss of contribution of those who are unemployed and highly qualified and gifted, and loss of contribution to the economy of those who are employed, in particular in the financial sectors in Wales, but spend their working day contributing to Forums on websites rather than contributing to the Economy. Can anybody in Management in the Financial sector swop these two groups around.

Concerned Citizen said...

To return to the subject at hand, I’m not sure what the ratio of GDP and public spending actually shows, it can be either public spending is to high or that GDP is to low. In Wales, I suspect the latter.

Wales has lower than average GDP in comparison with the norm in Europe. Northern Ireland is in a period of transition for the better. As to comparing Wales to Sweden and Denmark are they really comparable?

As to “the majority of resources (both financial and in terms of young talent) get sucked up by the public sector thus stunting private sector”

From House of Commons Welsh Affairs Committee - Globalisation and its impact on Wales…

“between 1985 and 2005…employment in agriculture and rural activities in Wales dropped by 46%; in mining and utilities it dropped by 82%…In construction the drop was 14%…in manufacturing it was 13% less than in 1985; but in all the public sector side of life—community and personal services up 30%; health care up 72%; education up 43%; public administration up 27%, so the shift in the Welsh economy in employment terms into using knowledge…to add value has been enormous.

And

In the decade since 1997, the number of manufacturing jobs in Wales declined by 45,000, although total employment increased by 138,000 over the same period. The submission provided by the Department for Work and Pensions in May 2007 noted that the increase in the number of jobs in Wales had occurred in almost all sectors, but most notably in public administration, health and education, distribution, hotels and restaurants, banking and finance, and construction.”

If there is a ‘drain of talent’ is suspect it’s not to the public sector within Wales but to England and further a field.

Finally our legislators, need not be economic geniuses, they can seek the advise of experts. However you may also be surprised as to how many of them studied economics at college -. considering the global collapse of the banking system, whether this is a good thing I’m not sure.

Welsh Ramblings said...

Concerned Citizen puts it correctly, and in a way that makes alot more sense than the Spectator's nonsense about the 'Soviet bloc'.

Anonymous said...

I wonder how much of the private sector relies on public sector contracts for their income, and whether this counted as generated wealth.

Many Welsh companies are less competitive because they are fulfilling a deliberately created and temporary market.

To make things worse, the Menter organisations in Wales are all now setting up trading or enterprise companies, who will probably receive contracts from their parent companies, the so-called 4th sector; not profit making, but they don't need to be as their salaries are generous and funded separately. Are these new play-businesses counted as public or private sector.

The Druid of Anglesey said...

Ramblings - Sorry for the late reply but I have been a little busy. Anyway, regarding your points:

>"Wales has lower identifiable government expenditure than London, actually."

- Has it occurred to you that this may because (a) London contains a large concentration of government ministries, agencies, quangos etc; and (b) because the population of London swells each day as people commute in to work, requiring larger amounts of public services? In fact the treasury figures you link to support this as the index of identifiable expenditure for services (table 9.2) show that the South East has the lowest spend in the country. Could this because many people in the SE access those services in London?

- The second point I'd make is this: what value is there in comparing Wales to London? On Paxman, Plaid's Eurfyl ap Gwilym used the fact that government spending is higher in London than Wales as a crutch to rebut Paxman's claims that the public sector in Wales is too high. I've explained why London spends more above. Ultimately this is a red herring because London has no pretensions to want to become an Independent region, unlike Wales.

>"The old idea that 'Government spending makes up 70% of Welsh GDP' is a myth. 2 thirds of Welsh workers work in the private sector, 1 third in the public sector. "

- No, its not a myth. See here: http://www.cebr.com/Resources/CEBR/Forecasting%20Eye%20Special%20Regional%20Expenditure%20-%2026%20April%202010.pdf

- As for the second part of your sentence, I think you are mixing up public spending as a percentage of GDP with percentage per head of people working in the public sector. Just because 'only' 1 in 3 persons work in the Public Sector in Wales, it doesn't mean that public sector spending as a percentage of GDP is not around 70%. They are two very different things.

>"As is the Spectator/Conservative stuff comparing us to 'the Eastern bloc' or 'the former Communist countries' when actually they are some of the most dynamic economies in Europe- and indeed where 'our' manufacturing jobs are mostly heading. It's semi-racist scaremongering."

- Again, Ramblings, I think you have gotten hold of the wrong end of the stick. The Spectator blog was suggesting comparing the UK regional public spending figures with that of soviet bloc countries WHEN they were STILL soviet countries, not as they are now. They are dynamic economies now precisely because they have reduced the drag of an overlarge public sector. And all of them have considerable smaller government expenditure as % of GDP than Wales:

Bulgaria 40.7%
Czech Republic 46.1%
Estonia 45.4%
Latvia 42.9%
Lithuania 43.0%
Hungary 49.8%
Poland 44.5%
Romania 40.4%
Slovenia 49.9%
Slovakia 40.8%
Russia 39.3%
Ukraine 45.2%
Belarus 45.2%

- Ultimately it comes down to this: if you believe that Wales needs either (a) greater fiscal autonomy or (b) full independence then you have to realise that both will become more and more difficult the larger the Welsh public sector grows. I have heard you make the argument before that its not that the public sector is too large, its that Wales's private sector is too small. This is just putting the cart before the horse - the public sector has to be of a size which can be supported by the private sector. If you really want an independent Wales, then a sensible nationalist party would advocate reducing the size of the public sector so as to make independent feasible.

The Druid of Anglesey said...

Concerned Citizen - thanks for your constructive input.

> "If there is a ‘drain of talent’ is suspect it’s not to the public sector within Wales but to England and further a field. "

You are no doubt right that a lot of Welsh talent leaves Wales because of a lack of good private sector jobs here. However the fact remains that one in every four working people in Wales work for the public sector. Thats a lot.

>"Finally our legislators, need not be economic geniuses, they can seek the advise of experts. However you may also be surprised as to how many of them studied economics at college -. considering the global collapse of the banking system, whether this is a good thing I’m not sure."

They certainly aren't economic geniuses and based on the evidence I'm not sure that their advisors are giving them good advice either.

Anonymous said...

Do people really hold ambitions for their children never to leave Anglesey? Is the highest ambition in the land a final salary pension from the COuncil?

Concerned Citizen said...

I am not sure you can say large public spending = a large public sector, for example business rate relief is public spending.

Let us be honest, it does not matter who wins on May 6, the budget of the Welsh Assembly will be reduced, and most likely, this will result in job losses by whatever means they are achieved.

I don’t think anyone is arguing that Wales is prosperous (putting Albert Owen aside) what we need is a honest dialogue on:

How can we attract inward investment, ensure that there is a skilled workforce and what investment made by us, in today’s global market would ensure growth in the economy of Wales.

Wales future will not be based on a large manufacturing base, those days have passed to China and India, the new engines of the global economy.

Finally, government expenditure needs to be of a size that can be supported by the income it receives. Let’s not forget certain government functions are provided by private companies.

The Druid of Anglesey said...

Concerned Citizen

>"I am not sure you can say large public spending = a large public sector, for example business rate relief is public spending."

- but business rate relief is just recycled tax money being given back to businesses, minus the cost of the bureaucracy of taxing it in the first place and then reallocating it back. It is inefficient and wasteful by definition.

>"I don’t think anyone is arguing that Wales is prosperous (putting Albert Owen aside) what we need is a honest dialogue on:

How can we attract inward investment, ensure that there is a skilled workforce and what investment made by us, in today’s global market would ensure growth in the economy of Wales.

Wales future will not be based on a large manufacturing base, those days have passed to China and India, the new engines of the global economy.

Finally, government expenditure needs to be of a size that can be supported by the income it receives. Let’s not forget certain government functions are provided by private companies."

I fully agree with you there. Perhaps this can be the topic of a new post.

Concerned Citizen said...

To anon above

Parents hope their children will grow up to find good paying jobs, with good job satisfaction and if it's in government within Wales I suggest they head towards Cardiff.

Welsh Ramblings said...

Druid, good reply and decent points.

"Has it occurred to you that this may because (a) London contains a large concentration of government ministries, agencies, quangos etc; and (b) because the population of London swells each day as people commute in to work, requiring larger amounts of public services? In fact the treasury figures you link to support this as the index of identifiable expenditure for services (table 9.2) show that the South East has the lowest spend in the country. Could this because many people in the SE access those services in London?"

No because the comparison is per head. Wales has a similar profile of public institutions, in proportion to our size (possibly relatively even bigger than London? Think about the media, broadcasting, the arts as well as the civil service). The point about people swelling London is surely neutralised by Wales' sparsity of population distribution. It's a fact that areas that are sparse require higher levels of public spending than areas that are dominated by conurbations. There is an article today on Wales Home by Dwr Cymru/Welsh Water which backs up this point.

I am not sure about public service access in SE rather than in London, though I do know that private investment is heavily concentrated there. Interestingly though, the last time I was in SE England I saw visible signs of poverty and urban decay, and buildings in quite a poor state in two different market towns. So the story about SE England prosperity isn't complete, there is also huge inequality there and a condiserable layer of relatively poor people.

The CEBR's figures are not universally accepted by economists that's why I wanted a 'second opinion' from someone other than us two.

But, your conclusion might hold water, and if Wales did assume independence or fiscal autonomy, people on the left might find themselves having to look at some of their assumptions.

In terms of public-private sector relationship, remember we aren't talking about waste, it's things like teachers, doctors. You can't have a business if your recruits can't read and write, or can't work properly because of their health. If the UK's public spending to GDP ratio is 43% (which tallies with your chart of Eastern European countries) I am not going to accept that Wales' is at 70%, until we get that second opinion!

The Druid of Anglesey said...

Ramblings - thanks for your reply.

>"No because the comparison is per head. Wales has a similar profile of public institutions, in proportion to our size (possibly relatively even bigger than London? Think about the media, broadcasting, the arts as well as the civil service). The point about people swelling London is surely neutralised by Wales' sparsity of population distribution. "

- To be fair I think it is incontrovertible that the huge amount of government agencies in London far outstrip in size and numbers of staff what we have here in Wales - even on a per head measure. Any administrative capital in any country in the world would be similar. Secondly the figures for London will be based on 'per head of residents' and not on 'per head people working there' therefore it is unsurprising that the figure is high. I accept that sparsely populated countries require more infrastructure investment, but the figures you reference are for 'services' not for 'capital' expenditure.

>"The CEBR's figures are not universally accepted by economists that's why I wanted a 'second opinion' from someone other than us two."

Fair enough. If you find a second opinion please do also post it here.

>"But, your conclusion might hold water, and if Wales did assume independence or fiscal autonomy, people on the left might find themselves having to look at some of their assumptions."

You sound like you may be my first convert! ;-)