RE-BUILDING THE ECONOMY OF WALES INDUSTRIAL COMMUNITIES. A ten-point action plan for government. (Revised edition)

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1 RE-BUILDING THE ECONOMY OF WALES INDUSTRIAL COMMUNITIES A ten-point action plan for government (Revised edition)

2 RE-BUILDING THE ECONOMY OF WALES INDUSTRIAL COMMUNITIES A ten-point action plan for government Summary Keep the economy growing Rebalance towards industry and the regions Use procurement as a development tool Balance the needs of the environment against the need for jobs Invest in infrastructure to support the Welsh economy Deliver structures that work Make the most of European funding Keep financing aid to businesses Beef-up the Enterprise Zone initiative Cut unemployment and low pay, not benefits 1

3 The context Wales industrial communities the places once built on industries like coal, steel and engineering continue to lag behind in terms of prosperity and jobs. The recovery from recession is also proving slow. The governments in Cardiff and Westminster are committed to promoting growth and there is much talk of the need to rebalance the economy away from a narrow range of sectors and places. These commitments are widely supported. But delivering prosperity to Wales industrial communities requires not only the right economic policies but also the right measures to deliver growth and jobs in the right places. Wales older industrial areas are a substantial part of the country, home to perhaps half the population. But plagued by years of job loss from mining and manufacturing they have often struggled. More than anywhere, perhaps, they should benefit from and contribute positively towards the economic rebalancing that is needed. They can only do so, however, if the right policy framework is in place. This booklet sets out an Action Plan for Wales industrial communities. It is based on extensive discussion within the Industrial Communities Alliance and its constituent member authorities. It is also rooted in an unrivalled understanding of the challenges facing some of Wales most difficult local economies and disadvantaged communities. The Action Plan is our view of what we need to revive the economy in our areas. The Action Plan recognises that economic policy is only partially a devolved matter. In some cases the policies we propose need action by the Welsh Government. In other cases the initiative lies with the Westminster Government. And often both governments will have to play their part. 2

4 .KEEP THE ECONOMY GROWING The prosperity and economic success of local economies is intimately bound up with the success of the economy as a whole. There is likely to be little sustained recovery in Wales industrial communities unless the UK and Welsh economies are heading in the right direction. The economy is at last growing again but a number of pre-conditions seem essential for growth and job creation to be sustained: On the demand side: A low exchange rate that enables Welsh businesses to compete effectively in domestic and international markets Low interest rates, to help foster investment A measured approach to deficit reduction that recognises the need to sustain the overall level of spending in the economy And on the supply side: Investment in education and training, so that businesses have access to 21st century skills A banking system that provides finance to business, especially smaller firms, on reasonable terms Regulatory regimes that encourage growth and investment Many of these policies concern the UK economy as a whole but they matter enormously in the older industrial areas of Wales. On the other hand, a revival in the UK economy is not by itself sufficient to ensure a revival in Wales or in its industrial communities. 3

5 REBALANCE TOWARDS.INDUSTRY AND THE REGIONS Since the financial crisis of 2008, rebalancing has become an article of faith across the political spectrum. But it means different things to different people. What Wales industrial communities need is a shift from over-reliance on financial services in London towards a more broadly based model of UK growth that builds on the potential of industry in the regions. One of the reasons the pre-2008 model of economic growth failed is that the UK relied too heavily on public and private borrowing rather than on income generated through selling goods and services to the rest of the world. Too many manufacturing industries, in particular, were allowed to wither. Manufacturing industry still generates more than half of all Wales exports, even though it accounts for only around one-in-ten of all Welsh jobs. From a Welsh point of view, rebalancing the UK economy towards industry should be a win-win strategy: A revival in industrial investment and production is a key part of what the UK economy needs to sustain growth A new emphasis on industry would be especially beneficial to Wales (and to the Midlands, North and Scotland) because these places remain where so much manufacturing is located What this means in practice is that the tax regime needs to encourage investment in plant, machinery, R&D and skills, while discretionary incentives target specific places, sectors and projects. Manufacturing needs to be the key target, but the parts of the service sector that sell to wider national and international markets also have a legitimate role to play. 4

6 USE PROCUREMENT AS A.DEVELOPMENT TOOL The governments in London and Cardiff both have crucial roles to play through their procurement policies. Plenty of UK firms have the capacity to supply UK needs. Sometimes potential suppliers are right on the doorstep. But too often the contracts seem to go elsewhere for little obvious reason. EU competition rules mean that orders cannot be earmarked for specific firms but it is still possible to introduce a range of socio-economic requirements into contracts, for example to: Provide apprenticeships for local workers Recruit from among the long-term unemployed Draw on local supply chains Earmark a proportion of sub-contract business for small firms In addition, through collaboration and dialogue it is possible to ensure that the timing, scale and specification of big public sector contracts allow Welsh suppliers to be prime candidates. In this regard the UK and Wales would be going no further than existing practice in much of the rest of the EU. The Westminster Government now encourages pre-procurement discussion with potential suppliers but this requires a cultural shift that needs to become embedded across the whole of the public sector. Lowest cost matters, but not to the exclusion of all other considerations. The Welsh Government understands the potential and is well-placed to realise the economic benefits of effective public procurement. Local authorities are mostly only too willing to play their part in supporting local businesses and workers so long as they can be confident that their actions are legal and above board. 5

7 BALANCE THE NEEDS OF THE ENVIRONMENT AGAINST.THE NEED FOR JOBS The governments in London and Cardiff need to balance the legitimate needs of the environment against the need to protect jobs. There is no point in carbon taxes on energy-intensive industries if the effect is merely to shut down UK plants and transfer production to other countries where environmental regulations are less stringent. This would simply lead to the same quantities of pollution or possibly even more. Energy-intensive industries in Wales and the rest of the UK need a clear signal that there will continue to be financial compensation available to offset the costs of moving to greener energy so that their international competitiveness is not undermined. There is also little sense in supporting renewable technologies, like wind power, without fostering a local supply base. Wales is blessed with significant potential sources of renewable energy wind power, tidal power and wave power and the large-scale deployment of renewable energy provides a key opportunity for Wales to display its green credentials. But hand-in-hand with the deployment of renewable energy it makes sense to ensure that UK and Welsh businesses are prime beneficiaries at all stages: In the development of the technology In the manufacture of the hardware In the installation on-site In developing the skills for production, assembly and maintenance The economic benefits should also be shared by the communities that host renewable installations. 6

8 INVEST IN INFRASTRUCTURE TO SUPPORT THE WELSH.ECONOMY Few of the really big infrastructure projects that are currently underway or planned across the UK are located in Wales. The Westminster government s priorities are too often to spend money in and around London. The electrification of the railway line between London and South Wales is welcome. This needs to be matched by the extension of electrification to the Valleys. The HS2 rail link, in contrast, offers little in the way of direct benefit to Wales and threatens to skew Westminster s spending on infrastructure for years to come. There is plenty of scope for infrastructure investment in Wales. The priorities in the Welsh Government s infrastructure plan include: Transport networks, particularly east-west links Telecommunications networks The energy sector Housing Educational infrastructure These aspirations need to be brought to fruition, with a strong emphasis on schemes that deliver economic benefits to less prosperous industrial communities. With significant reductions in capital budgets underway, the Welsh Government and Welsh local authorities need sufficient resources to bring the infrastructure plan to fruition. Most local authorities have investment projects on the drawing board that could be implemented quickly if the finance were made available. Investment in infrastructure lays the foundations for future economic growth. It also provides an immediate boost to employment and a source of orders for industries such as steel and engineering. 7

9 DELIVER STRUCTURES.THAT WORK Local and regional economic growth needs effective administrative structures to deliver support to business and industry. Local authorities are not only a provider of services but also the key player that orchestrates local economic development. Their input matters to economic growth and so therefore does their funding. Local authorities need a funding system that: Offers reasonable rewards for delivering economic growth But also continues to compensate, through government grant, those councils that have a fundamentally weak local tax base Local authorities in older industrial areas already work hard to deliver economic growth. This should be encouraged. Collaboration between authorities is important too. The new administrative arrangements for the Cardiff and Swansea city regions are in their infancy. City regions have the potential to deliver benefits, but the assumption should not be that only the cities at their core can be the motors of growth. Indeed, while the investment in Phase 1 of the South Wales Metro is welcome there are limits to the extent to which the transport network could (or should) be expected to handle vast commuting flows from the Valleys. Some institutions and structures in Wales are exemplary. The Jobs Growth Wales programme, for example, picked up where the GB-wide Future Jobs Fund left off when it was discontinued by the Coalition Government in Westminster. Jobs Growth Wales aims to create 12,000 job opportunities for young people across Wales, with a strong emphasis on real jobs and quality experience. Its performance so far is impressive. Jobs Growth Wales deserves a longer-term future and, more generally, the Welsh government should be prepared to back structures that are working well. 8

10 MAKE THE MOST OF.EUROPEAN FUNDING The European Union has the potential to make a huge contribution to regional development in Wales and the rest of the UK. It also has a key role to play in rebuilding the economy of older industrial areas. In the EU spending round, more than!2bn is earmarked for Wales from the EU s Structural Funds. Around two-thirds of this is specifically for regional development and most of the remainder to finance training schemes. West Wales and the Valleys have top-priority less developed region status under the EU programmes. Industrial communities need to maximise the benefit of this funding. This requires the Welsh Government to: Target EU funds at areas of economic need which include the majority of Wales older industrial areas Resist the pressure to be overly prescriptive in defining the types of projects on which EU monies can be spent Retain strong involvement of local authorities in the local management of the funds Keep an eye on the long-term future, to ensure that this valuable source of funding to Wales doesn t dry up All EU funding has to be matched by a local contribution. In previous spending rounds this has often proved to be a problem. Too often the emphasis has therefore been on getting money out of the door rather than on financing the schemes most likely to contribute to economic development. In the era of cuts to budgets these problems look set to grow. The Welsh Government needs to: Identify the UK and Welsh funding schemes that can be used as sources of matching finance Maximise the compatibility between domestic and EU funding streams in terms of focus, timescale and geographical targeting 9

11 KEEP FINANCING AID TO.BUSINESSES A key tool in promoting private sector jobs is the ability to offer companies financial support to deliver investments that otherwise wouldn t have gone ahead on the same scale, on the same timetable or in the same place. This helps to secure inward investment and promotes re-investment in local businesses. With a new Assisted Area map coming into force in 2014 and new EU rules on aid through to 2020, the way is now clear to keep on providing aid to Welsh business. For many years Wales has provided support to investment projects that create or protect jobs. There is plentiful evidence that this has proved effective. However, it is far from clear that the current package exploits the full potential of the EU rules, especially in West Wales and the Valleys. Aid to business should be deployed as a key tool in re-balancing and reindustrialising the Welsh economy: Financial assistance should be actively marketed, and not unduly cashlimited Using the new Assisted Area map, which sets the limits on how much aid can be given and where, aid can be targeted at the Valleys in particular Wales should push the limits of the new EU rules on aid to large firms Wales should exploit the full potential of the more generous limits on aid to small and medium-sized enterprises Wales should deploy grants as well as loans to provide a clear and powerful signal to investors The Westminster Government needs to play its part by ensuring there are tax allowances to support investment in R&D and training. 10

12 BEEF UP THE ENTERPRISE.ZONE INITIATIVE The experience of the 1980s and 90s shows that if the right local conditions are in place, Enterprise Zones (EZs) can be a useful tool in boosting economic growth in some of the most disadvantaged locations in the country. The Westminster government embraced this experience by introducing a new generation of EZs in England. Wales followed with seven zones of its own. The trouble is that the package of incentives in the new EZs is much weaker than of old. The relief from Business Rates is for a shorter duration and is cashlimited as well. The relaxation of planning controls doesn t go much beyond what many local authorities were intending anyway. And the Treasury has restricted capital allowances for investment in plant and machinery to a handful of sites on a limited, discretionary basis. The new Enterprise Zones need to be made to work: The incentives in the new EZs should be beefed-up, particularly by the inclusion of capital allowances for investment in buildings The best of the old Enterprise Zones worked well because they were propertyled. The incentives to invest in buildings attracted developers, and the ready availability of modern industrial and office space then drew in firms looking to expand quickly and easily. Investment in plant and machinery followed, and new jobs. So long as the older industrial areas of Wales retain Assisted Area status, additional incentives in their Enterprise Zones would encounter no problems with EU State Aid rules. 11

13 CUT UNEMPLOYMENT AND LOW PAY, NOT.BENEFITS Bringing down spending on welfare benefits is one of the key aims of the Coalition Government in Westminster. But the approach is wrong. Wales older industrial areas have some of the highest claimant rates in the country. This is the direct result of years of job loss. High unemployment has been one result, but there has also been a big diversion onto sickness and disability benefits. Weak labour markets have led to low wages, forcing many families in work to draw on tax credits. Housing Benefit is widely needed to help make ends meet. Not surprisingly, research shows that Wales older industrial areas are being hit especially hard by welfare reform. The financial loss per head in the Valleys, in particular, is on course to be among the very highest in Britain while more prosperous areas in southern England escape lightly. The effect is that: The poorest households are being made poorer, while others that have previously muddled through are pushed down to the poverty line Spending power is taken out of the weakest local economies With lower spending, there is further pressure on employment in local businesses Cutting welfare benefits won t reduce the numbers out-of-work unless there are more jobs available to be filled. Growing the economy is the key to bringing down welfare spending. And this growth will have the biggest effect on claimant numbers if growth is concentrated in the places where the shortfall in job opportunities is greatest. Rebuilding the economy of Wales industrial communities has the potential to slash millions from spending on welfare. 12

14 The Industrial Communities Alliance is the all-party association representing some 60 local authorities in the industrial areas of England, Scotland and Wales. The Alliance was formed in 2007 by the merger of the longer-standing associations covering coal and steel areas and also includes a wide range of other industrial areas. The aim of the Alliance is to promote the economic, social and environmental renewal of the areas covered by its member authorities. The Alliance works with the governments and parliaments in London, Edinburgh and Cardiff, with Brussels, with development agencies and with its own member authorities. National (GB) Secretariat, 9 Regent Street, Barnsley, S Yorkshire S70 2EG Tel: natsec@ccc-alliance.org.uk Wales Director: Peter Slater Tel: peterslater@psconsultancy.co.uk 13

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