Spending Review 3: Jury out on Chancellor’s gamble

Phil Cooper finds that more Welsh-based procurement provides a way forward

One wry commentator on the Comprehensive Review remarked that the Chancellor was inspired by Jean-Baptise Colbert, Louis XIV’s treasury minister, who said that the art of taxation was “to pluck the maximum amount of feathers from the goose with the least amount of hissing”. The private sector was quietly supportive but the hissing from the public sector has been loud and continuous given the 500,000 jobs to be cut over the next four years. Wales will be hit particularly hard, with an expected 50,000 job losses given our economy is so dominated by the public sector.

Spending Review Special

This is the third in a series of four articles we are publishing this week analysing the Comprehensive Spending Review which will determine much of what happens in Welsh public life during 2011. Tomorrow: Mike German, a Liberal Democrat peer in the House of Lords and former Economic Development Minster in the National Assembly.

This article is from the current issue of  The IWA’s journal Agenda, issued three times a year. To receive Agenda and get unlimited access to the IWA’s online archive, click here.

However, given the amount of duplication and inefficiencies in parts of the public sector these losses could take place without any decline of services as many will come from natural wastage or efficiency drives. Our leaders will have an opportunity to break away from conventional approaches and think about how public services can be delivered by fewer people for less money. It also gives the private sector an opportunity to introduce innovative solutions which focus on outcomes rather than process.

A plan for tackling the deficit was announced but it is not clear how the Chancellor can create the right conditions to put the UK back on a path to growth. The gamble he has taken depends on whether he can bring down the deficit without killing off growth. For without economic growth deeper cuts or higher taxes will become inevitable and consumer confidence could stall.

The only way to solve the problem of rising unemployment is to induce the economy to grow again. Yet the greater reliance on the public sector in Wales, together with the fragility of our business climate, heightens the responsibility to get our public policy right. The recovery is all about jobs. Creating more jobs means faster economic growth and greater income for the Government with less outlay through the benefits system.

The crucial questions revolve around whether the Coalition government can create the right conditions for growth and whether the Welsh Government’s economic renewal programme is appropriate to drive the private sector growth needed to compensate for the cuts.

Drivers for generating private sector employment are: start ups, the expansion of existing firms and encouraging companies to move into Wales. However, the creation of jobs is hampered by a profusion of regulations and legislation which have  multiplied in recent years, especially for SMEs which dominate the Welsh economy. Current employment law is a minefield which places a disproportionate burden on SMEs and is a barrier to their employment growth potential.

The specific focus in the Welsh Government’s Economic Recovery Plan of only supporting growth firms in six sectors penalizes excellent firms in other sectors of the economy which have proven job creation capabilities.  Recent studies by NESTA and McKinsey show that few growth firms came from Government-supported sectors. Warren Buffet confirms this as his portfolio invests in growth firms in traditional sectors which are overlooked by Governments. In abandoning its support for growth firms outside the chosen sectors, the Welsh Government could be risking the employment-creating prospects of many firms, particularly those in the poorest areas of Wales.

Growth firms need to access skills and have a healthy appetite for cash. Both are in short supply. Innovation is critical for the future development and competitiveness of growth firms. But our innovation policy has focused more on landmark buildings to house innovating firms than helping them with their research and development costs. Productivity also requires investment. Yet the repayable grant system to support research and capital investment simply does not work on pre-revenue innovative projects. The closure of the Welsh Government’s international division is also a worrying sign when growth firms need to look outside the UK market for expansion, a fact which our new polices seem to overlook.

However, there is hope. Procurement is an excellent way to create jobs although the £4.5 billion spent by the public sector in Wales could get smaller as a result of the Comprehensive Spending Review. Around half of this spend is procured outside Wales. It should be a Welsh Government mantra that for every 1 per cent retained in our country, approximately 2,000 jobs are created. Despite this there are many barriers facing the SME sector. Many companies feel the public sector is biased towards larger firms, often based outside Wales, which have a superior brand image and professional tendering teams. As a result they are perceived to offer lower exposure to risk.

Welsh firms must be more proactive and invest more time and effort in the tendering process and not ignore the potential for collaboration with the larger firms to obtain sub-contract work.

SMEs are being made fully aware of the public sector procurement processes in order to overcome real or perceived barriers. For example, the Supplier Development Service provides guidance to SMEs on all aspects of engaging with the public sector and in particular the Pre-Qualification Questionnaire process through which potential providers are short-listed. The public sector must support and engage with this supplier education agenda to maximise the economic impact.

Wales also has EU structural funding to help reshape its economy and create the new jobs but the Wales European Funding Office should engage more with the private sector rather than focus on the Welsh Government’s pet projects which have failed to provide a return.

The Spending Review poses many challenges to our fragile economy. At the same time it provides an opportunity for the public and private sectors to work closer together to capture the enormous goodwill of those who want Wales to succeed in developing a more robust economy with a stronger indigenous base. The private sector will rise to the challenge if given the opportunity.

Phil Cooper is the Chief executive of Venture Wales that provides business support for SMEs.

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