Spending Review 4: Sharing the pain to keep our competitive edge

Mike German says we should look to private sources for capital spending

Wales, like the rest of the UK and much of Europe, has had to face up to the challenge of deficit reduction. The pain for Wales will be less than for the UK as a whole in terms of its revenue spending. But there are difficult decisions to be made in how capital expenditure will be dealt with over the coming 3-4 years.

No one in their right mind would keep piling debt and interest charges on to the country’s credit card, sacrificing the future prosperity of our country and placing a weight of debt to be repaid by our children. Faced with £120m a day of interest – money going to no good public use – the government was right to act swiftly.

Spending Review Special

This is the last in a series of articles we have published this week analysing the Comprehensive Spending Review which will determine much of what happens in Welsh public life during 2011.

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.

By way of comparison, the UK ratio of debt to wealth, is similar to that of Spain, a country which is struggling to escape recession. Even with the tough times ahead for our deficit reduction programme, Spain is intending to bring its deficit below the 3 per cent ratio a year earlier than the UK.

It is to the credit of the UK government that Wales, Scotland and Northern Ireland have received a lesser burden to bear than England as a whole. In particular, the protection of health and education budgets in England has meant some respite for the Welsh Government.  The almost audible sighs of relief from officials in Cardiff Bay meant that their original budget reduction plans could be rethought.

No-one is denying all this is difficult, and no-one in the Liberal Democrats relishes the prospect of the tough times ahead. But we have to share the pain in order to maintain our competitive edge in the world. This means keeping interest rates low so that companies can invest, and so our exports can grow. Nothing would be worse than reducing spending over a longer time frame than our principal markets, thereby placing a growing interest rate burden on the very companies which alone can help us fight our way back to prosperity.

Labour left the Coalition government with the largest peacetime deficit in our history, a terrible economic legacy. The consequences of not acting now are very serious – higher interest rates, business failures, and rising unemployment. That’s why the Coalition government has acted as it did  to bring the country back to prosperity. It is making the tough choices now, and not being deluded by some kind of future nirvana but without the means to achieve it. That’s what the opposition parties offer.

So where are the tough decisions for Wales. Clearly there are some difficult choices to make in respect of capital expenditure. Our schools and hospitals will need refreshing, development and new equipment. The absolute reliance by the Welsh government on using their own resources and never engaging with private finance must surely come to an end. New financial mechanisms are available and an ideological approach will mean fewer new buildings, and less of the vital new treatments which are available to a modern health service. Delays in new renal dialysis centres and GP practices not being allowed to locate in private sector premises are just two examples of current Welsh Government practices which must end.

The benefits of the additional funding from Europe are maintained, and the Government must ensure that they get maximum value from the two thirds of Wales which qualifies for the additional expenditure.

The real engine for growth in Wales will be by establishing a business environment which encourages new business and helps existing business to expand and develop. Export growth is one area where more can and should be done by the Welsh Government. Recent activity has not provided the return we should expect of public investment. Now is the time for a complete re-appraisal of how links are built with new markets. Joint ventures are a particularly appropriate way of reducing business risk yet maximising the development opportunities. This is particularly relevant for bringing new ideas and processes to new markets, and can work within Wales as well as in other countries.

Welsh Ministers now have the consequential from the £60 million renewable energy growth fund to invest as they see fit. This is a real opportunity to grab part of the new business development potential and invest in the infrastructure to meet our immediate needs in offshore wind energy and newer forms of renewable development. The big Severn barrage project was opposed by Liberal Democrats not just because it was too costly in economic and environmental terms, but also because it would have been 2030 before it provided any energy! We need to invest now to enable companies to meet our 2020 international obligations.

An often missed feature of the Coalition’s plans is an emphasis on part-time study and also expansion in the Further Education sector. Many people have found the acquisition of new skills very difficult because of the funding regime, where payment of up-front costs are the rule. Wales needs to be at the forefront of new ideas and industrial processes. Recent evidence shows that manufacturing is already making the difference. Our skills base is crucial to providing Welsh business with the engine needed to make growth possible. Both of these areas lie within the responsibility of Welsh Government Ministers. I look forward to seeing the ambitions set for England being matched or exceeded by the actions of government in Wales.

The new Universal Benefit reforms will have a profound impact on poverty, with very positive projections for the impact these will have in the medium term in Wales. This is an important matter, as many political commentators have focused solely on the impact of savings to the welfare bill rather than the overall impact of policy on poverty. The expectation is that by the next general election more families in Wales will have been lifted out of poverty than was achieved during the whole period from 1997 – 2010.

Taken as whole, with measures on expenditure and spending looked at together, the plans for the future impact more on those who are able to afford it. The poorest will take a smaller hit than the rich. After a successful referendum next March, the Coalition will turn its attention to the way in which Wales is funded.  Expect a real step forward in the way in which Wales can have a real fiscal influence over its destiny.

Mike German is a Liberal Democrat peer in the House of Lords and former Economic Development Minster in the National Assembly.

2 thoughts on “Spending Review 4: Sharing the pain to keep our competitive edge

  1. ” Expect a real step forward in the way in which Wales can have a real fiscal influence over its destiny.” Further confirmation that what is on offer from the UK Coalition after March is a Welsh version of Calman .

  2. Mike – the big problem with PFI is that it seeks to convert finite capital spending (and borrowing) into an open ended revenue spending commitment – and as England is finding at present, the actual cost to the economy is totally disproportionate to the often dubious benefits realised .

    There is, as you know, a big difference between borrowing to cover revenue shortfalls and borrowing to fund capital projects.
    PFI gets Capital borrowing off the government’s books, and on to private companies’ books. Generally, companies have to pay more for their borrowing than governments. Add to that the profit and guarantees that are built into the contracts, and it really doesn’t make much sense at all.

    No a not-for profit company – set up for the sole purpose of facilitating Welsh government capital projects might solve both issues. It would be able to borrow on a quasi-sovereign basis, there would be no shareholders to pay dividends to, and it would keep the actual business of managing these projects at arms length from the government.

    I merely float the idea. Glas Cymru has been a great success, so why why not extend the idea into other realms?

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