Eurfyl ap Gwilym says this is the lesson of the crash is that it does not make sense to base the UK economy on the banking industry
The performance of the Welsh economy compared with other parts of the UK was much debated during the referendum campaign and is sure to be debated in the run up to the National Assembly elections. The No campaigners claimed that the advent of devolution had resulted in a decline in the relative performance of the Welsh economy. However, analysis of the latest report from the Office of National Statistics, which was published in December 2010, shows that whilst relative GVA in Wales had indeed declined, the picture is more complex. In fact the No campaigners were confusing correlation with cause and effect.
What are the facts? Between 1999 and 2009, the first decade of the National Assembly, relative GVA in Wales declined by 3 points from 77.3 per cent to 74.3 per cent of the UK average, shown in the table below, taken from the ONS Statistical Bulletin: Regional, sub-regional and local gross value added 2009.
Comparative GVA per head across the UK1
|Yorkshire & The Humber
|East of England
1 GVA per head indices at current basic average (see background note 6 in the report).
2 2009 estimates are provisional.
However, in the decade immediately preceding devolution relative GVA declined by 7 points from 84.3 per cent to 77.3 per cent. Thus, given the even more rapid relative decline in the period from 1989 to 1999, it would be unwise to attribute the decline in the last decade to the existence of the National Assembly.
Another striking feature shown in the ONS report is that only two of the regions and countries of the UK had an average GVA greater than the UK average. London sported a heady 170 per cent and south east England 105 per cent. Furthermore, during the decade to 2009 there was a further material growth in divergence between London and the rest of the UK. Back in 1989 London’s index was 156.9, and by 1999 it was 160.7. However, by 2009 it had accelerated away to 171.2. The only two regions to improve their relative position during the decade were Scotland with a 4.3 per cent improvement and north east England with a 0.1 per cent improvement. The chart below, also taken from the ONS, shows this divergence graphically:
The reason for the increasing geographical inequality across the UK is not hard to identify. It was the policy of the last UK Labour government massively to stimulate growth in financial services, particularly in the City of London, through the combination of light touch regulation and the encouragement of a credit led boom.
Only last month the US Treasury Secretary Tim Geithner drew attention to this policy of ensuring that the regulation of the financial services sector was more lax in the UK compared with financial centres such as New York and Switzerland. City traders would recognise this as ‘regulatory arbitrage’. Analysis of the ONS data shows that of London’s total GVA from financial services already accounted for a very high 12 per cent in 1997. But by 2008, the latest year for which ONS data are available, it had accelerated to 19.5 per cent of the total. Moreover, these figures do not include the related growth in high value services supporting the City such as the legal profession, accounting and IT.
It also followed that when the banking bubble burst the UK suffered more than most other countries. The UK’s fiscal deficit of 12 per cent of GDP is one of the worst among the G20. According to the Institute for Fiscal Studies, following the crisis the UK has the third highest borrowing of the 29 most advanced economies.
Sorting out the legacy of the banking boom and bust will be painful. Ironically it is not the authors of this crash who will pay the heaviest price. The City of London is already enjoying a robust rebound in business with the top 231 staff at Barclays enjoying a combined remuneration of £554 million this year. At RBS, a bank where the government is the majority shareholder after a taxpayer bailout, the Chief Executive and his immediate team are exercising ‘restraint’ with a combined pay packet of £28 million.
So it is the other countries and regions of the UK which will pay the heaviest price for Labour’s boom and bust as a result of increased taxes and deep cuts in public expenditure. Here in Wales we see the Labour party, the authors of the boom and bust, now claiming to be the party best positioned to protect the people of Wales from the consequences of their own failure.
Perhaps the one ray of hope in all of this is an increasing recognition that it does not make sense to bet the UK economy on the banking industry. Instead, there is an urgent need for an economy more balanced both in terms of sectors and geography. The new UK coalition government has indicated that it wishes to tackle this issue with an emphasis on a revival of the regions and of the manufacturing industry.
One or two decisions such as the HS2 rail link to the north of England and Scotland and the electrification of the track between London and Cardiff are welcome steps in the right direction. On the other hand the reduction in capital allowances announced in the last UK budget will hit manufacturing industry disproportionately hard. Ironically this is being used by the UK coalition government to fund the reduction in the headline rate of corporation tax from which the banking industry will be a major gainer.
Meanwhile, the failure to introduce fairer funding for Wales raises doubts as to the UK government’s commitment to encouraging a more geographically balanced economy which in turn could reduce the big regional disparities revealed in the ONS report.