Yes, we can

IWA Director Lee Waters outlines the think-tank’s latest report on closing the wealth gap between Wales and England

“An outsider observing our economic policies and the national debate, such as it is, would conclude the Welsh were either content with their relative position or did not believe there was anything to be done about it” – Gerald Holtham, Chair IWA Economy group.

We mustn’t accept that Wales will always be the poor relation of the UK. That’s the core message of the IWA’s latest report, An Economic Strategy for Wales?

Our expert group of economists, business leaders and academics have spent the last five months analysing data and debating its recommendations for reversing Wales’ economic decline. Its conclusion is that Wales has been a ‘middling performer’ since devolution but the wealth gap with England can be closed if there is determined political leadership behind an ambitious and detailed delivery plan for growth.  We recommend a bold £25 Billion programme for investment over the next 15 years, funded by public sector borrowing and private sector investment.

Whilst Welsh wealth (GVA) per head remains at 72% of the UK average – the same level it was at in 1999 when the Assembly was established – the North East of England has climbed to 75% GVA per head. By growing 2% every year the English region has outpaced Wales over the same period even though it lacks the tools devolution has given the Welsh Government.

2% annual economic growth is achievable, and if we could sustain it for 10 years we could reach 75% of the UK average; over 20 years we’d stand at 79% of the UK’s GVA per head by 2035. That is surely do-able, but it would still leave us a fifth poorer than the UK average in a generation’s time.

True catch-up growth with England would require growth of 4% a year for 20 years – unprecedented in the UK, and in-line with the leaps made by the former Soviet republics after the Iron Curtain fell.

The additional economic activity we’d need to generate would be the equivalent of the annual turnover of Admiral Insurance every year, for two decades.

These are sobering figures. We’ve laid them out because it’s important we confront the severity of the position we are in, and our failure to make any progress out of it since devolution.

As Gerald Holtham writes in his chapter of the report, “there is an undercurrent of grumbling in Welsh public life about the relatively poor economy, as if there is an expectation that the government should do something about it. Rather than vague grumbling or vaguer aspirations, surely it is time for the country to take a clear-eyed look at how ambitious it wants to be for its economic future and what sort of changes would be required to achieve its ambitions”.

The IWA’s Economy Group, chaired by Gerry Holtham, is firmly of the view that closing the gap with England is achievable, but the political debate in Wales is nowhere near acknowledging the scale of the actions that are necessary.  Our report says “The growth policies of Welsh governments up to now have sometimes fallen down in implementation owing to a lack of commercial nous but they have also generally been on a scale implying acceptance of only modest narrowing of the gap with the rest of the UK”.

Our report highlights examples of good policies or projects taken forward by the Welsh Government – the Arbed housing energy saving scheme or the WG’s policy on procurement for example, but even these are too modest in scale – in the case of Arbed – or are not being implemented effectively, in the case of procurement.

In a telling passage Gerry Holtham – who recently left his role inside the Welsh Government advising on accessing finance for investment in infrastructure writes:

“The Welsh Government broke new ground with a National Infrastructure Investment Plan, but with no underlying economic strategy it is a list of projects that will happen as Departmental budgets permit. In the absence of a strategy and priorities resources will not be moved between capital budgets to reflect those priorities”.

The risk aversion of Ministers and their senior officials needs to be overcome if we are to obtain true catch-up growth. That, the report says, “requires taking risks because investments may not pay off to the extent hoped or expected. It also requires sacrifices. Money spent on investment cannot be spent on goods and services – including public services – in the here and now. Even if financed by borrowing, the investment would require debts to be serviced in the near future at the expense of other sorts of spending”.

The capacity and competence to deliver well was a recurring theme in the IWA’s Constitutional Convention project, and is also woven through our economy report.  The civil service is not a delivery body and it is time for the First Minister to reconsider his aversion to arms length delivery bodies. An early test of this will be the delivery of the Metro project, which currently seems to be stuck in the system.

These are the principles we espouse in our report – ambitious targets, a detailed plan to deliver a clear strategy, willingness to take calculated risks and a robust approach to implementation. We set out the type of projects we believe would contribute towards narrowing the wealth gap. These are not definitive, nor exhaustive. There needs to be a wide debate on the best approach but we put these forward as examples of interventions, if taken together, could propel the Welsh economy:

—   Implementation of City Region projects with full roll-out of south Wales ‘Metro’ project.

—   Challenging investment targets for Research and Development need to be set and much more needs to be done to encourage companies to invest in R&D in Wales.

—   New build housing: an investment of approximately £500 – £750 million over and above existing programmes could enable an additional 10,000 affordable homes to be built.

—   Housing retrofit: doubling existing investment in improving energy efficiency of homes to £250 million over the next Assembly term would support nearly 9,000 jobs.

—   Large scale programme of multiple low carbon and energy savings projects to make Wales ‘renewable energy’ self-sufficient.

—   Firms should be encouraged to develop more linkages to the local economy through their supplier choices and bringing more of their own activities to Wales.

—   A “succession fund” to keep businesses in Wales by enabling owner managers to get retirement money out without selling the business or by facilitating management buyouts.

Devising and implementing a new energy model for Wales involving a more energy-efficient housing and vehicle stock, distributed micro-generation and smart networks would require massive investment but could spawn a new industry of locally-grounded firms. Concentrating and accelerating infrastructure investment in growth-pole areas with schemes like the Cardiff metro could also give the economy a boost, especially if a firm eye was kept on local content and local apprenticeships. A renewed commitment to financing higher education at an appropriate level and pursuing initiatives like the software university, and the generation of medical spin-outs is also a promising area. All of these things will require heavy investment, necessitating a programme of borrowing.

They also require new public institutions working at arm’s length from government and employing people with the requisite skills, experience and drive. Each of them involves considerable risk and perhaps some stringency in current spending on other public services.

Ultimately it is a political question for the people of Wales. Do we want to purse modest sensible policies that will change our situation only very gradually? Or are we ready to venture something bolder with no certainty of success but some hope of making a faster change in Wales’ circumstances?

The IWA believes Wales can do better, and its time for all parties to get behind an ambitious long-term to grow the economy sustainably and spread prosperity


Lee Waters is Director of the IWA

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