Lord German
To ask Her Majesty’s Government what actions they are taking regarding the challenges faced by the Welsh economy, and how they are ensuring that the Welsh and United Kingdom Governments work closely together in the interests of the Welsh people.
Baroness Northover
My Lords, because the Question for short debate of the noble Lord, Lord German, will now be taken as last business, the time limit becomes 90 minutes rather than 60 minutes. Speeches should therefore be limited to 10 minutes; the speech of the noble Lord, Lord German, remains as 10 minutes and the Minister’s as 12 minutes.
Lord German
My Lords, I begin my speech today by paying tribute to my noble friend the Minister and welcoming her to her new position as well as her first appearance at the Dispatch Box. I hope that nothing that I might say, or that other noble Lords might say, gives her any difficulty in responding to questions about Wales that we pose in this debate.
The economic health of Wales is the most important issue of all facing our country. Jobs, prosperity and the well-being of our people depend upon it, but there are some worrying underlying trends which are holding Wales back. I want to examine those issues today and to look at some potential solutions.
Despite 13 years of a Welsh Assembly, economic performance in the country still languishes at the bottom of the league. There is an overdependence on the public sector, and lower private sector development than is needed to pull Wales up by its bootstraps. In 1989, GVA per head in Wales was 84% of the UK average; in 2009—these are the latest figures available—it was 74%. GDP in Wales in 2010 was 80% of the European average, compared to 111% in the UK as a whole, and in west Wales and the valleys that fell to 68%. In the last quarter, public sector employment in Wales represented nearly 26% of the total workforce, higher than in any other part of Great Britain.
Wales went through its last industrial revolution in the mid and later 20th century, with the virtual ending of coal and heavy, smokestack industries. The replacement was with inward investment companies from around the globe, producing goods for the UK and European markets. That was a difficult transition, but it was a transition. Unfortunately, some of that has remained, but much has moved on to areas of cheaper labour cost. Once again, Wales needs to look for a different pattern of economic development, which is why the UK and Welsh Governments need to work together.
The levers that affect economic change are split between the Welsh Government and the UK Government. Working in different directions would at worst be pointless and could also result in overlapping or duplication of support and effort. By way of example of the split of those levers, we can take employment issues. The Work Programme remains with the UK Government but the Welsh Government provide apprenticeships. Financial support between SMEs is split between some of the banking provision and work that the UK Government do and the small, support grant aid that the Welsh Government provide. On exporting activities, the Welsh Government lead trade delegations, and so do the UK Government; sometimes they work hand in hand, but sometimes they do not. Essentially, the microeconomic and macroeconomic measures that Governments can take are split between two Governments.
We await the report of the Silk commission, which will undoubtedly propose changes to the ability of the Welsh Government to use financial levers. These are crucial, because the Welsh Government will benefit from financial incentives to boost the Welsh economy. I am therefore somewhat surprised that Labour seems to have rejected income tax powers. It is not about the variation of income tax—whether it is 1p up or 2p down, or whatever—but about raising the tax base overall in Wales, which will give the Welsh Government a better income. The more successful that the Welsh Government are in raising the tax base of Wales, the more money they will have to spend on public goods. And it is important that the Welsh Government should have financial incentives to do better; it goes alongside borrowing powers. You cannot use one without the other.
The other issue is the use of European funding. Wales will in all likelihood have a third round of the highest level of European support, subject to a budget which I understand some in the other place are striving to reduce. But there is a need to refocus the use of that European money and concentrate on private sector development—small company growth, new business formations, supply chain support, new financial support mechanisms, exporting, and redoubling the effort that we put into skills development and training. Convergence funding is very likely to continue, because GVA in west Wales and the valleys in 2010 was 68% of the European average, well below the current 75% qualification threshold for the highest level of funding. To measure that against the figure for the UK as a whole, it was 111% of the European average.
The recently published Heseltine report suggested bringing together many structural funds to try to create an armoury of financial weapons, with the ESF, ERDF, the marine and fisheries fund and the European agricultural fund for rural development, so that there could be an organised direction for European funding, particularly to aid the goals of small and medium-sized enterprise growth, skills and training. I would like to know the Minister’s attitude towards the proposed Atlantic strategy, which of course is now in its formation and which would serve the purpose of doing just that for Wales.
Where are the opportunities for the future? Manufacturing is a key Welsh advantage, and always has been in recent decades. In 2010, manufacturing made up 18% of the Welsh economy, compared to 12% of the UK as a whole. The automotive sector, pharmaceuticals and steel production are key areas for development but there is now a need to look at new and emerging sectors where there is an added value and an export advantage. For example, we need to encourage joint ventures between companies from outside Wales and companies with know-how within Wales. There is a need to bring the know-how and the finance together to create wider markets.
As regards research and development, Welsh higher education can and should do more to grab the available funding for innovation. We have really good examples of progress in this area. Some of our universities are to be congratulated on what they have done but we need to replicate that and expand it. Research and development expenditure in Wales represents only 2% of the UK spend in this area and the split in Wales is 46% investment from the private sector and 54% from the public sector. However, the figure is too small in terms of encouraging the innovation and development which companies in Wales need.
Small companies make up 99% of businesses in Wales and represent 43% of all company turnover. Many of them urgently seek credit to enable them to expand, so getting the cash to these companies must be a priority. However, noble Lords will know that small business formation in Wales has gone down each year since 2004. In 2004, some 11,525 VATable threshold companies were created, but only 7,500 were created in 2010. They decreased in number through each of the good years as well as the lean years. Therefore, renewed emphasis on supporting the small business birthrate is needed.
The M4 syndrome whereby people believe that they are doing different things and achieving different purposes must end. There must be a common purpose between the Welsh Government and the UK Government, so perhaps now is the time for a joint task force: not a review or a policy document but a group which can recommend action, support both Governments, suggest new approaches and enable better working together. This could draw on the best brains and build on best practice in all these areas. I believe that a new arena for co-operation is needed. Wales is in need of an injection of new thinking to drive its economy upwards and off the bottom rung. There is more need than ever to work together because not working together will damage the prospects of the very growth which is so needed in our country.
Baroness Gale
My Lords, I add my congratulations to the noble Baroness, Lady Randerson, on her promotion to the Wales Office and on becoming a Wales Office Minister. I share in the warm welcome that has been extended to her tonight. I know that her experience as a Minister in the Welsh Assembly will stand her in good stead in her work in the Wales Office. I look forward to working with her. I also congratulate the noble Lord, Lord German, on securing this debate tonight and thank all noble Lords who have contributed. I detected a note of optimism in all the speeches about where Wales can go if we are all determined to work together.
This is a timely debate with the Silk commission due to report on part one of its remit very shortly. Ahead of this, as noble Lords will know, the UK and Welsh Governments have reached a significant agreement on funding reform. The agreement acknowledges that convergence has led to Wales being underfunded in the past and has the potential to do so again in the future. We welcome this admission from the Treasury and will be holding it to account on this point. We also welcome the Treasury’s support for extending borrowing powers in Wales—rightly dependent on an income stream—as a way to shape the Welsh economy, which they have the ability to do.
The debate is timely too because of the better-than-expected employment and growth figures over the last quarter. We welcome those figures but they are still nowhere good enough yet. On the number one challenge facing the Welsh economy—how to secure jobs and growth—the two Governments are not working well together. That is because the policies of the United Kingdom Government are falling short on the real needs for the Welsh economy. The Welsh Government are doing all they can with the levers at their disposal but what Wales really needs to tackle the challenges facing its economy is for the Government at Westminster to change course from their so-called plan A.
That is the message that I hope the Minister will be able to take back with her from this debate, because the Government’s austerity programme is not working for Wales. A 1% injection of growth over the past three months, which was boosted by the Olympics, does not change the fact that the Government’s economic policies have greatly underachieved. Two years ago, the Chancellor said his plan would assume growth at 4.6% by this time. In reality, the UK economy has grown by just 0.6% and we are only now emerging from the deepest double-dip recession in over half a century.
On getting jobs and growth into the economy, we need the United Kingdom Government to implement a plan that works for Wales and follow the example set by Welsh Labour Ministers in Cardiff. Despite the real terms cut of 42% to their capital grant, the Welsh Government have put forward a budget for jobs and growth. On tackling youth unemployment, for example, the Welsh Government introduced jobs growth Wales in April this year, which will create 12,000 job opportunities over the next three years. In contrast, of course, one of the first things the UK Government did when they came into office was to scrap the future jobs fund. That was a risible and completely counterproductive decision, especially with long-term youth unemployment in Wales having quadrupled over the last year.
Another way the Welsh Government are doing what they can to boost jobs and growth is by reaching out to business through city regions, through growth funds, and by investing in Wales’ infrastructure with a £15 billion investment plan over the next decade. As far as we are concerned, the Welsh Government are doing their fair share, but unfortunately Wales is being let down by the coalition Government in Westminster pursuing counterproductive policies.
I will put three questions to the Minister. First, on the scale of public sector cuts, what assurance can the Minister give that forecasted 700,000 public sector job losses in the UK will not fall disproportionately on Wales? Secondly, the Government’s regional pay proposals would be disastrous for Wales. Does the Minister share the views of the Liberal Democrat leader in Wales, Kirsty Williams, who said recently that regional pay would exacerbate a “brain drain” in Wales and create the impression that to “get on”, you first had to “get out” of Wales? Thirdly, does she agree that the increase in VAT—which, before the election, the Deputy Prime Minister Nick Clegg estimated would cost people £389 a year—has hindered the Welsh economy?
Public sector job losses, regional pay and VAT are three policies that will hit Wales hard and are indicative, we believe, of the Government’s divide-and-rule approach to politics. Labour has put forward an alternative “One Nation” plan to get growth into our economy. We are calling for a jobs plan to boost the economy, including using funds from the 4G mobile spectrum auction to build 100,000 affordable homes in the UK. We believe that the Prime Minister and the Chancellor need to change course and follow Labour’s alternative plan as well as the example set by the Welsh Labour Ministers in Cardiff Bay. We believe that that will be the best way for the two Governments to work together to tackle the real challenges facing the Welsh economy, and the best way to get jobs and growth into the Welsh economy, which we all know is what is needed. I look forward to the Minister’s reply.
The Parliamentary Under-Secretary of State, Wales Office (Baroness Randerson)
My Lords, I first thank the noble Lord, Lord German, for securing this debate to discuss the economy of Wales. It is a hugely important subject and clearly close to the hearts of many noble Lords here today. It is an honour for me to be standing here for the first time as the Wales Office Minister answering this debate.
We have had a large number of really good ideas put forward today and some very valuable contributions from noble Lords. Although we might not always agree on the solutions, I hope that we all share a common objective: to revitalise the Welsh economy. Clearly this is not just a job for the Welsh Government. The Welsh Government need to work hand in hand with the UK Government. We also need to work closely with the private sector and with all stakeholders in delivering our vision for the Welsh economy. The noble Lord, Lord German, illustrated the sometimes confusing split of powers and economic levers. We have to work with them and ensure that they work effectively.
However, our hopes and aspirations need to be founded in reality, and the noble Lord, Lord German, outlined the challenges that Wales faces. We must recognise that the UK economy as a whole is dealing with some very deep-rooted problems. The global financial crisis in 2008 exposed an unstable and unbalanced economic growth model, based on increasing levels of public and private sector debt: an unbalanced model, overreliant on the financial sector and on the economy of the south-east of England. Since then, the UK economy has of course been hit by a series of further shocks, including the eurozone crisis. Returning the UK to strong, sustainable, balanced growth is the top priority for the UK Government.
We had welcome news last week of course, with confirmation that the UK economy is officially out of recession. We had particularly welcome news in Wales. The noble Lord, Lord Roberts, drew attention to the recent statistics on the state of the economy in Wales. Employment statistics tell a great story for Wales in the last quarter: 40,000 more people in work, 7,000 fewer people unemployed and 32,000 fewer people economically inactive. I disagree with the noble Baroness when she says that the Government’s economic policies are not working for Wales.
I am pleased to be able to say that the increase in the employment rate in Wales over the past quarter was the largest of all the devolved countries and English regions and well above the increase seen across the UK as a whole. The figures may have been stimulated by the Olympics; I can assure noble Lords that Wales did not benefit disproportionately from the Olympics but still did very well indeed in these figures. However, there is no room for complacency, and no one is more alive than I to the challenges that we continue to face in Wales.
The Government are investing in Wales, illustrated by our commitment to electrify the south Wales main and valleys lines, which several noble Lords referred to. Wales is expected to benefit directly and indirectly from almost £2 billion from the programme to modernise the rail network. I can assure the noble Lord, Lord Jones, that we have repeatedly indicated our desire to look at infrastructure improvements in north Wales and we are committed to working with the Welsh Government and the local community in considering the business case for electrifying the north Wales line. The noble Lord, Lord Thomas of Gresford, drew attention to the number of regular commuters in this area and hence the need for this improvement.
We have made considerable investment in broadband infrastructure. The Government have provided the Welsh Government with almost £57 million to help bring broadband to everyone and super-fast speeds to 90% of homes and businesses in Wales. In July, the Welsh Government announced that they had matched our investment and had awarded the contract, which is worth £425 million and also includes European structural funds.
Several noble Lords referred to the importance of enterprise zones, and we wish to see these flourish in Wales. By granting enhanced capital allowances to the Deeside enterprise zone, we have demonstrated that we can work very closely with the Welsh Government to ensure that that zone is a success. But we need to find ways to further accelerate major infrastructure investment, and I hope that we will see Welsh projects benefit from the £50 billion UK guarantees scheme that we have introduced. The noble Lord, Lord Carlile, drew attention to the need for venture capital funding, which will also need to be stimulated in some cases by those government guarantees.
I welcome the recent agreement reached in principle that the Welsh Government should have access to capital borrowing powers, which was also welcomed by the noble Baroness, Lady Gale. Those borrowing powers are necessary in order to finance infrastructure, and there are ongoing discussions with the Welsh Government on infrastructure improvements along the M4 in Wales. We look forward to considering the report from the Silk commission, due to be launched on 19 November, which has assessed the case for borrowing and taxation powers. I agree with the noble Lord, Lord German, that increased fiscal responsibility is important for the development of devolution.
I recently had a very productive meeting with Edwina Hart, the Welsh Government’s Minister for Business, Enterprise, Technology and Science, in which we discussed how the two Governments can work together to ensure that enterprise zones work properly for Wales, and I welcome the news that the Welsh Government will soon be announcing proposals for more enterprise zone sites, which could benefit from enhanced capital allowances. The noble Lord, Lord Thomas, gave us international examples of economic co-operation. If it can be done on an international basis, it can be done within the UK.
Edwina Hart and I also discussed how our two Governments can work together in response to the report on city regions by Dr Elizabeth Haywood, which highlighted the need for the Welsh and UK Governments to work together to strengthen the Mersey Dee Alliance to deliver growth and jobs for north-east Wales. That report was referred to in detail by the noble Lord, Lord Thomas. There are important cross-border opportunities that we are committed to take forward with the Welsh Government.
In addition to the challenges that we face to improve infrastructure, it is vital that we do all that we can to enhance the skills of the workforce in Wales. Improving skills will not only support indigenous business but help Wales to attract more inward investment. It is excellent, as the noble Lord, Lord Jones, said, that Airbus and Tata Steel, for example, continue to operate effectively in Wales and to run apprenticeship schemes that are examples of best practice. I know that the Welsh Government have a number of such schemes running to support young people into work across Wales.
Of course, many aspects of skills policy are devolved to the Welsh Government, but that does not mean that there are not opportunities for the Governments to work together in this important area. Wales’s higher education institutions have a world-class track record. I am very pleased that the noble Lord, Lord Aberdare, chose to highlight the importance of the higher education research contract recently won by Swansea University. We can celebrate that it will team up with BP to create an Energy Safety Research Institute which is worth £38 million in partnership.
There is clearly still more to do if we are to improve the economy in Wales, and tonight’s debate has raised some interesting and important points. In my last couple of minutes, I will try to answer some of the points that noble Lords have raised. The noble Lord, Lord German, emphasised the need for new thinking to spread prosperity across Wales. Within the Wales Office, we will need to give careful consideration to his proposals for joint working; he had some very interesting ideas. The noble Lords, Lord Roberts of Conwy and Lord Jones, referred to the abolition of the WDA, which has undoubtedly had an adverse impact. Sadly, the figures say it all on that. However, both the Wales Office and the Welsh Government are working hard with UKTI to market Wales abroad. The two organisations are having success and we hope to continue that and redouble our efforts.
The noble Lord, Lord Jones, referred to the Secretary of State and the First Minister being in close contact. I am aware that they are, but I cannot answer the question about which language they speak in their meetings. I am very grateful for the intervention of the noble Lord, Lord Wigley, who brings a different perspective to our debate.
Finally, the noble Lord, Lord Carlile of Berriew, talked about the lack of venture capital in Wales. I am pleased to be able to tell noble Lords that Welsh businesses are benefiting from the enterprise finance guarantee. So far, 784 loans have been offered in Wales with a total value of nearly £72 million. I also welcome the announcement that Finance Wales recently made its first investment from the new £40 million Wales SME investment fund.
I hope that noble Lords will bear with me. When I read Hansard tomorrow, I will write to anyone whose questions I have not had time to answer here today.