GVA and GDHI

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There are times when I find myself agreeing with both sides in an argument and end up scratching my head as to whether they’re arguing about the right thing.  Today’s extensive coverage in the Western Mail’s Business section of the GVA vs. GDHI argument is a case in point.

The Welsh Government has chosen to adopt GDHI as its headline economic measure and the Western Mail set about finding people to explain why that was the wrong measure to adopt.  They half succeeded.

The Welsh Government argues that GDHI is a better measure of people’s real wealth, whereas a number of economists argue that GVA is a better measure of economic performance.  It seems to me that they’re both right.  The argument isn’t really about what the ‘best measure’ is, but about what it is we’re trying to measure and why.  It was a question which was skated round, rather.

If we are setting out to measure the relative wealth of people in Wales compared to the UK average, then I’d agree that the Welsh Government has probably selected the best measure to do that.  What it is not, however, is an effective measure of Welsh economic performance.  Because it includes all household income, it includes the fiscal transfer which results from the taxation and benefit system, which to some extent hides or disguises underlying economic performance.

That highlights an interesting point in itself.  It is theoretically possible for Wales to reach 100% of the UK average for GDHI with absolutely no underlying improvement in the Welsh economy, simply by increasing the redistributive impact of taxes and benefits - and without any action at all from the Welsh Government.  I can’t conceive of any UK Government actually doing that, but that doesn’t mean that it couldn’t be done.  It might even satisfy many people in Wales that we were getting a ‘fair deal’; but it wouldn’t really mean that the Welsh economy was successful.

On the other hand, if we want to measure underlying success, then GVA is a much better measure.  It tells us the extent to which we are paying our way rather than depending on fiscal transfers.

The question that needs to be asked – and really doesn’t seem to have been probed in any depth – is why the Welsh Government feels that measuring household wealth is better than measuring the state of the Welsh economy.  Why measure equality of wealth rather than equality of performance?  Surely anyone concerned about the Welsh economy would be more interested in measuring to what extent we are economically self-sufficient – even if we never actually decide to turn that into political independence?

It is difficult to avoid the conclusion that the measure has been chosen primarily because it makes the numbers look better.  That would make it another victory for spin over substance.

Regional pay - will he, or won't he?

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We will very shortly know whether the Chancellor will or will not propose the introduction of Regional Pay as part of his budget.  The mood music has been confusing and changeable over recent days; the current balance of opinion seems to be that it will not be introduced after all.

If that turns out to be true, no doubt some will heave a great sigh of relief.  That looks premature to me, however.  Given the regularity with which the idea has been floated, by Labour and Conservative-Lib Dem governments alike, I think we can take it as read that our real masters – the senior civil service – are committed to the idea and will continue to press whoever happens to be in government at the time to introduce the concept.  History suggests that they’ll probably get their way eventually; this is not an issue which is simply going to go away.

There are good reasons to oppose it, of course.  Not only is it a direct – and almost certainly deliberate – weakening of hard-won rights to collective bargaining and equality of treatment of employees, it is also a mechanism for reversing the fiscal transfers which are inherent in the current unified approach.  It is, in short, a mechanism by which GVA and wealth are removed from the poorest areas and transferred to the richest.

It does however leave those of us who support independence with something of a dilemma, because it is inherent in our position that wage levels in the public sector should be set in Wales rather than for the UK as a whole, and it is easy to see why opponents suggest something of an inconsistency here.  Whilst there might be a difference in the underlying principle between the introduction of regional pay set at a UK level and the devolution of pay rates to Cardiff, the potential impact on individual pay packets may not look that different.

In the short term, devolution of power to set wages would almost certainly offer better protection for public sector employees in Wales than would be available for those in the poorer areas of England; it seems certain that the Welsh Government would use such powers to maintain a level of parity.

Longer term, though, there can be less certainty. 

There are two not inconsiderable practical issues.  Firstly, if wage rates across England start to diverge, with what level of wages would the Welsh Government seek to maintain parity?  London rates?  The England average?  Some sort of notional starting point enhanced by inflation?  The second is the question of impact on budget.  I don’t doubt that the UK Government would ‘adjust’ the Barnett formula based on what pay rates would be if they were set in London; maintaining higher pay rates than that would inevitably impact on other budget areas.

Then there’s the question of principle.  Why would an independent Wales – or even a devolved Wales with the right to set public sector salaries – always do so by reference to salary levels set elsewhere, rather than in line with local circumstances and needs?  As far as I’m aware, Dutch civil servants’ salary isn’t set by comparison with what is paid in Germany – why would the relationship between England and Wales be any different?

The context is different, of course.  Opposing the introduction of regional pay, and proposing the devolution of power over the issue are, in my view, the right things to do for Wales, even if they appear contradictory.  But we do need more clarity of thinking over the longer term consequences of the latter.  And the issue underlines the danger of looking at pay rates in isolation – devolving pay rates as a stand-alone matter may create as many difficulties as are resolved.

Regional Pay and GVA

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In this post on Monday, the Bevan Foundation drew attention to one of the key reasons for Wales’ comparatively low GVA – low wages.  It’s not a surprise; it’s a point that has been made a number of times in the past, but it’s a point of which we sometimes lose sight.

There are a number of reasons for Wales’ average pay being lower than the UK average.  Not the least of them is the fact that for organisations not headquartered here, the Head Office salaries – usually the highest – are elsewhere.  In a sense, that means that economic activity in Wales doesn’t contribute to GVA as much as it would if the higher salaried jobs were distributed in the same way as the lower paid jobs.  Such distribution is not exactly a practicable solution, but the effect of an uneven distribution is worth bearing in mind.

Given the way that GVA is calculated, low wages will inevitably depress GVA in any area, just as high wages would increase GVA.  So, the proposals by the UK Government to introduce ‘regional pay’ would have a direct impact on GVA.  For any area where regional pay was set at a lower value than average, GVA would apparently drop; for any area where it was set at a higher level, GVA would apparently increase.

This happens with no change whatsoever in the work people do, in the output they produce, or in their productivity; it’s solely an effect of redistributing the same amount of pay in a different way geographically.  I think we can be reasonably confident that the introduction of regional pay would see public sector pay levels reduce in Wales compared to the average, whilst they would increase in London and South East England relative to the average.

In principle, I’m in favour of redistributive policies, but in this case, the UK Government would be deliberately and consciously increasing the GVA gap between Wales and the UK average, by taking from the poorest areas and giving to the richest.

No doubt, some will cease on the resultant increase in disparity as clear proof that Wales can’t afford to control her own affairs.  But in fact, all it proves is that the measurement of GVA is a complex business, and doesn’t simply reflect poor economic performance in Wales.

I wish it were as easy as suggesting some sort of reverse regional pay, where the highest salaries were paid in the poorest areas, as a deliberate tool of policy to redistribute GVA more evenly.  But it does underline the way in which a policy of deliberately moving high paid public sector jobs from the centre to the periphery can have an impact on relative economic wealth. 

£170 million of lost opportunity

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The Welsh Government announced this week that it is working with the 22 local authorities in Wales on a scheme to use local authority borrowing powers to boost infrastructure investment in Wales.  This looks, in principle, very similar to the proposal floated by Gerry Holtham some time ago, and effectively circumvents the restrictions which prevent the Welsh Government from borrowing.

To that extent, it’s a welcome departure from the usual approach of simply blaming the Tories for everything.  I do have three reservations though.

The first is the scale of the plan – or rather the lack of scale.  Gerry Holtham suggested that it would be possible to use this approach to borrow around £2billion for spending over the five year life of a government.  In comparison to that, £170million looks remarkably unambitious.  It’s significantly less even than Plaid’s rather more modest Build4Wales, which suggested borrowing a mere £500 million from the private sector.

The second reservation is that it seems to be restricted to spending on highways projects.  Whilst I’m sure that at least some of those schemes will be worthwhile, investment in road schemes wouldn’t be my top priority.  And it appears as though the schemes haven’t even been selected yet – local authorities are being invited to come forward with proposals.

And that brings me to my third reservation – the lack of an obvious strategic driver behind the scheme.  Obtaining a large capital sum for infrastructure investment should be a real opportunity to take a strategic view and decide on the most important projects to boost GVA.  Instead of that, we have a bid-driven allocation of resources to local authorities – the availability of the money is driving the spending, rather than the infrastructure needs.

It’s what we’ve seen far too often from successive Welsh Governments.  It’s the same curse which afflicted Objective One funding and Convergence Funding – an attempt to please as many people as possible and share the cash around rather than use it to drive a step change.

Sadly, it isn’t that the Welsh Government doesn’t have strategies – those they have aplenty.  They’re all carefully written, consulted on, amended, approved, and filed somewhere, with all the right boxes duly ticked.  What they are not, however, are drivers of government action.

In going down this route, the Welsh Government was in serious danger of getting something right – it’s a pity that the implementation is another missed opportunity.

Fiddling at the fringes

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According to this story yesterday, job losses in the Welsh public sector could be up to 26,000, and each job loss in the public sector could be matched by a job loss in the private sector, pushing the total cost to the Welsh economy up to around £3.65 billion.  I assume that to be an annual figure, although it wasn’t stated as such, and nor was there much by way of clear justification of any of the other figures.  I’m not sure how confident we can be, as a result, in the precise figures, but there are some key general points that do emerge.

The first is that cutting spending in the public sector is not neutral in its effect on private sector employment.  There is a direct knock-on effect as the public sector places fewer contracts and buys fewer goods and services.  It’s a relationship which should be obvious, really, and I don’t understand why those who are so keen to cut the public sector quickly and deeply don’t understand that relationship. 

The result is that, even if we assume that the private sector is going to create jobs to take up the pool of labour created by public sector cuts, the total number of jobs needed is much higher than simply those cut from the public sector.  And that’s just to stand still, without doing anything about the high levels of unemployment which were there to start with.

The second thing that struck me about the report was the quote from the IoD representative, who claimed that “the private sector was doing its best to create jobs to compensate for public sector cuts”.  I’m not convinced about that.  For how many organisations in the private sector does the question of ‘creating jobs’ feature in the mission statement, strategy, or objectives?  Not many, I suspect. 

Private companies exist to make money for shareholders, not to employ staff, and part of the reason that the economic system is badly broken is that there has been an obsession with ‘efficiency’ as companies try to produce more goods and services more cheaply – generally for less effort using fewer employees.  Whilst it’s true that the expansion of private companies can create jobs, that’s a side-effect – it’s not the aim.  Suggesting otherwise is mere spin.

The third point is the repetition of the canard that the problem with the Welsh economy is that we are “over-reliant on the public sector”.  That’s an ideological belief rather than a statement of fact.  There is no magic number for the percentage of the economy which belongs in one sector or the other, and it really doesn’t matter, in terms of GVA, whether a particular activity is carried out by the private sector, by the public sector, or by the private sector as a contractor to the public sector. 

(I’d accept that there are questions about whether the public sector has historically been as ‘efficient’ as the private sector.  That’s a subject for another day, but the point is that there really is no inherent reason why the public sector should be any less productive or effective than the private sector.  And there have been, in the past, plenty of examples of profitable businesses in the public sector – until they were sold off.) 

Who owns enterprises is irrelevant from a GVA perspective, but we’re stuck in the Thatcherite mode of believing that only private profit can drive an economy, and that the state should only concern itself with the provision of a limited range of services.  It’s a paradigm which patently isn’t working, yet governments and oppositions alike only offer us more of the same.

On the same page as that story was the report about Cameron stating that “getting debt under control is harder than envisaged…”.  The only thing that surprises me is that he or anyone else would be in any way surprised at that.  Increasing the numbers of unemployed people reduces tax revenue and increases benefit expenditure, leading to the government needing to borrow just as much as if they had stuck to Labour’s plans.  They’re effectively just spending a similar amount of money in a different way.

Labour seem to take some satisfaction from that, but they really shouldn’t.  The difference between the two parties' approaches is little more than fiddling at the fringes.  £6billion may sound like a lot of money, but it’s really neither here nor there in the grand scheme of things.  But within the current paradigm, fiddling at the fringes is the best we’re likely to be offered by conventional political parties.  None of them is offering a real alternative.

Room for more consensus?

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I’ve had some time this week to read the report of the Welsh Conservatives’ Economic Commission, penned by Dylan JE, and which he has been highlighting in bite-sized chunks on his blog over the past couple of weeks.  It’s probably more widely-available by now, but my source was Syniadau here.

One of the first things that struck me was the similarity in style of the analysis of the Welsh economy since 1999 to the sort of analysis which Plaid Cymru would have produced prior to 2007.  And that isn’t intended as a suggestion that such an analysis has somehow become any less valid. 

The other thing that struck me was the graphic way in which the report highlights the huge disparity between GVA/ head in London and GVA/ head in any other part of the UK.  From a UK (rather than a simply Welsh) perspective, the ‘above-average’ levels of London are as much a part of the problem as the ‘below average’ levels in Wales.

However, as might be expected, even where I agree with the analysis of the problems, I don’t agree with all the suggested solutions; there are things in the document with which I agree, and others with which I do not.  I don’t understand the Conservative obsession for introducing the private sector into the health service, for instance.

It is, though, a worthwhile contribution to debate about the way forward for the Welsh economy, and it indicated to me that there is at least a possibility of developing a degree of consensus around some policies, whilst continuing to disagree about others.

The headline policy, described by Dylan himself in his introduction as the ‘main recommendation’, is to vary the rate of Corporation Tax in Wales. 

(If I may be forgiven a political side-swipe a moment, I really don’t understand why the proposal that the Welsh Conservative Party (is there really such a beast, by the way?) should lobby the UK Government to adopt this approach is predicated on the words ‘if elected’.  If it’s the right thing to do, then it’s the right thing whoever is in government in Cardiff – why wouldn’t members of the Conservative Party in Wales want to lobby their own party’s government to make this change regardless of the outcome of the election?)

The method of achieving the reduction in CT isn’t spelled out, although the relevant passage in the Holtham report is quoted with approval.  It isn’t what nationalists would ask for – i.e. the right for the Assembly to vary the rate of CT – but it’s a neat unionist solution, tying regional variations in the rate of CT to the variations in GVA per head.  And, if it achieves the desired result, I can live with a unionist solution, for the short term at least.

As an aside, Dylan reported on his blog an interesting comment on the idea of varying the rate of CT, which deserves to be considered properly.  It’s given some food for thought, even if it hasn’t led me to change my mind about the value of reducing CT in Wales.  The comparison with the Irish experience is instructive; but the purpose of a change in Wales isn’t (or shouldn’t be) about encouraging companies to move here so much as giving indigenous companies a better chance of success.  Wales won’t get the tax receipts either way, so it isn’t about raising revenue.

It's worth bearing in mind when talking about varying the rate of CT is that it is a policy which will largely benefit precisely the target companies for future economic growth in Wales – the SMEs.  For the larger, international companies, CT is largely a voluntary tax anyway – they can and will declare their ‘profits’ in whichever tax regime is most favourable to them.  (That’s a loophole which needs to be plugged, of course, but it isn’t one which is immediately relevant to a discussion about the ‘right’ rate of CT for the Welsh economy.)

So – is a regionally-varied rate of CT a good place to start looking for cross-party consensus in promoting the Welsh economy?

Self-government dividend

Tweet We all know that salaries in Wales lag behind the UK average. The Welsh average is about 87% of the UK average. It's another indicator of the relative underperformance of the Welsh economy compared to the UK average. Low wages and low GVA per head are not exactly synonymous; but there's a clear relationship between the two sets of figures.

Those who are implacably opposed to any degree of Welsh autonomy will no doubt see it as yet another indicator that Wales cannot survive without 'subsidies' from across the border; but we need to look deeper than that. There's nothing inherent about being Welsh or living in Wales which dooms us to a lower level of salaries, a lower level of economic activity, or a lower GVA.

One of the usual responses has been to suggest more training provision, but it's not immediately obvious to me how continually upskilling the Welsh workforce actually addresses the issue. It might prepare Welsh workers for jobs in the future, but I have a feeling that we've already spent quite a lot on training people for jobs which somehow never seem to arrive. And I detect a growing feeling that people are turning against some training schemes, seeing them more as a means of hiding unemployment than of preparation for employment.

More relevant to me was the CBI comment some months ago that "We have insufficient head offices located here and there are not enough big corporations headquartered here." That's certainly one of the factors which keeps wages in Wales lower than the UK average. Far more companies choose to locate their higher-paid head office staff in England – predominantly the South-East of England – than in Wales. Changing that would certainly give us a higher proportion of high paid jobs; but is it really realistic?

It's been much talked-about for many years, but I don't see many footloose multinationals - or even UK corporates - being likely to move their headquarters to Wales any time soon. In fact, I think that the One Wales Government has got it right in saying that it intends to build future strategy around the development of indigenous companies rather than around attracting inward investment.

The nay-sayers like to claim that companies would head east over the border if Wales had more powers or even independence; I suspect the opposite. If Wales became a self-governing nation, with its own legal jurisdiction, wouldn't at least some companies see some benefit in creating at least a 'regional' presence in Wales as a result, with the knock-on effect of increasing average pay? And wouldn't self-government also mean that we'd have more senior public sector employees in Wales from all the organisations currently run from England?

Perhaps we could call it the 'self-government dividend'.

DIY is best

Tweet There's no arguing about the fact that Wales has a lower GVA per head than the UK average. Nor about the fact that this is a very long-standing problem. But whose fault is it?

During his flying visit to Wales, Cameron attempted to pin the blame on Rhodri Morgan and Gordon Brown – presumably hoping that voters have short memories. In reality, insofar as Morgan and Brown are guilty on this score, it is of failing to improve on the legacy left to them by the Tories, rather than creating it. (WelshPoliticalHistory comes to a similar conclusion, although it's disputed in some of the comments. In the narrow context of an utterly hypocritical accusation by Cameron, I agree with his conclusion). In fairness to the Tories – did I really just say that? – they in their turn were guilty primarily of failing to improve on their legacy from the previous Labour government. And so, apparently, ad infinitum…

That doesn't mean that I don't consider Morgan and Brown to have been a failure; merely that the accusation was disingenuous at best, given its source. Cameron is wrong to hurl the accusation at Labour without taking at least equal responsibility for his own party's past actions.

The problem of Wales' comparatively low GVA is a serious and deep-seated issue. It would be easy at this point to revert to the simplistic traditional position that it's not which party is in government which is the problem, but that London government in general fails Wales. I happen to think that that is true, but it isn't the whole story.

It is actually extremely difficult for any government to ensure that GVA per head is consistent across its territory. The very nature of the word 'average' requires that some areas are below it and some above it. There are differences between the different parts of Wales as well. Attention is currently focussed on the differences between Wales and England, but I am certain that in an independent Wales, the differences between Cardiff and Ynys Môn would be receiving a similar level of attention. It isn't just a problem for 'London government'.

Governments setting economic policy make choices. Maximising GVA per head in the economy as a whole isn't necessarily inimical to sharing growth and prosperity; neither are they automatically the same thing. But the belief that the 'free market' is the best way of achieving the former (a belief which is now common to both the Tories and Labour) will almost inevitably lead to 'regional' variations. The question is – how do we respond to that?

The least helpful – and least honest – response is to start accusing the least well-off areas of being somehow responsible for their own failure, of being dependent on handouts from the centre, and of whinging. It's unhelpful, yet it seems to underlie the attitude of a number of unionist politicians, who seem for some perverse reason to be almost pleased that - as a result of their economic policies - 'Wales is too poor to be independent'. Even more bizarrely, the only remedy they offer is more of the same.

A more honest unionist response would be to say something like, "Our aim is to maximise the prosperity of the UK as a whole. We believe that the policies which we are following are the right ones to do that. We recognise that this might well mean that some parts of the UK are relatively less well-off than others, but we will do what we can to redistribute wealth so that all citizens benefit from the prosperity which is being created."

It's a better line than complaining about having to give out 'handouts' to the poorer areas, an approach which serves not only to increase the likelihood of a dependency culture, but also to build resentment amongst both the givers and the receivers of the alleged largesse. The problem is that, to be credible, such a line needs to be backed up by precisely the sort of pro-active regional policy which has been progressively dismantled by Labour and Tory governments alike.

The other response, of course, is to argue that the best way of reducing the disparity in GVA between Wales and England is to have an economic policy focussed specifically on the needs of Wales – and that means maximising the economic powers of the National Assembly and/or Independence.

Nobody will be in the least surprised that I favour the latter viewpoint. I have zero faith that anything which Cameron would do in government would have any more impact than the efforts of previous governments – especially given his stress on cutting the public sector. Focus on, and ownership of, our own problems always seems to me to be preferable to expecting someone else to do something.