Welsh economic prospects in 2011

It is of course no secret that the UK economy is in deep trouble, and consequently, so is the Welsh economy. Much has been made by the media of the spending cuts aimed at reducing the unsustainable budget deficit. So far as Wales is concerned the effects of such a policy could be more damaging than in the UK as a whole. Unless, that is this is treated as an opportunity for fundamental change.

LOOKING AHEAD This is the first of a series of articles we shall be publishing this week looking ahead to the prospects for key Welsh policy areas in 2011. Tomorrow: health. The IWA’s National Economy conference, in Cardiff on 11 March is on the theme Private Sector to the rescue: an opportunity for Welsh economic renewal. Keynote speakers include Gerald Holtham, Chairman of the Holtham Commission on Financing and Funding for Wales, Rob Lewis, Senior Partner, PricewaterhouseCoopers, Adele Blakebrough, Social Business Trust, Professor Kevin Morgan, Cardiff University, and Jon House, Chief Executive, Cardiff County Council. Click here for more details and to book.

Reductions in spending that are too deep and too fast mean the threat of a double dip recession has not gone away, or at best lead to a prolonged period of slow or indeed negative growth. Consequently, cuts in spending have to be aimed very carefully. The upshot is simple, if brutal. The way out of the present problem is to reign in spending. Cuts work faster than tax adjustments and to a great extent speed is of the essence.

The UK government is seeking ways to cut the deficit by some £83 billion over the course of the next four years, with the axe falling on the public sector. Here’s the rub, however, the public sector in Wales remains a major player, a substantial employer and perversely, a major customer of the private sector.

For many, the present situation has brought back memories of the Thatcher era. But despite the social and economic upheaval, the cold facts are that the problems and backwardness of British industry had to be addressed and changed and now more than ever is the time to grasp the opportunity to role back the public sector. The chickens have indeed come home to roost. I and many others have constantly warned that the Welsh economy’s dependence on the public sector was inappropriate, dangerous and always a risk to future economic welfare.

So what is to be done? First of all, the £15 billion that might have been spent on the Severn barrage has thankfully been waived. The barrage made no sense economically or environmentally – there are other more efficient and less intrusive ways of generating electricity. The £1 billion earmarked for electrifying the south Wales main line has also been waived, at least for the time being. Spending public money so that more of our countrymen – according to the former First Minister – can work in London was always a nonsense. Meanwhile, scrapping the Defence School at St Athan is no real loss to the Welsh economy. It’s main contribution would have been to maintain, and indeed deepen, our reliance on the public sector.

Government at both Assembly and local level must be innovative, indeed brave. The public sector employs almost 40 per cent of the working population, most of them in government. At risk of suggesting yet another local government re-organisation, the present system defies logic. The 22 local authorities differ in size, level of service and problems. Merthyr and Torfaen are poor and tiny, Rhondda Cynon Taf is large and poor, the Vale of Glamorgan is small and rich, while Powys covers an illogical land mass. The Welsh Local Government Association (no vested interest here) is dismissive but the reality is that this situation cannot continue – even if a complete re-organisation is a step too far, do we really need, or can we afford, 22 chief executives, directors of different departments and their staff?

Before cries of the cost involved, what about an alternative to redundancy? Why not adopt the agency idea. Spin out departments which can then tender for work in all authorities (including outside Wales) and develop new skills in servicing, and indeed become part of, the private sector. Many, perhaps even the majority of local authority, health, social services and Assembly duties lend themselves quite comfortably to private sector activities. The private finance initiative is apparently not welcome, yet this is a way both of relieving the public sector of up front capital costs and driving the private sector.

The Welsh Government has seen its staff mushroom since the National Assembly was established in 1999. Not only is there room for staff redeployment into the private sector as suggested, but there is the need for a long hard look at what use is being made of the money it has to spend.

The worry is that any substantial cutbacks in spending will be aimed at what are seen as soft targets. Much has been made of protecting the health services (now there’s an organisation crying out for some private sector skills, input and efficiency). Yet future growth must come from the private sector, so economic development, education and transport budgets should have better protection. The substantial reduction in the economic development budget is insane. Economic growth takes time and this is one activity that needs serious attention and support if the private sector is to provide jobs and growth. The strange thing about an economy in recession is that past evidence has shown such recessionary times are linked with strong growth in new businesses. Here is the challenge to the Welsh Government to provide appropriate support schemes so that the private sector can grow and develop.

Ironically, the major tool that would help alleviate any perceived or real damage to the economy – the powers to raise or amend taxation – are not available to the Assembly and are not on any future agenda.

This may well be a troublesome time, and although there must be redundancies and cutbacks, this provides an opportunity permanently to drive back a bloated and inefficient public sector. There must be a definite and clear willingness at all levels to accept that the dominance of the public sector must end and that the way forward is an acceptance of the need to develop the private sector. Now is the time.