Budget Special 3: Wales needs a hand up not a hand out

After twelve years of devolution, Wales remains the poorest region in the United Kingdom. Despite Rhodri Morgan’s first Government back in 2001 setting a target to increase our relative prosperity to 90 per cent of the UK average by 2010, it has now fallen to just 74 per cent. Out of all the UK regions, only the West Midlands has experienced a lower rate of growth than the Welsh economy since 1999.

The question is what can be done to reverse this decline?

For the Welsh Government, the answer lies in a ‘new’ approach to economic development. After three years at the helm of the Department of Economy and Transport, Ieuan Wyn Jones last year finally published a strategy that he and his civil servants believed would transform the nation’s fortunes. Yet, is there anything new in the Economic Renewal Programme (ERP) that will really make a difference?

Budget Special Tomorrow Gerald Holtham, who chaired the Welsh Government’s Independent Commission on Funding and Finance, says Wales should be able to cut the top rate of income tax. He argues that the chance of persuading the UK Government to lower Welsh corporation tax is about as much as finding Elvis alive in Cwmbran.

For example, will focusing on six key industrial sectors really transform the Welsh economy, given that growth is to be found across all sectors? Will investing in broadband drag Welsh business into the 21^st Century when take-up within areas already having access to superfast connections is pitifully low? Will abandoning support to the vast majority of small businesses really ensure that the Welsh economy grows?

One of the constants of the Welsh civil service is that a strategy will always come along every few years that will purport to deliver our economy to the land of milk and honey. First of all, in 2002, we had Winning Wales – the National Economic Development Strategy. This was quickly followed, in 2005,  by WAVE – Wales a Vibrant Economy. Five years later, in 2010, the Economic Renewal programme arrives.

Given the lack of imagination or vision in any of the these documents, is there a ‘big idea’ that could be transformational for the Welsh economy? What can be done to ensure that re-energises our business community?

One solution is to examine developments within another devolved region of the UK, where there have been calls from the private sector for corporation tax to be reduced as the main tool for regenerating an economy that is second only to Wales in terms of its relative poverty within the UK.

Last year, the Northern Ireland Economic Reform Group of senior economists, accountants and business interests launched a major report on reduced corporation tax for the province. It concluded that: “reduced corporation tax is the fastest way we know to revitalise the Northern Ireland economy” and estimated “that more than 90,000 extra jobs could be created over 20 years.” This was followed by a further study from the accountants PwC which noted that:

“Continuation of the Treasury’s traditional one size fits all approach to taxation across the UK will simply doom Northern Ireland, Scotland and Wales to fall further behind the UK average”.

Unfortunately, no business or government body in Wales has undertaken a similar study to examine the impact of lower corporation tax on the Welsh economy. However, a Cardiff Business School research paper has suggested that a significant reduction in corporation tax in Wales could create around 16,000 additional jobs.

The lobbying by Northern Ireland politicians and businesspeople has clearly worked. Last week, the Treasury published a consultation exercise to examine the benefits and costs of devolving corporation tax-varying powers to the Northern Ireland Executive. One can only admire advocates in the Province for making such a strong case to the Treasury. Led by business, with the full support of Ulster politicians in Stormont and Westminster, they have been persuasive and persistent in pushing Whitehall mandarins to the starting line of considering the merits of such a policy change.  Compare and contrast this with the efforts of Welsh politicians and business groups whose ambitions for the nation unfortunately reflect the dire performance of our economy.

The argument for Northern Ireland seems to be centred on the fact that it is a ‘special case’ because of the lower levels of corporation tax in its neighbour, the Republic of Ireland. This is despite the main centre of business activity in Ireland,  Dublin,  is actually closer to Holyhead than Belfast.

Yet, in making any case for any region to be given additional fiscal support through reduced corporation tax, the only true economic measure should be that of relative prosperity. And not only is Wales the poorest UK region, but three areas within Wales – Anglesey, the Gwent Valleys and the Central Valleys  – are amongst the five poorest in the whole of the UK.

But this brings me to a wider issue.

It is not that Northern Ireland and Wales must compete to see which region gets the prize of lower corporation tax. Addressing the prosperity levels of all regions is an issue that must be at the heart of UK economic policy. If the Conservative-Liberal coalition in Westminster truly wishes to be a progressive and reforming government, then it must address the increasing disparities in wealth amongst the different regions of the UK that has occurred under the last three Labour governments.

George Osborne has already indicated that he may be willing to consider a regional tax approach after offering new firms based outside the three most prosperous regions in the UK a £900 million tax break. That is, any company set up outside London, the South East of England and East England will not have to pay employer National Insurance contributions for the first ten employees taken on during its first year in business. Given that the reduction in National Insurance for new firms is regionally focused, there is no reason as to why other future tax measures cannot also focus on those parts of the UK in greatest need of support – in particular, those areas that are overly dependent on the public sector and desperately need private sector jobs.

If, as the Chancellor indicated in his latest budget, the reduction in corporation tax is seen as the main tool for reinvigorating the private sector in the UK, then surely the same case can be made for using this fiscal instrument to address some of the deep-rooted disparities in wealth across this nation. Indeed, additional reductions in corporation tax within our more deprived communities would be seen as a hand up, not a hand out, after years of a public grant-led approach that has largely failed to make any real difference to the long-term economic sustainability of regions such as Wales, Northern Ireland and the North East of England.

Of course, there continues to be those doomsayers who believe that reducing corporation tax will not have the desired effect. However, they consistently fail to come up with any alternatives to this policy. Certainly, the current approach of essentially rehashing together a new economic ‘strategy’ every four or five years has simply failed to change the decline of the Welsh economy.

In fact, as the data on relative economic prosperity clearly shows, the gap between Wales and the rest of the UK continues to grow whilst economic strategies are developed and then quietly discarded. Does anyone really think that the policy equivalent of periodically reorganising the deckchairs on the Titanic will have any real effect on the ability of the Welsh economy to revitalize itself over the next decade?

As Ron Jones, founder of Tinopolis, noted last year, too often our politicians announce that the answer to our economic problems is another strategy. Clearly, that is the last thing this nation requires at this critical time when we need to be focusing our efforts on a radical transformation of the economy. I would therefore urge all Welsh political parties to put aside their differences and lobby the UK Government for immediate and urgent discussions about the feasibility of reducing corporation tax in Wales.

As is happening in Northern Ireland, we should be examining how we can encourage investment and create thousands of new jobs at a time when the economy is recovering from recession. With Wales remaining at the bottom of the UK prosperity league table, such a measure that directly helps those running Welsh businesses cannot come quickly enough.