Reducing Regional Disparities in Prosperity ODPM Committee 18 Mar 2003

Mr. David Clelland (Tyne Bridge): Good morning, Mr Blackie. This is your second visit to the Committee in a few weeks, you are doing very well. Can I just ask you a question about the Government's Spending Review. As you know, the Government decided to introduce a regional dimension into the Spending Review and this year, for the first time, Government Offices were invited to make regional bids to the Spending Review. Can you explain to the Committee how the process works?

(Mr Blackie) Yes. The Treasury asked us at the end of 2001 to put together a joint submission between the Regional Development Agency and the Government Office highlighting four priorities for the region in advance of the Spending Review. At the time I was working with the Regional Development Agency so, as you can see, there has been a relatively seamless transition. We identified four key issues for the North East of England: business enterprise, the need for greater wealth creation, business formation; raising standards in education, particularly from Key Stage 2 to Key Stage 3; related to that a step change in the skills of the workforce in the region; the fourth priority being a focus on research and development, particularly linking research and development within our universities to our company base. That was a joint submission between the Government Office and the RDA. I think it is quite interesting to compare that with the submissions made by other regions. Looking at other regions they all identified skills in one shape or form as one of their four key priorities and I think there have been some useful lessons learned in that joint exercise. I hope that process will be developed as we move to the next Spending Review.

Mr. David Clelland (Tyne Bridge): The Government Office budget is only a small proportion of the total Government spending in the region. Can you effectively influence the total spending from your position?

(Mr Blackie) I think increasingly the Government Office has a role to orchestrate the contributions of different government services within the region. This is something that the White Paper, Your Region: Your Choice, actually explicitly asked the Government Office to develop. I think we have seen in recent weeks, literally, the creation of Regional Housing Boards which are chaired by the Government Office to make sure we get the maximum contribution from all stakeholders in the sustainable communities. We have just recently formed a Regional Resilience Forum bringing together a range of government and other services in the region. I think this is increasingly a role that we have to play. The Government Office provides direct programme management, particularly in the form of European Structural Funds, Neighbourhood Renewal Funds and a number of other community development initiatives. That amounts to about 400 million in total, yet total Government investment in the region is something like £10 billion a year, so clearly the direct funds at our disposal are relatively modest compared to the total Government investment. We have been doing work with other government agencies in the region to try and get greater integration across the range of government services. Although it is fairly early days yet we have run a number of seminars, we have set up an inter-agency working group. Three key themes have emerged: first, about the importance of integrating the various strategies that we have in a region like the North East. There are something like 17 different regional strategies. Obviously at the heart we have the economic strategy and the planning strategy but there is a whole range of other activities surrounding that. As somebody said at the recent Regional Assembly meeting, if you map those the problem is you could go around in circles with the range of different activities. We think that, number one, our priority is to integrate those different strategies in the region. Number two is to build up a clearer evidence base of what is happening in the region, so getting more hard information. Thirdly, to build more capacity at a regional level to orchestrate all of this activity.

Mr. David Clelland (Tyne Bridge): Just returning to the process in terms of allocations, it seems that every region has basically identified the same priorities for their region and, therefore, the distribution of funds benefits every region rather than just the less prosperous ones like, for instance, the North East. How can the Government overcome that problem?

(Mr Blackie) I think the Government's approach is we want to see all regions grow and prosper and the real challenge is to reduce the divergence or disparities between regions. In the North East we are actually the poorest region in the UK measured across a whole range of indicators compared to, say, the South and the South East, but the Government is keen not to try and restrict the growth in areas like the South East. What particularly this convergence target now in the PSA targets is about is looking at what are the levers to actually enable the North East to catch up with other regions, not just in the UK but in Europe. There has been a lot of work, particularly led by the Treasury, that has gone into that, what are the key drivers to reduce that gap between the regions.

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Mr. David Clelland (Tyne Bridge): Can I just follow up on that. If we have an elected Regional Assembly as opposed to what we have at the moment, will the relationship be the same between your office and an elected Regional Assembly as it is now with the ad hoc body?

(Mr Blackie) No. I think it will develop significantly. Over the next few years if the people of the North East decide to have an elected Regional Assembly then clearly some of these functions will transfer, as they did when the Regional Development Agency was set up. We now have a scrutiny role, or a sponsoring role, in the Regional Development Agency and I could anticipate a similar role developing for the Government Office under an elected Regional Assembly.

Mr. David Clelland (Tyne Bridge): Do you say your Government Office should be under an elected Regional Assembly?

(Mr Blackie) I am suggesting that there would always be a keen interest from Government into the performance of an elected Regional Assembly as well as the Regional Development Agency. I am sure ministers will retain a keen interest in ---

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Mr. David Clelland (Tyne Bridge): We know what the philosophy of the White Paper is. You have experience now of working with a regional body and we are now looking at moving on to an elected regional body. What we are really asking for is your opinion as to how it would work more smoothly. What would you recommend to the Government in terms of your relationship with the Regional Assembly?

(Mr Blackie) I think the White Paper represents a very good starting point for ----

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Mr. David Clelland (Tyne Bridge): But the links to the national motorway system are pretty poor, are they not? Although we have a two lane motorway, the A1(M), running through the region, once we get into Yorkshire there the problems start. It is not really our regional problem, it is Yorkshire's problem, but it causes a difficulty. In terms of the A69 and the A66 they are badly in need of improvement. I understand we are going to get a new bypass to Haltwhistle fairly shortly, which is good news, but these improvements are long overdue.

(Mr Johnson) Just to take those in order. Yes, there has been a long-held view in this region that we need better motorway connections to the south. On the back of that there was a road based study that was carried out by the Government Office Yorkshire and Humberside which looked at the A1 between Brandon and Barton which is very important to us. The result of that study is that that section of the A1 will be upgraded to motorway in the not too distant future, which as far as we are concerned is a very good thing for the North East. Equally, we have had an A66 Safety Study, Penrith to Scotch Corner, and the outcome of that study is to fully upgrade to dual carriageway the A66 and certainly for the business community in Teesside that is an important step forward. In terms of the A69 ----

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Mr. David Clelland (Tyne Bridge): Is that a realistic prospect, having a heavy rail link to Newcastle Airport?

(Mr Johnson) Consultants have done work and shown that there is a feasible option to track share with Metro in the same way that we do to Sunderland.

Mr. David Clelland (Tyne Bridge): Mr Parker does not know about that.

(Mr Parker) I think we should not get too excited about this. It is something that is on the very long-term agenda. Metro takes ten per cent of the market share of the passengers going to and from the airport and has done virtually since the extension.

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Mr. David Clelland (Tyne Bridge): But if the Government switches, as is proposed, from the Structural Fund system to domestic programmes, is that going to be an improvement?

(Mr Blackie) Personally I think the current system of State Aid rules and the complexity of financial regulations do make it difficult for people trying to access Structural Funds to match the funds that, say, the RDA has now in the single pot. I think that the consultation document that was issued recently contains some very interesting ideas about how we can move to a single pot perhaps so that people do not have to go through this fairly complex maze of regulations that there is at the moment.

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Memorandum submitted by ONE North East
Examination of Witnesses
COUNCILLOR TONY FLYNN, Chair, North East Regional Assembly, and DR JOHN BRIDGE, Chairman, ONE North East, examined.

Mr. David Clelland (Tyne Bridge): We have got some shining examples of high productivity in the region, not least the Nissan plant in Sunderland. Having said that, in terms of the national average we are still below the national average as a region overall in terms of productivity, in fact the lowest in the country other than Northern Ireland. Have you any explanation as to why that is? Is it lack of capital investment, is it low skills in management, other cultural issues? What is the reason for it?

(Dr Bridge) To a certain extent the answer lies in your question. If you look at the joint Treasury/DTI Report on Productivity in the English Regions, which came out some 18 months ago, it identifies five areas where there needs to be significant improvement to raise productivity. One is investment, another one is skills, another one is the development of business enterprise and innovation and improving markets and improving infrastructure. Those are all of the areas where I think we should concentrate our efforts because it is an unfortunate legacy of our manufacturing sector, but it is true, that where regions have high levels of manufacturing intensity with regard to regional GDP they typically have low levels of productivity.

Mr. David Clelland (Tyne Bridge): What about the balance in terms of job creation initiatives and schemes like New Deal, do you think the Government has got the balance right there?

(Dr Bridge) What I would say, and it goes back to my opening statement, is I see what has happened at the regional level and what has happened through the Regional Economic Strategies - I am using that in the plural, it is not just true of the North East - and there is a clear coming together of social and economic policies so we see that what should be happening is within socially deprived communities there is a need not only to improve the capacity of individuals, which may be seen as a social policy line, but also to provide opportunity and that is, if you like, the economic line. Those two need to come together. My criticisms of programmes at the present time is that they are often conceived in isolation and delivered in isolation and that is where we do not get best value in this region. In other words, it is not necessarily about more money, it is much more, as Tony Flynn said, about flexible use of that money.

Mr. David Clelland (Tyne Bridge): Where are the growth sectors in terms of employment? Where are the jobs coming from that you need to create?

(Dr Bridge) In very broad terms there is, as you know, a long-term circular decline in manufacturing employment and we do not see that is going to be reversed over the next five to ten years and, therefore, we need to look at the non-manufacturing areas where we would expect to see substantial growth. We know from a national and international basis that tourism is one of those sectors, the creative industry is another sector, the cultural industry is another, professional services, financial services, those are all areas that are growing. That does not mean that we will lose our manufacturing sector. I believe that manufacturing output in the North East in 2010 is probably going to be the same, if not higher than it is today, but it is going to be done with fewer people and, therefore, productivity within the manufacturing sector needs to rise quite considerably as well.

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Mr. David Clelland (Tyne Bridge): Some of the new businesses we have are built on the inward investment of companies like Nissan, for instance. We all hope that Nissan will be here forever but we know from bitter experience that quite often you have international companies like this moving into a region and then they quickly move again. That means, of course, that some of these companies which are basing their peripheral businesses on these bigger ones end up going to the wall. What are we actually doing to encourage companies like that to spread their wings a bit so they are not entirely reliant on the one customer?

(Dr Bridge) I think from a policy point of view the biggest thing that we have done within the RDA is to establish these various cluster groups to look at the relationships between various major industrial groupings and through that we hope to be able to direct, if you like, and support and steer smaller companies into other areas. For instance, people who might be servicing the offshore industry could quite easily service the warships order. That is an obvious movement and something that we are doing at the present time.

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Mr. David Clelland (Tyne Bridge): Let us talk about regional funding. You argue, and I certainly join you in the argument, that the North East does not get a fair share of regional funding. Let us just imagine the happy day when we can all agree that we are getting a fair share of regional funding, what material benefit is the region going to get from having that fair share of regional funding as opposed to what we get at the moment?

(Cllr Flynn) It is not only increasing funding but, as I said earlier, and John agreed, the flexibility of that funding in terms of block grants, for us to decide what the priorities are within this region because we are closest to the region and each region differs substantially. There has been a lot of debate here about the Barnett Formula because Scotland is so close to our borders and if you just go to Berwick and cross over the road into Scotland you see a totally different level of funding, that was given to Scotland on the basis of need at that time as perceived in Scotland. We are not saying do not necessarily scrap the Barnett Formula but apply it to other regions in the country.

Mr. David Clelland (Tyne Bridge): If I can stick to funding for a moment, Scotland gets more money than us you are saying?

(Cllr Flynn) Yes.

Mr. David Clelland (Tyne Bridge): How are the people of Scotland better off? How would the people in this region benefit?

(Cllr Flynn) Because within Scotland they can decide where that money is going to be allocated. The perceived need there is to allocate it for skills and give extra funding to provide classroom teachers at certain levels and that is seen as an improvement for the competitiveness of Scotland.

Mr. David Clelland (Tyne Bridge): That is not necessarily about the level of funding, that is about the powers of the Scottish Parliament.

(Cllr Flynn) It is about the powers and how it is directed and a regional say about where that money should be directed. Obviously you have to work with the Central Government but it is money that is less targeted and decided on at a national level. It is more regional decision making about how that money should be spent.

Mr. David Clelland (Tyne Bridge): So even with the current level of funding we could have better services and a better regional economy if we just had more flexibility?

(Cllr Flynn) I think so. There needs to be increased money but more say regionally about how that money is spent would be an improvement. Very often that money comes with Government targets to achieve certain things and we might question the value of money spent in that way if there was an opportunity for us to determine that regionally. We would argue for extra resources but more self-determination is the point I am trying to make.

Mr. David Clelland (Tyne Bridge): You mentioned the Barnett Formula, which is a burning issue in this region. I often wonder about the actual results of the Government doing something about the Barnett Formula and whether or not we exaggerate the benefits of changes in the formula. If the North East was to get on the Barnett Formula the same level of funding as Scotland I can see that we would all be much better off, and that would be great, but if the Government was to review the Barnett Formula, which is what we call for, it would have to review the Barnett Formula in the light of the country as a whole, not just the North East or what one region gets and, therefore, any benefits coming from a fairer system which involved a review of the Barnett Formula would not necessarily be the huge benefits that we imply by comparing ourselves with Scotland.

(Cllr Flynn) If it was needs based assessment for the fairer funding and you look at all the indices for the North East you would say we are the most deprived, so on that basis we would expect a larger level of funding. If that funding came to us with the flexibility of us being able to spend it in the most appropriate way then I think the North East would benefit.

Mr. David Clelland (Tyne Bridge): That would mean there would be losers as well as gainers then?

(Cllr Flynn) There always are, as you are aware. Looking at local government funding there are winners and losers. If you look at a fundamental review of what you are trying to achieve and increase the needs based element, a lot of the funding comes to this area, or does not come to this area, because a lot of the funding is based on population. We lose population, as do some other regions, and therefore financially we lose out at the end of the day. If there was a more needs based assessment of the funding that would be to the advantage of the North East.

Mr. David Clelland (Tyne Bridge): You mentioned in your memorandum some possible changes in fiscal policy which might benefit the region. Can you expand on that?

(Cllr Flynn) Obviously to encourage certainly research and development to come to the area the Government could give encouragement through fiscal policy to encourage people to come to the North East. I think that is perfectly legitimate and, as I indicated earlier, it is done in other countries and would be to the benefit of the North East if there were tax breaks for companies to locate, or relocate, in the North East. I think that would be to the benefit of this region.

Mr. David Clelland (Tyne Bridge): Do you think there should be the reverse of that as well? We are seeing tremendous plans for even more growth in the South East and even more congestion in the South East, should fiscal policy perhaps be discouraging growth in the South East as well as encouraging it?

(Cllr Flynn) I think so. This is a national issue and it is for the benefit of the whole of the country. It does not help if we have unjust policies and inefficient policies because you are concentrating development in the South East where there are considerable problems which in turn demand new planning regulations to build new roads and new housing, whereas if there were incentives and perhaps people prevented from developing in the South East and guided to the North East and other regions that would be to the benefit of the whole of the country.

Mr. David Clelland (Tyne Bridge): You would say that much of the difficulties that we have to face in the North East are as a result of the strength of the South East and Scotland and in actual fact for us to gain they would have to lose?

(Cllr Flynn) I think if we are looking at this from a national perspective it is to the benefit of the whole of the country to invest in the North East. I do not have a begging bowl approach to this. I think we are very successful in lots of areas and operations and we can show how we can develop various sectors. The cultural sector is an obvious one where we are building on that significantly in the North East and that affects the competitiveness of the whole economy. It is a combination of us being able to do things for ourselves but positive assistance from the Government to try and improve those less well performing regions.

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Mr. David Clelland (Tyne Bridge): Do you think that regional government as proposed in the White Paper will have enough functions to really make a difference? In terms of the finances, the White Paper says the regional government will have an influence over some finances. Do you think you will be able to influence those budgets in the way suggested in the White Paper?

(Cllr Flynn) I think it is a useful starting point. You and I would like other things in there, like learning and skills. You cannot separate that out from having a major say over the region, and the RDA on the economy and skills work hand in hand. Certain control over small businesses, etc.

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Mr. David Clelland (Tyne Bridge): It is not just a question of carrying out Government policy. If we are going to have a regional government we want it to be able to have some flexibility and freedom. As proposed will it have enough freedom given the fact that the Government is going to lay down a number of targets which the Regional Assembly will have to work to?

(Cllr Flynn) Central Government has to relax some of the targets at a national level and let the regions decide how they are going to deal with matters. If you look at the arrangements in both Scotland and Wales - I know regional government is not going to be the same - there is a distinctive difference now in Wales and Scotland from the rest of the UK. Obviously we will not have the powers of Scotland and Wales but there is the opportunity at a regional level to have our distinctive contribution to how this region should operate and hopefully the Government will release some of the rigid set of targets they have at the moment for the region and leave a considerable amount of discussion to the locality.

Mr. David Clelland (Tyne Bridge): In terms of financial flexibility, it is proposed in the White Paper that Regional Assemblies should have the power to precept local government. How much value is that in a region like ours which is a fairly poor region? Would that put us at a disadvantage compared with other stronger regions?

(Cllr Flynn) I see precepting as an opportunity and a lot of us certainly in the region have said that should not come first. As long as there are some powers there to raise some money as we used to be able to do in ----

Mr. David Clelland (Tyne Bridge): That puts you at an electoral disadvantage. If we have financial flexibility we have got to have some sort of income independent of Government, have we not?

(Cllr Flynn) I appreciate that in the longer term but I am not arguing for that initially.