INTRODUCTION

  The Committee has resolved to undertake an inquiry into how the Office of the Deputy Prime Minister (ODPM) is going to achieve its target to "reduce the persistent gap in growth rates between regions". This note by ODPM provides general background and comments briefly on points identified in the Committee's Press Notice of 6 December.

General

  2.  The Government's central economic objective is to achieve high and stable levels of growth and employment. Thriving and prosperous English regions are a key element of that vision. The Government's policies, such as the establishment of the Regional Development Agencies, and the proposals set out in the White Paper "Your Region, Your Choice", have been designed to that end. The regional economic performance target, announced as part of the 2002 Spending Review (Cm 5570) is a further step along that road. This note provides general background on the target and on plans to achieve it.

The PSA target

  3.  Reducing the gap in growth rates is one aspect of a demanding Public Service Agreement Target on regional economic performance, announced in July 2002, which is the joint responsibility of HM Treasury, the Department of Trade and Industry and ODPM. Meeting this target is a key objective for the three departments. It aims to improve the cohesion of national policy, and strengthen cross-departmental working between these departments and others. The PSA target is to:

"Make sustainable improvements in the economic performance of all English regions and over the long term reduce the persistent gap in growth rates between the regions, defining measures to improve performance and reporting progress against these measures by 2006."

  4.  A Technical Note explaining how performance against the target will be measured was published on the websites of the three departments in December 2002, and is at Annex A. In brief, the target will be met if:

(a)  for every region the trend rate of growth in Gross Value Added (GVA) [6]per head measured over the period 2003-08 is higher than the baseline, which is the trend rate of growth in each region over the period 1989-02;

(b)  over the period 2003-12 there is a reduction compared to the baseline in the absolute gap between the average trend growth rate in the three regions which currently have above average GVA per head and the average trend growth rate in the other six regions; and if each individual region's trend rate of growth over the same period has increased compared to the baseline; and

(c)  by the time the conclusions of the 2004 Spending Review (SR2004) are published the three departments have identified the key measures to improve performance; by end 2006 they can demonstrate significant progress in implementing or changing those measures which are the responsibility of the three departments; and they can show that they have brought influence to bear to secure the implementation of measures for which other departments have responsibility.

BACKGROUND

What is the problem?

  5.  The Government's central economic objective is to achieve high and stable levels of growth and employment. Improving the economic performance of every region is an essential element of that objective, partly for reasons of equity, but also because unfulfilled economic potential in every region must be released to meet the overall challenge of increasing the UK's long-term growth. Higher levels of prosperity can help to address other issues including problems of crime, social exclusion and health inequalities.

  6.  There are persistent disparities in regional economic performance. At Annex B are charts which illustrate:

—  a comparison of regional GVA per capita with the England average for each of the years 1995-99;

—  a decomposition of the differences in GVA between regions in 1999, into the components attributable to differences in productivity, unemployment, employment participation rates and size of the working age population.

  7.  There are also disparities in other regional indicators such as levels of health and health care, crime, education, and housing. These factors affect the overall standard of living as well as influencing regional economic performance.

  8.  Regional differentials have persisted for many years, and the ranking of English regions by growth rate has remained relatively stable during the 1990s. The regions with the highest GVA per head—London, the South East and the East of England—have in recent years shown the strongest growth. For the gap in performance to be narrowed, the poorer regions would have to grow faster than the richer ones. It may be unrealistic to expect this in the short term. The current target is therefore to "over the long term reduce the persistent gap in growth rates".

What are the causes of regional economic disparities?

  9.  Our knowledge of the causes of regional economic disparities, and of the policy levers that might be used to address them, is incomplete. The delivery plan for the PSA target seeks to improve the evidence base (see para 15 below). Many influences are at work, including long-term changes in the economy such as the decline of the relative importance of heavy industries such as coal and steel, or changes in trading patterns. The problems will not be addressed simply by increased government spending in particular regions. One starting point is the Treasury/DTI report "Productivity in the UK: 3—The Regional Dimension" published in November 2001. This suggests that differences in productivity are the main cause of regional economic disparities. The key drivers of productivity growth in UK regions are skills, investment, innovation, enterprise, and competition. "Productivity in the UK" suggests that efficient functioning of product, labour and capital markets is essential to high levels of productivity and employment. The functioning of these markets can be constrained by a series of market failures with a detrimental impact on the "five drivers". These market failures can arise at the regional and local level, as well as at the national.

Existing policies and programmes

  10.  The White Paper "Your Region, Your Choice" published in May 2002 set out the Government's vision for prosperous and thriving English regions. The Government believes that successful solutions to regional problems need to be rooted in the regions themselves. The Government has pursued an active regional policy since 1997, setting up the Regional Development Agencies, facilitating the establishment of voluntary regional chambers/assemblies, and developing the role of the Government Offices. Chapter 2 of the White Paper sets out plans to develop these arrangements. The White Paper also sets out proposals for directly elected regional assemblies in those regions that wish to have them. One of the key roles of elected regional assemblies will be to improve regional economic performance.

  11.  The Treasury, DTI and ODPM already have in place a set of policies and programmes which have the potential to make a considerable contribution to the achievement of the PSA target. Several are already focused on improving economic performance in the regions and, to a lesser extent, reducing the gap in performance. They can be categorised under three broad headings.

  12.  The first group are instruments focused primarily on economic growth—the first part of the PSA target—whose precise operation is to some extent determined in the individual regions or from the centre, taking regional disparities into account. Examples are the Regional Development Agencies (whose financial allocations reflect regional disparities along with other factors) and the Small Business Service. The second group covers those instruments focused primarily on reducing disparities between regions and largely operated in the regions. Examples are the EU Structural and Cohesion Funds, and the DTI's programme for Regional Selective Assistance, which are not available in all regions. The third group covers instruments that have either a national or local imperative but whose contribution to improving economic performance or closing the gap is likely to be different from region to region. For example. Neighbourhood Renewal will have a bigger impact in the northern part of England and in London where deprived communities are more heavily concentrated, while R&D tax credits are currently likely to have a larger impact in the southern part of the country where innovative businesses are more common. Some instruments have an impact in more than one of these categories. For example the Government's Strategy for Social Enterprise is intended to improve economic performance but is also likely to reduce disparities between growth rates by having a greater impact in poorer-performing regions.

DELIVERY

  13.  The three Departments have developed a Delivery Plan for the PSA Target. This focuses on what they propose to do by July 2004 including inputs to and possible outcomes from the 2004 Spending Review. They will be revising the Delivery Plan as necessary, and plan to produce a revised version charting actions to the end of the target period which will reflect the work done during 2003.

  14.  Within the overall PSA target, the delivery plan identifies three target areas for this first stage of delivery. First, as noted above, the three departments already have in place relevant policies and programmes. A list of the key measures is below.

DTI[7]	Treasury	ODPM
Regional Development Agencies (Regional Economic Strategies)	Spending Reviews	Planning
Small Business Service	Budget process	Housing
Regional Selective Assistance	Regulatory reform	Neighbourhood Renewal
Regional venture capital funds	R&D tax credit	English Partnerships
Structural and Cohesion Funds (overall policy)	Structural and Cohesion Funds (overall policy)	European Regional
Development Fund (current)
Enterprise grants	Stamp duty exemptions	Regional governance
	Enterprise measures	Local Government's economic development/regeneration function

  While the performance of these policies will be reviewed, as noted below, the three departments will continue and where possible improve the delivery of these key existing regional policies. They also plan to engage with other departments about the contribution their policies can make (eg on skills, transport).

  15.  Second, the three departments plan to develop policy, within the timescale for SR 2004, by

(i)  reviewing the performance of existing policies, and by autumn 2003 undertaking any new analysis and research needed on policies to address regional economic performance and the causes of the gap in performance;

(ii)  Improving the evidence base, identifying by end 2003 key drivers and changes to existing instruments and any new instruments needed to deliver this PSA target in the longer run, involving the regions, which will have a key role in this process. These can then be considered during the 2004 Spending Review.

(iii)  promoting support for those changes and new instruments and ensuring their consideration in the course of SR2004, which we expect to complete in July 2004.

  16.  Third, the three departments plan to secure greater regional involvement in future policy making and delivery. They will establish new mechanisms which build on the concept of the Regional Priority Documents produced for SR2002. They will seek an annual commentary from each region that will identify actions they have take to deliver better economic performance in the region and their suggestions for further actions which they or central Government can take to help delivery, together with supporting evidence. The Regional Co-ordination Unit and Ministers in the three Departments will pursue the delivery of those actions within Whitehall.

  17.  The three departments have developed detailed workstreams to match each of these target areas, each with a manager from one of the three departments. The three departments have decided to set up a small dedicated team to lead delivery of the various workstreams and project manage achievement of the PSA target. Progress is overseen by a Steering Group of senior Treasury, DTI and ODPM officials.

Other relevant background

  18.  The Committee will also wish to be aware of:

—  "Sharing the Nation's Prosperity: variation in economic and social conditions across the UK", a report to the Prime Minister by the Cabinet Office, published in December 1999.

—  the 2002 Spending Review published in July 2002, in particular Chapter 23 "The English Regions";

—  the interim report issued in November 2002 by the joint working group on "Cities, Regions and Competitiveness" set up by the ODPM's Urban Policy Unit in March 2002. (The group includes representatives from the ODPM, DTI, Treasury, the Regional Development Agencies and English Core Cities Group covering the eight largest cities outside London. It is looking at practical actions to get major regional cities to fulfil their potential as drivers of urban renaissance and economic competitiveness in their regions. A substantive report is due in June 2003);

—  an inquiry currently being conducted by the House of Commons Treasury sub-Committee into the technical issues of regional spending, which is designed to pave the way for a subsequent inquiry by the main Committee into regional economic issues;

—  the Deputy Prime Minister's forthcoming announcement on Communities Plan.

Office of the Deputy Prime Minister

3 February 2003

7   DTI measures are subject to the outcome of their Business Support Review designed to make for a more effective and user friendly system of business support. Back