1. Dr John MoffatRichard Price Building, Room F49Email: J.D.Moffat@swansea.ac.ukOffice Hours: Tuesday & Friday, 1:30-2:30pm

2. Learning Outcomes Students should be able to answer the followingquestions: What are the recent trends in UK regional performance? What policy instruments are available for reducingregional disparities in economic performance? Which of these instruments have been used in the UK? How successful have these instruments been?Topic 2: UK Regional Policy 2 3. Readings Armstrong & Taylor, chapter 9 BIS (2010), Local Growth: Realising Every PlacesPotential, Available from:http://www.bis.gov.uk/assets/biscore/economic-development/docs/l/cm7961-local-growth-white-paper.pdf Wren, C. (2005), Regional Grants: Are they worth it?Fiscal Studies, Available from:http://onlinelibrary.wiley.com/doi/10.1111/j.1475-5890.2005.00012.x/pdfTopic 2: UK Regional Policy 3 4. Relative Regional GVA per head,1968-2010Source: Armstrong et al. (2012)Topic 2: UK Regional Policy 5. Bottom 20 UK NUTS 2 Regions, 2009Topic 2: UK Regional Policy 5NUTS 2 Region/Country GDP per head (Euros)West Wales and The Valleys 15,700Portugal 15,800Cornwall and Isles of Scilly 16,500Slovenia 17,300Tees Valley and Durham 17,700Lincolnshire 18,000Merseyside 18,100South Yorkshire 18,800Shropshire and Staffordshire 18,800Northern Ireland 19,000Lancashire 19,100East Yorkshire and Northern Lincolnshire 19,300Highlands and Islands 19,300Devon 19,800Cumbria 20,000Northumberland and Tyne and Wear 20,200Essex 20,400Greece 20,500Kent 20,600Cyprus 21,100Source: Eurostat (2013) 6. Top 20 UK NUTS 2 Regions, 2009Topic 2: UK Regional Policy 6NUTS 2 Region/Country GDP per head (Euros)Cheshire 25,900Surrey, East and West Sussex 25,900Gloucestershire, Wiltshire and Bristol/Bath area 26,100Bedfordshire and Hertfordshire 26,500Iceland 27,200Germany 29,000France 29,300Sweden 31,300Belgium 31,500Finland 32,300Berkshire, Buckinghamshire and Oxfordshire 32,500Austria 32,900Netherlands 34,600Ireland 35,900North Eastern Scotland 36,200Denmark 40,600Switzerland 45,500Norway 55,900Luxembourg 75,200Inner London 75,900Source: Eurostat (2013) 7. Average Gross Weekly Earnings of Full-timeEmployees, July-September 2011 ()Topic 2: UK Regional Policy 7Source: ONS (2013)0100200300400500600700800North East NorthWestYorks &theHumberEastMidlandsWestMidlandsEast London South East SouthWestEngland Wales Scotland NorthernIreland 8. Regional UnemploymentRates, 1992-2012 (%)Topic 2: UK Regional Policy 8Source: ONS (2013)0.02.04.06.08.010.012.0North East North West Yorkshire and the Humber East MidlandsWest Midlands East London South EastSouth West Wales Scotland Northern Ireland 9. Regional Unemployment RatesSource: BBC (2012)Topic 2: UK Regional Policy 9http://www.bbc.co.uk/news/10604117 10. Regional Policy OptionsSource: Clark (2010), adapted fromArmstrong & Taylor (2000)Regional Policy OptionsMICRO options Co-ordination optionsMACRO optionsRelocate labour Relocate capital Within JurisdictionsDevolvedBetween JurisdictionsDifferent MICROoptionsMICRO & MACROoptionsTrans national Within the nationCentral controlTariff & tradeDiscriminatingmonetary policyDiscriminating taxand expenditureAutomaticstabilisersDiscretionaryTopic 2: UK Regional Policy 10 11. Co-ordination Policy is delivered at different tiers of government Policy must be co-ordinated to ensure that policy atone level of government is compatible with policy atanother level of government Otherwise, policy at one level of government maynegate or offset policy at another level of governmentTopic 2: UK Regional Policy 11 12. Macroeconomic Policy Different tax and expenditure levels may be set acrossregions This happens automatically as regions with highunemployment tend to receive more expenditure onunemployment and incapacity benefit and pay less tax It may also happen if government deliberately setslower rates of taxation and higher levels of expenditurein high unemployment areas We will look more into this issue in Topic 5Topic 2: UK Regional Policy 12 13. Microeconomic PolicySource: Clark(2010), adapted fromArmstrong & Taylor (2000)Micro policy optionsPolicies to reallocatelabourPolicies to reallocatecapitalIn situ SpatialreallocationLabour MarketefficiencypoliciesMobilitypoliciesMigrationpoliciesEfficiency ofcapital mkts.Efficiencyof firmsSocialcapitalAdmincontrolsTaxes &SubsidiesOutputInputs TechnologyLabour Capital OtherTopic 2: UK Regional Policy 13 14. Microeconomic Policy As differences in unemployment rates across regionsarise because of a mismatch between the demand forlabour and the supply for labour, regional policy canassist by: moving workers to where there are jobs (i.e. increasinggeographical mobility) relocating capital to areas where there is an oversupplyof labourTopic 2: UK Regional Policy 14 15. Reallocating Labour The Employment and Training Acts in the UK (firstintroduced in 1950) offered grants and loans to assistthe transfer of workers to low unemployment regions However, take-up and provision was low Great emphasis has been given to reallocate labour toother industries in situ (i.e. increasing occupationalmobility)Topic 2: UK Regional Policy 15 16. Reallocating Capital More effort has gone into reallocating capital towardshigh unemployment regions The two main policy instruments which have beenused to achieve this are: Administrative controls Tax incentives and grantsTopic 2: UK Regional Policy 16 17. Industrial Development Certificates IDCs were introduced in 1947 Firms wishing to build new or expand existing plant inexcess of a specified limit had to obtain an IDC These were difficult to obtain in low unemploymentareas but easy to obtain in high unemployment areas The difficulty of obtaining IDCs varied overtime, reflecting different levels of commitment toregional policy before they were eventually abolishedin 1982Topic 2: UK Regional Policy 17 18. Industrial Development Certificates The main advantages of IDCs are that they: Are cost effective as they only involve administrativecosts Are flexible as they can be changed in response tochanging economic circumstances Open channels of communication between industry andgovernment which allow for better policy-making Proved to be effective in moving industry to deprivedregions (Armstrong and Taylor, 2000: p. 216-7; Twomeyand Taylor, 1985)Topic 2: UK Regional Policy 18 19. Industrial Development Certificates The main disadvantages are that they: Can have harmful effects on efficiency by preventingfirms from expanding in their chosen location Can stifle expansion as firms failing to get an IDC mayabandon their project or go ahead in another country Of those firms which were refused an IDC: 1% transferred their project abroad 13% abandoned their project 50% went ahead in existing premises or by building within thelimits allowed by location controlsTopic 2: UK Regional Policy 19 20. Tax Incentives and Grants Tax incentives and grants can be automatic ordiscretionary: Automatic means that any firm undertaking the eligibleactivity receives support Discretionary means that firms have to apply to thegovernment to obtain the support and the governmentmay accept or reject their application The advantage of discretionary support is that itcan be targeted to ensure that grants are onlyprovided in cases where they will achieve theobjectives of governmentTopic 2: UK Regional Policy 20 21. Tax Incentives and Grants The main purpose of automatic tax incentives andgrants is that they provide firms in assisted regionswith a cost advantage over firms in unassisted regions However, firms may use this cost advantage to increaseprofits rather than to reduce prices and increaseoutput and employment Furthermore, for the cost reduction to be sufficientlylarge to increase employment, the tax reduction/grantmust be sufficiently large which means that suchschemes can be very expensiveTopic 2: UK Regional Policy 21 22. Expenditure on Regional IndustrialAssistance in Great Britain, 1960-2003Source: Wren (2005)Topic 2: UK Regional Policy 22 23. Employment Premiums The Regional Employment Premium (REP) was asubsidy of 1.50 per man (75p per woman) per week inmanufacturing in the assisted areas between 1967 and1973. In 1974 rates were doubled but the scheme wasabolished in 1977 The size of the subsidy relative to total labour costswas small and overall production costs fell by onlyabout 2%. It was therefore unlikely that the REP had alarge impact on employmentTopic 2: UK Regional Policy 23 24. Automatic Investment Support Regionally differentiated tax allowances were introduced inGreat Britain in 1963 These were replaced by Investment Grants in 1966, worth40% (20%) for plants and machinery in DevelopmentAreas (non-Development areas) and 25% for new buildingsin Development Areas. They were not available for newbuildings in non-Development areas In 1972, Investment Grants were replaced by RegionalDevelopment Grants, worth 22% in Special DevelopmentAreas and 20% in Development Areas for plant, machineryand buildings All automatic capital grants were abolished in the UK in1988Topic 2: UK Regional Policy 24 25. Capital Versus Labour Subsidies If the primary aim of regional policy is to raiseemployment in deprived regions, labour subsidiesare, at first glance, superior to capital subsidies This is because both the substitution and outputeffects on labour are positive for labour subsidies With capital subsidies, while the output effect onlabour is positive, the substitution effect is negativeand only if the former is larger than the latter is thetotal impact positiveTopic 2: UK Regional Policy 25 26. Capital Versus Labour SubsidiesCapitalLabourI100I200I150l1k2k1l2substitution output Source: Adaptedfrom Clark (2010)Topic 2: UK Regional Policy 26Isocost Lines Lines representingcombinations of labour and capitalthat cost the firm the same amountTheir slope is (w/r)Isoquant Curves Curvesshowing all the combinationsof labour and capital that givethe same level of outputBA CImpact of labour subsidySubstitution effect A to BOutput effect B to C 27. Capital Versus Labour Subsidies But capital subsidies have certain advantages overlabour subsidies which are not captured by a staticanalysis (such as that shown in the previous slide) The main advantage is that, because the technologyembodied in capital improves over time, capitalsubsidies help firms to modernise their capital stock This improves efficiency and therefore lowerscosts, leading to a larger output effectTopic 2: UK Regional Policy 27 28. Impact of Automatic Assistance A major issue with automatic grants is whether theygenerate investment that is additional over what wouldhave happened without such grants: Robinson et al. (1987) estimated that up to 50% of projectsthat received funding from automatic capital grants wouldhave gone ahead in some form without assistance Another issue concerns whether such grants simplydisplace economic activity from regions that are noteligible for assistance to regions that are eligible forassistance without leading to a net gain in employmentTopic 2: UK Regional Policy 28 29. Impact of Automatic Assistance Moore and Rhodes (1973) estimate that the shift to a moreactive regional policy in the UK between 1960 and 1963resulted in an increase in employment in the DevelopmentAreas of 12% by 1971 Canning, Moore and Rhodes (1987) find that between 1959and 1971, regional policy in Northern Ireland created anextra 33,000 manufacturing jobs Harris (1991) estimates that employment in Northern Irishmanufacturing would have been 4% lower in 1983 withoutautomatic capital and employment subsidies. 2.8percentage points of this effect is due to labour subsidiesTopic 2: UK Regional Policy 29 30. Discretionary Assistance The Regional Selective Assistance (RSA) scheme began in 1972and was available to support investment in new plant, machineryand buildings The scheme was principally designed to safeguard and generateemployment in the Assisted Areas There were many criteria which projects had to satisfy to beeligible for a grant. Two of the most important were: Grants should only be made if the project could not have proceededin the same form without the grant the additionality criterion Jobs created by the project should not be offset by job losses inother parts of the Assisted Areas the displacement criterion The successor schemes to RSA were abolished in England andWales in 2011Topic 2: UK Regional Policy 30 31. Discretionary Assistance Examples of projects that received grants to create employmentare: Admiral in Swansea in 2006 BAE Systems in Flintshire in 2000 Examples of projects that received grants to safeguardemployment are: Alcoa in Swansea in 2003 (closed in 2007) Ventura in Cardiff in 2004 (closed in 2008) RSA was often used as a way of attracting/keeping inwardinvestment: Great Lakes Chemical Corporation in Anglesey If projects failed to achieve specified job targets, clawbackclauses meant that the money should be returned: LG in NewportTopic 2: UK Regional Policy 31 32. Impact of Discretionary Assistance A recent evaluation of the RSA scheme (Hart et al. 2008)showed that additionality was a significant problem In England for the period, 2000-2004: 5% of respondents to a survey of RSA recipients reported thattheir projects were entirely non-additional 26% reported that receiving a grant had no effect apart fromspeeding up the project The Northern Irish equivalent of RSA is Selective FinancialAssistance. For the period, 1998-2004: almost 10% of firms reported that their projects were entirelynon-additional around 38% reported that receiving a grant had no effectapart from speeding up the projectTopic 2: UK Regional Policy 32 33. Impact of Discretionary Assistance Hart et al. (2008) and Criscuolo et al. (2007) both foundthat receiving an RSA grant increased employment in therecipient firm But such results are not surprising when you consider thatRSA funding had to be returned if job targets were not met Arguably, a more interesting question is to look at theimpact of receiving a grant on productivity as this willprovide an indication of whether the jobs created by grantswill endure Harris and Robinson (2005), Criscuolo et al. (2007) andMoffat (2010) all failed to find a significant impact ofreceiving an RSA grant on productivityTopic 2: UK Regional Policy 33 34. Current Regional Policy The main source of funding for regional policy in England is nowthe Regional Growth Fund which will be worth 2.6 billion in2011-2016 The objective of the Fund is to stimulate private sectorinvestment by providing support for projects that offersignificant potential for long term economic growth and thecreation of additional sustainable private sector jobs (BIS, 2012) It is aimed primarily at areas which are heavily reliant on thepublic sector Further details are available at:https://www.gov.uk/understanding-the-regional-growth-fund Current policy in Wales will be discussed in the next lecturesTopic 2: UK Regional Policy 34 35. Summary There are substantial disparities in economicperformance across the UK There are many types of regional policy but, in theUK, it has tended to take the form of microeconomicpolicies to reallocate capital to regions of highunemployment Studies have shown that regional policy has boostedemployment in the Assisted Areas But, as expenditure on regional policy has never beengreater than 1% of GDP in Great Britain, it isunsurprising that it has failed to eliminate regionaldifferences in economic performanceTopic 2: UK Regional Policy 35 36. Next topic:EU REGIONALPOLICYTopic 2: UK Regional Policy 36