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Public sector crowding out private firms

Last week, a very interesting report emerged from the thin tank Reform. Entitled “Whitehall’s last colonies”, it reflected what an increasing number of economists have been thinking about the widening prosperity gap between Wales and other regions of the UK, namely that regional economic performance has become increasingly imbalanced over the last ten years between dynamic regions such as the South East of England and the rest of the economy.

According to the authors, the main reason for this is the high dependency of certain regions on the public sector, a situation which has been accentuated as a result of the recent unprecedented increases in public spending.

Only last month, another study from the CEBR suggested that the proportion of public spending in Wales was far higher than the average for other parts of the UK, a finding that was denied vehemently by the Assembly Government in the press.

Interestingly, the Reform report uses the government’s own statistics to show that the proportion of public spending in Wales as a proportion of overall prosperity is 54 per cent, as compared to around 29 per cent in the South East of England and 34 per cent in London. Indeed, 23 per cent of the workforce in Wales works in the public sector as opposed to just 17 per cent in the South East of England.

However, it is not the number of jobs alone which is important but also the amount of wages generated in the economy. Again, it is worth noting that in the South East of England, private sector employees are paid more than their public sector equivalents. In contrast (and this is would be of no surprise to those who read the jobs pages of the Western Mail every Thursday), the median public sector salary in Wales is £341 per week, 15 per cent higher than the median private sector wage of £297 per week.

And what is the effect of all dependence on the public sector in regions such as Wales? According to the authors, it is not a pretty picture.

They suggest that a vicious circle of economic activity is being created with the increased dependency on the government for jobs and incomes as the private sector is ‘crowded out’ in the economy, especially with regard to the recruitment of talented staff. As a result, there will be fewer opportunities for start-up businesses, especially among young people and modern knowledge-based industries that will migrate to those more prosperous regions where opportunities are greater. This will result in both increased unemployment and likely reductions in private enterprise, which will then lead to greater dependency on the state sector which, in turn, will have an effect on the social and economic environment, making it even more difficult to retain younger people and to develop new businesses, and so on.

So what can be done about it? As I have said time and time again, it is not merely about throwing more money at the problem. Indeed, the report shows that the amount of public money allocated to economic development in Wales per head of population is higher than any other region in the UK. Since 2000, Wales has also experienced the highest proportional increase - 110 per cent - in spending on economic development of any region. Yet, our nation continues to languish at the bottom of the UK prosperity league table.

More importantly, the conundrum for policy analysts is how the nation can capture the wealth creating abilities of the private sector and engage fully with businesspeople who want to make a real difference to their economy, something that the various economic strategies of the Welsh assembly Government have failed to do.

Currently, the jury is still out as to whether the current public sector driven approach favoured by the Assembly Government will achieve growing prosperity for the nation. However, it is clear to anyone working within the economy that without harnessing the talents of those entrepreneurial individuals (especially our young people) who have the drive, motivation and talents to make a real difference, then the bleak future as predicted by the Reform report seems increasingly likely.

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