Helen Goodman MP has authored a paper on behalf of the Northern Group of Labour MPs on how to get the North East economy moving. The paper can be read in full below:
Evidence to the North East LEP Review of the North East Economy from the Northern Group of Labour MPs
A) Introduction
The North East has clear geographical boundaries – the North Sea, Pennines, Scottish border and Yorkshire Moors – and a strong cultural identity. Relatively speaking the population is small – 2.5 million, but spread over a large area. It tends to pivot on an east-west axis with the coastal regions drawing activity in from the rural hinterland. This has implications for institutional capacity. Distance from the capital has been an increasing concern with the London focus on finance and services.
Alongside the North West and Yorkshire, the nation as a whole needs the North East – it should be integral not peripheral to economic and industrial policy. Rebalancing means reducing the North-South divide.
The aim of economic development is to improve the quality of life for the people of the region. This implies an approach which gives investment in human capital, place making and a concern for the distribution of success, a significant role alongside infrastructure, science and investment.
Background
A hundred years ago the North East economy was the main driver of economic development not just in Britain, but across the Empire. This strength, built on mining, heavy manufacturing and a tradition of enterprise still frames many peoples’ picture of the region.
Since WW2 the region has made an, often painful, transition to modern manufacturing. Notable success in securing inward investment has helped to give the region a number of world class sectors – the process industry cluster, Nissan and, to come, Hitachi. The region is the most successful exporter in Britain outside London; however these successes have been insufficient to pull the region up to the average level of income in the country as a whole.
We believe an intelligent and proactive approach to economic development is needed for the North East to fulfil its potential. This should build on our strengths, address weaknesses and look outward at opportunities to develop competitiveness.
B) Where are we now?
This paper does not answer all the questions, but rather sets out the approach we believe should be adopted in developing an economic strategy for the region.
Strengths
Economic The rate of growth in the North East went from being the lowest of the regions during the 1990s, to the second highest during the last decade
Only two English regions grew faster than the UK average between 1999 and 2009 – London and the North East
The North East also saw a significant employment increase from mid 1990s to 2008, of 11.2%, compared to a national average of 9.2%
Between 2003 and 2008 the North East’s private sector employment grew by 9.2%, stronger than the public sector at 4.1%
Furthermore a knowledge based economy was developed under Labour – with the number of degree qualified people living in the North East increased nearly 50% during the 2000s
The North East has an export surplus of approximately £2.5bn, whereas virtually every other region has a deficit. Exports beyond on the EU grew by 20% in 2011.
Global competitiveness in the automotive and processing sectors;
- One in three cars made in the UK comes out of Nissan in Sunderland, making the North East the country’s number one car producing region.
- The North East is home to the largest integrated chemicals plant in the UK at Wilton in Teesside. Over 1,400 companies operate in the sector exporting £12bn of goods a year.
- More than 65,000 people work in the oil and gas sector and more than 70% of the oil and gas platforms operating in the North Sea were built in the North East.
Cutting edge university research (e.g. Newcastle’s medicine and biological sciences)
Centres of Excellence bringing together public and private sectors at Netpark in Sedgefield, Nairec at Blyth and Sunderland Software City.
Japanese links and learning – Nissan and Hitachi. Last year the North east was one of the highest recipients of inward investment creating 10,000 jobs.
Low land prices – office costs are 50% lower than London and the South East and 20% lower than Leeds and Manchester.
Social Strong community solidarity and friendly people
Place Making Fantastic countryside from North to South
Very successful arts development in Sage Gateshead and Newcastle
Nation’s favourite building – Durham Cathedral
Weaknesses
Economic The legacy of heavy industry – which has serious social consequences and means the region lacks a service culture
Poor infrastructure – road, rail, ports, airports, connectivity. For example it is the only region without motorway connections; it is not part of the HS2 development, one of its two airports is under threat. Connectivity is poor.
The highest level of unemployment in the UK – Unemployment 9.9% in the North East. UK is 7.9%.
Social Very high levels of deprivation and poverty – 20% of people in the North East are in relative income poverty compared with 16% UK average. 31% of constituencies in the North East are in the 20% most deprived.
Legacy of ill health and inactivity (25% of working age) – 28.1% of the people in the North East are economically inactive, because they are long-term sick. This is the highest of any English region.
Levels of educational achievement are below the national average. NE 5 A*-C GCSE pass rate is 56.8%. English average is 58.9% – only region lower than North East is Yorkshire and Humber. 49.8% of 19-year olds pass at least two A-Level or equivalent in the North East – national average is 54.5%. Between 20-24, 18.9% in the North East have degree compared with 20% nationally.
The gap is greater for the over 25s: only 19.1% in the North East have a degree compared with 26.1% across the UK.
This combines to produce low levels of aspiration and high despair in some communities and a big sense of “loss”.
There are significant class and gender divisions.
Place Making Areas of very poor housing – inner-city large estates/run down 19th century villages.
Many small isolated communities.
Opportunities
Export opportunities building relations with Northern Europe, Baltic, Russia, Scotland.
Green growth – offshore wind/electric cars; The North East is leading the UK in electric vehicle manufacture and is at the centre of sustainable energy innovation. Our location gives the shortest access to Dogger Bank, the largest of the nine Round 3 offshore wind farms. This is happening next to some of the UK’s most important yet most energy intensive businesses, creating a special opportunity for the region to be a world leader in decarbonising industry.
Tourism which brings £3.9bn into the regional economy and is rising
Threats
The level of cuts being imposed by the government on this region (see below)
That this Government doesn’t invest in green technology or provide a stable regulatory framework in the energy sector.
Scottish independence/Devo Max, which could privilege investment north of the border
Another decade of lost time
C) Parallel Process of Development
To achieve social alongside economic objectives we need a parallel process of development
For World Competitiveness | For Quality of Life |
Identity and focus on key sectors | High quality jobs |
Wind | |
Leaf | |
Trains | |
Process industry | |
| Research and Development | |
| Education and Skills | Education and Skills |
Social infrastructure | |
| Transport infrastructure | |
| Rail | Rail |
| Road | Road |
| Ports | Public transport |
| Airports | |
| Public transport (buses and metro) | |
| Connectivity | Connectivity |
| Broadband (also for SMEs) | Broadband |
Housing | |
Place making | |
Environmental protection |
D) Supply Side
An intelligent approach to economic development would have the following elements:-
Clusters
This Review – or the two LEPs-should undertake a full economic analysis to identify clusters (probably, automotive; advanced materials; processing; renewable; offshore wind servicing; health sciences; digital media; call centres). Building public/private partnerships so that university research and centres of excellence (such as Netpark and Nairec) are working co-operatively on connected issues has worked well and this is the approach we recommend building such an active industrial policy. For example; Thorns decided to build their new factory in Spennymoor because of the partnership with Durham University Chemistry Department located at Netpark. The NECC say “ The energy sector represents an enormous opportunity for the North East economy. This could result in £6bn of investment and 40,000 extra jobs in the North East in the next 20-30 years. However, the proposed Energy Bill risks missing a key opportunity to cement this”.
In general this work needs to be co-ordinated with work on foreign direct investment and export promotion
Finally, to get the greatest “spin-off” we need to ensure that the supply chain is developed regionally. This has worked well with Nissan where suppliers fund new markets for their output. Automotive engineering suppliers for example have diversified into renewable energy technology
Research and development
As set out above the work in universities can be a significant support. But in addition new ground-breaking work which they do (as in genetics at Newcastle) can lead industry. This too requires fora for discussion across sectors.
Education
Even with current levels of unemployment there are shortages in the mid-range of technical skills, (NVQ 2) which is leading to a demand from industry for immigration rather than a “grow your own” approach.
Currently there is no manpower planning or formal co-ordination and framework for a forward looking approach to skills development. What is taught, especially in FE colleges is dependent on the preferences of 16 year olds – hardly a recipe for international competitive success. There are more hairdressing students than hairdressing jobs!
This lack of co-ordination between industry and education is a longstanding problem but the advent of free schools, academies, the weakening of local authority education departments and decline of the LSC is fragmenting expertise and making it harder to share information and co-operate.
Young peoples’ educational achievements are close to the national average. The significant gap is with older workers. This suggests that in our region a real push is needed on retraining for adults. This is especially the case given that many of those leaving the public sector do not have the skills required in modern manufacturing.
Infrastructure
The need for better infrastructure in the North East is well known and well understood in the region. It comprises:-
Roads – both within the region and connecting the region with its neighbours (A1 and A19). We were concerned to learn of the bias in the calculation methodology against our region (see IPPR)
Rail – especially freight capacity and interconnection with air and sea hubs
Airports
Ports – a deepening project on the Tees
Broadband – many rural areas lack broadband, in Durham and Northumberland there is no access for 20% of the population. Speeds are not high in the urban areas
Commuting patterns within the region demonstrate that travel between areas which are geographically very close is often extraordinarily low because of poor public transport provision (see IPPR). Bus grant cuts have affected many areas badly.
Despite this when the government announced its £40 billion infrastructure plan last year the North East received 0.03% – £13 million. £5 p.c. compared to £2,000 p.c. in the South East. If we had our per capita share it would have been £2 billion. Looking at the distribution of infrastructure spend we believe it reflects political (where are the marginal seats) rather than economic considerations.
This is wholly unacceptable. Central Government should govern in the interest of the whole nation, not sectional or party calculation.
Finance
For all businesses, but particularly SMEs the lack of access to finance and financial advice is a major barrier. It is noticeable that much of the West Yorkshire boom followed the establishment of merchant banking in Leeds in the 1990s. Leeds, Edinburgh and London are all too distant for many. North Eastern SMEs.
We support stronger regulation to prevent another crisis but it must not end up choking off lending to SMEs.
The private sector should be asked what it will take to get credit flowing and the British Investment Bank developed to address the gap. We also believe the EU has potential to support this region further through structural funds and do not want to see Whitehall erecting false barriers to access.
Housing and Place Making
The acute shortages, long waiting lists and high ratios between earnings and rents and prices are not as severe in the North East as in the South. But there is a serious quality issue, with very poor quality in all sectors – privately owned, privately rented and the social sector.
Over the last 15 years quality was tackled, but the numbers living in sub-standard accommodation is still too high. Sub-standard local authority housing stock in the North East is 22% compared with an England average of 16%. There is therefore an opportunity to improve the quality of life and boost the economy by a significant building programme.
Institutional Infrastructure
One of the positives in the North East has been very good relationships across sectors. These too are now under pressure given the difficulties of the recession and public sector cuts.
Much of what is described above requires capacity to:-
- Build and facilitate partnerships
- Co-ordinate activity
- Represent the regional interest both nationally and internationally
- Mobilise resources quickly
The demise of the RDA which undertook the analysis and fulfilled both the co-ordination and international elements of this work has set us back significantly. The LEPs should revisit the useful work done by the RDA and follow it through. In addition to the work previously undertaken by the RDA we would be interested in looking at whether this could be combined with co-ordination for further and higher education, childcare and a regional element of the British Investment Bank. In the long term we would like a unified regional strategy. In the meantime we would like to see the LEPs co-operate. Major issues ranging from exploiting the potential of our universities, major infrastructure projects and the development of green industries along our rivers.
E) Demand – The impact of Government cuts
These elements – clusters – R&D – infrastructure – education – finance and institutional capacity could all have been identified 3 years ago. They are supply side measures to increase capacity. What makes the current situation extremely alarming now is that even if some of those measures were to be adopted they would be taking place against the background of massive public spending cuts which are sucking resources and demand from the regional economy. There is no point pouring bubble bath in, if the plug has been pulled out.
The final section of this paper looks at the extremely damaging impact this government’s spending cuts are having on the regional economy. Far from re-balancing the British economy, these cuts are tipping over the North east.
The cuts are disproportionally falling on our region – this is wholly unjust – the city fiasco was not made in the North. It is pushing many of the most deprived into an abyss and destroying paths to life improvement. It is also extremely detrimental to the local economy.
- 1. The cuts are disproportionate
PWC analysis of the Treasury figures set out in the July 2010 emergency budget show that at 7% of GVA the cuts announced in July 2010 are the highest as proportion of GDP in the country.
New analysis undertaken for us by Oxford Economics show that this 7% GVA is equivalent to £2.8 billion (in 2012 prices) and that the indirect or induced effects – mainly second round effects on the private sector total £960 million. This means that in addition to taking over £1,000 from every man, woman and child in the region – collectively we are seeing a 10% drop in the size of the regional economy. If the IMF is right the impact may be even greater at a second round impact of £30bn.
The Economist recently highlighted how government cuts to council services were hitting poorer areas in the North harder than prosperous areas in the South. They cite figures from the IFS showing the local authorities in the North East and North West must cut their spending by around 12%, compared with just 4.6% in the South East.
The IFS estimates the local authority cuts at 18.7% compared to 9.3% in Wales, a comparable region.
- 2. Impact on jobs
According to the Work Foundation there have already been 45,500 public sector jobs lost in the North East over the last three years.
Alarmingly, Oxford Economics’ forward projection is that job losses from 2008-12 at 68,000 will not be compensated by job creation from 2012-2022 when 46,800 are projected, leaving us with a deficit of some 20,000 jobs.
Because of our legacy of heavy industry and low income benefits cuts are falling disproportionately on us too.
While last quarter’s job figures reflected an improvement there are still more people out of work in the North East under the Coalition government.
ONS: 93,319 people claiming jobseekers allowance in the North East in Sept 2012 compared to 78,909 in Sept 10. A net increase of 14,410.
- 3. The overwhelming majority of cuts are still to come
Earlier this year the IFS highlighted how we’ve only had 12% of the government’s planned cuts. How will the regional economy withstand the remaining 88%?
- 4. Regional pay
The Chancellor’s proposal for regional public sector pay would be very damaging for the North East. The New Economics Foundation has modelled a range of scenarios and they believe it could cost the regional economy up to £761M per year.
Many North East businesses are worried about it and ten recently wrote to the press voicing their opposition.
- 5. A social recession
A new report has highlighted how poorly North East women have fared from the Coalition’s cuts and highlight how a range of organisations helping women are on the brink of closure undermining efforts in childcare, housing, welfare and domestic violence. They also highlight homeless figures for the North East have increased by a staggering 40% compared to 19% nationally.
Food banks are currently opening at a rate of 2 per day nationally. They are emerging all over the North East to prevent the poorest families from starving. Currently in Middlesbrough, Durham, Billingham, Sunderland and Newcastle – with more due to open in Redcar, Hartlepool and Gateshead.
The North East voluntary sector
The notion that public services can be replaced by the voluntary sector is utterly fanciful. The cuts are falling most heavily where the third sector finds it hardest to raise funds and build capacity. Last year a survey by VONNE showed that among the North East’s voluntary and community organisations:
73% have seen a decrease in funding
64% are using reserves
59% have experienced an increase in demand for their service
48% expect to, or are considering closing a service
40% have lost staff
23% may close in the next 12 months
Consequences
If Government policies continue or, worse, the Chancellor of the Exchequer were to impose further cuts on 5th December. Undertaking the supply-side measures without addressing demand or social factors would spell a future of division for the region. Yes there could be centres of excellence, but this would be in a sea of deprivation. There would not be paths for people to fulfil their potential. The economic modelling does not support trickle down.
We believe there does need to be a rebalancing of the British economy for a one nation approach. This means the heaviest burden should fall on the broadest shoulders, public services should be equally well funded across the country according to need. Infrastructure, investment and economic development should be driven by economic potential not subject to political manipulation and that far from imposing further cuts – the Chancellor of the Exchequer should change course.
We hope the Review will support this call and that the LEPs will unite to build the capacity of our region.
Notes
We are grateful to the Northern TUC, Industrial Communities Alliance, NECC and Oxford Economics in putting this paper together. We have also referred to the interim report from IPPR North on Northern Prosperity and PWC’s sectoral and regional impact assessment of the fiscal squeeze.
