Wales TUC response to the Governments consultation paper
A Modern Regional Policy for the UK
The Wales TUC welcomes the opportunity to comment on the Governments consultation paper " A Modern Regional Policy for the UK ". The Wales TUC represents 56 trade unions who in turn represent half a million members across Wales.
This document sets out the Wales TUCs response to the consultation 'A Modern Regional Policy for the United Kingdom' jointly issued by HMT, DTI, and the Office of the Deputy prime Minister in March 2003. The consultation document has been prompted by the likely impact on the EU Structural Funds from 2006 onwards following enlargement of the EU from 15 (EU15) to 25 (EU25) member States in 2004.
The consultation document sets out the Governments vision for the future of UK regional policy; the Governments proposals for EU regional policy reform; and the related reform of the EUs approach to state aids.
The consultation document poses a single specific question - 'What are your views on our proposed approach: that in principle, the EU Framework for Devolved Regional Policy should form the basis for a UK position on Structural Funds post 2006? The Government would also welcome comments on its overall objectives for the future of the Structural Funds and on the current thinking emerging from the Commission.'
Our response is divided into three broad sections dealing with the Governments vision for regional policy in the UK; the Governments proposals for EU structural Reform; and the reform of European State aids.
We strongly welcome the Governments vision of a modern regional policy locally led and substantially devolved. The Wales TUC strongly supported the establishment of the National Assembly for Wales, the Scottish Parliament and the English Regional Development Agencies. There has already been a significant decentralisation of industrial policy.
The enlargement of the EU from 2004 onwards will increase membership to 25 when 10 States join the EU (Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia). The population of the EU will increase by about a fifth to 450 million, the biggest single market in the industrialised world. Wales would share in the wider economic benefits of enlargement and the potential boost to EU wide trade and investment. The Treasury quotes one 1997 study that estimates the UK GDP would be nearly £2 billion higher as a result.
However, GDP per head is significantly lower in the new member States. This will have a number of immediate economic impacts:
The current allocations to the Funds run out in 2006. Over the next eighteen months the existing EU15 members have to agree new arrangements and funding levels to apply for the period 2007 to 2013. The EU has four 'Structural Funds' including the European Regional Development Fund and the European Social Fund that are expected to spend just under 200 billion euros (£140 billion) between 2000 and 2006. The Funds are allocated around four key priorities or Objectives:
Many more regions in the new member states will become eligible for Objective 1 status because they have GDP below 75 per cent of the EU25 average. But some regions in the current EU15 States will lose Objective 1 eligibility because of the fall in average GDP per head across the EU. Overall, the net effect will be to increase eligibility from 18 per cent to 26 per cent of the EU25 population. However, there will be a marked shift eastwards in the coverage of the population. The statistical effect from enlargement reduces the eligibility for Objective 1 status in the current EU15 Sates by about a third.
The Copenhagen Council approved an overall envelope for the Cohesion and Structural Funds for the new EU members of 22 billion euros (about £16 billion) for the period 2004-2006. About one third will be allocated through the Cohesion Fund. Two thirds will come through the Structural Funds - mainly Objective 1 funding - about14 billion euros or roughly £10 billion. Copenhagen reduced the financial commitment provisionally made at the Berlin Council in 1999, partly because of growing resistance among EU15 States to increase the size of the cohesion funds and partly because of concerns at the capacity of the new states to absorb large sums quickly.
The Commission has made it clear that accession States can only draw on the funds if they satisfy EU regulations on administrative structures and monitoring and control procedures. As the Commission points out, 'the candidate countries will have to meet the challenge of integrating very quickly into a system which was not designed for them but which offers them a substantial prospect of speeding up their development.' The Commission will report on progress made on putting the required systems in place in July 2003.
The UK has been allocated just over 15 billion euros from the Structural Funds, or just over £11 billion between 2000-2006, of which about £9 billion comes from Objective 2 and Objective 3. Even without enlargement, some regions in the UK were due to lose support from 2006 because their relative economic performance had improved. The loss of this 'transitional funding' would reduce UK allocations by about 2 billion euros in the next funding round from 2006 onwards.
The additional impact on the UK of enlargement means that only Cornwall would retain Objective 1 status, although Wales and some regions might hold on to some 'transitional' funding from 2006 onwards. The Treasury also say that much of the UK would lose Objective 2 status. However, this is partly because relative UK unemployment performance has improved against the European average. The gap between UK unemployment and employment rates and EU25 unemployment rates would widen through the statistical impact of enlargement.
The loss of regional support would mean the UK would have to pay more as a net contributor to the EU Budget under current arrangements. Net payments to the EC budget were estimated at £3.2 billion in 2003-2004, rising to £3.9 billion by 2005-2006 in the 2002 Spending Review. Even if our gross contributions to the EU Budget remained the same and we retain our special 'claw-back' arrangements, we would still get less back to offset support for the Community Agricultural Policy (CAP) and other EU programmes.
In addition there is some pressure within Europe to increase the size of the Cohesion\Structural Funds from 2006 onwards to at least the Berlin Council target of 0.45 per cent of Community GDP. The EU Commission, the European Parliament, the Committee of the Regions, and some EU States have indicated support. The UK has officially reserved its position, but the Treasury is clearly resisting any suggestion that the UK should pay more.
The next key issue and the main focus for the Governments proposals concerns how the Structural and Cohesion Funds would look in the enlarged EU for the period 2007-2013. The Commission is expected to bring forward proposals by November 2003.
The Government sees both strengths and weaknesses in EU regional policy. Some of the strengths are:
But the Treasury also sees some important weaknesses:
The Treasury argues that the reform of the Funds must retain and build on the strengths and get rid of the weaknesses. The UK Governments overall objective for the reform of the Structural Funds is to deliver an 'effective, sustainable and affordable regional policy for the UK and the EU which gives the best possible value for money and outcomes for the UK taxpayer'. The Government identifies three key objectives for the reform agenda :
To achieve these objectives the Government is proposing a 'EU Framework for Devolved Regional Policy'. This has a number of elements:
The Government clearly has much work to do to convince others in Europe that its proposals have been tabled in good faith. In the Cohesion report the Commission noted: 'To a large extent this has been the case, although proposals such as those regarding the renationalisation of the policy tend to be motivated by budgetary considerations'. So it would appear that the Commission thinks the UK approach is primarily driven by worries over the UKs net contributions to the EU Budget rather than the effectiveness of EU policy.
This is also a European TUC (ETUC) concern, as set out in a policy statement of November 2002: 'At national level, Member states should also integrate the aims of economic and social cohesion into their national and regional policies. The implementation of these policies should be carried out in close coordination with European aims and policies, in order to avoid a certain tendency towards the re-nationalisation of economic and social cohesion policies'. The ETUC also emphasises the need for strong cohesion policies, but with greater emphasise on innovation, co-ordination and the active promotion of the European social model and partnership, including the role of the social partners.
The Commission has not yet tabled a proposal for how big the future cohesion funds might be, but it is thought likely it will endorse the figure of 0.45 per cent of EU GDP (the figure implied by the Berlin Council). This has support within Europe from the ETUC, the European Parliament, the Economic and Social Committee and the Committee of the Regions.
However, where the Commission has doubts that the aid is compatible with the Article and orders an investigation, over 50 per cent of these applications are turned down, including many of the cases where member states failed to notify the Commission. In recent years most of the negative decisions have involved Germany, Italy and Spain. The UK has relatively few proposals investigated and hardly any are turned down. However, the process can be time-consuming and undoubtedly held back the introduction of some UK measures.
The consultation paper makes no reference and offers no critique of the Commissions simplification of the procedures by introducing new regulations to take effect from February 2001. These introduce a block exemption for aid to SMEs and for training, so that member states can introduce aid without seeking Commission approval beforehand. It also makes no reference to the Commissions intention to draw up a new framework for state aids for environmental protection and venture capital and a new block exemption for employment measures. The Commission also says ' work continues on identifying tax measures in the form of State aid'
Clearly, we would not want to see British based companies disadvantaged because foreign competitors were getting tax breaks that were simply re-introducing subsidies by the back-door. But for good reason, the development of a modern industrial policy in Britain has used the tax system with, for example, the new R&D tax credit. It would be counter-productive if in the desire to crack down on uncompetitive practices, the Commission made life harder for the UK government to increase the scope and generosity of the R&D tax credit. If the 'block exemption' principle can be applied to training and employment programmes we can see no reason why the same should apply to R&D support as part of the commitment to the Lisbon strategy to boost R&D spending across Europe.
The UKs relative position shown in the Commission figures only describes the position to 2000. It will not reflect much of the increased funding for the DTIs regional industrial programmes under the Second Review, let alone further increases under the Third Review. The new R&D tax credit will also help develop a more balanced industrial policy, although it is not clear whether this or the new Employer Training Pilots would be included as a State aid under the EU Commissions Scoreboard. Both would however be classified as non-sectoral aid rather though aid for manufacturing even when, in the case of the R&D credit, we would expect most assistance to go to manufacturing. This will present an increasing problem in monitoring whether aid in the UK is closing with that in the rest of Europe. It would be helpful if as part of the review and to help inform industrial policy in the UK the Government and the European Commission continue to improve measures of comparable state aids available across the EU.
The EU commission has recently published the 'State Aid Scoreboard' for the EU covering the period up to 2000. The State aid covers national programmes that fall within the scope of EU legislation (in this case Article 87(1) of the EU Treaty) and have been examined by the Commission. It does not include general measures - such as New Deal - or aid from the EU Structural Funds.
The Barcelona Summit saw EU governments agree to cut the share of GDP spent on state aids and to redirect industrial aid towards 'horizontal' objectives such as support for R&D, SMEs, environment, and training and employment. As in previous periods, the UK has the lowest level of state aids in the EU whether measured in terms of share of GDP, euros per person employed, or as a share of government expenditure over the period 1998-2000. Moreover, on all these indicators state aids declined in the UK comparing 1996-1998 with 1998-2000. Indeed, the cut in UK state aids measured in euros per person employed was bigger than the average fall in EU State aids over this period, so that the UK declined from 53 per cent of the EU average in 1996-1998 to 49 per cent of the EU average in 1998-2000.
Between 1996-1998 and 1998-2000 state aids have been cut in most EU States, with the exception of Luxembourg, Ireland, Denmark and the Netherlands. The increase in Ireland is because some corporation tax breaks have been reclassified as state aids by the Commission between the two periods. The increase in Denmark and the Netherlands reflects increased support for the railways. The biggest cuts in absolute terms where Germany and Italy, reflecting cuts in historically very big regional industrial aid programmes. There were also significant cuts in some smaller state budgets, notably Greece and Portugal.
Annual average 1998-2000 | |||
Euros per person |
Index EU=100 |
Change since 1996-98 | |
Luxembourg |
1406 |
- |
+24.1% |
Finland |
863 |
162 |
- 11.3% |
Belgium |
835 |
156 |
- 3.9% |
Denmark |
750 |
140 |
+17.5% |
Ireland |
739 |
138 |
+44.9% |
France |
711 |
133 |
- 13.9% |
Germany |
684 |
128 |
- 14.7% |
Italy |
529 |
99 |
- 29.5% |
Austria |
524 |
98 |
- 11.0% |
Netherlands |
446 |
83 |
+12.9% |
Sweden |
440 |
82 |
- 8.3% |
Spain |
400 |
75 |
- 14.2% |
Greece |
296 |
55 |
- 25.4% |
Portugal |
287 |
54 |
- 23.1% |
UK |
261 |
49 |
- 22.5% |
EU average |
534 |
100 |
- 15.5% |
Source: EU Commission Industrial Aid Scoreboard, Spring 2002
Across the EU about 40 per cent of spending on state aids goes to support the railways, followed by manufacturing at just under 30 per cent, and about 17 per cent on the agricultural sector. There were some significant differences between EU States, with 65 and 70 per cent of the national state aid budget going to railways in Belgium and Luxembourg respectively, and 74 per cent of state aid in Finland going to agriculture. Germany and Spain are now the only EU States to devote significant amounts of state aid to their coal industries. The UK appears to devote a smaller share of its total State aid budgets to manufacturing. However, a significantly higher share of UK aid comes through non-sector specific spending on training and employment. Some of this will help manufacturing, although no figures are available to show by how much.
Share of total |
EU average |
UK | ||
Sector |
1996-1998 |
1998-2000 |
1996-1998 |
1998-2000 |
Transport |
34% |
37% |
34% |
37% |
Manufacturing |
33% |
30% |
17% |
18% |
Agriculture |
15% |
16% |
20% |
16% |
Coal |
7% |
8% |
10% |
7% |
Services |
7% |
5% |
3% |
3% |
Non sector specific |
3% |
4% |
16% |
18% |
All state aids |
100% |
100% |
100% |
100% |
Notes: 'not classified' by industry includes aid such as cross -sectoral aid to employment and training. Transport is almost entirely railways.
Source: EU Commission, Spring 2002
A key objective agreed at Barcelona was to concentrate industrial aid on 'horizontal objectives' such as R&D, environment, and support for SMEs and on allowable regional aid under Article 87. Between 1996-1998 and 1998-2000 the share of horizontal aids increased from 26 per cent of EU spending to 39 per cent, and sectoral aid declined from 21 per cent to 14 per cent of the total.
The UK is more focused on horizontal aids than the EU average, with 54 per cent of the total state aid budget going on such aid in 1998-2000. However, the UK spend over this period was massively focused on training support, with relatively little going on support of other objectives such as R&D and the environment. Overall, 40 per cent of UK industrial state aids go in support of training compared with a EU average of 9 per cent.
EU average |
UK | |||
1996-1998 |
1998-2000 |
1996-1998 |
1998-2000 | |
Regional |
37% |
29% |
24% |
25% |
Coal |
16% |
18% |
21% |
13% |
Sectoral |
21% |
14% |
7% |
8% |
Horizontal aids |
26% |
39% |
48% |
54% |
Of which, | ||||
- R&D support |
8% |
10% |
4% |
4% |
- Environment/energy |
2% |
9% |
- |
2% |
- SMEs |
7% |
9% |
8% |
7% |
- Training/employment |
7% |
9% |
34% |
40% |
- Other |
1% |
2% |
- |
- |
All industrial State aid* |
100% |
100% |
100% |
100% |
Note:* excludes agriculture and transport
Source: EU Commission 2002
The latest EU figures show that in the period 1998-2000 the UK gave less aid to manufacturing than any other EU State, with the exception of Portugal. The Government has been reluctant to accept the EU Commission estimates, arguing that some support for training was not included. There is some truth in this, as successive TUC policy statements have acknowledged. As noted above, the new analysis presented by the Commission shows that the UK has a significantly higher spend on cross-sectoral aid programmes - mainly training related- than in most EU economies. However, we believe that even making fairly generous assumptions hardly changes the UKs relative position in the European league as shown in the table below.
Overall, EU state aid to manufacturing fell by 21 per cent in terms of euros per person employed between 1996-1998 and 1998-2000, with big cuts in Germany, Italy and Spain. However, several EU states increased state aid for the sector, including France, Denmark, Netherlands, Portugal and Sweden. State aid also increased in Ireland but only because of the reclassification of corporation tax breaks as state aid. The UK also cut identifiable state aid to manufacturing, though by slightly less than the EU average.
1999 constant prices |
Annual average 1998-2000 | ||
euros |
Index EU=100 |
Change on 1996-1998 | |
Ireland |
1866 |
219 |
+58% |
Denmark |
1784 |
209 |
+16% |
Luxembourg |
1266 |
148 |
-18% |
France |
1215 |
142 |
+ 3% |
Germany |
1199 |
140 |
-18% |
Belgium |
1034 |
121 |
-11% |
Finland |
931 |
109 |
- 1% |
Italy |
801 |
94 |
-50% |
Greece |
720 |
84 |
-30% |
Austria |
656 |
77 |
- 8% |
Netherlands |
608 |
71 |
+13% |
Sweden |
575 |
67 |
+11% |
Spain |
487 |
57 |
- 32% |
UK * |
305 |
36* |
-13% |
Portugal |
215 |
25 |
+ 4% |
EU average |
854 |
100 |
-21% |
Note: * excludes non-sector specific aid. Denmark, Portugal and Spain also have significant non-sectoral State aids.
Source: EU Commission, TUC.
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