1. Dr John Moffat
Richard Price Building, Room F49
Email: J.D.Moffat@swansea.ac.uk
Office Hours: Tuesday & Friday, 1:30-2:30pm

2. Learning Outcomes
 Students should be able to answer the following
questions:
 What are the recent trends in UK regional performance?
 What policy instruments are available for reducing
regional 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 Place’s
Potential, 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/pdf
Topic 2: UK Regional Policy 3

4. Relative Regional GVA per head,
1968-2010
Source: Armstrong et al. (2012)Topic 2: UK Regional Policy

5. Bottom 20 UK NUTS 2 Regions, 2009
Topic 2: UK Regional Policy 5
NUTS 2 Region/Country GDP per head (Euros)
West Wales and The Valleys 15,700
Portugal 15,800
Cornwall and Isles of Scilly 16,500
Slovenia 17,300
Tees Valley and Durham 17,700
Lincolnshire 18,000
Merseyside 18,100
South Yorkshire 18,800
Shropshire and Staffordshire 18,800
Northern Ireland 19,000
Lancashire 19,100
East Yorkshire and Northern Lincolnshire 19,300
Highlands and Islands 19,300
Devon 19,800
Cumbria 20,000
Northumberland and Tyne and Wear 20,200
Essex 20,400
Greece 20,500
Kent 20,600
Cyprus 21,100
Source: Eurostat (2013)

6. Top 20 UK NUTS 2 Regions, 2009
Topic 2: UK Regional Policy 6
NUTS 2 Region/Country GDP per head (Euros)
Cheshire 25,900
Surrey, East and West Sussex 25,900
Gloucestershire, Wiltshire and Bristol/Bath area 26,100
Bedfordshire and Hertfordshire 26,500
Iceland 27,200
Germany 29,000
France 29,300
Sweden 31,300
Belgium 31,500
Finland 32,300
Berkshire, Buckinghamshire and Oxfordshire 32,500
Austria 32,900
Netherlands 34,600
Ireland 35,900
North Eastern Scotland 36,200
Denmark 40,600
Switzerland 45,500
Norway 55,900
Luxembourg 75,200
Inner London 75,900
Source: Eurostat (2013)

7. Average Gross Weekly Earnings of Full-time
Employees, July-September 2011 (£)
Topic 2: UK Regional Policy 7
Source: ONS (2013)
0
100
200
300
400
500
600
700
800
North East North
West
Yorks &
the
Humber
East
Midlands
West
Midlands
East London South East South
West
England Wales Scotland Northern
Ireland

8. Regional Unemployment
Rates, 1992-2012 (%)
Topic 2: UK Regional Policy 8
Source: ONS (2013)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
North East North West Yorkshire and the Humber East Midlands
West Midlands East London South East
South West Wales Scotland Northern Ireland

9. Regional Unemployment Rates
Source: BBC (2012)Topic 2: UK Regional Policy 9
http://www.bbc.co.uk/news/10604117

10. Regional Policy Options
Source: Clark (2010), adapted from
Armstrong & Taylor (2000)
Regional Policy Options
MICRO options Co-ordination options
MACRO options
Relocate labour Relocate capital Within Jurisdictions
Devolved
Between Jurisdictions
Different MICRO
options
MICRO & MACRO
options
Trans national Within the nation
Central control
Tariff & trade
Discriminating
monetary policy
Discriminating tax
and expenditure
Automatic
stabilisers
Discretionary
Topic 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 at
one level of government is compatible with policy at
another level of government
 Otherwise, policy at one level of government may
negate or offset policy at another level of government
Topic 2: UK Regional Policy 11

12. Macroeconomic Policy
 Different tax and expenditure levels may be set across
regions
 This happens automatically as regions with high
unemployment tend to receive more expenditure on
unemployment and incapacity benefit and pay less tax
 It may also happen if government deliberately sets
lower rates of taxation and higher levels of expenditure
in high unemployment areas
 We will look more into this issue in Topic 5
Topic 2: UK Regional Policy 12

13. Microeconomic Policy
Source: Clark
(2010), adapted from
Armstrong & Taylor (2000)
Micro policy options
Policies to reallocate
labour
Policies to reallocate
capital
In situ Spatial
reallocation
Labour Market
efficiency
policies
Mobility
policies
Migration
policies
Efficiency of
capital mkts.
Efficiency
of firms
Social
capital
Admin
controls
Taxes &
Subsidies
OutputInputs Technology
Labour Capital Other
Topic 2: UK Regional Policy 13

14. Microeconomic Policy
 As differences in unemployment rates across regions
arise because of a mismatch between the demand for
labour and the supply for labour, regional policy can
assist by:
 moving workers to where there are jobs (i.e. increasing
geographical mobility)
 relocating capital to areas where there is an oversupply
of labour
Topic 2: UK Regional Policy 14

15. Reallocating Labour
 The Employment and Training Acts in the UK (first
introduced in 1950) offered grants and loans to assist
the transfer of workers to low unemployment regions
 However, take-up and provision was low
 Great emphasis has been given to reallocate labour to
other industries ‘in situ’ (i.e. increasing occupational
mobility)
Topic 2: UK Regional Policy 15

16. Reallocating Capital
 More effort has gone into reallocating capital towards
high unemployment regions
 The two main policy instruments which have been
used to achieve this are:
 Administrative controls
 Tax incentives and grants
Topic 2: UK Regional Policy 16

17. Industrial Development Certificates
 IDCs were introduced in 1947
 Firms wishing to build new or expand existing plant in
excess of a specified limit had to obtain an IDC
 These were difficult to obtain in low unemployment
areas but easy to obtain in high unemployment areas
 The difficulty of obtaining IDCs varied over
time, reflecting different levels of commitment to
regional policy before they were eventually abolished
in 1982
Topic 2: UK Regional Policy 17

18. Industrial Development Certificates
 The main advantages of IDCs are that they:
 Are cost effective as they only involve administrative
costs
 Are flexible as they can be changed in response to
changing economic circumstances
 Open channels of communication between industry and
government which allow for better policy-making
 Proved to be effective in moving industry to deprived
regions (Armstrong and Taylor, 2000: p. 216-7; Twomey
and 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 preventing
firms from expanding in their chosen location
 Can stifle expansion as firms failing to get an IDC may
abandon 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 the
limits allowed by location controls
Topic 2: UK Regional Policy 19

20. Tax Incentives and Grants
 Tax incentives and grants can be automatic or
discretionary:
 Automatic means that any firm undertaking the eligible
activity receives support
 Discretionary means that firms have to apply to the
government to obtain the support and the government
may accept or reject their application
 The advantage of discretionary support is that it
can be targeted to ensure that grants are only
provided in cases where they will achieve the
objectives of government
Topic 2: UK Regional Policy 20

21. Tax Incentives and Grants
 The main purpose of automatic tax incentives and
grants is that they provide firms in assisted regions
with a cost advantage over firms in unassisted regions
 However, firms may use this cost advantage to increase
profits rather than to reduce prices and increase
output and employment
 Furthermore, for the cost reduction to be sufficiently
large to increase employment, the tax reduction/grant
must be sufficiently large which means that such
schemes can be very expensive
Topic 2: UK Regional Policy 21

22. Expenditure on Regional Industrial
Assistance in Great Britain, 1960-2003
Source: Wren (2005)
Topic 2: UK Regional Policy 22

23. Employment Premiums
 The Regional Employment Premium (REP) was a
subsidy of £1.50 per man (75p per woman) per week in
manufacturing in the assisted areas between 1967 and
1973. In 1974 rates were doubled but the scheme was
abolished in 1977
 The size of the subsidy relative to total labour costs
was small and overall production costs fell by only
about 2%. It was therefore unlikely that the REP had a
large impact on employment
Topic 2: UK Regional Policy 23

24. Automatic Investment Support
 Regionally differentiated tax allowances were introduced in
Great Britain in 1963
 These were replaced by Investment Grants in 1966, worth
40% (20%) for plants and machinery in Development
Areas (non-Development areas) and 25% for new buildings
in Development Areas. They were not available for new
buildings in non-Development areas
 In 1972, Investment Grants were replaced by Regional
Development Grants, worth 22% in Special Development
Areas and 20% in Development Areas for plant, machinery
and buildings
 All automatic capital grants were abolished in the UK in
1988
Topic 2: UK Regional Policy 24

25. Capital Versus Labour Subsidies
 If the primary aim of regional policy is to raise
employment in deprived regions, labour subsidies
are, at first glance, superior to capital subsidies
 This is because both the substitution and output
effects on labour are positive for labour subsidies
 With capital subsidies, while the output effect on
labour is positive, the substitution effect is negative
and only if the former is larger than the latter is the
total impact positive
Topic 2: UK Regional Policy 25

26. Capital Versus Labour Subsidies
Capital
Labour
I100
I200
I150
l1
k2
k1
l2
substitution output Source: Adapted
from Clark (2010)
Topic 2: UK Regional Policy 26
Isocost Lines – Lines representing
combinations of labour and capital
that cost the firm the same amount
Their slope is –(w/r)
Isoquant Curves – Curves
showing all the combinations
of labour and capital that give
the same level of outputB
A C
Impact of labour subsidy
Substitution effect – A to B
Output effect – B to C

27. Capital Versus Labour Subsidies
 But capital subsidies have certain advantages over
labour subsidies which are not captured by a static
analysis (such as that shown in the previous slide)
 The main advantage is that, because the technology
embodied in capital improves over time, capital
subsidies help firms to modernise their capital stock
 This improves efficiency and therefore lowers
costs, leading to a larger output effect
Topic 2: UK Regional Policy 27

28. Impact of Automatic Assistance
 A major issue with automatic grants is whether they
generate investment that is ‘additional’ over what would
have happened without such grants:
 Robinson et al. (1987) estimated that up to 50% of projects
that received funding from automatic capital grants would
have gone ahead in some form without assistance
 Another issue concerns whether such grants simply
displace economic activity from regions that are not
eligible for assistance to regions that are eligible for
assistance without leading to a net gain in employment
Topic 2: UK Regional Policy 28

29. Impact of Automatic Assistance
 Moore and Rhodes (1973) estimate that the shift to a more
active regional policy in the UK between 1960 and 1963
resulted in an increase in employment in the Development
Areas of 12% by 1971
 Canning, Moore and Rhodes (1987) find that between 1959
and 1971, regional policy in Northern Ireland created an
extra 33,000 manufacturing jobs
 Harris (1991) estimates that employment in Northern Irish
manufacturing would have been 4% lower in 1983 without
automatic capital and employment subsidies. 2.8
percentage points of this effect is due to labour subsidies
Topic 2: UK Regional Policy 29

30. Discretionary Assistance
 The Regional Selective Assistance (RSA) scheme began in 1972
and was available to support investment in new plant, machinery
and buildings
 The scheme was principally designed to safeguard and generate
employment in the Assisted Areas
 There were many criteria which projects had to satisfy to be
eligible for a grant. Two of the most important were:
 Grants should only be made if the project could not have proceeded
in the same form without the grant – the additionality criterion
 Jobs created by the project should not be offset by job losses in
other parts of the Assisted Areas – the displacement criterion
 The successor schemes to RSA were abolished in England and
Wales in 2011
Topic 2: UK Regional Policy 30

31. Discretionary Assistance
 Examples of projects that received grants to create employment
are:
 Admiral in Swansea in 2006
 BAE Systems in Flintshire in 2000
 Examples of projects that received grants to safeguard
employment 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 inward
investment:
 Great Lakes Chemical Corporation in Anglesey
 If projects failed to achieve specified job targets, ‘clawback’
clauses meant that the money should be returned:
 LG in Newport
Topic 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 that
their projects were entirely non-additional
 26% reported that receiving a grant had no effect apart from
speeding up the project
 The Northern Irish equivalent of RSA is Selective Financial
Assistance. For the period, 1998-2004:
 almost 10% of firms reported that their projects were entirely
non-additional
 around 38% reported that receiving a grant had no effect
apart from speeding up the project
Topic 2: UK Regional Policy 32

33. Impact of Discretionary Assistance
 Hart et al. (2008) and Criscuolo et al. (2007) both found
that receiving an RSA grant increased employment in the
recipient firm
 But such results are not surprising when you consider that
RSA funding had to be returned if job targets were not met
 Arguably, a more interesting question is to look at the
impact of receiving a grant on productivity as this will
provide an indication of whether the jobs created by grants
will endure
 Harris and Robinson (2005), Criscuolo et al. (2007) and
Moffat (2010) all failed to find a significant impact of
receiving an RSA grant on productivity
Topic 2: UK Regional Policy 33

34. Current Regional Policy
 The main source of funding for regional policy in England is now
the Regional Growth Fund which will be worth £2.6 billion in
2011-2016
 The objective of the Fund is to ‘stimulate private sector
investment by providing support for projects that offer
significant potential for long term economic growth and the
creation of additional sustainable private sector jobs’ (BIS, 2012)
 It is aimed primarily at areas which are heavily reliant on the
public 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 lectures
Topic 2: UK Regional Policy 34

35. Summary
 There are substantial disparities in economic
performance across the UK
 There are many types of regional policy but, in the
UK, it has tended to take the form of microeconomic
policies to reallocate capital to regions of high
unemployment
 Studies have shown that regional policy has boosted
employment in the Assisted Areas
 But, as expenditure on regional policy has never been
greater than 1% of GDP in Great Britain, it is
unsurprising that it has failed to eliminate regional
differences in economic performance
Topic 2: UK Regional Policy 35

36. Next topic:
EU REGIONAL
POLICY
Topic 2: UK Regional Policy 36