Memorandum by HM Treasury
This memorandum responds to a request from the
Clerk of the Sub-committee for a written submission in connection
with the Sub-committee's inquiry into the technical issues of
regional spending which is designed to pave the way for a subsequent
inquiry by the main Committee into regional economic issues.
The memorandum addresses the three issues highlighted
in the Sub-committee's terms of reference, viz recent trends in
regional spending levels, the factors behind regional disparities
in economic performance and the mechanisms by which regional spending
requirements are assessed and allocated.
1. The Government publishes figures on regional
spending trends in Chapter 8 of Public Expenditure Statistical
Analyses. The latest version of PESA was published in April 2001(Cm
5101). The next version will be published in May 2002. For convenience
Chapter 8 is reproduced at annex A.
The spending figures show identifiable total managed spending
by function and region based on information provided to the Treasury
by departments. The methodology for constructing the figures is
set out in PESA, which covers the period 1998-99 and 1999-2000,
the latest available year. Earlier years were covered in previous
versions of PESA.
2. The Department of Transport, Local Government
and Regions is currently leading a feasibility study aimed at
identifying the form and level of public expenditure (domestic
and European) flowing into individual English regions and for
each expenditure flow what determines the level of that expenditure.
This will also work to develop and apply a methodology to estimate
the flow of expenditure into the English regions.
3. ONS are presently undertaking a pilot
project sponsored by Eurostat to regionalise the Government Accounts
from ONS's "The National Accounts 2001(Blue Book)".
This work will be undertaken for estimates for the calendar year
1998, and the estimates will be broken down to 37 areas within
the UK (known as NUTS2 regions). There are to be separate regionalisations
for central government and local government. This work is due
to be completed in June 2002, concluding with a report to Eurostat
and publication of an article in Economic Trends.
Factors behind regional disparities in economic
4. The factors behind regional disparities
in economic performance were analysed in "Productivity in
the UKCthe regional dimension" published at the time
of the PBR by the Treasury and DTI in November 2001. For convenience
the introduction and conclusions of the report are reproduced
at Annex B attached.
5. There are a number of potential sources
of regional and local underperformance, including macroeconomic
instability, market failures in the underlying productivity drivers,
barriers to labour mobility and failures that affect the clustering
of economic activity.
6. The paper set out the Government's policy
framework for tackling the persistent differentials in economic
performance across and within regions and countries of the UK.
The framework builds upon macroeconomic stability to invest in
tackling market failures at the geographical level at which they
occurCbe it national, regional or local.
7. The framework is built around tackling
market failures in the five productivity drivers: skills, investment,
innovation, enterprise and competition. In England, the Regional
Development Agencies are the key agents in driving forward this
new regional economic policy.
8. The 2002 spending review will reflect
the Government's emphasis on the regional agenda and build on
the analysis in that paper.
9. A report was also produced by the Cabinet
Office in December 1999 "Sharing the Nation's Prosperity:
variations in economic and social conditions across the UK",
which analysed the variation between regions and described the
Government's policies aimed at tackling economic and social deprivation.
10. The Treasury is also part funding an
academic study into regional productivity inequalities in the
UK under its Evidence Based Policy Fund.
Mechanisms by which regional spending requirements
are assessed and resources allocated
11. Public spending in the English regions
is not determined by any single allocation mechanism. Rather spending
is determined by Government departments through a variety of different
mechanisms which reflect the differing nature of the spending
12. For example some spending programmes
are claimant based and the regional pattern of spending reflects
the claimant eligibility criteria and demographic characteristics
eg social security spending. Other spending is carried out by
local authorities and the regional pattern of spending reflects
the aggregation of local authority spending in that region. DTLR
are responsible for allocating general revenue and capital support
to local authorities in England, on behalf of several departments.
Other spending (mainly ring-fenced grant) is allocated to local
authorities by individual departments, according to rules and
criteria that they set. Some is essentially project based and
the regional pattern of this spending reflects the geographical
location of projects eg trunk road schemes. Some spending is carried
out by regionally based agencies and reflects the relevant regional
allocation mechanisms eg the spending of the RDAs.
13. Details of department's spending plans
can be found in the relevant department's departmental public
expenditure reports. Some of the main allocation mechanisms are
described in Annex C attached.
14. Because much of public spending is allocated
according to other than regional criteria and because there are
a variety of allocation mechanisms it follows that the pattern
of regional spending is not determined by any single assessment
of regional spending needs. However it is nevertheless the case
that the various allocation mechanisms are based on assessment
of circumstances and conditions, and therefore regional spending
patterns reflect regional circumstances.
15. It is worth noting that the allocation
mechanisms are not static over time. For example the Government
is reviewing and replacing the current system for allocating revenue
support to local authorities. This review is being co-ordinated
by DTLR. Furthermore departments are committed to improving the
performance of the public services in all regions through their
PSAs, which are being reviewed in the 2002 spending review.
1 May 2002
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