Tuesday, 11 September 2012

Wales : An Economic Profile IV - Public Sector & Universities

You can't have any discussion on the Welsh economy without mentioning the influence of the public sector. Firstly though, you have to define what the "public sector" is.

The Role of the Public Sector in Wales

The public sector, in general, consists of services commissioned (directly or indirectly) by the state. This includes : health, education, welfare services, local services like waste collection and state-run enterprises.

Bodies such as universities and the "third sector" straddle the definition between public and private, as they are mostly run as private businesses, but a large chunk of their income comes from a mix of the private sector and public sector. Even if they are well dodgy. Universities aren't officially counted as part of the public sector by the Office of National Statistics.

Those on the left generally view the public sector as a form of public ownership, and a way to ensure that public services are delivered evenly on a basis of need, not ability to pay, or profitability. The problems with this are that it's generally paid for via increasing levels of taxation (which is claimed stifles economic performance), can lead to the creation of overbearing bureaucracies/"empire building", a top-down "targets culture" that stifles creativity and innovation and it doesn't always offer the best value for money, or highest standards of service.

Those on the right - while not openly hostile to the public sector - consider value for (taxpayer's) money a key consideration. They're less opposed to private companies providing public services, or competition in public services to ensure the best quality of service. However, this doesn't ensure the same levels of investment from the government, it can burden the state with debt (via PFI-style schemes) and competition can lead to poorer areas being left with an ongoing legacy of poor-performing public services.

Wales, Northern Ireland and Scotland – generally - follow the "left wing" model. England however, through both the previous Labour administrations and the current Coalition, are experimenting with a mix "right-wing" policies : free schools, city academies, PFI, NHS foundation trusts etc.

Some of these reforms would be impractical in Wales, but England's public services generally perform better across a wider range of indicators. However, there are gaps appearing in service performance between different areas, dubbed a "Postcode Lottery". Wales isn't immune from this either it has to be said, but the focus here is more towards providing an even service across the board, though services in rural parts of Wales are coming under the most pressure.

More than 300,000 people in Wales are employed in the
public sector, and more than half had some sort of higher
education qualification in 2007.
(Pic : Lewis & Lewis Ltd)

When it comes to the economy, the Welsh public sector:
  • Is a major employer. More than 300,000 people in Wales are employed in "the public sector".
  • Employs more graduates. In 2007, more than 50% of public sector employees had a higher education qualification or above, compared to 22.9% in the private sector. (Table 9)
  • Generally pays more than the private sector. In 2007, the public sector paid £70 per week more on average (Table 10) than the private sector. This trend appears to have continued since across the UK, but the private sector paid more to those without qualifications and school-leavers.
  • Is female-dominated. 63.7% of public sector employees in Wales were women in 2011.
  • Procures between £4-5billion in services from the private sector every year – for example, building a new school or hospital, catering services, IT contracts.


NHS Wales is Wales' single largest employer, with approximately 84,800 members of staff in 2011. Of these, 32,800 were employed in nursing or related roles (i.e. Midwives). There are seven local health boards that run the NHS in Wales, in addition to a separate all-Wales Ambulance Trust, the Welsh Blood Service (based in Llantrisant) and the cancer-specialist Velindre NHS Trust based in Cardiff.

There are currently 14 major general hospitals (with A&E units) in Wales, and 2 minor general hospitals. This is in addition to 13 community hospitals with minor injury units (varying part-time and 24 hour) and numerous supporting clinics, community hospitals, psychiatric hospitals and a specialist children's hospital in Cardiff.

The Welsh NHS is Wales' single largest employer,
and around £6billion is spend on health and social services
by the Welsh Government every year.
(Pic : BBC Wales)

The Welsh NHS has its own logistics and procurement service (Welsh Health Supplies, now called Shared Services Partnership) with bases across Wales. A surgical materials testing laboratory is also based at the Princess of Wales Hospital in Bridgend.

Local Health Boards and the Welsh Government are leading a (controversial) reorganisation of hospital services in Wales, centralising services at some hospitals, while downgrading or removing services at others, being replaced with more flexible community-oriented services.

The Welsh Government currently spends around £6billion on health & social services from its allocated budget every year – the single largest expenditure group - and approximately 40-45% of the total devolved budget.

Local Government

The single biggest sector within the Welsh public sector are our 22 local authorities. There were 177,000 people employed in local government in 2011, but this is a fall of 7,000 on 2010 as public sector cuts make an impact, and local authorities are encouraged to collaborate in providing services.

Local authorities (including police authorities, national park authorities and fire authorities) were responsible for up to £7.8billion of public spending in Wales in 2012-13 on rudimentary local services such as : education, social services, policing, fire services, waste collection, planning and highways maintenance. Local authorities are provided with around £4billion from the Welsh Government directly annually, topped up by some UK Government direct and indirect grants (i.e. Policing).

Local government employed more than half of all
public sector workers in 2011.
(Pic : BBC Wales)

Local Government has the power to levy taxes, which has its own economic impact, raising around £2billion per year in Council Tax and Non-Domestic Rates on businesses. The Welsh Government recently carried out a review of Non-Domestic (Business) Rates, suggesting that local authorities might be able to keep more of this money for themselves in the future.

Central Government

The Welsh Assembly and Government are not huge employers by themselves. Approximately 5,100 people are employed by the Welsh Government directly, and around 300 by the Assembly legislature. Some of these jobs have been spread around Wales – to Llandudno Junction in Conwy and Merthyr Tydfil for example, though most Welsh Government jobs are in Cardiff.

Wales hosts a few major UK public bodies spun-out from the centre : Companies House in Cardiff, the DVLA and Land Registry in Swansea, the Office for National Statistics and Patent Office in Newport. It's also important to note that pan-UK institutions, like defence, are likely to employ large numbers of Welsh people who are based outside Wales, whilst employing very few directly within Wales.

Taxes are non-devolved. The major fiscal levers - including monetary policy, employment law, regulation of financial services, industrial relations, consumer protection and general fiscal policy - are reserved to the UK Government. The Silk Commission is currently investigating whether some tax-varying powers could be devolved to the Welsh Government in the future.

Education & The Role of Universities

In 2012, there were 1,696 maintained schools (221 of them secondary schools) and 66 independent schools in Wales, serving 474,800 pupils (just under 9,000 of them attending the independent schools). There were 28,153 qualified teachers.

There are currently 18 further education colleges - some of which are undergoing mergers - serving around 184,000 students in 2009. These offer vocational and technical courses in a wide variety of subjects. In some local authorities – Neath Port Talbot and quite possibly in future Merthyr Tydfil and Blaenau Gwent – post-16 education (including A-Levels etc.) is provided exclusively by FE colleges.

Neath Port Talbot provides almost all post-16 education
in the county, with around 15,000 students.
(Pic : Bailey Partnership)

At higher education level, Wales has 11 universities, but like the further education sector, are undergoing a restructuring process led by the Welsh Government, which is proving controversial in some cases. Newport University and the University of Glamorgan are due to merge, but it remains to be seen whether Cardiff Metropolitan University will join them.

In 2010/11 there were more than 140,000 enrolments to Welsh higher education courses, and around 10% of these were overseas students. Of these enrolments, some 30,000 will be postgraduates. It's estimated that the university sector contributes up to £1billion to the Welsh economy.

30.6% of the working age population in Wales held a higher education qualification (Level 4) or above in 2011, although this is below the UK average (33.6%). As a percentage of working age people completing tertiary education (including further education) Wales (33.8%) is competitive compared to the EU27 average (26.8%)

The Welsh university sector has had some considerable success in:
  • Spin-outs and business start ups (10% of the UK's graduate businesses and 9% of university spin outs surviving more than three-years are Welsh )
  • Software licences (11% of the UK's total)
  • Income from research (7%)
  • Income from regeneration and development (11%)
  • Attendees at "chargeable performance arts events" (17%)

Most, if not all, Welsh universities offer some sort of support for "spin out" companies launched from within universities, in partnership with the likes of Venture Wales and graduate employment scheme, Go Wales.

AIM-listed Fusion IP - part-based in Cardiff - holds rights to research produced by Cardiff and Sheffield Universities, focusing on science, engineering and energy research, and assists in attempting to turn research into marketable products and patents.

The likes of the Cardiff Partnership Fund and Finance Wales have also helped pump investment in start-up companies, while Ser Cymru (mentioned in Part II) was recently launched by the Welsh Government to help attract and retain more world-class scientific research in Wales.

Some prominent Welsh "spin outs" and graduate companies include:
  • Mesuro (Cardiff) – Radio frequency & microwave testing equipment
  • MedaPhor (Cardiff) – Medical training/simulations
  • Asalus (Cardiff) – Laparoscopic ("keyhole") surgical devices
  • Q-Chip (Cardiff) – Drug delivery methods
  • Nanotether (Cardiff) – Biochemical assays (speed up drug discovery)
  • Rocktails (Cardiff) – Frozen cocktails for retail market
  • Forensic Resources (Cardiff) – Forensic science consultancy
  • Placements UK & India (Cardiff Met) – MBA recruitment
  • Promedical Innovations (Cardiff Met) – Obstetrics medical devices
  • Cymtec (Glamorgan) – Optronics/LED's
  • Rumm (Glamorgan) – Utilities data analysis
  • Allerna Therapeutics (Swansea) – Allergy therapies (i.e. Asthma)
  • Haemair (Swansea) – Respiratory disease treatments
  • Enfis (Swansea) – Optronics. Now Photonstar, mentioned in Part II
  • Innovis (Aberystwyth) – Agricultural breeding technology
  • Optical Reference Systems (Bangor) - Optronics
  • Food Dudes (Bangor) – Social enterprise encouraging healthy eating

Although Cardiff University may be Wales' largest university, with around 30,000 students, it's events further down the M4 that I believe (and have mentioned before) could totally transform the economy of Wales.

Swansea University are currently planning a new campus to the east of the city at Crymlyn Burrows. BP, regeneration experts St Modwen and the Welsh Government are backing the scheme on the site, which was once part of BP's operations in the area. The first £200million phase is due in the next few years. It'll host Swansea University's engineering, computer science, maths, business and economic departments.

Swansea University are planning a new technology-related
campus, which could boost the local economy by as much as £3billion
(Pic : Swansea University)

This is significant as it would provide modern, world-class facilities for high value-added research & development as well as teaching – and all outside Cardiff.

It's been estimated that it could be worth £3billion to the south west Wales economy. If all of that passed onto Swansea's population alone (239,000 in 2011), it would almost double Swansea's GVA, making it Wales' most prosperous local authority in terms of GVA per capita by some distance (~£27,000 or ~134% of the UK average based on 2010 figures).

Though, technically speaking, the new campus would be in Neath Port Talbot, I won't let minor details like that get in the way.

Despite these positive developments, in 2009 Wales attracted £530million in research and development funding - just 2% of the UK's total R&D funding that year. Compare that to Scotland (£1.91bn) and Northern Ireland (£478million).

Is Wales "reliant" on the public sector?

Around £12.15billion, or 27.3% of Welsh GVA in 2011, was "the public sector" compared to 20.3% for the UK as a whole. The UK (non public) service sector was 13% larger (58.2% of GVA) than Wales (45.2%) - a large chunk of that being the difference in financial services. Wales has a proportionally larger secondary/manufacturing sector (Part II) than the UK as a whole, which makes up for the shortfall.

The public sector in Wales & UK expressed as % of GVA
(Click to enlarge)

Next, it's worth looking at where the public sector jobs are.

The density of public sector jobs in Wales by local authority
(Click to enlarge)

There's no set pattern across Wales.

  • Cardiff has the second highest percentage, yet is also home to more large private sector and fast-growing companies (more on that in Part V).
  • Flintshire is a populous local authority, yet has a small public sector by Welsh standards. Rhondda Cynon Taf and Carmarthenshire are populous areas with large public sectors.
  • There's no difference between Y Fro and the rest of Wales, and the two local authorities with the highest percentage of Welsh speakers (Anglesey and Gwynedd) have mid-table levels of public sector workers. Ceredigion and Carmarthenshire are the opposite.
  • Urban authorities tend to have more public sector workers than rural ones (the likes of Ceredigion and Carmarthenshire excepted). The highest percentages appear to be in south and south west Wales.

You can't really set an "ideal" percentage of public sector workers, and the definition of "public sector" is rather fluid. It depends on the situation you find yourselves in, political ideology, as well as the public's demands.

There's also what I'm dubbing a "monolith effect".

Ceredigion had the highest percentage of workers in the public sector in March 2012 - at 37%. Ceredigion also has a population of just over 75,000 (around half the population of Newport). Within its boundaries, they have a major general hospital, is its own local authority (justifiable due to its size) and Aberystwyth is host to a Welsh Government outpost. The county also has two universities which would, unofficially at least, boost numbers of workers paid directly or indirectly by the state, but not actually officially working for the state.

Number of jobs in the public and private sector in Wales
(Click to enlarge)

Can you see why having large public sector employers in such a small (in population terms) local authority is going to affect public sector employment levels? This is ofset by a similar local authorities - Powys and Pembrokeshire for example - having the complete opposite, so it balances itself out across Wales.

There are other situations too:
  • Areas with higher numbers of elderly people will, as a consequence, require more healthcare staff and general care staff – but some of these in turn could be working for private companies.
  • Areas with high levels of deprivation will probably, as a result, require a higher than average number of social workers, government scheme coordinators etc.
  • Areas with a smaller private jobs market (i.e. Valley authorities) will have disproportionately larger public sector. Public services are still needed there even if there's economic problems.
  • Increased investment in capital projects might lead to extra public sector recruitment (i.e a new school, hospital, college)
  • Job security in the private sector is influenced by the state of economy, while the public sector is "shielded" somewhat, so private sector jobs are shed quicker in times of crisis.

Public sector workers as a % of workforce Wales v UK
(Click to enlarge)

From 1999 to 2011, public sector employment in Wales (as a percentage of all people in employment) rose by 1.7% - from 24.2% to 25.9%. This is exactly the same rise as the UK as a whole (19.2% to 20.9%) over the same period.

The difference could be accounted for by the Welsh private service sector being "too small" (Part III), as well as the loss of manufacturing jobs in Wales - for example, the steel industry in the 00s - which Wales is proportionally more reliant on (Part II).

This isn't that much of a problem. Judging by this report from the Scottish Government (Chart A2.3), though public sector employment rates in Wales are high by European standards, they're not that different from Scandinavian nations.

Once you adjust the figures to a whole population figure (Table 1) - not just those in work - there's only a 1% difference in public sector employment rates between Wales and the rest of the UK. If private sector employment - and economic growth - had matched pace with the rest of the UK, you would expect Wales to have a similar level to the rest of the UK too.

The "problem" in relation to the public sector, as I see it, are levels of public spending compared to GVA.

Levels of public spending compared to Welsh gross value added
(Click to enlarge)

Identifiable public spending to GVA per capita rates have risen from 54.2% (£6,515) in 2002-03 to 66.1% (£10,017) in 2010-11. Once you add all the non-identifiable stuff (defence, foreign affairs) you could be looking at a ratio in the mid 70s.

There's a real possibility that Wales could, at some point in the future, have as much spent on it as the economy produces
– a public spending to GVA ratio of 90%+.

Think about that for a second. That's North Korea territory. Would you want to invest in a country like that? Am I the only person concerned about it? The moment you reach numbers like that you cease having, not just a functioning economy - you cease having an economy full-stop.

The fact it might happen here, whilst being a part of one of the richest nation states in the world, despite having a large private sector (as I've demonstrated in previous parts) and excellent exports record (Part V), is an absolutely ridiculous situation to be in.

On paper, only nationalists need to be worried about it, as it makes independence "unaffordable". Based on Wales' tax income alone, the public spending to GVA ratio would be around 40%, or £6,016 per head – a drop in public spending of £4,001 per head (not including all the "non-identifiable stuff").

You can argue, and I have done before (The Big Independence Question), that not all of this public spending has a beneficial effect. A large chunk of it might not even be spent in Wales, and there could be differences between actual outlay expenditure and Treasury estimates. For example, £560 per head is currently spent on defence in Wales on our behalf.

Now, could Wales spend that £6,000 per head better as an independent, but sparsely populated nation of 3 million people?

Or, will the "drop in living standards" (as if living standards have improved by having the equivalent of 66% of our GVA spent on us) be too great a risk?

It's such a broad-ranging argument, it's going to have to be left for another day and for people who  get paid to think about such things.

So, you could conclude that:
  • The public sector is a major employer in Wales, but tends to cluster itself in very few areas, or on very large single sites ("monolith effect" i.e. a major hospital, outsourced UK government body or local government HQ in small towns).
  • Some parts of Wales are – statistically – more reliant on public sector jobs because of this "monolith effect", or a smaller working-age population (i.e. Valley authorities with higher levels of disabled, retiree magnet authorities).
  • Wales isn't "reliant" on public sector employment. With very few exceptions, between three quarters and two thirds of Welsh people work in the private sector. Wales has a market economy with a bit more government intervention than other parts of the UK.
  • On a "whole population" basis there's little difference in public sector employment between Wales and the rest of the UK .
  • Wales is disproportionately reliant on public spending, perhaps explained by : increases in public spending from the centre (proportional shares of "big UK projects") being accounted to Wales, higher than average spending on social protection and Wales' GVA failing to keep pace with the rest of the UK (Offa's Gap) over several decades.

Part V in this series will look at the economic geography of Wales, where we stand in relation to the UK, EU and global economy, as well as answering the question - where do Welsh exports go?


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