Ideas for the UK – election economics nations and regions week

Next Thursday, voters across the country will go to the polls. Some of their decisions will be made on the basis of the parties’ promises on big national issues like taxes, public spending and the cost of living. Others will be more concerned about local matters – the things that directly affect them where they live.

For voters in the devolved nations, there are constitutional matters to consider and even different political parties to choose from beyond those standing in the UK as a whole. What’s more, many of the issues affecting people’s decisions at the ballot box – from health to education – are devolved. This means that a number of policies discussed in the debates between Keir Starmer and Rishi Sunak would not necessarily apply in the Northern Irish, Scottish or Welsh contexts.

In this week’s election newsletter, we look at some of the policy ideas being discussed in the devolved nations, as well as the challenge of tackling striking inequalities across the UK’s cities and regions. Manifesto promises of the main national parties are summarised in previous editions of this newsletter.

Wales

Labour is expected to win the general election in Wales – and comfortably. But there are challenges ahead many of which are set out by Guto Ifan (Cardiff University) in an Economics Observatory article published this week.

The public finances will be tight. Under Labour’s manifesto commitments, the Welsh government budget for day-to-day spending is projected to increase by just 1.1% per year. While most public services are devolved, the money available depends on decisions made in Westminster. So if the NHS budget is increased – a priority for Welsh voters – cuts to non-protected services will be inevitable.

Both the Conservatives and Labour are banking on economic growth as the solution. The parties hope that stronger growth will allow for public spending increases funded by additional tax revenue.

But additional fiscal space may prove elusive. The public finances outlook is underpinned by Office for Budget Responsibility (OBR) forecasts, which are already more optimistic than most others, such as those from the Bank of England and the International Monetary Fund (IMF). As Guto argues, without changes to tax or borrowing, a marked improvement in economic growth will be needed to enable more spending on public services.

Welsh steel

The future of heavy industry matters for Wales and its economy. Labour has pledged £3 billion to support Welsh steel. The proposed ‘clean steel fund’ would incorporate £500 million for a new electric arc furnace and target modernisation of the sector.

Figure 1: Steel production, UK and Wales, 2000-22

Source: StatsWales

The steel industry in the UK has been in long-term decline, with the production of raw steel more than halving since the start of the century. During this period, China, which joined the World Trade Organization (WTO) in 2001 and has subsidised steel, now accounts for 54% of global production. Yet the industry in Wales has proven a little more resilient: in 2021, just 5% less steel was produced in Wales than 20 years earlier.

Figure 2: China’s share in worldwide crude steel production

Source: World Steel Association, via Statista

Indeed, around 45% of the UK’s iron and steel sector workforce is employed in Wales. These metals are also the nation’s fourth largest export, worth around £1.4 billion.

Welsh steel is nevertheless in a precarious position. Tata, which runs the largest steelworks, claims that it is losing tens of millions of pounds a month and has announced plans to close its remaining blast furnaces at Port Talbot.

Figure 3: Steel industry sites, Wales

Source: Senedd research briefing, 2016

If Tata ceases operations, it would join a long history of closures, including most recently the company’s Orb plant in Newport and the Wrexham Wire factory. In 2022, just 7,420 people were employed in the Welsh iron and steel industry, far from the peak of 63,000 in the early 1970s.

Closure would have a ripple effect throughout the Welsh economy, leading to thousands of additional job losses in dependent industries. Research by Calvin Jones (Cardiff University) indicates that around 5,000 job losses are to be expected – around 2,000 from Tata and a further 3,000 roles that rely on the company for trade. Worryingly, this is estimated to lead to, at least, a 10% drop in gross earnings in Port Talbot, equivalent to £133 million a year.

As Calvin highlights, much as with the mine closures in the 1980s, there is ‘no going back’ for Welsh steel. But to decide where we want to go next, a clear industrial strategy is urgently needed.

Plaid Cymru policies in brief

• Transport: Campaign for the allocation of £4 billion worth of HS2 funding from the UK government for Welsh infrastructure projects. Reform the Barnett formula to ensure that Wales receives its fair share of transport spending (and other budget lines).
• Health: Recruit 500 extra general practitioners (GPs) in Wales – a 25% increase in the overall number and assign 8.7% of the devolved budget to GPs.
• Welfare: Reform the current welfare system (which is controlled from Westminster), with a £20 increase in child benefit payments per week. Currently 29% of Welsh children live in poverty (that is, they live in a household where the income net of housing costs is 60% below the national average).
• Energy: Implement a windfall tax on energy companies, building on and increasing the rate of Rishi Sunak’s one-off energy profits levy (which increased the headline rate paid by oil and gas companies from 40% to 75%).
• Trade: Pressurise the UK to rejoin the single market and customs union, as a step towards a return to full European Union (EU) membership. Advocate freedom of movement to support the Welsh labour market.
• Net zero: Commit to net-zero emissions by 2035 (15 years before the UK as a whole). Encourage greater investment in green jobs, more renewable energy generation in Wales and increased taxes on flying.
• Education: Recruit more teachers and offer universal free school meals to all Welsh school children.

Scotland

The Scottish National Party (SNP) has dominated politics in Scotland for over a decade. But this may be about to change, as Labour is currently expected to take the most seats in Scotland in the election. This also means that the question of independence is less certain.

As highlighted in an Economics Observatory article by Graeme Roy (University of Glasgow and one of our lead editors), the SNP has had a tumultuous 18 months, in which time it has had three different leaders. But beyond these internal politics, issues related to energy, health, tax and welfare will all be key to voters’ choices on 4 July.

Tax

The SNP’s manifesto is pressing for full tax devolution. Since 2016, the Scottish parliament has had powers to adjust income tax bands and rates for Scottish taxpayers. But the SNP claim that full devolution of tax-setting powers would enable better alignment of national insurance contributions with Scotland’s ‘progressive income tax rates’.

Meanwhile, the Scottish Conservatives have promised to return income tax rates in Scotland to be the same as the rest of the UK. Tax commitments in the Scottish Labour manifesto rule out raising income tax if the party comes to power in 2026 (the next Scottish parliamentary elections). They have not indicated any plans on realigning Scottish and UK income tax bands.

Figure 4 shows the marginal tax rates in Scotland and the rest of the UK, following the introduction of Scotland’s new ‘advanced’ tax band in April 2024. Currently, Scotland has six tax brackets, compared with three in the rest of the UK.

The tapering of the personal tax allowance means that some Scottish taxpayers, earning between £101,000 and £125,140, face a 67% marginal tax rate. The Scottish ‘higher’ rate bracket also imposes a sharp increase in the marginal tax rate, rising from 29% in the ‘intermediate’ rate up to 50% for earned income over £43,663 and £50,270. For an individual earning £50,000, the tax liability is at least £1,500 higher in Scotland than elsewhere in the UK.

Fiscal drag is rapidly pulling many more taxpayers into this income bracket over £43,663. And the continued deviation from UK tax rates could have an impact on the labour market. For example, senior hospital consultants earning £130,000 can expect to pay over £5,000 more in tax in Scotland than their peers south of the border.

Figure 4: Marginal tax rates in Scotland and the UK

Source: OBR

Energy

Energy is a critical sector in Scotland’s economy, particularly given the high proportion of jobs in the oil and gas sector. Figure 5, based on estimates from the Fraser of Allander Institute, illustrates the distribution of direct, indirect and ‘induced’ jobs in this sector. Induced jobs are those supported by the wages earned in direct and indirect jobs, such as in cafes and shops.

Over half of the total oil and gas sector jobs in the UK are located in Scotland. This is broken down as follows:

• Direct jobs: Scotland accounts for 23,000 of the 28,000 direct jobs in the UK.
• Indirect jobs: out of 122,000 indirect jobs in the UK, 35,000 are in Scotland.
• Induced jobs: the induced jobs range from 8,000 to 26,000 in Scotland, out of a total of 90,000 in the UK.

This significant concentration of jobs underscores the importance of the sector to Scotland's economy and highlights the challenges and opportunities that the region faces in the clean energy transition.

Figure 5: Total jobs linked to oil and gas, Scotland versus the UK (as a whole)

Source: Fraser of Allander Institute

Historically, the SNP has advocated maximisation of North Sea oil and gas production to fund future generations through a ‘Norway-style’ energy fund. But by January 2023, the SNP approach had shifted, prioritising the reduction of carbon emissions.

During the election campaign, the SNP have stated that they will consider new drilling licences on a case-by-case basis, aiming to balance environmental commitments with the economic necessity of protecting jobs in the sector. In contrast, Scottish Labour have confirmed that they will not approve any new oil and gas drilling licences.

Labour's manifesto proposals aim to transform the UK into a clean energy superpower, with significant implications for Scotland. Key initiatives include the creation of a publicly owned company, Great British Energy, which could leverage Scotland's abundant renewable resources, particularly wind and wave power.

The aim is for the company to boost investments in renewable projects and to offset a declining oil and gas industry in Scotland. Around 30,000 jobs could be lost over the next decade as a result. The number of jobs supported by oil and gas has more than halved in the past decade despite the government issuing hundreds of licences. But analysis projects that new oil and gas licences will have a marginal impact on future jobs.

A carefully managed transition of workers and supply chains into new technologies will be crucial. A recent Rystad report highlights the importance of aligning oil and gas skills with emerging sectors. For example, skills and supply chains for floating offshore wind are more compatible with those in oil and gas than fixed-bottom wind.

Further work underscores the need for significant investment in new technologies to safeguard jobs through 2030. Without this, the government may have to reconsider oil and gas licensing to maintain the supply chains necessary for future technological advancements.

SNP policies in brief

• Scottish independence: Trigger independence talks (note: in 2014, Scotland voted to remain in the UK by a margin of 55% to 45%).
• Health: Call for the next UK government to boost health spending by £10 billion per year, with £1.6 billion allocated to Scotland (via the Barnett formula – the system used to derive budgets for the devolved nations). Oppose further privatisation.
• Welfare: Scrap the two-child limit on the child tax credit component of universal credit. This would cost £2.1 billion this year, rising to £3.4 billion after five years. Increase maternity pay to 100% of average weekly earnings for the first 12 weeks of leave for new mums. Depending on which is lower, it would then be set at either 90% of earnings or at the statutory minimum allowance (£184 per week) for 40 weeks.
• Trade: Rejoin the EU and single market (note: without Scottish independence, it is not currently clear how this would happen).
• Migration: Take control of visa and immigration policy from the UK government and use new powers to bring in more foreign workers to Scotland(note: Scotland is projected to have a greater share of pensioners to workers than the rest of the UK by the mid-2030s).

Northern Ireland

Economic and social concerns are at the centre of the election debate across the 18 constituencies in Northern Ireland. These sit alongside constitutional issues, made more complex by the post-Brexit trade arrangements, as highlighted in an Economics Observatory article by Karen Bonner (Ulster University). These include the Northern Ireland Protocol and the Irish Sea border, raising questions, for some, around whether the nation would be better off remaining in the UK or reunited with the Republic of Ireland.

The five main parties in Northern Ireland each have views on this. Sinn Féin and the Social Democratic and Labour Party (SDLP) both support the idea of a united Ireland. Alliance has a neutral position on this matter, while the Democratic Unionist Party (DUP) and Ulster Unionist Party (UUP) are committed to remaining part of the UK.

The DUP currently has the highest number of MPs, with eight elected in 2019. The party recently stated that it wants to remove the Northern Ireland Protocol and ‘restore NI’s place within the UK’.

The protocol was established to guarantee the Belfast (Good Friday) Agreement and minimise disruption after Brexit, avoiding a hard border on the island of Ireland. The idea was to protect the interests of Northern Ireland with both access to the UK’s internal market and the EU single market for goods. But it was not designed as a permanent solution, and the elected authorities in Northern Ireland have the power to decide what will happen to the agreement at the end of 2024.

The protocol has created trade disruptions between Northern Ireland and the rest of the UK, effectively establishing a border in the Irish Sea. In simple terms, goods that are moving from Great Britain (GB) to Northern Ireland require more customs inspections, tariffs and formalities as they are entering the EU customs union.

Trade between Northern Ireland and the rest of the UK is important, accounting for 17% of total sales from Northern Ireland and 30% of total purchases. Ensuring the free flow of goods within the UK’s internal market is therefore vital to the Northern Irish economy. Combined, the sale of goods and services to GB is worth £12.8 billion to Northern Ireland’s economy, while purchases total £14.4 billion.

While there is a trade deficit with GB, Northern Ireland has a trade surplus - selling more than it buys – with the Republic of Ireland, of £2.1 billion.

Figure 6: Northern Ireland sales/exports and purchases/imports by trade partner, 2013-22

Source: Northern Ireland Statistics and Research Agency (NISRA), 2023

According to the National Institute of Economic and Social Research (NIESR), the protocol has contributed to the improvement of Northern Ireland’s economy. The nation’s output (measured in gross value added per hour) has slightly outperformed the UK average. This is due to the better trade and investment conditions resulting from membership of the EU’s single market.

Figure 7: Northern Ireland gross value added per hour worked relative to the fourth quarter of 2019

Source: National Institute regional economic modelling system (NiReMS)

Policies in brief

Democratic Unionist Party (DUP)

• Health: Invest £1 billion to cut NHS waiting times, partnering with private service providers. Deliver 750,000 extra appointments/procedures. Increase the number of GPs trained each year.
• Local economy: Support 20,000 new jobs, with a particular focus on agricultural technology, science and advanced manufacturing. Grow Northern Irish tourism to a £2 billion industry.
• Education: Build more schools during the next parliament. Increase access to breakfast and homework clubs and cap uniform costs. Improve and restructure special educational needs service.
• Households: Deliver 30 hours of childcare per week. Support lower-income families with an ‘energy support payment’ and improve energy efficiency in residential buildings to lower bills, funded by windfall taxes on energy companies.
• Trade: Remove the protocol under which Northern Ireland, but not the rest of the UK, remains in the EU single market (for goods only). Pursue a new agreement that is supported by both unionists and nationalists.

Sinn Féin

• Fiscal independence: Transfer powers to set tax and spend policies from Westminster to Stormont (note: income tax has been partially devolved in Scotland since 2016, and the Welsh government has been able to tweak income tax rates since 2019).
• Health: Create an ‘all-Ireland’ health service, based on cross-border collaboration between health services.
• Local infrastructure: Expand Ulster University and make improvements to some of the major roads in Northern Ireland. Continue to push for the redevelopment of the Casement Park Stadium in Belfast.

Levelling up: cities and regions

The future of devolution – both for the devolved nations and the country’s regions and cities – has emerged as a hot topic in the campaign.

One example is the Conservatives’ proposal to redirect £275 million from the shared prosperity fund to pay for their national service plan for 18-year-olds. This would reduce the funding available for the ‘levelling-up’ agenda that was a central focus of the Conservatives’ 2019 election campaign and throughout the last parliament (including the Levelling Up White Paper in 2022). Labour has promised instead to return control of this fund to the devolved nations.

Experts cite geographical inequalities in the UK – between cities, regions and devolved nations – as a key contributing factor in the country’s productivity decline in recent decades. These inequalities exist across incomes (see Figure 8), economic inactivity (see Figure 9), productivity (see Figure 10), infrastructure, skills and transport. More not less devolved power is seen as an important part of the solution to close existing gaps.

Much as Calvin Jones calls for a coherent industrial strategy, Anton Muscatelli (University of Glasgow) highlights the lack of a ‘rational and symmetric structure for devolution’ in the UK. He calls for more clarity on the purpose of regional development, redirected spending to the city-regional level, and a refresh of the relationships between Westminster and the devolved administrations, including allowing for overlapping competencies in spending.

Figure 8: Gross median weekly pay, 2023

Source: Office for National Statistics (ONS)

Figure 9: Economic inactivity, 16-64 year-olds, 2023

Source: NOMIS

Figure 10: Gross value added per filled job, cities and authorities, 2022

Source: ONS

Several economic research institutions have contributed to discussions of the crucial issue of geographical inequalities during the last parliament and during the election campaign. For example, a NIESR briefing looks at what’s been achieved on the last government’s agenda of reducing regional inequalities by levelling up. It shows that the combination of insufficient central government resources and the slow disbursement of relatively small pots of money has meant that there are few signs of levelling up. Indeed, geographical disparities in living standards and productivity have either remained unchanged or widened.

This view is echoed in briefings from the Institute for Fiscal Studies (IFS) on how well – or badly – the UK has fared on the 12 levelling-up missions in the White Paper; and the Centre for Economic Performance (CEP) on spatial disparities in productivity and income.

Jack Newman (University of Bristol) concludes:

‘Despite the prominence of the Conservative’s “levelling-up” slogan in the 2019 election, and the Labour party’s bold rhetoric on “taking back control” in the years since, the 2024 election campaign has seen little emphasis on decentralisation or spatial inequality. And yet the underlying issues remain. Regional government will be the linchpin in any future growth or industrial strategy, but England has an unfinished devolution project full of holes and unanswered questions. Geographical inequality not only raises economic questions about underperforming second cities, but also political ones about a geography of discontent that has not ebbed away post-Brexit.

‘Given that Labour are broadly expected to form the next government, it is their manifesto that has received the most scrutiny on English devolution. There is bold rhetoric on plans to broaden and deepen devolution in England, but the manifesto is – as on so many other issues – light on detail. Perhaps part of the reason is that the metro mayors pose a new and potentially very difficult party management issue for the Labour leadership. They have their own power-base, centred in the historically recalcitrant cities of Northern England. Therefore, although decentralisation is crucial in economic and democratic terms, the devolution process will no doubt be steeped in party politics in the years to come.’

New reports

Here we highlight new election briefings from some leading UK research institutions:

• Trade policy: Sahana Suraj at the UK Trade Policy Observatory (UKTPO) divides the parties’ policies on trade into three groups. Labour and the Liberal Democrats align trade policy with industrial strategy, aiming to capitalise on the UK’s existing economic strengths, including in services trade. The Conservatives and Reform UK’s approach derives from their commitment to sovereignty above all, and assigns particular importance to agriculture and intra-UK trade. The Greens’ stance incorporates elements of the other two with policies that encourage trade agreements to take account of workers’ rights, consumers’ rights, animal protection and environmental standards. Many key issues are missing from all manifestos – and there is insufficient recognition that as an open economy, the UK relies on trade for prosperity and jobs. The UK in a Changing Europe (UKICE) has also reported on what the main parties are saying about trade; and CEP has covered Brexit and trade.

• Education policy: Claire Crawford at the Centre for Education Policy and Equalising Opportunities (CEPEO) notes that there are some agreed areas of importance across the parties on this policy area: the need to recruit, train and retain high quality teachers; to do more to support children with special educational needs; and to increase incentives for more adult learning. But there are also some clear omissions, including what might be done to shore up funding of both higher and further education; a potential workforce strategy to deliver the extended early education entitlements to children in working families from nine months, which both the Conservatives and Labour have promised; and reforms of school and university admissions that would help to equalise young people’s life chances.

• Migration policy: The Migration Observatory, led by Madeleine Sumption, is comparing Labour and Conservative policy statements on immigration, visas and the asylum system as the campaign progresses. A CEP briefing notes that while immigration is viewed by many voters as a significant political issue, the overall impact of migrants on the wages and employment opportunities of UK-born citizens appears to be minimal. And a UKICE report concludes that although both main parties say they want to reduce net migration, the impact of policies to do that will be highly dependent on which groups are targeted for greater restrictions.

• Science policy: The Royal Society, the world’s oldest scientific academy, has set out proposals for how the next government can build on the UK’s strengths as a home to cutting-edge innovations, from green energy to healthcare, and nurture the next generation of scientists. Their ‘manifesto for science’ notes that the UK led the world in developing an effective Covid-19 vaccine, building on a strong base in biological sciences; and from the steam engine to artificial intelligence, science and innovation have fuelled productivity growth and job creation. The scientists call for the next government to support a stable investment environment and make long-term decisions that ensure a science and technology ecosystem in which fundamental research discoveries can provide the foundations to a more resilient and prosperous future.

Economics Observatory articles

• Devolved nations: Robyn Smith at NIESR looks across output, productivity, employment and economic inactivity to describe a picture of how Northern Ireland, Scotland and Wales have fared in the five years since the last general election; Stuart McIntyre (University of Strathclyde and one of our lead editors) looks at policy challenges for Scotland related to growth, an ageing population, regional inequality and the transition to net zero; Gareth Davies (Swansea University) explores issues in Wales over recent years under the long-serving and now former first minister of Wales, Mark Drakeford; and David Jordan (Queen’s University Belfast, QUB) examines how investment in skills improve can Northern Ireland’s productivity performance, which is the lowest of any region in the UK.
  
• Politics, economics and financial markets: Clive Walker (QUB) explores how general elections affect the stock market, noting thatuncertainty around such votes – and the potential policy decisions of new governments – can lead to big fluctuations; while his colleague Gareth Campbell asks whether the stock market reflects the economy; Kemar Whyte (formerly at NIESR and now at the Bank of England) reports on the interactions between asset prices and the real economy; and Ahmet Kaya (NIESR) surveys how the current geopolitical risks posed by elections, polarisation and conflicts within and between states have inevitable knock-on effects on the economy.

Authors: Andrea Correa-Jimenez, Richard Davies, Josh Hellings, Ashley Lait, Finn McEvoy, Charlie Meyrick and Romesh Vaitilingam