British regional industrial policy from the aftermath of the 'Great War' to the 'Thatcher era' (1920-1989)

N.B. This paper was produced and circulated by the DTI North West Regional Office in August 1989 under the title 'A History of Regional Industrial Policy'. It is reproduced here to provide background to discussions about economic development and sustainability.

1 It was in the late 1920s that the Government first recognised the problem of regional imbalance in industrial structure and employment opportunities and began to enact measures designed to alleviate them. Unlike in many other European Countries, the root of Britain's regional problem was, and still is, the regional imbalance of declining traditional industries which prospered in the nineteenth century, rather than a decline in the agricultural industry.

2 The problem was highlighted during the early 1930s. Unemployment nationwide rose from 10% in 1929 to 231 in January 1933. However whilst unemployment in London and the South East peaked at 15%, in Wales, Scotland, Northern Ireland and Northern England rates rose to between 27 and 37%.

3 In 1928 the Government had established the Industrial Transference Board to retrain men from the declining industries and by the use of grants enable them to move and find employment in expanding industries. More than 275,000 people were transferred during the ten years the scheme ran, but it was not a popular measure and the departure of the more enterprising of the workforce tended to have a deleterious effect on the areas they left. It thus remains the only instrument of regional industrial policy to have concentrated on moving the workers to the work, rather than vice versa.

4 Following some studies commissioned by the Government on those areas with the highest rates of unemployment, the Special Areas (Development and Improvement) Act was passed in 1934. It designated four Special Areas: West Central Scotland, West Cumberland, North East England and South Wales and appointed two Commissioners to promote the recovery of those areas. It was initially regarded as a temporary measure and the Commissioners were given very limited powers, being unable to provide funds for any profit-making enterprise or to any project which could receive any other Government finance. The inadequacy of these powers soon became apparent and in April 1936 the Special Areas Reconstruction Association (SARA) was established with a nominal capital of £1 million to provide loans of up to £10,000 for small businesses in the Special Areas. This in turn was followed by a £2 million trust established by Lord Nuffield to help undertakings set up in the Special Areas and in 1937 under the Special Areas Amendment Act the Treasury were empowered to give loans to larger firms than those helped by SARA. The 1937 Act also encouraged the development and use of trading estates and introduced special tax incentives for firms in the Special Areas.

5. In 1936 the Government introduced factory building into its regional policies with the creation of North Eastern Trading Estates Ltd. The intention was to encourage development of new light industry in an area relying on few basic industries. By

1946 five such bodies had been set up covering the NE, NW, Wales, Scotland and West Cumberland.

6 These measures were not in operation long enough for any clear picture of their effectiveness to emerge. Certainly between 1937 and 1938 the building of new factories in the Special Areas (which contained about 10% of the population) increased from 4i% to 171 of the national total. However it became increasingly apparent that not only was there a problem of unemployment and underemployment in the Special Areas, the solution to which was proving more difficult than expected, but that there were disadvantages - social, economic and strategic - of a concentration of industry in London and the South East. A Royal Commission was appointed under Sir Montague Barlow to consider the latter problem and its report was published in 1940. It recommended that the distribution of industry and population should be influenced centrally with the object of redeveloping overcrowded urban areas, decentralising industry and achieving a regional balance of diversified industry and, by anticipating the decline of certain areas, encouraging development there before depression occurred. It advocated the use of satellite towns, garden cities, the expansion of rural towns and trading estates and the greater co-ordination of planning. The majority of the Commission recommended that a central authority independent of Government should have the power to control industrial expansion in London and the South East, and further if necessary; while a minority thought that a Government Department should be responsible for the distribution of industry and population, prepare national plans and take over and extend the powers of the Special Area Commissioners.

7 Because of the war, the recommendations of the Barlow Report were not immediately taken up since rearmament had temporarily masked regional imbalances and unemployment was very low. The report did, however, form the basis of the Distribution of Industry Act 1945 and many of its ideas were incorporated in the more active regional industrial policy of the 1960s.

8 It was feared that after the war the high unemployment of the 1930s might return and in 1944 a White Paper on Employment Policy was published in which the Government accepted, for the first time, responsibility for maintaining a high and stable level of employment. The measures listed to achieve this included influencing the location of new industry, facilitating the moving of workers and increasing the efficiency of basic industries to make them more competitive in the international market. The White Paper was followed in 1945 by the Distribution of Industry Act which, with a few amendments, determined regional industrial policy for the next fifteen years. The Act redefined the Special Areas and extended them to include those major towns and cities within them which had previously been excluded from assistance. The new areas, renamed Development Areas, also included Dundee and its immediate environs and, by 1948, Merseyside, Wrexham, Wigan/St Helens, North East Lancashire and a small area centred on Inverness. This last area particularly illustrates the emphasis on development rather than the relief of unemployment per se since it was considered suitable as a focal centre of industrial development throughout the Highlands and had not been chosen for its local unemployment. This attitude is at variance with later policies which have concentrated primarily on unemployment as a criterion for choosing the areas to be assisted.

9 The 1945 Act transferred responsibility for the Development Areas to the Board of Trade which was given powers similar to those of the Special Area Commisioners: to build factories, to make loans to industrial estate companies to manage the factories, to provide basic public services, to clear derelict land and to give grants or loans from the Treasury to help specific industrial undertakings that were commercially sound but for which finance could not be obtained elsewhere. In addition to these attractions to the Development Areas, industry was discouraged from developing in the South East by the extensive use of the building licence system, originally a wartime measure, and subsequently by the system of Industrial Development Certificates introduced in the Town and Country Planning Act

1947.

10 It was thus with these instruments that regional industrial policy was pursued until 1958. The policy was given a high priority by the post-war Labour Government, anxious to avoid a repetition of pre-war unemployment. The time was, however, ripe for industrial expansion and development following the destruction caused by the war so that with the vigorous use of building licence control the Government were able to steer industry towards the Development Areas. Between 1945 and 1947 the areas received over half the new industrial building in the country although they accounted for only a fifth of the population.

11 However the very success of the policy during this time ensured that it received a lower priority thereafter. No advance factories were built between 1951 and 1959, building licences were abolished in 1954 and Industrial Development Certificates more easily obtained. Of the £77 million spent on industrial estates and factories between 1946 and 1960 £29 million was spent in the first three years and expenditure on grants and loans in those fourteen years totalled less than £12 million.

12 This period of eclipse of regional industrial policy was possible only because of the prosperity of the traditional industries such as coal-mining, shipbuilding and steel-making which were able to profit from heavy national and international demand until the mid 1950s. Unemployment remained low and regional GDPs rose faster than the national average. From 1956 however deflationary policies combined with a low in the trade cycle to depress world markets and force the previously prosperous industries to cut back their production. Shipbuilding and coal were most badly hit although the effects were also felt in the steel and textile industries. Unemployment in the regions began to rise although it was still very low compared with that before the war (in 1958 Wales had an unemployment rate of 3.81 compared with 2.1% for the UK) and high rates (by the standards of the time) were not confined to the Development Areas.

13 The Government's response to this decline was contained in the Distribution of Industry (Industrial Finance) Act 1958 which increased the coverage of the Development Areas by adding smaller areas, the choice of which was determined primarily on unemployment grounds rather than suitability for development. The loans and grants available in these areas were extended to cover all forms of trade.

14 A reconsideration of regional industrial policy resulted in the Local Employment Act 1960 which repealed the Distribution of Industry Acts of the previous fifteen years. It had been felt that the designation of Development Areas, needing Parliamentary approval, was too inflexible to tackle the regional problems effectively and thus the 1960 Act gave the Board of Trade the power to designate or deschedule Development Districts, as the assisted areas were then renamed, without recourse to Parliament. Moreover these Development Districts were to be based on Local Employment Exchange areas, smaller units than had been used before, and would be chosen strictly on unemployment criteria. Initially the Board of Trade took an unemployment rate of 4i% as its threshold and with its greater flexibility readily designated areas as soon as their unemployment reached or threatened to reach this figure and equally descheduled areas where, for example, the opening of a new factory reduced their unemployment below the critical figure. This policy had two obvious drawbacks. The first was that its flexibility led to uncertainty among industrialists in the making of investment plans and the second was that no consideration was given to the economic potential for development in the areas to be assisted. The criteria also led to areas in all regions, even small pockets of high unemployment in the South East, at one time being assisted. Development Districts initially covered 13% of the working population as against 18% for the former Development Areas.

15 Some or this criticism was reflected in two White Papers published in 1963 about Central Scotland and North East England which emphasised the need to encourage viable growth. Following these Papers certain "growth areas" in the two regions were designated and it was made known that they would continue to have Development District status whatever the level of their subsequent unemployment. The two White Papers could be regarded as the first steps towards regional planning.

16 By 1966 the Development Districts covered 16.8% of the country's total population and included most of the earlier Development Areas plus most of Cornwall, North Devon, the Highlands and Islands and rural North West Wales. The major forms of assistance between 1960 and 1966 were factory building and loans, the criteria for which had been relaxed in 1960. A limited number of grants were also awarded but these and the loans were only given after consultation, often extensive, with the Board of Trade and thus their value could not be known in advance. This reduced the effectiveness of the incentive.

17 The 1960 Act did, however, introduce building grants for firms to build their own factories in the Development Districts. After a simplification in the 1963 Local Employment Act these grants (which were at a rate of 25%) became a major incentive and by 1966 accounted for 40% of regional assistance. Grants of 10% of the capital cost of new plant and machinery for projects creating employment in the Development Districts were introduced in the 1963 Act; and the Finance Act of that year provided for "accelerated depreciation" whereby manufacturing industry could write off the cost of new plant and machinery against profits at any rate it chose.

18 In 1966 the emphasis of regional policy was shifted away from the narrow social need to relieve unemployment towards the wider advantages of balanced growth and development throughout the Country. The Industrial Development Act 1966 replaced the development Districts with wider continuous Development Areas (DAs) selected “with consideration given to all the circumstances, actual and expected, including the state of employment, population changes, migration and the objectives of regional policies”. The new DAs covered most of Scotland, most of Wales, the Northern Region, the Furness Peninsular, Merseyside, most of Cornwall and North Devon. Towns taking overspill from DAs, although not so designated were treated as if they were DAs provided their population intake from a Development Area was high enough. (Skelmersdale New Town and Winsford Urban District were so treated in relation to the Merseyside DA).

19 Although the areas could be altered if appropriate, the wider set of criteria ensured that the rapid changes of the development Districts were avoided. The larger continuous areas also enabled industry to choose locations roost suited for the development of the region rather than particular unemployment blackspots.

20 The system of incentives was also considerably altered. Accelerated depreciation and the plant and machinery grants were abolished. These were replaced by an automatic grant (Investment Grants) towards the cost of investment in plant and machinery which was available nationally but at a higher rate in the Development Areas (40% as compared to 20% elsewhere). As a temporary measure rates of 45% in DAs and 25% elsewhere applied in 1967 and 1968. The system of 25% Building Grants available under the Local Employment Act was extended to the new DAs. Discretionary loans and grants towards the cost of transferring or setting up business in the DAs also continued to be available. The Local employment Act incentives, but not the Investment Grant, were linked to the amount of employment to be provided by a project. The Board of Trade continued to build factories for rent or sale on favourable terms (by 1970 some 275,000 jobs were housed in Government built factories). In 1967 a labour subsidy, the Regional Employment Premium, was introduced to further assist manufacturing industry in the DAs at the rate of 30s (£1.50) per week for male adult employees, with lower rates for adult women and young people. (An additional Selective Employment Premium was payable at the rate of 7/6d (37ip) between 1967 and 1970.) IDC controls on factory building were applied vigorously outside the DAs in this period; and a parallel system of controls on office development in the prosperous parts of the country was introduced in 1965.

21 Also in 1967, in certain areas within the DAs where, in the absence of special measures, colliery closures were expected to cause high and persistent unemployment, further financial assistance over and above that/ given elsewhere in the DAs was made available for new undertakings set up there for the first time. These areas in Scotland, South Wales and the Northern region of England were known as "special development areas" (SDAs).

22 In 1967 the Government appointed a committee under the Chairmanship of Sir Joseph Hunt to examine, in relation to the economic welfare of the country as a whole and the needs of the DAs, the situation in other areas where the rate of economic growth gave cause (or might give cause) for concern. The Committee's report - "The Intermediate Areas", known as the Hunt Report - found that the Yorkshire and Humberside region was economically vulnerable as it was too dependent on industries which were shedding manpower, growth was slow, earnings low and there was lack of alternative employment, particularly in view of the considerable unemployment expected to arise from the run-down in mining in the Yorkshire coalfield area; moreover, much of the region had a poor environment as a result of dereliction from coal-mining. The Report considered that in the case of the North West region it was of paramount importance to evolve a coherent and balanced policy for the area as a whole by introducing policies to unify and stimulate the whole region: here too were the problems of declining traditional industries, slow growth and industrial dereliction, as well as poor amenities and a lot of sub-standard housing. The Hunt Report recommended the extension of regional assistance to both these regions but that Merseyside should lose its DA status and be treated on a par with the rest of the North West. The Government decided that in view of the limited resources then available assistance must be concentrated in more narrowly defined localities within those regions, where the need was judged to be greatest.

23 The Local Employment Act 1970 authorised the creation of "Intermediate Areas" (IAs) which were localities where special measures were necessary to encourage growth and the proper distribution of industry but where the economic problems were not so acute as in the Development Areas. As a result, the Yorkshire coalfield. North Humberside. North East Lancashire, the Nottingham/Derbyshire coalfield and Plymouth in England, parts of South East Wales and Leith in Scotland were designated IAs. The assistance available in IAs comprised Building Grants for factory building and training measures, which also applied in DAs. The same Act also authorised the designation of localities as "derelict land clearance areas" (DLCAs) where the economic situation was such that Government grants to Local Authorities towards the cost of acquiring and improving unsightly or neglected land would make an appropriate contribution to the development of industry in the particular locality; parts of the North West, Yorkshire & Humberside and the Northern part of the

Midland regions were designated derelict land clearance areas. (This form of assistance had been made available in the DAs under the terms of the Industrial Development Act 1966).

24 In the 1970 Budget Statement a further stimulus to investment in industrial buildings was announced. The rate of initial allowance for tax purposes was raised from 15 to 40% in DAs and IAs, as compared to 30% elsewhere. Later that year, the abolition of Investment Grants and their replacement by tax allowances was announced. Between 1970 and 1972, expenditure on plant and machinery in the DAs attracted first year capital allowances of 1001 (i.e. free depreciation) as compared to 601 elsewhere (later 801). The rate of building grant in DAs was increased to 45%. As part of the package of changes, it was decided to make more flexible use of powers to make loans under the Local Employment Act. Despite the apparent weakening of policy, no net saving to the Exchequer was expected.

25 In February 1971 the Government announced the creation of some new SDAs and certain limited extensions to the ZAs. SDA status, with the highest rates of Government financial assistance to industry, was extended to the older industrial centres where policy in earlier years had failed to provide much needed relief and IA status was extended to a small number of areas which had been experiencing increasing economic difficulties because of their exclusion from and overshadowing by the existing Assisted Areas.

26 In March 1972 the Government issued a White Paper "Industrial and Regional Development" setting out the measures to be introduced to stimulate industrial and regional generation. Although the measures included changes in the form and rates of incentives in Assisted Areas, no changes were made in the boundaries of the DAs or SDAs. It was recognised, however, that wide areas outside the DAs faced problems, among them industrial obsolesence in the form of out-dated and unattractive or derelict buildings and, until recently, poor communications, in addition to relatively high rates of unemployment. Allied to these disadvantages, indeed partly because of them, there had been a high rate of emigration from the areas concerned, with a net loss of population to the South of the country and overseas. For these reasons IA status was extended to almost the whole of the North West and the Yorkshire and Humberside Economic Planning Regions (as recommended by the Hunt Committee Report in 1969) and to those parts of Wales not previously designated as Assisted Areas.

27 In the Industry Act 1972 the system of incentives was again changed. Free depreciation for tax purposes of investment in plant and machinery and Building Grants were replaced by Regional Development Grant payable at a fixed percentage (22% in SDAs, 20% in DAs) on capital expenditure on new building, works, plant or machinery for most industrial undertakings. It was also payable at 20% on new buildings in an IA. Provision was also made for the granting of Selective Financial Assistance (RSA) for undertakings in the Assisted Areas (AAs) which provided or safeguarded employment.

26 Between 1972 and 1979 several small changes were made in the coverage of the AAs although the total remained at about 43% of the working population of the country. The formation of the Scottish and Welsh Development Agencies provided a focus for the encouragement of industrial development in those two countries

although most of their activities were matched in the English AAs by a variety of bodies. Government factory building in Scotland and Wales came under the wings of the two Development Agencies, leaving English Estates as the -only body in England directly responsible to the Department of Trade and Industry for developing land and providing premises in the Assisted Areas. In 1974 the nominal value of Regional Employment Premium was doubled. In early 1977 REP was abolished.

29 In 1979 the present Government undertook a thorough review of regional industrial policy. They decided to retain all the existing incentives, though they widened the differentials between those available in the three categories of AA, abolishing Regional Development Grant in Intermediate Areas and reducing the rate of RDG to 15% in DAs, and tightened the criteria for Regional Selective Assistance. They also announced a phased reduction, over three years, of the total coverage of the Assisted Areas in order to concentrate on the areas "with the most intractable problems of unemployment". The changes were completed with a few alterations, due in part to the rationalisation of BSC, by 1 August 1982 so that 271 of the working population were in the Assisted Areas. However the coverage of Special Development Areas was increased over the period. The emphasis on factory building was also changed with English Estates resuming its control of day to day management and decisions on where development will take place. The English Industrial Estates Corporation Act 1981 consolidated the Corporation's new status with its programme being limited only by broad guidelines from the Department of Trade and Industry, and the Assisted Areas boundaries.

30 In 1982 the Government suspended the use of Industrial Development Certificate controls which, though keenly applied during the 1960s, had become little more than a formality by the late 1970s. (IDCs were formally abolished in 1986 under the Town and County Planning Act 1986.)

31 Following a further review of policy, the Government published a White Paper on 'Regional Industrial Policy' in 1983. Whilst the Government reaffirmed its commitment to reducing regional imbalances in employment opportunities on a stable long-term basis, the review had led it to the conclusion that the case for doing so was by then primarily social rather than economic. This was largely because the high levels of unemployment prevailing in most of the country substantially weakened the argument that diverting economic activity to areas of high unemployment permitted a higher level of national employment than could be achieved by other means. The Government also concluded that, whilst there was persuasive evidence that regional industrial policy had significantly increased employment in the Assisted Areas, there was scope for increasing cost effectiveness. Of particular concern were the very high RDG payments to some highly capital intensive projects (the Sullom Voe oil terminal being the most notorious example) which created relatively few jobs; and more generally the absence of a job link in the RDG had been criticised. There was also pressure for change from the European Commission which regarded the availability of ROG for simple replacement investment as contrary to rules governing the use of industrial incentives within the Community.

32 In the following year, legislation (the Industrial Development and Co-operative Development Agency Act 1984) was introduced to implement the Regional Development Grant II scheme. The change was a fundamental one as the scheme became project rather than asset based and included (for all bar the majority of small firms) an explicit job creation requirement. Qualifying projects (which included some service sector activities) received the greater of 151 of expenditure on plant and machinery and buildings (subject, except for small firm projects of £0.5m or less, to a ceiling of £10,000 per new job created) or £3000 per new job created (subject, in the case of manufacturing projects, to a limit of 401 of total fixed investment). A change was also made to Regional Selective Assistance. Grant was no longer normally available for simple relocation projects within the UK.

33 Major changes to the Asssted Areas map were also implemented in November 1984. Special Development Areas were abolished and Development Area coverage was reduced to 151 of GB working population (previously SDAs and OAs, taken together, covered about 221 of the working population). However, the coverage of Intermediate Areas was greatly expanded from about 6% to 20% of the working population. For the first time, significant parts of the West Midlands attracted AA status. The region had been particularly hard hit by the substantial fall in manufacturing employment after 1979, although it is possible to trace the region's decline further back in time.

34 The main criteria used during the 1984 review when determining the Assisted Areas Map was relative annual average unemployment rates for each Travel to Work Area (TTWA). TTWAs were used as they are the closest approximations to self contained labour markets covering the whole country and therefore the best basis for nationwide comparison of relative need for employment opportunities. Other indicators of the likely relative need for current and future employment opportunities also included long term unemployment, growth in labour supply, industrial and occupational structure, economic activity rates and distances from main markets (peripherality).

35 Also in 1984 a package of measures (known as 'Business Improvement Services' in England and Wales and 'Better Business Services'/'Better Technical Services' in Scotland) was introduced in shipbuilding, steel and textile closure areas (as designated by the European Commission). These schemes provide support for the use of advisory services by small firms and capital grants to very small firms. On average, two thirds of the funding comes from the European Regional Development Fund. The measures were extended to fishery closure areas in early 1986; to parts of Cornwall (with 100% UK funding) later that year following the closure of several tin mines; and to Thanet (with 100% UK funding) in 1988.

36 The next major consideration of regional industrial policy took place during 1987. As part of a wide-ranging review of the Department's policies, culminating in the publication in January 1988 of the White Paper 'DTI-the Department for Enterprise' (Cm 278), the Government decided that greater emphasis should be placed on assisting regeneration from within the various regions of the country. This was reflected in the changes made to the regional components under the Enterprise Initiative.

37 A central objective of the revised policy which had taken effect from November 1984 had been to 'encourage the development of indigenous potential within the Assisted Areas with the long-term objective of self-generating growth in these areas'.

This objective remained, but was considered to be more effectively achievable by shifting the balance of regional policy towards the promotion of improvements in the managerial skills and strategies of local business.

38 Consequently the Government concluded that the Regional Development Grant Scheme should be closed to applications on 31 March 1988. Owing to its essentially 'automatic' nature which took little account of project viability the scheme placed an open-ended call on public expenditure. It was therefore no longer suited to the prevailing economic conditions, evidenced by rising investment and falling unemployment. Legislation under the Regional Development Grants (Termination) Act was passed to bring this change into effect and to give force to the transitional arrangements which applied between January and March 1988.

39 At the same time new policies were introduced. Under the Enterprise Initiative a range of business development consultancies, covering key functions such as design, quality and business planning, were launched on a nationwide basis. These were designed to encourage the enhancement of management skills in small and medium-sized businesses through the provision of grant towards consultancy projects lasting between 5 and 15 man days. Government support was set at half of the costs, except in the Assisted Areas and Urban Programme Areas where firms were eligible for two-thirds. In addition two new incentives, the Regional Enterprise Grants, were made available in Development Areas from April 1988 for firms with fewer than 25 employees. There were investment grants of 15% towards the costs of fixed assets subject to a maximum grant of £15,000, and innovation grants of 50% subject to a maximum of £25,000 to support product and process development. Regional Selective Assistance continued to operate throughout the Assisted Areas, which were retained in an unchanged form.

40 The overall effect of the revised policy was to move further in the direction already signposted by the 1983 review: to a more selective, cost effective form of assistance which addressed the particular difficulties which can arise in the Assisted Areas: remoteness from best business practice, poor rate of small business growth and failure to innovate.

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