Large, complex and lasting economic divides are naturally harder to manage when growth and productivity stutter and slow down over a prolonged period. When it feels like the country’s economy is underperforming, those places that lag behind the leading regions offer up more evidence of decline.
The productivity gap goes a long way to explain the divides between our regions and nations and addressing it is the best route to boosting living standards and growth. In Wales, the 17% gap with average UK productivity should motivate action – in Cardiff and London – that consistently prioritises this challenge.
So what led us here and what are the tools that could change what happens next?
The challenge
Two papers recently submitted to the Senedd’s Finance Committee provide useful primers on Wales’ productivity challenge: one from the Wales Productivity Forum (part of the UK Productivity Institute) and another from the National Institute for Economic and Social Research.
While both papers remind us that Wales’ challenges track the UK picture and have been made more difficult by Britain’s overall productivity slowdown (even if that was less severe than originally believed), they also show that the structural issues of economic inactivity, skills, and weak business investment, are more acute in Wales. The benefits of a high concentration of economic activity around a place – what economists call agglomeration effects – are also harder to achieve with smaller cities and physical barriers to connectivity. This is why so much financial and political capital were invested into the multi billion pound South Wales Metro and the Heads of the Valleys Road projects, with the latter requiring the support of the Welsh Government’s Mutual Investment Model (covered in a previous FGF report), unlocking private finance to prevent the stoppage of major infrastructure upgrades.
The wider backdrop was, of course, dominated by shrinking capital budgets. That meant weaker regions and nations were unable to nurture the spillover benefits that come with larger scale infrastructure investments on transport or housing, for instance. As we have explored elsewhere, the concentration of the most growth-friendly forms of public investment within the south east of England helps to explain the lower levels of R&D spending per job, a specific problem cited in the Wales productivity forum’s analysis. Broader R&D funding disparities informed the recommendation of a Renewal Investment Tracker in my first FGF report: Impactful Devolution 03: A toolkit for regional growth and industrial strategy. This could be designed to test and disrupt the status quo and help drive more productive spend across the UK. It is especially difficult to justify the extent of the R&D example when research excellence is spread across a UK university sector that excels globally.
If regional divides and structural weaknesses make the productivity catch up job so difficult, which priorities could help reverse this trend?
Evidence, investment and problem-solving
In debates about this big, unwieldy challenge, the ‘productivity puzzle’ has become a well-worn phrase. The problem with that language is that it risks embedding a sense of passivity and, worse still, it can provide cover for ducking trade-offs or defending vested interests that stand in the way of efforts to upgrade our economy. A former Chief Economist at the Welsh Government captured this well, arguing that Wales’s economic performance is ‘a challenge, not a mystery’.
We suggest three tools for an approach that could help shift performance and steer good decision making in government.
Evidence: A ‘Regrets Prevention Service’
Evidence is a great place to start. In the same report, I argued for an ‘evidence and evaluation service for local growth’ to support better decisions and more decisive government at all levels.
Perhaps a better name would be a ‘Regrets Prevention Service’. By building up evidence on what actually works – and making sure we learn from past failures – governments can avoid throwing money at plans or projects that fall short of targets, overspend and overrun. The pain of regret is a poor substitute for lessons with proper evidence and evaluation. If a stronger evidence base can give councillors and Ministers in both the Welsh and UK governments more confidence in weeding out poor projects and backing the better bets, we are more likely to see speedier decision making. Better still, it will be easier to push back on policy developed on the basis of anecdote and to accelerate projects held back by hesitation.
Saying ‘no’ as well as ‘yes’ much more quickly in Wales would be good news for the investment story Ministers are keen to tell. A stronger role for evidence that is linked with the Industrial Strategy as well as devolved economic strategy could aid this work. This would involve scaling up organisations like the Productivity Institute, allowing decision makers in Wales and Whitehall to benefit from greater scope and more local data.
Some of this work is already happening. Evaluation was mandated across EU structural funds which provided important learning that helped ensure funds were better directed from 2007 onwards compared with the early years of devolution. More recently, the Development Bank of Wales, the Office for National Statistics (ONS) and the Productivity Institute have been collaborating to generate better economic intelligence. A report published at the end of 2025 shows that Welsh firms are making more productive investment decisions compared with the UK average, with more regular investments directed at training, education and software assets. More of this insight, over longer periods could, for instance, drive better targeted business support in Wales. The story in Whitehall is less encouraging and a lack of evaluation and evidence has made for poor policy and worse implementation; see Henry Overman’s Levelling Up ‘reality check’ for more on that recent example.
While respecting and upholding the mandates of each government, it would be possible to create a service that actively helps civil servants, ministers and regions (mayoral authorities in England) draw together the macro and local picture at once. And now would be a good time to start.
Investment: The £120 billion story
Much greater private sector investment will be fundamental to addressing Wales’ productivity gap. Decisions at both ends of the M4 impact on this and the Productivity Institute argues the £27bn Welsh budget has an important role to play in ‘generating confidence and incentives for business innovation and investment’. With this in mind, the bullish positivity at the Wales Investment Summit in December 2025 signalled a welcome shift in tone, which appeared to be well received by a business audience that will be eager for a clear story and direction from a new Welsh Government after May’s Senedd election.
The new level of ambition on capital investment means there is also substance behind the gloss of a glitzy summit. The change to the fiscal rules in the 2024 autumn budget – augmented at the 2025 spring statement – provides up to £120 billion for additional investment. This is a genuinely radical change from previous governments, and yet has consistently struggled for political attention. The Chancellor reaffirmed this commitment in the last budget, and it matters for growth across the regions and nations that she did because it puts major investment on the table.
This change – and the new Industrial Strategy – offers more reason to believe that the new nuclear project announced at Wylfa will actually happen this time, following previous dashed hopes, as well as a Defence Deal and two AI Growth Zones for Wales.
Another opportunity comes in the form of the new National Wealth Fund, which has a larger budget and broader remit than the UK Infrastructure Bank it replaced. That means more investment for sectors central to the Investment Summit: clean energy, advanced manufacturing and digital technologies.
This forms part of a Modern Industrial Strategy that sets out commitments to connect expanded public investment with business investment. Both the Welsh and UK government should be focussed on how to use this momentum to crowd in private finance in sectors where Wales has a specific advantage.
In Westminster, Ministers will need to tell a story that elevates this £120bn shaped opportunity and talk up the proof points that show how the government is betting on the success of projects in Welsh communities that have felt frozen out.
Problem-solving: The how is as important as the what
To reach those proof points, the state needs to work with complexity and ditch the habit of wishing it away. It can adapt to the learning on effective problem solving at the subnational level at home and abroad. The ‘Impactful Devolution 03 A toolkit for regional growth and industrial strategy report (referenced above) explores this thinking and is specifically designed to encourage a government approach that is more reliable, capable and purposeful.
These are the attributes of a state focused on solving difficult problems such as our chronic regional divides These are also the attributes that can help make the £120bn bet pay off.
That work will need to involve better engagement with devolution and a Whitehall operation that understands how the system works. The devolved nations will together spend more than £500bn during this UK parliament (when they’re not making primary legislation). It’s increasingly irresponsible for so much of Whitehall to remain so ill-informed about how those institutions work. Efforts have been made to improve this but they are too small in scale and disconnected from huge tasks such as the job of putting major capital investment to work in devolved nations.
The positive news is that puzzles do have solutions so government at all levels should focus on getting better at problem solving. Evidence, investment and an urgency on the ‘how’ as well as the ‘what’ when it comes to governing could all help to close the gap and drive the productivity Wales needs in 2026 and beyond.
