Sunday, April 24, 2005
Another take on north and south
Posted by David Smith at 11:05 AM
Category: Thoughts and responses

The Centre for Economics and Business Research has delved into the Treasury's Public Expenditure Statistical Analysis, and come up with some interesting findings:

Parts of the UK are as dependent on the state as some Soviet bloc countries were at the time communism collapsed, a new analysis based on official figures shows.

It paints a picture of large areas of the country whose prosperity in recent years owes everything to Gordon Brown’s largesse with taxpayers’ money, and which will struggle when spending slows down to more normal levels.

The analysis, carried out by the Centre for Economics and Business Research (CEBR), is based on detailed statistics on public spending released by the Treasury earlier this month.

It shows that in the northeast of England, Wales, Scotland and Northern Ireland, government spending exceeds 50% of their gross domestic product (GDP). In the northeast and Wales it accounts for almost 60% of the economy. In Northern Ireland it accounts for more than two-thirds of its GDP at 67%. In London and the southeast, in contrast, government spending accounts for just one-third of the economy.

“Some of these places are very heavily dependent,” said Professor Doug McWilliams, chief executive of the CEBR. “It’s like a drug — once you’re on it, it is very hard to get off.

“The eastern European countries as they emerged from communism typically spent about 60%, for example Hungary in the early 1990s and the Slovak Republic in the mid-1990s, but they have cut back ferociously since. Today, only Sweden and Denmark are anywhere near these numbers.”

Much of the difference between the UK regions is accounted for by so-called “social protection” spending; mainly state pensions and welfare benefits.

These range from 9.6% of GDP in London to 20.3% in the northeast and 21.3% in Northern Ireland. This reflects not only a higher proportion of people who are unemployed or on incapacity benefit outside the south, but also much greater reliance on state pensions.

But the figures, from the Treasury’s Public Expenditure Statistical Analyses, also show that big increases in employment, education, health and other public services — with job numbers up by about 750,000 since Labour came to power — have had a huge impact.

“Manufacturing job losses have impacted particularly severely on the Midlands and the north,” said David Frost, director-general of the British Chambers of Commerce. “Public-sector jobs have filled the gap, but that can’t carry on for ever.”

The Treasury figures show that since 1998-9, when the current series of figures began, government spending has risen from 53.8% to 58.7% of the economy in the northeast and from 46% to 51.7% in Scotland. Nationally, it has increased from 38.3% to 41.3%.

Economists believe that the “socialisation” of large parts of the UK’s economy will harm Britain’s ability to compete. Some areas will prove impossible to wean off the state, they warn.

“It is a chicken and egg situation,” said McWilliams. “One of the reasons these places have a large public sector is because they don’t have enough private enterprise.

“But one of the reasons they don’t have enough private enterprise is because it is squeezed by a large public sector.

“This analysis shows how great the scale of divergence is between regions, not just in total quantity but also by function. It also indicates that public spending trends in the UK are different from most other countries worldwide, with it growing faster than GDP in the UK whereas it is falling as a share of GDP in the majority of other countries.”


GDP growth in the UK is too imbalanced and centred around London and the South East.

One reason why Scotland and northern England need greater public expenditure is because these areas don't grow as fast as London or the South East of England. Hence, this is why they aren't as wealthy.

In my opinion, the government needs to ensure that GDP growth in the UK is balanced across the different regions. What if London suffered from some sort of shock (such as a terrorist attack)? I feel it's unwise and dangerous for London alone to be the sole driver of UK GDP growth. It also is unjust on other areas of the United Kingdom.

Posted by: Chris A at April 24, 2005 06:42 PM

An interesting, although perhaps tenuous, link between pensions and the North South divide may be the current iniquity in our pensions system. At the moment tax relief on pension contributions is granted at the saver's maginal tax rate. Since the South East has a vastly greater number of higher rate taxpayers who are more likley to save for their pensions it could be argued that the government is effectively subsidising the South East. Of course, these future pensionsers will be taxed at the prevailing income tax rate when they come to draw on their pension, but this presupposes that they remain higher rate taxpayers. The Conservative's proposal in their election promises goes some way to redressing this problem, as it would bring the marginal tax relief up to 32% and in effect more than subsidise base rate taxpayers. An unusual move for the Tories to be seen to be enagaing in a mildly more just and redistributive policy.

To say that the North needs to develop more service based industries and move away from manufacturing is probably correct, given the competitive pressures from abroad. This does not take into account, however, the fact that manufacturing may have fared much better had sterling been weaker and interest rates lower. Monetary policy in the UK has had a distinct bias towards protecting the South East from itself. While house prices have undeniably risen due to low interest rates, they have also risen markedly as buy to let investors in the South East have bought homes in the North, amplifying the upward price trend. This, in turn, has led to a consumer boom across the country thanks to mortgage equity withdrawal, but the number of Northerners for whom local house prices are now beyond their reach is telling. A prime example of how a one rate fits all policy is not just a problem for the eurozone but even within the UK.

It is also worth alluding to the critical mass enjoyed by London and its ripple effect on the South East. The proximity of so many professionals has given London economies of scale that the North can only dream of. Similarly, whilst deriding London's infrastructure, the bus service is far more regular than any other British city I have travelled in and the tube network is unrivalled. Londoners bemoan having to wait a few minutes for the next tube, yet such a short delay between services would be greeted with joy by anyone attempting to travel in Manchester or Edinburgh. The tourism industry is largely focused on London, with most visitors to Britain making the trip to the capital the focal point of any journey. It is only natural, therefore, that the SouthEast will reap the greatest fnancial benefit from overseas visitors. The geographical proximity of the South East to the Continent also means that it is easier to reach, making it attractive to visitors and haulage companies. Unfortunately, these advantages have evolved over time (decades and centuries in terms of the economies of scale) and millenia (in terms of geography) and are not going to be resolved in a few years, depsite the best efforts of any governement keen to reduce the divide.

Posted by: Benjamin Walker at April 25, 2005 07:14 PM

We probably all agree the existence and nature of this divide is a bad thing. The question remains: Who should do something and what should be done?

Clearly, in this case, it’s government that needs to do something first. So where does responsibility lie? There’s Blair and Brown of course. But there’s also John Prescott (regional & local gov., etc.), Patricia Hewitt (trade and industry) and Alan Johnson (work and pensions). Now we start to see the problem. As with all other major departments in this government, the Ministers aren’t good enough. If the media were to focus on the performance of Prescott, Hewitt and Johnson rather than Brown and Blair then the opinion polls might tell a different tale. The only realistic hope for progress on this front is for Brown to become PM and to change the Cabinet.

But what should be done? All government can do, apart from be competent and efficient, is to give State aid. Now it turns out the EU is trying to cut down on State economic aid. But fortunately there’s a ‘Scoreboard’ that shows how member States are doing. Comparing the UK to Germany shows that the UK gives a lot less aid as a percentage of GDP. Germany gives aid in the form of tax allowances and the UK gives aid in the form of grants. The bulk of UK grants go towards training.

So again we bump into politics. It doesn’t take too great a leap of imagination to see the UK government is more interested in keeping bodies off the unemployment list than building up successful industries in the regions.

Gordon Brown said to the BCC conference “In a global economy the role of government is to create and sustain the stability and competitive environment in which the entrepreneurial, the talented, and the dynamic can rise and succeed.”

Well sod the competitive environment, Gordon, start helping to create some real jobs outside London for a change.

Posted by: David Sandiford at April 26, 2005 12:07 PM