Sunday, December 22, 2019
As well as infrastructure, regions need a shot of entrepreneurial spirit
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

With the passing of the years, I find it increasingly useful to scribble reminders for myself on Post-it notes, as an aide memoire of things that have to be done. I am pleased to say that Sajid Javid, the chancellor, adopts the same approach, or at least he did on his Twitter feed, even though he has an army of officials to keep him on track.

The chancellor’s list of things to do had six items: GBD; NHS, police and schools; an infrastructure revolution; cutting taxes for working people; keeping the economy strong and walking Bailey.

I had to think about GBD for a while, though you will probably have spotted that it stands for getting Brexit done. Walking Bailey is not a reference to Andrew Bailey, the new Bank of England governor, but to Javid’s dog.

As well as his Post-it notes, Javid addressed Treasury staff, telling them: “We are a department that doesn't just think about numbers and spreadsheets and tax and spend we are the fiscal reform, the economic reform department.

“There is much more ambition now. The challenges are bigger, but the ambition is there to try to meet those and we can deliver more. All that energy can now go into thinking about the future and planning for the long-term.”

He knows that he is under pressure to deliver as much as his officials are. The Westminster rumour mill has Rishi Sunak, his deputy as Treasury chief secretary, is a Downing Street favourite and, for some, a favourite for the chancellorship. He featured prominently during the election campaign and supported Brexit in 2016, Javid, meanwhile, ensured that the Tories did not promise the earth, to the detriment of the public finances, in their manifesto. There is a bit of ancient City rivalry between the two too; Sunak was with Goldman Sachs, Javid Deutsche Bank.

Many is the chancellor who, in his pep talk to officials, has stressed the need for the Treasury to look beyond the numbers into embracing the kind of reforms which change people’s lives. Gordon Brown, when he entered the Treasury in 1997, was perhaps the most dramatic recent example of a chancellor being determined to refocus the Treasury as an economic rather than a finance department, dedicated to raising the economy’s underlying performance. It was one reason why he wanted to grant independence to the Bank of England; to get away from the question taking up too much of the time of former chancellors: when are you going to raise or lower interest rates?

That question, together with the ever-present fear of a sterling crisis, persuaded an earlier Labour government, under Harold Wilson, to establish a separate Department of Economic Affairs, tasked with the job of implementing the government’s economic plan. Tucked away in a corner of the Treasury, and lacking in political weight after its first head, George Brown, was moved, it was not a success, though it lived on as a model for pointless government departments in Yes, Minister.

Javid is keeping things in-house, even though he is treading in the footsteps of his predecessors. The question is whether he can succeed or, perhaps more relevantly, do so quickly enough to deliver on the Tory promise to its new voters in the midlands and north to “level up” the economy.

Infrastructure, what he describes as his “revolution”, is Javid’s signature policy; taking advantage of low borrowing costs to spend more. The roughly £100bn extra the government intends to spend over the next five years will do three things.

It, along with the boost announced and partly implement by Philip Hammond, when he was chancellor, will raise capital spending by the government to significantly above its average in recent years (though well below 1970s’ levels, when it was boosted by nationalised industry spending).
It will meet the demands of business groups and think tanks for a more even spread of infrastructure spending across the regions, against the charge, supported by the data, that it has been too heavily concentrated in London and the southeast.

And it will, over time, if spent wisely, rather than on vanity projects and white elephants, deliver improvements in productivity and overall economic performance, narrowing the gap.
But it will take time. However “shovel ready” the infrastructure projects are that the government wants to get done, they will not be built in a day. Their impact will pan out over many years.

That is also true of measures to boost R & D spending through a more generous tax credit, and to raise education and skill levels. They are a long-term response, and arguably all the better for it.

In the end, too, the government can provide the stimulus and the basis for future growth, but that growth will fundamentally be driven by the private sector. It is not a perfect measure, some of it reflecting different regional economic structures, but the number of private businesses tells us something about the degree of entrepreneurial activity in parts of the UK.

So in London there are 1,544 private sector firms per 10,000 adults – one for every six or so – and in the southeast there are 1.274. Next come the southeast and he East of England, 1,218 and 1,544 respectively.

Then, as you move away from London in a northerly direction, the numbers fall. The West Midlands has 1.012 businesses per 10,000 adults, the East Midlands 912, Yorkshire and the Humber 967, The northwest 981, Wales 862, the northeast 694, Scotland 739 and Northern Ireland 834. There is an entrepreneurial divide between north and south.

According to an assessment last year based on a London School of Economics’ study: “While the UK ecosystem rewards entrepreneurial success it is not very inclusive, with resources highly concentrated in London and the southeast. There is a visible centralisation of the entrepreneurial resources in London.”

That the UK has become more entrepreneurial is not in doubt, but its spread, and therefore of prosperity, is very uneven. Most of the attempts to tackle that, over many decades, have fallen short. Winning seats in Bassetlaw, Blyth Valley and Blackpool is one thing, getting businesses to set up and expand there, another.

Any future attempt will be against the current backdrop of very weak business investment – even weaker than it expected according to the latest assessment from the independent Officew for Budget Responsibility - and doubts, which have to be resolved, about whether the UK is still a good location for foreign direct investment. Even if the building blocks are literally put in place, with more infrastructure, it still looks like it will be a long haul.