Sunday, January 12, 2020
Yes, invest in the regions, but don't expect miracles
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.

Some Treasury traditions have been lost in the mists of time, which is a pity. January used to be the time when the Treasury floated ideas for the March budget. Hares were set running, some of which found their way into newspapers like this one, though sometimes they fell by the wayside before the day itself.

Chancellors would take senior officials to Dorneywood, the Buckinghamshire country home that goes with the job, or occasionally borrow Chevening, the foreign secretary’s official residence in Kent. There, interspersed with parlour games and snooker matches between officials and ministers, a budget brainstorming would take place.

Things have moved on. Even with two months to go until the March 11 budget, the chancellor, Sajid Javid, appears to have decided what will be in it. Maybe that is understandable as he was expecting to deliver it on November 6 last year until the Brexit delay and the general election intervened. Chancellors normally try to dial down the excitement till nearer the day, but not this one.

The only hares set running are the ones released by Javid. On a visit to Manchester a few days ago, when the date of the budget was announced, he promised it would “set out ambitious plans to unleash Britain’s potential, level up across the UK and usher in a decade of renewal”.

Javid added later that “there will be up to an extra £100bn of investment in infrastructure over the next few years that will be transformative for every part of our country”.

For business leaders in Britain’s underperforming regions, all this came as good news. Governments have a habit of promising a lot before elections and reining back after them, but not this one. Indeed, the election, which delivered Tory MPs in parts of the country where the party’s candidates used to be lambs to the slaughter, reinforced the argument for the government to deliver for the regions.

So all this is good, and welcome, and by preparing the markets in advance the chancellor has probably ensured that there will be no adverse reaction when he unveils his infrastructure revolution. His argument, that it is entirely logical for the government to borrow when it can do so cheaply, still holds. Indeed, one of the ratings agencies, S&P, took Britain’s sovereign debt off negative watch in the aftermath of the election.

We should still not expect miracles. Encouraged by the government, and even the chancellor himself, there have been strong suggestions in recent weeks that, in effect, Treasury rules have prevented the necessary investment in infrastructure in the regions for decades. Those rules, embodied in what is known as the green book, are said to have imposed a London-centric bias on infrastructure decisions, by concentrating public investment in areas where prosperity and productivity are already highest.

A recent paper in the journal Regional Studies by Diane Coyle and Marianne Sensier, called the Imperial Treasury, offered support for this view. However, the green book has been extensively revised over the years to be made more flexible and, as the Coyle and Sensier’s paper also pointed out, politics often means that projects outside London and the southeast that meet the relevant cost-benefit tests are less likely to be approved by ministers.

If the regions feel hard done by when it comes to infrastructure investment in recent years , and they do, they should blame politicians, not Treasury rules. Also, some rules are necessary to prevent politicians spending purely for party advantage; what they call pork barrel politics in America.

Regional productivity comparisons are, though, a reminder of the mountain there is to climb. Once it was possible to define regional economic differences in terms of unemployment rates, but, while northeast England has the UK’s highest unemployment rate, at 6.1%, the discrepancies are much smaller than they used to be. London, for example, has 4.5% unemployment, which is higher than the national average and, for that matter, higher than the northwest or Yorkshire and the Humber. Northern Ireland has an unemployment rate so low, 2.3%, that at first I thought it must be a misprint.

When it comes to productivity, however, and the generally accepted measure of GVA (gross valued added), the latest official figures are stark. London’s GVA per head, £50,547, is roughly 2½ times that of the poorest regions of the UK, Wales and thenortheast, and twice as much, or more, in other parts of the Midlands and northern England.

The London figure exaggerates its productivity lead, as the capital benefits from commuters from the rest of the southeast and beyond. Yet on a fairer productivity comparison, GVA per hour worked, London is almost 60% more productive than Yorkshire and the Humber, the East Midlands, Wales and Northern Ireland. These differences are longstanding. More public investment in the regions should make a difference, though the effects have been slow to show through in the past.

Also, public investment works only when it operates in harmony with private investment. On this, there is another dimension, which means that the task of reviving the regions is more demanding than it would be in normal circumstances.

Javid talked about setting out in his budget, “how we are going to take advantage of all the huge opportunities that Brexit will bring”. The elephant in the room, of course, is that every credible assessment, including the government’s own, shows that leaving the EU will do the greatest damage to the very regions that the government is committed to levelling up.

According to the last published official assessment, a free trade agreement of the kind the government appears keen to negotiate will do the most economic harm, relative to staying in the EU, to northeast England, followed by the northwest, the West Midlands, Northern Ireland and Yorkshire and the Humber. London will suffer least.

For the worst-affected regions, even assuming the policies unveiled in the budget are effective, it may be a case of running to stand still. Whether that will be enough will be one of the big questions in the coming years. Past experience suggests that we should not hold our breath for a transformation of the economic performance of the regions.