North to pay heavy price for dependence on public spending

Public spending dominates the economy of the North of England. In the North-East region, for example, it accounts for close to 70% of GDP.

Many northern cities seemed to prosper in recent years. The luxury apartments and office blocks that sprang up in Newcastle, Liverpool, Manchester and Leeds were one visible sign. But it was largely a bogus boom based on Gordon Brown’s public-sector spending spree, which included substantial regeneration subsidies.

Times have changed and very severe reductions in government expenditure are now necessary. This suggests that those areas that are heavily dependent on public spending face a particularly painful adjustment process. These regions include not only the North of England, but also Scotland, Wales and Northern Ireland.

In the long-term, however, the cuts should bring benefits. Undoubtedly the bloated public sector has crowded out private sector activity in these areas, partly because it has artificially inflated wages.

Yet it may be over-optimistic to expect the private sector to become the economic dynamo it was during the 18th and 19th centuries and pull the North out of stagnation. Businesses now face barriers that would have been unknown to the great entrepreneurs of that era. Environmental legislation will make life very difficult for manufacturers, while the welfare state has blighted much of the North with endemic worklessness and poor skill levels.

Britain’s stagnating regions are therefore likely to be a major problem for the next government. But it should resist the temptation to repeat the mistakes of the past. Public subsidies to failing areas undermine the adjustment process needed for their economies to recover. Policymakers should instead focus on removing the barriers to entrepreneurship and self-help. This means deregulation to help businesses and improve labour mobility, and welfare reform to end the curse of long-term worklessness.

Politicians understandably don’t want to be too unpopular just before a general election. On that score, it seems clear that Gordon Brown, the present Prime Minister, has failed rather badly. There must, however, be a question whether David Cameron, the current Leader of the Opposition, craves popularity too much.The last Leader of an Opposition facing a very difficult economic situation if she won her first general election was, of course, Mrs. Thatcher in 1979. The ‘Iron Lady’ already gave an impression of toughness, which her first year or two in office confirmed (in spades!).I suggest Cameron needs a ‘Clause Four’ moment very early on (if he wins), to establish his own toughness.

Very minor point, Richard – GDP is a national concept and the more usual way to discuss regional product is through the concept of gross value added.

“Times have changed and very severe reductions in government expenditure are now necessary”. I am sceptical that these cuts will ever happen. The short to medium term political difficulty of making them is surely enormous. Far more likely is the possibility that public spending will continue to grow or stay at about the same level as it is now while double digit inflation chips away at the real term value of public sector debt.Of-course a British govt would never default on its debt obligations. Perish the thought. But it might just defraud its creditors by devaluing the value of their asset. Never before has the phrase “Rip-off Britain” had more resonance …

Len – Point taken. I was following the precedent set by David B. Smith in Chapter 5 of Living with Leviathan, who uses ‘regional GDP’ estimates to work out the share of government spending.

Not an Economist – You may well be right (unfortunately), but I wonder how exactly the Bank of England will be emasculated to allow double-digit inflation to take place.

The recent book by Carmen M. Reinhart and Kenneth S. Rogoff, entitled ‘This Time Is Different’ lists a number of government defaults over eight centuries. Table 6.1 (p. 87) refers to three defaults by England, in 1340, 1472 and 1594.Table 7.2 (p. 112) refers to four ‘defaults or restructuring’ by the United Kingdom, in 1749, 1822, 1834 and 1888-89, all of which ‘were among several conversions of debt into lower coupon rates.’Finally, Table 7.3 (p. 114) refers to the United Kingdom restructuring in 1932, in which ‘most of the outstanding debt from World War I was consolidated into a 3.5 per cent perpetual annuity.Of course currency debasement represents a default too.

What is likely to complicate the matter is that were the Conservatives to win the next election they will have done largely due to votes in the Southern half of England. So not only will the SNP be able to flail against an ‘English’ government, but also there may be resentment in the Northern cities. When Mrs Thatcher faced this very same situation in the 1980s she responded by with targeted subsidies aimed at encouraging enterprise and creating employment. Do any current politicians have a similar vision?

Richard (W),I believe that ten years ago we would have asked ourselves the question “I wonder how exactly the Bank of England will be emasculated to allow an increase in the monetary base of £175bn plus”.While indpt, the BoE is given clear objectives for its monetary policy – e.g.,keep within a specific range for a given price index.Surely the Bank could be given a wider objective – e.g., maintain a given level of monetary demand in the economy – which could have dire monetary consequences. There may be headline disagreements between the governor and the PM of the day. But thats not really an unsurmountable hurdle to modern politicians and their spin doctors surely.

“Public subsidies to failing areas undermine the adjustment process needed for their economies to recover.”And they don’t seem to bring the promised ’social harmony’ between properous and struggling regions either. Is it just my impression, or is it often true that in subsidy-dependent regions, large parts of the population feel contempt and animosity towards the people in the donor region? Catalans don’t seem to be particularly popular in Andalucia. Northern Italians don’t seem to be particularly popular in Sicily. Bolivia’s Evo Morales sails on popular resentments against the Santa Cruz region, which ultimately picks up the bill for his spending programmes…

Politicians understandably don’t want to be too unpopular just before a general election. On that score, it seems clear that Gordon Brown, the present Prime Minister, has failed rather badly. There must, however, be a question whether David Cameron, the current Leader of the Opposition, craves popularity too much.The last Leader of an Opposition facing a very difficult economic situation if she won her first general election was, of course, Mrs. Thatcher in 1979. The ‘Iron Lady’ already gave an impression of toughness, which her first year or two in office confirmed (in spades!).I suggest Cameron needs a ‘Clause Four’ moment very early on (if he wins), to establish his own toughness.

Very minor point, Richard – GDP is a national concept and the more usual way to discuss regional product is through the concept of gross value added.

“Times have changed and very severe reductions in government expenditure are now necessary”. I am sceptical that these cuts will ever happen. The short to medium term political difficulty of making them is surely enormous. Far more likely is the possibility that public spending will continue to grow or stay at about the same level as it is now while double digit inflation chips away at the real term value of public sector debt.Of-course a British govt would never default on its debt obligations. Perish the thought. But it might just defraud its creditors by devaluing the value of their asset. Never before has the phrase “Rip-off Britain” had more resonance …

Len – Point taken. I was following the precedent set by David B. Smith in Chapter 5 of Living with Leviathan, who uses ‘regional GDP’ estimates to work out the share of government spending.

Not an Economist – You may well be right (unfortunately), but I wonder how exactly the Bank of England will be emasculated to allow double-digit inflation to take place.

The recent book by Carmen M. Reinhart and Kenneth S. Rogoff, entitled ‘This Time Is Different’ lists a number of government defaults over eight centuries. Table 6.1 (p. 87) refers to three defaults by England, in 1340, 1472 and 1594.Table 7.2 (p. 112) refers to four ‘defaults or restructuring’ by the United Kingdom, in 1749, 1822, 1834 and 1888-89, all of which ‘were among several conversions of debt into lower coupon rates.’Finally, Table 7.3 (p. 114) refers to the United Kingdom restructuring in 1932, in which ‘most of the outstanding debt from World War I was consolidated into a 3.5 per cent perpetual annuity.Of course currency debasement represents a default too.

What is likely to complicate the matter is that were the Conservatives to win the next election they will have done largely due to votes in the Southern half of England. So not only will the SNP be able to flail against an ‘English’ government, but also there may be resentment in the Northern cities. When Mrs Thatcher faced this very same situation in the 1980s she responded by with targeted subsidies aimed at encouraging enterprise and creating employment. Do any current politicians have a similar vision?

Richard (W),I believe that ten years ago we would have asked ourselves the question “I wonder how exactly the Bank of England will be emasculated to allow an increase in the monetary base of £175bn plus”.While indpt, the BoE is given clear objectives for its monetary policy – e.g.,keep within a specific range for a given price index.Surely the Bank could be given a wider objective – e.g., maintain a given level of monetary demand in the economy – which could have dire monetary consequences. There may be headline disagreements between the governor and the PM of the day. But thats not really an unsurmountable hurdle to modern politicians and their spin doctors surely.

“Public subsidies to failing areas undermine the adjustment process needed for their economies to recover.”And they don’t seem to bring the promised ’social harmony’ between properous and struggling regions either. Is it just my impression, or is it often true that in subsidy-dependent regions, large parts of the population feel contempt and animosity towards the people in the donor region? Catalans don’t seem to be particularly popular in Andalucia. Northern Italians don’t seem to be particularly popular in Sicily. Bolivia’s Evo Morales sails on popular resentments against the Santa Cruz region, which ultimately picks up the bill for his spending programmes…

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