Thursday, 9 February 2012

Why Should Londoners Help Cut Regional Public Spending?

I confess that I spent a long time ignoring politics and politicians. I didn't even vote, to avoid encouraging them. I figured if I kept perfectly still they'd lose interest and move away. And for a while it worked - John Major's heroically quiet government nearly brought spending down to a reasonable figure of 35% of the UK's output. At that sort of level, the tax burden can be reduced, there's more money for private enterprise, output increases, the government gets more tax revenue at the same rate - everyone wins. Or at least the Australians and the Swiss do (source: OECD, hat tip IEA, p. 47).

But the UK figures turned truly nasty during the noughties, and that certainly grabbed my attention. By 2009, Gordo and his cronies were spending an amount equal to about 50% the UK's output.  That left the UK in a terrible hole, and it's difficult to believe some hail Gordo as an economic saviour. Contrary to his own claim, he didn't put an 'end to boom and bust' - Mr Bust is alive and well and living high on his overdraft. And if you believe Osborne's plans for the greatest spending reduction since the invention of the stylus, he'll only cut national spending to 40% of GDP by 2015. 

But, for Londoners at least, the picture is a lot less depressing when you break down public spending by UK region. The rate of public spending has remained under 40% by regional GDP for London and the South East, while the rest of the country (bar the East at 45%) is way north, so to speak. In fact, public spending in the North-East peaks at a whacking 70% of regional GDP. England is cruising at 50%, while Scotland is at 60% and Wales and Northern Ireland are dragging around a millstone of government expenditure equal to 80% of their GDP  (source: HM Treasury, hat tip IEA, p. 57). 

As mentioned previously, the government is crowding out private businesses in the regions, and strangling their ability to compete, nationally as well as globally. Manufacturing seems to have been hit hardest, but even a local services business will have to compete with the public sector for administrative staff. And if those people don't want to work for the public sector, they may as well head to... London and the South East.

Funny that. And even funnier that Labour attacked Tory plans to reduce regional public spending. Far from risking a regional recession, the policy change was an opportunity for the regions to rid themselves of the cold dead hand of government.

Of course, bound up in this are national schemes that put public funds in the hands of middle-class people who shouldn't have been taxed to pay for them in the first place. You also see regional MPs resisting cuts to those programmes, preying on the middle class fear that they won't lead to tax cuts.

But people seem to be missing the competitive element to all this. Not only do London and the South East benefit from the flow of dissatisfied regional private sector workers and businesses. But there must also be a risk that London-based policy-makers won't persist in trying to administer medicine the regions don't want. I mean, it's hard to get the attention of Ministers and senior officials at the best of times. But when they're under the sort of pressure they are today, well, maybe they just won't get round to doing the regions a favour...

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