Whitehall’s last colonies: breaking the cycle of collectivisation in the UK regions

Regional economic performance has become increasingly imbalanced over the last ten years. A series of key indicators show a clear and growing difference between dynamic regions, in particular London, the East, and the South East, and challenged regions such as the North East, North West, Scotland and Northern Ireland. In particular:

  • Age profile. London has a much higher percentage of young people (20-44 year-olds) than any other region.
  • Population and migration. Between 1991 and 2004, London’s population grew by 8.8 per cent, more than twice the rate for the UK as a whole. Scotland, the North East and the North West actually shrank.
  • Growth. The South East increased its Gross Value Added (GVA) by 80 per cent between 1994 and 2004, while the North East has grown by just over a half in the same period. If all regions had grown at the same rate as the South East since 1994, UK output would be over £61 billion higher in 2004 (an increase of 6 per cent).
  • Productivity. Workers in London are 22 per cent more productive than the UK average. Workers in Northern Ireland are only 69 per cent as productive as workers in London.
  • Business formation. London has three times the number of VAT registrations per head of population as the North East.
  • New industries. London has the highest share of employment in financial services and the lowest share in manufacturing. The North East, Wales and Northern Ireland have the reverse, and public sector employment represents a large share of total employment in these regions.
  • Educational attainment. A quarter of London’s workforce has degree standard qualifications, more than twice the level of the North East.

Some of this regional polarisation has causes which go back to the past, such as regional agglomeration, and the decline of manufacturing-based industry. Economic growth follows an uneven pattern, and places like London have natural and man-made advantages which imply that these cities will naturally accumulate capital and skills. Other regions may be in a relatively disadvantageous position.

However, the differences have become much more accentuated as a result of the recent unprecedented increases in public spending. Certain regions are, in effect, becoming client areas dependent on state employment and state funding:

  • Income transfer. London, the South East and the East have a third of the UK population, receive a third of public spending yet pay nearly a half of personal taxation.
  • Dependency. In the North East, North West and Northern Ireland, nearly one in four households contains one or more members on incapacity benefits. Over a quarter of households in the North East are on family tax credits or income support.
  • Public sector as a proportion of GVA. The public spending-to-GVA ratio is 61 per cent in Northern Ireland, around 54 per cent in Wales and the North East and 47 per cent in Scotland. It is around 29 per cent in the South East and East and 34 per cent in London.

The danger is that a vicious circle of economic activity will be created. As more and more people become dependent on government for their jobs and incomes, there would be fewer opportunities for small businesses to start up and employ workers. Talented young people and modern industries – which are the lifeblood of future economic progress – would move from outlying regions into London and the South East. Further government resources would be redistributed into the outlying regions, continuing the cycle. The North East, Wales and Northern Ireland are in danger of becoming Whitehall’s last colonies.

The longer term effects of such a “cycle of collectivisation” include:

  • In challenged regions, out-migration of younger people; an ageing population; and even slower business formation particularly among firms which sell mainly to private buyers and other small firms and which draw on educated younger people in the local workforce.
  • In the South East, increased congestion and rising living costs.
  • Political stresses brought about either by resistance to further tax transfers or the effects of reducing growth in public spending.
  • A block on moves to localism, since local spending will be increasingly divorced from local revenue-raising.

This cycle will pick up speed in any recession or faltering of growth. Such conditions will mean both increased unemployment and likely reductions in private enterprise, so that the state sector will become even more prominent. Even if growth were to continue, planned reductions in growth of public spending will make for adjustment difficulties. In the longer term population ageing through out-migration of more qualified younger people will have distinctive effects on the social and economic environment making it even more difficult to retain younger people and to develop new businesses.

The main solution is a general one – to allow the growth of a stronger private economy through slowing down the growth of public spending and lowering taxation. A low tax economy is the only route towards regional revival in the UK. But there could also be some value from improved transport links and through tax and regulation holidays to firms – including the self-employed – starting up in the regions. Better local councils, with an innovative and pro-business approach to local development, may be a key factor here.

There is also much to be learnt from islands of success outside the South East especially in the larger cities such as Leeds, Liverpool, Manchester and Newcastle which have developed a new service economy. For example, a dynamic approach to local economic development has helped to raise the impact of Manchester airport over a wider area. But such leverage remains the exception. The key changes would be to develop new public/private partnerships for local enterprise; incentives to encourage more migration out of the South East by highly qualified young people; and an innovative and pro-business approach to local development on the part of local councils.