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.

16 November 2009, IEA Blog