Keep the goose fat to feed the regions

By Martin Wolf - Published: March 1 2007 18:31 in FN - It is the squeaky wheel that gets the grease. In the United Kingdom, Scotland squeaks most and, as I have argued (“Why Scotland cannot be Ireland”, January 18 2007), gets the most grease. But who is supplying the fat? The answer is: London, the south-east and the east of England, which are financing a huge transfer of resources to the rest of the country.

In the 1820s, the radical journalist, William Cobbett, called London the great wen", by which he meant a pathological growth. Today, Landon has become, instead, the generator of the nation's wealth. It is time for Londoners to squeak, for a change.

Two weeks ago, Oxford Economics produced some fascinating statistics on the scale of the fiscal contribution from the London city region. In 2004-05, it concluded, London ran a budget surplus (negative public sector net borrowing) of £13.1bn or as much as 7.6 per cent of gross regional value added (GVA). The comparable figures for the southeast of England were £10.8bn and 6.7 per cent and for the east £5.9bn and 5.8 per cent. All other regions ran deficits, from the east Midlands' 1.9 per cent of GVA to Scotland's 13.0 per cent, the north-east's 19.2 per cent, Wales's 21.6 per cent and Northern Ireland's incredible 27.1 per cent.

Per head, Londoners made a net fiscal contribution of £1,741, while the south-east and the east contributed £1.326 and £1.057. respectively. Meanwhile, the net transfer to Scots was £2,120 per head, to those living in the northeast £2,591, to the Welsh £2,869 and the Northern Irish £3.72,3.

If we add its three regions together, this London city region ran a fiscal surplus of £29.8bn. or 6.8 per cent of OVA. The rest of the UK ran a deficit of £58.3bn, or 9.9 per cent of GVA. Since tax ratios are quite similar, the source of these divergences in net fiscal contributions is huge differences in dependence on public spending. In London, public spending (including transfers) was only 36.5 per cent of GVA in 2004-05. In the London city region, as a whole, it was 37.7 per cent. In the rest of the country, however, spending was 53.E per cent of GVA - a truly Scandinavian level. In the east Midlands, spending was just 45.7 per cent of OVA. But in Scotland it was 55.6 per cent, to the north-east 62.8 per cent, its Wales 63.3 per cent and in Northern Ireland an astonishing 72.5 per cent. In seven of the country's 12 regions, public spending exceeded half of GVA. In three, it even exceeded 60 per cent.

A similar picture comes from data for employment. The public sector generated 20.2 per cent of UK employment in the third quarter of last year. In London, the ratio was below average, at 19.3 per cent. even though it is the capital of a highly centralised country. In the south-east of England, the public sector generated 17.2 per cent of jobs, while it generated 17.9 per cent in the east. But in Scotland it generated 216 per cent, in the north-east 23.8 per cent, in Wales 23.7 per cent and in Northern Ireland 29.1 per cent.

The overall picture, then, is of a few prosperous regions on which a larger number-of economically weaker regions are dependent. In 2005, Labour politicians must recognise haw much this country depends on the prosperity of its most valuable asset: the metropolis regional OVA per head was £24,140 in Landon, £20,400 in the south-east and £18,900 in the east. But it was £14,200 in Northern Ireland, £14,000 in the north-east and £13,800 in Wales. Scotland's GVA per head was £16,900, not far short of the UK average of £17,700, which is why the transfers it receives are anomalous. If the poorer regions had not been the recipients of large net transfers from the London city region, their prosperity would have been substantially lower still.

"So what," you may ask? -Are such transfers not perfectly reasonable inside any country?" The answer is:
"Yes, up to a point". But they also raise at least two big questions.

The first is whether the dependency of the UK's poorer regions on fiscal transfers is desirable. It is true that London's role as a global financial centre is generating a real exchange rate at which manufacturing has become uncompetitive, with adverse consequences for peripheral regions. Yet heavy dependence on public spending may well prove a crippling alternative, in the long term.

The second is whether government is remembering to feed its golden geese. If costs of operation became excessive in London, business is more likely to go to Frankfurt or New York than to Edinburgh or Leeds. Investment in the Infrastructure and housing that make the great metropolis work is, given the evident economies of agglomeration, almost certainly worthwhile. And, yes, that probably includes Crossrail.

It is understandable for Labour politicians to concentrate their attention on what is happening to the poorer regions. But they must also recognise how much the country depends on the prosperity of its most valuable asset: the great metropolis. British politicians need to be reminded of this regularly. Maybe, a secessionist party for London is a timely idea. Who wants to start one?

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