Where will growth be fastest in the UK?

During the Labour years London grew fastest, Scotland, Wales and the North slowest. The more public money Labour threw at the poorer and slower growing areas, the more the gap grew in favour of London and the South east. (1998-Q3 2006 London grew 41%, Scotland 16% – from “Freeing Britain to compete”)

The new governemnt has said they want more balanced growth around the country. On Friday the FT devoted a page to a forecast of what is likely to happen. This predicted more of the same, with a much stronger recovery and more jobs generated in London and the South East compared to the rest of the country.

The parts of the country that have the largest public sector failed to grow quickly during the years when Labour was pouring cash into them like a river in flood. Now the growth rate of public spending is to be brought right down, this source of cash will be less vigorous. That does not automatically trigger faster private sector growth.

A thoughtful Labour party in Opposition would ask themselves why did their top top down public sector spending led model fail to ignite the economies that mattered most to them in the strong Labour areas of the North and the devolved countries? Could it be that a balanced economy in any given area requires a stronger and wider ranging private sector? Did Labour’s public sector crowd out or deter the private sector in its core areas?

One of the worst mishaps was the failure of Northern Rock. Northern Rock was a Lanbour flagship. It was an apparent private sector success story, devoted to widening ownership and financing new residential development in the North East. To New Labour it was manna from heaven, a successful financial sector business growing in the North East, with its headquarters there. Was this the model of the future, the answer to Lodnon’s dominance in finance?

The long shadow of Northern’s collapse is cast on future financial enterprise, and private sector led support for other businesses in the Labour areas. The new government needs to be brave and argue in those Labour heartlands that the Labour experiment of leaading with public cash did not work. The government needs to bring the successes of London and the south east to the north, as it brings public spending as a percentage of the total down sensibly. The government’s strategy is to bring public spending’s proportion down through economic growth, taking care not to cut the overall cash expenditures.

It’s a chicken and egg problem. Years of experience shows that the more public spending there is the slower the overall growth. To bring more enterprise to the slower growing areas will take boldness to free the obstacles to enterprise. If we want many more people to run their own business, more larger businesses to set up elsewhere in the UK and more jobs to be created by free enterprise it is going to take much more work on educational success, training, deregulation and lower taxes. Above all, it requires inspiring people to believe they can do things for themselves, and to understand that if you want all your prosperity and jobs to be delivered from Whitehall you will be bitterly disappointed.


  1. John Hatch
    July 18, 2010

    The traditional building societies were based on the principle of borrowing money overnight and lending it out for 30 years. On the face of it, utterly absurd. However, in practice, there were strong pressures on depositors NOT to withdraw their savings; especially in the days when you needed to show you had been a prudent and regular saver with the building society before they would consider granting you a mortgage. When the boring old building societies became 'go-ahead' banks, people lost sight of the crucial change in the nature of deposits. Northern Rock was the most spectacular example of borrowing short-term from people who had no compunction in suddenly, and with catastrophic effect, demanding repayment. The moral: casting aside tradition is asserting that you are wiser than your grandparents. It is sometimes true but often a mistake.

    1. Mark
      July 19, 2010

      That's not quite my memory of how building societies operated: they offered higher rates of interest for longer term deposits, particularly for larger sums by private wealth standards. Many depositors would hav a range of accounts – say 7 day notice for emergency funds, and 1 or 5 year bonds for bigger sums. When they became banks, they started to rely on large chunks of wholesale funding – i.e. borrowing from other banks, often abroad, and on selling mortgage backed securities to provide funding for the next tranche of mortgages – eating the source of their income. The only way to survive was to inflate the property bubble (at least until it burst).

      1. John Hatch
        July 20, 2010

        With respect, it is mere detail that traditional building societies may have taken some slightly longer-term deposits at higher interest rates. Even a '1 to 5 year bond' is very short-term compared with a 30-year mortgage. The crucial point is that there were special factors which made it feasible for traditional building societies to borrow short and lend long. Those in charge failed to recognise that those special factors had changed once they began relying on deposits from different types of lender.

        1. Mark
          July 20, 2010

          The crucial factors were that they were borrowing from a large number of individuals, whose average behaviour was reasonably predictable (and could be influenced by varying interest rates), rather than depending on rolling over of multi billion loans. Rollover risk was greatly increased – which ended in the BoE having to supply the rollover funding. The other crucial factors were that Building Societies were not leveraged to the hilt, so even if there was a temporary increase in withdrawals the effect on lending was not so great; and that lending policies were conservative and proven, rather than depending on assumptions that house prices would always rise in real terms.

          1. John Hatch
            July 20, 2010

            JR raised the matter of Northern Rock, describing it as a Labour 'flagship'. My point is that you can explain the essential reason for the demise of Northern Rock as a simple morality tale. It was hubris. A young man with some marketing experience was given his head as chief executive and believed his own vainglorious propaganda; some older, vastly more experienced, and supposedly wiser heads failed to restrain him from a headlong charge to disaster. This is not a story that benefits from being unduly complicated by technical jargon and detail. We know Icarus was too full of himself and flew too near the sun; the wax on his wings melted; and he fell to earth. The analogy is plain and we don't need to know his precise flight path. The history of the New Labour government is littered with examples of hubris.

  2. Alan Jutson
    July 18, 2010

    Many of those in the Public Service sector have been living a "safe" existence in financial terms for years, so why risk your own savings, your own house, your Pension fund, and your standard of living by trying to go it alone, when it often means:

    Longer hours, higher financial risk, higher relationship risk, more worry, and certainly lower financial reward in the early stages of setting up any business, Compliance/responsibility for health and safety or/and Environmantal health regulations, Inland Revenue and Vat returns add to the complications.

    Yes some still make it, and some make it big, but for the majority, it is too little reward for the effort/risk in this high tax ecomony.

    It will take years to change the mindset of those who have been in the relative comfort zone of PAYE employment, with a job for life culture of the past 13 years, funded by the Taxpayer. But it does need to change.

    Lower taxes are the only incentive that will encourage more to set up their own businesses, as risk and effort is then perhaps worth the reward.

    The Solution: Governments must spend less.

  3. Acorn
    July 18, 2010

    Agreed JR; but, how are you going to ween these Welfare junkie labour areas, off the fiscal equivalent of methadone? We are seeing a parade of "bleeding stumps" through the media. People who have done very nicely out of dealing to the junkies.

    We are seeing so called charities, whinging about cuts by central and local government in funding. Well, in my book, if your charity needs taxpayer money to survive, that makes it a Quango, not a charity.

    (Site link removed as it did not work for checking)

  4. Stuart Fairney
    July 18, 2010

    Labour (or the self-aware ones anyway) don't want a bold, enterprising populace to rid themselves of state shackles because it would mean their own irrelevance and destruction. And what does a former Labour MP actually do? Would you trust them to run a fast food franchise for you?

    So the sophistry continues about the need for the state. And the de facto tax enforced serfdom to the government remains.

  5. Duyfken
    July 18, 2010

    For most people in general employment, there are a number of factors which they understandably wish to ensure:

    a) security of employment,
    b) security of and best possible pension,
    c) acceptable working conditions, and
    d) adequate wage/salary.

    If, as seems to be the case throughout the public sector, these conditions are generally satisfactorily met, it might well be difficult to convince public sector employees of the merits of your eminently sensible analysis. To attain more growth in the private sector and increase enterprise in the slower-growing areas, it should be necessary, inter alia, to make the attractions of employment in the private sector commensurate with (or better than) those in the public sector.

    As you say, there needs to be more work on educational success, training, deregulation and lower taxes to encourage entrepreneurs and employers, but also more attention should be paid to the present imbalance of employment conditions in the two sectors.

  6. Yorkie Boy
    July 18, 2010

    Lower taxes, NI in particular, for the private sector, especially SME, in poorer areas would be a good idea.

    Although its important to recognise that living standards let alone quality of life are not proportional to nominal wealth.

    The cost of living in many 'deprived' areas, in particular house prices, is much lower meaning that it is often easier to be relatively affluent than in London and the south-east.

  7. @pauldanon
    July 18, 2010

    Only the east, south-east and London regions contribute to the state; the other regions are net beneficiaries. The answer is to remove regional subsidy and advise the regions to compete with London and its satellites. If I ran the Manchester stock-exchange, I'd open an hour before London, close an hour after London, trade on Saturdays and charge less for deals. Same goes for everything else the regions do. Rather than relying on London-money, they should generate their own by doing better than the capital.

  8. nonny mouse
    July 18, 2010

    Labour were fixated on the North South divide by measuring income and wealth. Surely the bigger issue is jobs. What the North needs is a large number of jobs, not a few highly paid ones. Once the unemployment rates are more equal then you can try to get higher paid jobs over lower paid ones.

    How can the tax system be used to create a high volume of jobs? Maybe a modified NI holiday that allows for more companies and more employees per company to benefit, but is limited to employees on the basic tax rate.

  9. Demetrius
    July 18, 2010

    But it is all a lot more complicated than that. With so few young people in work, the complexity of employment and related laws, the planning obstacles, the inverted tax system favouring the big boys, almost all bureaucracy also favouring the big boys, and substantial proportions of local income being extracted by distant and often foreign large companies and finance houses, you finish up without the will, the type of labour, and the ability to get much if anything going. Relying on foreign big firms to come in may help to promote some consumer activity, but where do the revenues from that go to?

  10. Alan Wheatley
    July 18, 2010

    The FT prediction chimes with government enthusiasm for high speed rail between London and Birmingham compared with disinterest in high speed rural broadband. The Chilterns are valued as a means of making a marginal reduction in travel time between cities. Rural areas are left to fend for themselves to achieve a descent quality of internet connection at a time when it is evermore important AND government are increasingly requiring all citizens to communicate that way.

    Nineteenth century technology in preference to that of the twenty-first makes one question the vision and judgment.

  11. Javelin
    July 18, 2010

    It's so sad. The North has no culture and no infrastructure to promote enterprise and growth. New Labour has wrecked the North yet again.

    We have spoilt ourselves by borrowing over £150k each (The Independents figures) or £4 trillion and treating ourselves to public sector spending we cannot afford. But this spending has not been on "us" but on a minority – lime the worst debt junkies – the banks empty and we have very little to show for it.

    I would like to say again – the diet analogy and not the amputation analogy must win out in the press. The BBC would like to portray budget balancing as "cuts" and use the amputation analogy. We need to portray budget balancing as a diet needed to make the country fit again. David Cameron needs to complain bitterly to the BBC that their choice of the amputation analogy is a political motivated statement.

  12. Ian Pennell
    July 18, 2010

    Dear Sir John Redwood, MP

    SIR, It is good to hear that some MPs in the governing Parties understand first principles of basic economics, namely that businesses and enterprise do well and that the economy thereby flourishes given the right macroeconomic conditions of low taxes and less government interference. Whilst some government spending in the right areas is undoubtedly a good thing, the findings you refer to Sir, show that too much government spending and excessive taxes in some regions of Britain remove the incentives that the local populations need to drive forward their respective economies. Its common sense if one thinks these things through; if you either print tons of money, or tax and borrow to give folk enough money to live on comfortably without ever needing to work hard and make things you destroy the economy. Things and services have to be produced or provided in abundance, which would then be bought at competitive rates (keeping prices low through the Law of Supply and Demand) with money that makes for prosperity in an economy.

    Paper money alone cannot do this, and when you cannot buy stuff because stuff is not being produced (due to a big lack of need for folk to work by making things), you stuff the economy. Labour's idea of helping folk in their heartlands was only ever to give them lots of money so that they did not have to work and so that they could enjoy the same standards of living as those with good jobs.

    Its the economics of the madhouse to simply just give a ton of money to people who don't work because that removes the incentive for those people to get jobs, to set up businesses making widgets. Instead there is likely to be fewer businesses making stuff, particularly if these businesses are taxed more to pay for Government largesse, and with large numbers of non-workers with vast sums of money chasing a shrinking supply of goods and services you get serious inflation, as happens in any situation whereby the supply of goods is vastly exceeded by their demand. And inflation destroys prosperity.

    Unfortunately, there are MPs running the supposedly Conservative Coalition Government who think taxing businesses and top earners more, to simply give to the "poor" will help the economy. The 50% tax rate, increases in Capital Gains Tax and now Vince Cable's tax on richer graduates: Socialism does not work!

    Perhaps Sir, you might encourage all Conservative MPs on the 1922 Committee to defect, to UKIP. That would trigger a General Election and you would all be able to campaign strongly on the merits of neo-conservative economic thinking (much lower income taxes) and on leaving the European Union, both of which, if implemented, would be of enormous benefit to our economy!

    1. nonny mouse
      July 19, 2010

      It is so sad that, having failed to win the argument through the electoral system, UKIP supporters are reduced to begging Conservative MPs to defect.

      Lets look at the outcome of Conservative MPs defecting to UKIP:
      – defecting MPs would all lose their seats at the following election
      – Labour would be returned to office and do even more harm to the economy
      – Labour would move the country ever closer to Europe

      It makes me wonder if Ian Pennell is in fact a Labour supporter.

  13. Kevin Peat
    July 18, 2010

    "…it requires inspiring people to believe they can do things for themselves"

    It also requires inspiring people to believe that it's WORTH doing things for themselves. As it is, welfare dependants often enjoy a standard of housing that working people can only dream of.

    I was utterly dismayed that a Conservative front bencher said of the Somalian refugee fiasco that "Those on benefits should have a standard of living equal to those working and not better."

    Equal ? Does this man not have a clue what destruction is being wrought through encouraging the wrong people to breed whilst making it nigh on impossible for the right people to do so ?

    That any politician was shocked at the Raoul Moat tribute sites says a lot. It came as no surprise to me.

  14. Bill Old
    July 19, 2010

    If you pay people to be dependent, you get dependent people. If you pay people to be poor, you get poor people. If you funnel money into an area because it's in 'decline' – you ensure the continued decline, in order that the government programs may continue.

    Socialist government is all about lucrative, secure, feel-good jobs for socialists employed by the state. They need plenty of poor people, destitute cities and sink estates to guarantee them a life-time of 'work' followed by a comfortable pension.

    There is no incentive to remove the justification for their careers, and they have been very successful at ensuring it doesn't happen. The public spending has merely been a means to an end for a pious and dishonest elite.

  15. DBC Reed
    July 19, 2010

    It is very hard to make out how this public sector crowding out private sector argument works.You know as well as I do that if the public sector did not provide jobs outside the SE,there would n't be any work at all in some places.Similarly ,what private sector business does operate in these distressed areas( as they used to be called)often depends on contracts with the public sector and the purchasing-power of public sector workers.
    The Conservative and their coalition mates seem to have decided to push the economy off a cliff and see if it will fly.Osborne seems to be intent on transforming the British economy in a very short time like a Soviet five year plan,but without the planning.Conservatives have a patiently acquired reputation for dependability not experimentalism.

  16. Dave Evennett
    July 19, 2010

    People prefer to live in the south, probably on account of the weather more than anything else. The challenge is how to make the north more attractive for people to live and set up business. The answer quite simply is lower taxes in the north to offset the natural advantages of the south.

    Deregulation needs to become a national pastime.

  17. StrongholdBarricades
    July 19, 2010

    I am glad that you mentioned chicken and eggs

    With the downgrading today (again) of Ireland's sovereign debt is this debacle so close to home that it could yet wreak havoc upon our own economy?

    With an alarming problem reasserting itself in the Northern sector, are the fiscal problems in the South already having a knock on effect?

    How is it possible to ensure that these problems will be minimised, and can the governments both North and South of the border work together for a solution without presumably buying Irish debt?

  18. christina sarginson
    July 20, 2010

    I look forward with a great deal of interest to see what happens over the next few months, will people who currently work inthe public sector decide enough is enough and start their own business let us wait I see.

  19. manicbeancounter
    July 20, 2010

    You are quite right to point to the inverse correlation between growth rates and levels of government spending. There is also another relationship that needs investigating – that of immigration. From the Manchester perspective, there appear to be less of the vigorous economic migrants (such as from Eastern Europe) that one finds in London. Nor is there anything like the same levels of immigration of professionals/graduates. It could be that this has helped drive growth. This would correspond to growth in the South East in the latter half of the twentieth century being driven by migration from other parts of the UK.

  20. Kenneth
    July 22, 2010

    The number one reason that London grew so much faster is because the growth in its population was far higher than other regions.

    For example, in Scotland there has been hardly any growth in population, whereas in London it has been in the hundreds of thousands, if not over a million.

    The key figure to compare is London's Growth in GDP-Per-Capita versus Scotland's Growth in GDP-Per-Capita.

    You will find the two figures will be far closer than the Growth figures in your article, which don't take into account the differential growth in population levels.

    Reply: Whilst it is true that the population of London grew more quickly, the majority of the difference is nothing to do with popultion growth. Over the last 13 years Scotland's population grew around 2% and London 10%. The population growth of London is part of its economic success.

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