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Wales faces bleak economic future - think tank 30/7/2006
A new report today documents a profound economic imbalance between the UK regions, with wealth creation, enterprise and growth concentrated in London and the South East of England and high welfare dependency and large public sectors in Wales, the North-East and Northern Ireland in particular.
Whitehall’s last colonies – breaking the cycle of collectivisation in the UK regions, by Professor Nick Bosanquet of Imperial College London and others, shows that the heavy public spending increases of this decade have not helped the challenged regions; in fact they may have increased their dependence on Southern taxpayers and further reduced their attractiveness to talented young people.
The report, published by the independent think tank Reform, argues that the coming period of public spending slowdown gives an opportunity for a new policy direction for the UK North and Wales based on private sector initiative and lower tax rates.
The trends in economic performance are worrying for both South and North. The North faces further out-migration of young people and even slower business formation while the South faces greater congestion and rising living costs. The tax and spending imbalance – with London, the South East and the East paying half of personal income tax but receiving only a third of public spending – may create increasing political tensions.
UK public spending will fall as a share of GDP from 2008-09, giving the opportunity of a change in policy direction. Reform’s Growth Rule would enable public spending discipline and falling taxation, allowing the development of a stronger private economy in the regions. Other solutions could include better transport links and tax and regulation holidays in some areas.
Key findings of the report are:
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. For example:
Population and migration. Between 1991 and 2004, London 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. London and the South East are net attractors of young people.
Growth. If all regions had the same rate of growth as the South East over those ten years, UK output would be over ÂŁ61 billion higher in 2004 (an increase of 6 per cent).
Educational attainment. 26 per cent of London’s workforce has degree standard qualifications compared to 12.4 per cent in the North East.
Regional 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:
In the North East, North West and Northern Ireland, nearly one in four households contain one or more members in receipt of incapacity benefit.
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.
The ratio of public spending-to-economic output 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 the state for their jobs and incomes, there are 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 – will move from northern regions into London and the South East; further government resources will be redistributed into the northern regions, continuing the dependency cycle.
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.
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
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 partnership 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.
Nick Bosanquet said: “The regional imbalance of the UK economy is already stark. The danger is that it will become self-perpetuating, with some regions increasingly starved of talent and investment and reliant on income transfers from the South East, to the detriment of the UK as a whole. Public spending discipline and reduced taxation should make a major contribution to breaking the cycle of dependence.”
Nick Bosanquet is Professor of Health Policy at Imperial College London. He is a health economist who first carried out research on NHS funding in the 1980s for the York Reports sponsored by the British Medical Association, the Royal College of Nursing and the Institute of Healthcare Management. He has been Special Advisor on public expenditure to the House of Commons Health Select Committee since 2000.
Seth Cumming has been Reform’s Economics Researcher since June 2006. He completed an MSc (Economics) at the London School of Economics in 2006.
Andrew Haldenby has been Director of Reform since 2005.
3. The report is available at www.reform.co.uk
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