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Dysfunctions Last Updated: May 4th, 2007 - 10:38:11

The Real Cause of the North-South Divide
By Hamish McRae, The Independent, 4/5/07
May 4, 2007, 10:37

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The local elections tomorrow will be about many things but one key issue will be the performance of Labour in the South of England: does the most prosperous part of the country increasingly resent the transfer of wealth out to other regions?

Three regions in Britain pay more into the public purse in taxes than they get out in benefits.  These are London, the South East and the oddly-named East - actually East Anglia.  The rest of England, plus Scotland, Wales and Northern Ireland, get more out than they put in.

Of course there are individual districts where this is not the case.  For example people in the smart parts of Cheshire and prosperous side of Edinburgh pay much more in tax than they get in benefits.  Conversely there are more deprived parts of London and the South that receive more than they pay in tax.  But seen in the big, the south pays for the north.

This has been so for a long time and is a function of the greater economic success of the south.  But the gap has widened sharply since 1997.  According to some calculations by Oxford Economics, Londoners will this year pay 8.6 per cent more of their income in tax than they get in benefits, up from 4.1 per cent in 1997.  The corresponding figures for the South-East are 11.2 and 9.9.

This raises obvious political questions and less-obvious economic ones.  An obvious political one is whether a transfer of wealth on this scale is acceptable to the regions that have to pay it.  Some transfer from richer regions to poorer ones would be accepted by almost all of us.  But the richer parts of the country need good public services too.

For example Ken Livingstone makes the case well for greater spending on London infrastructure.  Whatever the motive, it is just not sensible to starve the South-East of public investment.


 Apparently there is more support for an independent Scotland in England than there is in Scotland.


The scale of the transfers of wealth that are appropriate will inevitably be a political decision.  There certainly does seem to be growing resentment at the scale of the transfer of wealth from England to Scotland: apparently there is more support for an independent Scotland in England than there is in Scotland.  But the internal transfers within England have been subject to less debate.  That period of calm may now be ending.

What about the economics?  The government, together with the various regional development bodies, has made a big effort to boost economic activity in the poorer regions and indeed in the poorer parts of the richer ones.  It deserves a lot of credit for that.  In particular I have been very impressed by the work of the development bodies.  Whereas 20 years ago the main thrust of their activities was to give money to foreign companies who promised to build a satellite factory.  Now the policies are quite different: there is much more emphasis on boosting local indigenous entrepreneurs, helping with planning, running seminars to increase skills and so on.

Nevertheless, despite some shining exceptions, regional policy over the past decade has been a failure.  The gap between north and south has tended to grow rather than to narrow.  The gap has widened in terms of income per head but more disturbingly, people have been voting with their feet to move south.

Scotland's population does seem to be rising again from a low in 2002, partly because of inward migration from Eastern Europe.  But it is still rising more slowly than England's and within England, virtually all the pressure from increasing population is south of a line drawn across from the Wash.  There is no sign of this changing.  Projections by the Office of National Statistics to 2028 show double-digit population increases for the East Midlands and all points south but single digit rises for everywhere else, bar a fall for the North East.

The biggest question is not so much whether it is sustainable to ship so much money from the south to the north, but why is the south such a magnet?

Just about whatever measure of enterprise you take — new VAT registrations are a good one — the private sector is much more buoyant the further south you go.  Last year Oxford Economic Forecasting and Arup produced an interesting paper called Regional Futures: England's Regions in 2030.

One of the most stunning bits of evidence is the way in which the size of the public sector relates to the size of the private sector in the poorer the regions.

London has been gaining ground relatively in its value added per head since the early-1980s (exactly at the moment the old Greater London Council was abolished, as it happens).  Since the late-1980s it has held steady at around 120 per cent of the UK average.  In other words Londoners produce 20 per cent more wealth per head than the average Briton.

But London now has the smallest proportion of workers in the public sector than any other part of the country, around 18 per cent: this has been falling fast since the late-1980s.  The North, the poorest region, has by far the highest proportion, rising steadily to reach 25 per cent of the workforce.

This leads to a disturbing possibility.  Maybe part of the reason why the north/south gap is widening is that the government is transferring jobs from the south to the north.  That might seem counter-intuitive until you consider the fact that the public attracts the best talent and bids up the wages in the north, thereby depriving the private sector of the talent and pushing up their costs.  In the short-term it creates jobs in struggling areas.  In the longer-term it undermines the vibrancy of local businesses.

Of course it is not just that.  Probably the main reason the South is so successful is its global role in financial and business services.  About 45 per cent of the world market in international financial services is in London and the South-East.  That sucks in global talent and growth becomes self-reinforcing.  But I think we need to wonder whether government policy of taking money from the south and giving it to the rest of the country is doing more harm than good, not just to the south but also to the north.

So this transfer of funds is not just bad politics; it may be bad economics too.  There are lots of ways in which the public sector can help improve economic performance of the regions that are having a tough time. And of course there should, as far as possible, be an equality in the provision of public services across the country.

But I think the way forward should place much more emphasis on encouraging local initiatives -- a public sector that helps local business do better, supports entrepreneurs, clears bureaucratic roadblocks, helps train staff and so on.  And there should be less emphasis on taking money from one part of the country and giving it to another.

Source:Ocnus.net 2007

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