We need to rethink our approach to regional spending

What is England for? Where are its regional economies headed? How is that funded? Who pays, and who benefits? How do we all feel about that?

These are questions that our politicians almost never debate in public, for the obvious reason that it is almost impossible to devise a system of local and regional funding with which everyone is happy, especially at a time of austerity. But recent weeks have forced the issue of regional fairness back on to the table. In the coming years, we will have to confront a series of troubling questions about our over-centralised economy, and the result may be a radical shift in the way we spend public money.

The EU referendum revealed a country in which many people living outside of successful urban centres feel alienated and left behind. It also revealed that some of those people were prepared to take a huge gamble on their area’s European funding and short-term economic prospects in order to ‘take back control’ of British sovereignty.

‘Governments might need to shift their attention

from funding services to growing local economies’

More prosaic, but just as important, is the government’s current consultation on business rate retention and the new system for recognising the needs of different council areas. This process may well result in a substantial redistribution of public money around the country.

The difficult truth is that most parts of Britain do not currently pay their own way. London, the south east and the east of England make a net contribution to the Treasury, while the rest of the country takes a net subsidy. This is hardly the fault of those regions – in many cases their recovery from Britain’s 40-year process of de-industrialisation remains incomplete and unevenly spread.

And there are lots of reasons why this sort of regional redistribution makes perfect sense. Quite apart from simple questions of fairness and need, London benefits from being part of a country that supplies it with talent, culture, and the heft that comes from being part of a globally-important nation state that contribute to the capital’s leading voice on the world stage. London has long received more than its fair share of capital investment. You could argue that taxpayers across the country both contribute to and invest in London’s success and deserve to see a dividend in return.

But the way we spend that dividend might be part of the problem. Huge amounts of it are paid out in revenue subsidies to support public services, but it has become increasingly clear that employing more people in local government and the NHS is not a route to economic sustainability. As we saw in the Blair years, public spending can prop up an economy in the short term, but it cannot substitute for a weak underlying private economy in the medium term. Once the public spending goes, so do many of the jobs and the local growth multiplier.

This is why we need to rethink our approach to regional spending. Governments might need to shift their attention from funding services to growing local economies. In other words, we should see national spending less as revenue for public service provision and more as long-term capital investment specifically targeted to improve regional economies to a point where many more places can fund their own local services.

You can see the beginnings of this shift at work in current local government policy. Greater Manchester’s devolution deal is explicitly aimed at self-sufficiency. Leeds City Region’s unsigned devolution proposal contains the same ambition. Business rates retention will ensure that there is a much closer link between the performance of the local economy and the amount available for social spending. Areas that do not grow get less money over time, and their councils must either fix the economy or accept a likely loss of population to wealthier areas.

But it is not possible simply to devolve some inadequate powers, cut budgets and demand regional self-sufficiency. We will need a period of transition, strong regional economic leadership and a clear strategy for economic change if places like Merseyside or Blackburn are going to move closer to becoming self-funding.

In this context, Theresa May’s promise of an industrial strategy becomes very important indeed, and the delivery of that strategy by the devolutionary Greg Clark at the new Department for Business, Energy and Industrial Strategy becomes even more critical. It will be vital to recognise that renewing regional economies requires both investment in infrastructure and ongoing support for reformed public services which can deliver a skilled workforce.

In the wake of the Brexit vote, the UK needs urgently to reconsider its economic model. We can continue with a centralised approach which turns London into a Singapore-style island of deregulated prosperity, using its dynamism to continue funding the rest of the country. Or we can take the longer, harder, but more hopeful path of restoring balance to our over-centralised economy.

Photo by wwarby