21 February 2017

More government spending will do nothing to help the North


IPPR North exist to insist that more of our money should be spent Up North. That they have presented us with a report insisting that more of our money should be spent Up North is not thus a surprise.

But even though we aren’t surprised, we should probably address their main point: since lots of money is spent on infrastructure in the South and London, why shouldn’t flat-cappers get some of it?

More than half of transport spending, they point out, is in London – some £1,943 per person in the Smoke and only £427 among their supplicants. Clearly, something must be done.

Let’s do something, then. Let’s examine their argument in more detail.

An important point raised in their report is this: “tax increment finance” is among the possible mechanisms for funding the new train sets and other infrastructure delights that the North needs. This is the method which uses anticipated future increases in tax revenue to finance current infrastructure improvements.

It is, in effect, the way the Battersea extension to the Tube is being funded. Having a station close by hugely increases the value of the surrounding land, so much so that the developers of the old Battersea Power Station (and others in the area) have chipped in to cover the entire cost. The rise in land values will more than compensate for the costs of the additional infrastructure.

We like this, of course. The very point of building such things is that they add value, create wealth. Those who garner said added value should be dunned for it, with the rest of us getting some portion of the wealth for free.

It’s an excellent deal, which is why Crossrail contains elements of such financing, as did the Jubilee Line to Canary Wharf. The Hong Kong metro almost entirely funds itself from such programmes.

But it does leave us with the question, raised by IPPR North, of why we’re not doing the same thing in the wastelands north of the Marylebone Road.

One answer is simple: that there are no projects adding sufficient value from the addition of a train set that we can capture it in such a fashion. And let’s be honest, if we’re not creating that value, then why are we even thinking about doing the building?

After all, we are all made richer if we employ our scarce resources so as to produce as much wealth as possible. So the correct answer to IPPR North’s question is that we’re spending the money in London because that’s where it adds the value.

This is not, however, a complete answer. We cannot leave the North of England with a 19th-century economy of whippet flanges and barm cake production purely because it’s more lucrative to upgrade southern commuter lines. And IPPR North are quite correct that at a more basic level, it is supply-side reform that we need.

Supply-side reform does not, as the Americans term it, mean ever lower marginal tax rates being levied on the rich. It means reform of the supply side of the economy.

Allowing point-to-point flights across Europe, leading to Ryanair and Easyjet, was supply-side reform; breaking up the CEGB was supply-side reform; building train sets and rail lines would be supply side; changing the regulations constraining economic activity would be the same.

So what reforms should we be making to the supply side of the economy if HS3 isn’t the answer? Enterprise zones à la 80s Heseltine might be an idea, possibly.

But perhaps the biggest distortion in the British economy at the moment is the manner in which public-sector wages are nationally determined.

Yes, there’s London weighting, but this is both small and also an admission of the basic problem. Those nationally agreed wages aren’t high enough to attract people in the sector in London. But the opposite must also be true: those wages are going to be too high outside the other expensive areas of the South and South-East.

The logical implication is that those high public-sector wages will out-compete and crowd out the private-sector vitality needed to advance that Northern economy. Indeed, it is said that there are areas Up North where the public sector constitutes as large a portion of the economy as was in the Soviet satellites of Central Europe – not a supply side structure that worked well.

Thus the reform becomes obvious – abolish national pay bargaining. Leave each local unit of the state to negotiate wages locally. Why shouldn’t a hospital negotiate its wages according to local standards, rather than the cost of living and competition for labour 300 miles away? We even know why pay should vary: a national pay scale for nurses kills people.

IPPR North is entirely correct that we need supply-side reform so that our Northern bretheren can thrive. It’s just that, as so often, that involves stopping government from doing what it already does, rather than thinking up more ways for it to splash our cash.

Tim Worstall is senior fellow at the Adam Smith Institute