Economic geography lessons, by Katie Schmuecker

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In recent days there has been considerable interest in how public spending is spread around the UK, after David Cameron identified areas like Northern Ireland and the North East as having a public sector that is ‘too big’.  Is he right?  Well, sort of.

Much of the coverage has been based on figures that show the public sector constitutes up to 70 per cent of the economy in some parts of the country.  These are quite shocking figures, but they deserve closer inspection.

Treasury figures published last week detailing levels of identifiable spending in the nations and regions of the UK, reveal that spending per head is spread unevenly around the country, with some areas receiving more per head than others. The data reveals a truth that has been little remarked upon in the recent debate: it is actually London that receives the most public spending per head, receiving 15% above the UK average. 

Mostly what this tells us is which parts of the UK that have the highest levels of social and economic need, as a large proportion of this spend is made up of what the Treasury calls ‘social protection’– more commonly known as benefits and the state pension.  This spending is entitlements based, and responsive to need, so if the number of claimants of Jobseekers Allowance in an area increases, so too does social protection spending. 

So why didn’t London feature in Cameron’s list of target places where the public sector is too large? The figures he used looked at the public sector as a proportion of GDP, rather than overall public spending per head.  In the case of London, the city’s economic success (much of it the result of people commuting into London from surrounding regions to work) disguises the size of public sector spending when the figures are looked at in this way.

To be fair to Cameron, in his response to questions he made the argument that the private sector needs to be larger in the Northern regions, Wales and Northern Ireland.  This is the right way to think about the issue.  It is not so much that the public sector is ‘too big’ but that the private sector is ‘too small’.  There is little evidence that the size of the public sector in these regions has somehow ‘crowded out’ the private sector, and there is no reason to think that cutting the size of the public sector will somehow magically stimulate growth in the private sector.  Indeed, the argument can be made that without the employment that the public sector has provided the situation could be even worse in some parts of the UK. 

We all know cuts are coming and they have to be made, but it is vital that economic geography is factored into the thinking as the size of the public sector is reduced.  Otherwise, there is a risk that swingeing cuts could have a particularly negative effect on those parts of the country where social and economic need is already high.

Katie Schmuecker is Senior Research Fellow at IPPR North. The Treasury figures are available at  http://www.hmtreasury.gov.uk/pesa2010_section4.htm <http://www.hm-treasury.gov.uk/pesa2010_section4.htm>

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