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If done right, Rishi Sunak’s towns fund will reap huge rewards and end decades of top-down strategies

If done right, Rishi Sunak’s towns fund will reap huge rewards and end decades of top-down strategies

Nurses’ pay has been one of the biggest flash points of last week’s budget. But, the Chancellor also stirred up lesser, but no less important, furores.

One of these was the list of places which are set to receive money from a whole string of new initiatives for the regions.

For example, under the Towns Fund, 45 towns will receive cash. And 40 of these have at least one Conservative MP (for transparency, since last May I have been pro bono Chair of the Rochdale Development Agency.  Rochdale borough has one Labour and one Tory MP).

Perhaps the cynics are right, this is politics. Governments are more inclined to reward their own supporters. Labour Prime Minister Harold Wilson, for example, agreed to build the notorious white elephant Humber Bridge simply to secure a Labour victory in a by-election in Hull.

But there is sound reasoning behind the government’s strategy – endowing towns with the resources to build themselves up will reap more rewards than throwing money at the problem, across the board.

The real meat of this blueprint was buried deep in the catalogue of accompanying documents to the budget, rather than the speech of itself.

One of these in the current batch sounds as dull as dishwater.  The National Infrastructure Commission has received terms of reference for a study on “Infrastructure, Towns and Regeneration”.

But, they mark an important intellectual shift in policy towards the regions.

Over the decades, since Harold Wilson was Prime Minister in the 1960s, many billions of pounds have been spent under the umbrella of regional policy by both Conservative and Labour governments.

But despite this, the gap between London and the South East and most of the rest of the UK has grown rather than narrowed.

Much of the spending has lacked focus, being top-down and driven by Whitehall. The projects have been huge, but have achieved little.

In more recent decades, an emphasis on cities in particular rather than “the regions” in general has paid dividends.

In the mid-1990s, for example, there were still bomb sites undeveloped since the Second World War within half a mile of the centre of Manchester. It was not possible to buy a house in the city centre because there were virtually none. Now there are 80,000 mainly young professionals living there, and the city has boomed.

The regeneration of cities like Manchester, Leeds and Liverpool provides examples of successful partnerships between the public and private sectors.

It is the satellite towns which surround these cities where problems have become further entrenched. The drain of talent to London has been around for a long time. But the recent success of their nearby cities have put the towns under even more pressure.

The government wants to focus attention now specifically on towns.

Crucially, the emphasis is on projects which are locally-owned. In the jargon of economics, growth in these towns has to be endogenous. It cannot be imposed from above. That particular approach has been tried and it has largely failed.

Towns need to innovate in how to do innovation. Beyond the politics, the government is carrying out an exciting intellectual and practical experiment.  The economics ministers deserve plaudits not brickbats.

As published in City AM Wednesday 10th March 2021
Image: Darlington by Robert Graham via Geograph
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Budget 2021: The political consensus on low taxes could be completely wrong

Budget 2021: The political consensus on low taxes could be completely wrong

In the run up to most Budgets there is almost always one key question shaping debate: should the screws be tightened or the floodgates opened?

This time round, a near unanimous consensus has arisen. Taxes should not go up, for fear of jeopardising the recovery.  Even the Leader of the Labour Party has signed up to this view.

The last time economists and commentators appeared so united was in the years immediately prior to the financial crisis of the late 2000s.

The view was that a new economic paradigm had been established by the Great Helmsman, Gordon Brown.  Boom and bust, as he himself proclaimed, had been abolished.  Levels of debt were irrelevant, and growth would continue uninterruptedly for ever.

Only a few paid up members of the awkward squad dissented, but their voices were drowned out.

What about this time round?  Could the consensus be completely wrong again?

The UK government confronted both a huge level of public sector debt and a large annual deficit, boosting debt even higher, in the immediate aftermath of the Second World War.

The outstanding stock of debt relative to the size of the economy was even higher than it is now, at some 260 per cent of GDP.  The annual deficit was smaller, but was still large by historical standards, at some £125 billion (in today’s prices) in the first full year of peace, 1946.

The Labour government led by Clement Attlee is seen as being the most radical in British history.  It established the NHS and, as was then fashionable in left-wing circles, nationalised industries such as coal and rail.

But in its fiscal stance it was the very model of austerity.

The large deficit of 1946 was turned by 1948 into a surplus of some £85 billion (again at 2021 prices).  Similar surpluses were generated until Labour lost office in 1951.  Taxes were increased and public spending controlled.

Yet economic growth remained buoyant, at over 3 per cent a year in real terms, above the annual average over the entire post war period of 2.5 per cent.

In the decade of the 1950s, the Conservative government continued this, well, conservative fiscal approach, though not as dramatically as Labour had.  There was a public sector deficit, but it only averaged some £10 billion each year (at today’s prices), compared to the 2020 deficit of getting on for £400 billion.

Again, growth was not harmed, averaging 3.5 per cent over the 1950s as a whole.

The growth under both Labour and the Conservatives in the late 1940s and 1950s was driven by supply-side factors.

The government did not boost the economy. The private sector did. Corporate investment boomed to provide consumer goods, after being suppressed in favour of military spending during the Second World War.

This key historical episode suggests that higher taxes can slash massive public sector deficits with no harm to the economy.

But there is a big proviso.  The dynamic, wealth creating sectors must be shielded for rapid supply-led growth to take place.

As published in City AM Wednesday 3rd March 2021
Image: Budget Day by Number 10 via Flickr
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The OBR’s forecasts should be taken not just with a pinch of salt, but with the contents of an entire mine

The OBR’s forecasts should be taken not just with a pinch of salt, but with the contents of an entire mine

There has been a great deal of crowing in metropolitan liberal circles over the report of the Office for Budget Responsibility (OBR), published with the Budget last week.

The OBR revised downwards its projections for GDP growth for each of the next five years. Annual average growth to 2022 is predicted to be just 1.4 per cent a year.

The OBR believes that the UK is experiencing a “negative supply shock”.

But forecasts are merely forecasts. They do not constitute scientific evidence at all. This is especially true of economic predictions.

One section of the OBR’s report which relates to facts rather than views about the future has been seized on. This is that growth in the euro area during 2017 has been both stronger than it was in 2016, and stronger than in the UK. This is represented as showing that the EU is dynamic, and the UK is fading away.

But the experience of just a few months data – we only have official data to, at the very latest, the end of September – needs to be put into context.

Since 2007, the year immediately before the financial crisis, GDP in the UK has grown by just over 10 per cent.

This does indeed represent a decade of growth which, by historical standards, is low.

But the figure is very similar in Germany. In France, output is only around six per cent higher than it was 10 years ago. In Spain, GDP has risen by five per cent.

In Italy, however, the economy has shrunk by some five per cent since 2007. The Italians have had a decade not just of low growth, but of negative growth. They have gone backwards.

Despite over 40 years of EU membership, the UK economy remains far more synchronised with the US in terms of the year-on-year fluctuations of the business cycle.

So over this period, we see some years when economies in the EU have grown faster than in the UK, and some years when they have grown more slowly. This is precisely what to expect when the cycles are not coordinated.

The OBR itself is fully aware of the huge potential for error in economic forecasts.

Indeed, the report illustrates the uncertainty around its five-year projection of 1.4 per cent annual GDP growth in a so-called “fan chart”. This shows the potential range around the prediction, based on past errors made in official forecasts.

At worst, growth could be negative, with an annual average fall of one per cent. But at best, we could have a sustained boom with growth of over four per cent a year.

Based on how wrong past forecasts have been, the next five years could see a cumulative fall in GDP of over five per cent, or a cumulative rise of over 20 per cent.

The OBR’s forecasts should be taken not just with a pinch of salt, but with the contents of an entire mine.

As published in City AM Wednesday 29th November 2017

Image: Philip Hammond via Wikimedia is licensed under CC by 2.0
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