It’s hard not to be gloomy on the UK

Allister Heath
THERE has long been a huge gap in Britain between London and the South East and the rest of the country. The former is powered by private sector growth; the latter depends ever-more on the public sector.

The latest figures, calculated by Jörg Radeke of the Centre for Economics and Business Research using Treasury data, are as eye-opening as ever. Public spending as a share of the London and South East of England economies has shot up, but at around 40 per cent of regional gross value added (GVA) – up from 33 per cent three years ago – we remain a private sector-dominated economy. But the picture is very different everywhere else: in Northern Ireland, the state will account for an astonishing 69.2 per cent of GVA in 2010-11; in Wales it will be 69.1 per cent, rivaling the levels of state spending seen in the old Warsaw Pact countries. Scotland’s state spending will hit 57.7 per cent of GVA, more than Sweden and almost as much as Finland and Denmark.

It is not that much better in the rest of England: public spending will account for 63.1 per cent of GDP in the North East, 58.4 per cent in the North West, 54.9 per cent in Yorkshire and the Humber, 50.5 per cent in the East Midlands and 55.8 per cent in the West Midlands. The South West will be at 49.7 per cent and the West of England at 43.7 per cent, making an average for England of 47.9 per cent of GDP – and 50 per cent for the UK as a whole (other measures, such as the OECD’s, put the UK’s levels of state spending even higher at 53 per cent).

The only way we will ever return to real, sustainable growth will be to grow and develop the private sector. Yet it is now weak everywhere in Britain apart from in London and Southern England and we are continuing to burden private firms with ever higher taxes and extra rules and regulations. It is hard to be optimistic for the long-term prosperity of this country.

AS if this were not worrying enough, the latest musings from Charles Dumas of Lombard Street Research are even more depressing. Between 2007 and 2009, he notes, the budget deficit of developed, OECD countries rose by 7 percentage points of GDP from 1.3 per cent to 8.2 per cent. Just over half this increase was the result of an actual decision to spend more in a Keynesian fashion – the remainder was caused by the automatic effects of lower tax revenue and higher welfare spending. This explosion in deficits has already meant the end of borrowing programmes in some countries (Greece, Dubai, Ireland, Spain – soon Britain, eventually the US). And by late-2010 or some time in 2011, the world could be facing a fresh crisis, he predicts.

Less controversially perhaps, Dumas reminds us that the 25-year boom of 1948-73 ended with out-of-control consumer price inflation and that it took two oil crises and ten years before the foundations of sound recovery had been laid. After the 25-year boom of 1982-2007, we are only two years – and the first crisis – into a new phase. And so far the behaviour of the major players – dependence on exports in China, Japan and Germany, and on debt-led growth in the US and UK – remains largely unreformed.

Dumas fears for the future of globalisation when all of this comes to a head and we realise that we are nowhere near out of the woods – I do hope he is wrong.