IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
After the recent disappointing performance in the last elections, the UK government led by Theresa May has revived the Northern Powerhouse project. The project aspires to make the North of the country a business centre able to compete with London. However, because of serious problems with labour productivity in the North, we fear that the project will likely fail. Without drastic reforms targeted at fostering market forces and private investments, the project will only produce a very expensive bill for the taxpayers.
The Northern Powerhouse is back on the agenda
The UK government’s Northern Powerhouse project was first championed by George Osborne, and aimed at boosting the northern economy by increasing public investments and devolving significant powers to directly elected mayors. The future of the project looked bleak when last summer PM Theresa May sacked George Osborne chancellor. After the last general election, however, the project appears to be once again back on the agenda.
Low labour productivity in the North of England
Low productivity, especially if compared with other regions across the UK, remains the Achilles’ heel of the Northern Powerhouse project. Despite the recent devolution of powers and various regional development strategies, productivity growth has remained sluggish in the North. The inadequacy of secondary education in Northern England and major difficulties faced by the NHS (especially during the winter) have significantly affected the region’s productivity.
How to improve productivity
Given the devolution of powers and the consequent changes in the local budgetary structures, the Northern Powerhouse project has actually become a political experiment in UK. However, the problem of productivity cannot be solved with devolution of powers alone. In addition, it is obvious that a vast increase in the budget of the Northern politicians, as promised in the Northern Powerhouse project, will not produce any long-lasting result. In fact, the Northern Powerhouse project needs bold reforms in the health care and education sectors.
The NHS is failing and additional public funds and devolution cannot solve the ailments of the system. The government should find the courage to introduce serious reforms in this sector, drastically limiting the scope of the NHS to the most vulnerable portions of the population, allowing wealthier groups to seek private insurance cover without having to pay national insurance taxation. This appears to us as the most credible and pragmatic way to improve health care provision.
Similar to the case of health care, the education sector is underperforming in the North of England. The government has timidly attempted to introduce a reform to secondary education, suggesting a system, based on grammar schools, that we have previously criticized. If public schools, with a few exceptions, are failing to adequately educate students, why not introduce a market-oriented provision of education, where students are free to choose the school they wish to attend and poorer students receive vouchers/scholarships to pay their studies?
The North of England could also become a testing ground for a reform of the welfare system and, in particular, salary policies. The national minimum wage, by definition, is a centralised decision that is taken without considering the need to boost northern regions’ productivity. Indeed, northern regions struggle to attract more skilled labour from other parts of the UK and Europe. Instead of engaging in a sterile debate on the pay cap in the public sector, we would have preferred the government to drastically reduce political intervention on workers’ pay and allow market forces to determine salaries. If the government thinks that the best way to provide public services is via public providers, why should such providers be deprived of the choice of setting salaries and attract the best teachers, doctors, engineers, etc.? If the government, instead, thinks that public provision of services is unsustainable, and this indeed seems to be the case, why not draw the obvious conclusions and allow private providers to play a central role?
At national level, the economic debate is currently on the desirability and effects of austerity. The term “austerity” is incorrect and misleading. Controlling public expenditure to avoid increasing taxes and/or borrowing is simply wise.
Rather, it is time that the national debate focused on the type of economic system that will ensure prosperity for generations to come. The nation, and in particular the North, requires free markets and private investments. Regrettably, the Labour party manifesto called for the nationalization of all public services and the electorate reacted positively to this.
It is time now that the Tory party stop being dismissive of the opposition and contentious with each other, and seriously join the debate. The Northern Powerhouse could be a game changer if politicians had the courage to seriously consider deep reforms in a depressed, but very resilient part of the country.