Public spending dominates the economy outside of the 'Greater South East'

In 2007-08, 41.1% of the UK's Gross Domestic Product (GDP) was public spending.  There had been a significant rise since spending bottomed out in 1999.  But, that is nothing compared to what is projected to happen over the next few years.


The Centre for Economics and Business Research have used Treasury figures to show (PDF) that spending is set to hit 50% of the economy in 2010-11.  That is a shocking increase in just a few years.  The picture is even starker, though, when you look at individual regions.  While London, the South East and the East of England continue to have relatively small states - at 40.9%, 40% and 43.7% respectively - many other regional economies are dominated by state spending.


In Wales and Northern Ireland spending is over 69% of regional GDP.  In the North East, that figure is over 63%.   The make up of these regional economies therefore bears a greater resemblance to Cuba, where public spending is around 79% of GDP, than the South of England.


At that level, state spending is likely to be having severe negative effects on the economy, even if it is paid for by revenues elsewhere in the country.  David B Smith, in a paper (PDF) for the Economics Research Council, set out one possible reason:


"One possible political-economy explanation is that being in receipt of transfers is positively harmful to a region’s economic dynamism, because it encourages people to look towards political activism and state dependency, rather than their own efforts in the marketplace. This explanation is entirely consistent with the traditional concept of the rational economic person, who tries to maximise his or her rewards while putting in minimum effort. It may be easier to lobby for a handout than to work a ten-hour shift in a steel mill, for example. There is also the interesting phenomenon that high government spending regions, such as Scotland, Wales and the North-East, seem to produce large numbers of political entrepreneurs, who live off and lobby for a large state, but few of the traditional wealth creating kind these days – compare and contrast the careers of James Watt and Gordon Brown, or George Stephenson and Alan Milburn, for example. Again this is entirely consistent with the predictions of the rational economic behaviour approach, which states that enterprise will be channelled to where it attracts the highest rewards."


As well as entrepreneurs, the best workers are also likely to be creamed off by the state, which can out bid the private sector with higher wages thanks to the subsidy from the South.


Britain's oversized government is paid for by the South of England but it may have its most pernicious effects in the North, Scotland, Wales and Northern Ireland by trapping the most talented and the most unfortunate into dependency on subsidies.

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