Are You Valued Where You Live?
8 November 2006
Economist Professor David B Smith.
Local and regional policies should be adopted to take account of market variations.
”David B Smith, Visiting Professor of Business and Economic Forecasting at The Derbyshire Business School.
‘Does Britain have regional justice or injustice in its government spending and taxation?’ That’s the question political economist Professor David B Smith set out to answer when he embarked on his thorough analysis of the real cost of living and working in different parts of the UK.
His conclusions indicate that Southern England bears a disproportionate share of the cost of the state, and high government spending in northern parts of Britain has had the unintended effect of encouraging joblessness and a culture of dependency.
Professor Smith is calling for a shake-up of government taxation and spending – and even the re-examination of our whole political system – to crack a growing divide which may threaten eventually to break up the UK.
This unsettling new analysis by the former City economist, Visiting Professor of Business and Economic Forecasting at the University of Derby’s Derbyshire Business School, has examined a wide range of regional data to reveal big structural inequalities.
Using Office for National Statistics (ONS) figures only recently made available, Professor Smith has found that the failure to allow for regional differences in living costs and productivity means taxation and government spending in Britain may backfire and do more harm than good.
Professor Smith said: “Dissatisfaction with large scale injustices generated by the combination of an onerous and complicated tax system and startling economic variations between different places could eventually threaten the political cohesion of the United Kingdom.”
His analysis found that more productive regions – mainly London, the South East and the East of England, which also have the highest living costs – unfairly subsidise those places where cash output per capita is low. This tends to stifle enterprise when areas become over-dependent on government funding.
London, the South East and the East of England together account for almost 42% of UK GDP (Gross Domestic Product) but have a combined government spending burden of only 34% of the market-price measure of GDP.
Professor Smith states that this “is consistent with the views of economists who have argued that there are almost no welfare gains from pushing government expenditure beyond the 30-35% mark. It’s the second lowest spending ratio of all OECD (Organisation for Economic Cooperation and Development) members after South Korea!”
We all know that it’s cheaper to live in certain parts of the UK than others. But according to Professor Smith’s research the ‘money illusion’ embedded in the current UK system of tax and government spending – which does not allow for the marked regional differences in prices and productivity – makes life difficult for nearly everyone.
These findings will be presented for the first time at a free Inaugural Lecture at the University of Derby’s Kedleston Road Campus in Derby on Wednesday November 8 starting at 6.15pm. The talk is essential for anyone interested in how we're taxed, how that revenue is spent, who benefits, and whether public spending – like unlimited free alcohol – can end up harming rather than helping its intended beneficiaries.
For the purposes of his Inaugural Lecture, Professor Smith extracted information from his wider analysis to focus on the East Midlands and Derby. It indicates that the East Midlands represents a useful midpoint between more extreme UK variations. For example, regional Gross Value Added (GVA) per head is 42% higher in London than in the North East (when adjusted for cost-of-living differences), while the North East attracts higher public spending.
As people start to feel the pressure of these differences regional rivalries could open up.
“As a City economist I spent a lot of time in Continental Europe,” said Professor Smith. “Examining the political situation in different countries, I saw strong secessionist pressures build up once the tax and benefits systems became perceived as unjust by national regions with distinctive cultural identities. This process can be observed, for example, in the rise of the Northern League in Italy, the ‘velvet divorce’ between Czechs and Slovaks, and the recent rise of secessionist tendencies in Catalonia.”
“The current system is indefensible and has become much worse in the past ten years,” he says. “As the State becomes larger and more complex, less attention seems to be paid to true regional variations in the economy.
“We probably have the most centralised system of any country I’m aware of,” says Professor Smith. “The individual voter is becoming more and more remote from the decision making process. In order to ensure a more stable system, a strong link needs to be established between political representation and taxation at the local level. Many of the current functions carried out by central government should be devolved downwards.”
From his conclusions Professor Smith suggests a number of steps that could be taken to correct discrepancies that currently exist:
- An alleviatory approach could see the introduction of a flat-rate income tax system, the raising of thresholds for death duties, and the abolition of retrospective taxation in the top bands for Stamp Duty and Death Duty (where crossing over a threshold suddenly means that the highest rates apply over an entire transaction).
- Welfare benefits could be corrected to allow for local living costs, and public sector wages could become locally negotiable. “London is short of teachers,” says Professor Smith, “while North Wales attracts an average of eight applicants per job. We’re not pricing according to local markets in any dimension.”
- Finally it would make sense politically to devolve responsibility for taxation and spending to more local levels and adopt a more federal approach akin to US, Australian, Canadian and Swiss models. “The devolved Swiss system of Cantons represents a pure ‘bottom-up’ system with each individual having political power that they ‘lend’ to their political representatives,” says Professor Smith. “Local and regional policies take account of market variations.”
The results of this study have far reaching implications for us all and pose many questions that call for further research and investigation.
The Inaugural Lecture is free and includes refreshments after the talk. It takes place in the Court Room (OL2) at the University’s Kedleston Road Campus in Derby on Wednesday November 8 at 6.15pm. To reserve your place, please contact Angela Drinkwater, Events Coordinator, on 01332 591046 or email a.drinkwater@derby.ac.uk.
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For further media information, contact Simon Butt, Press and PR Officer, on 07748 920023, 01332 591891 or via email on s.butt@derby.ac.uk. Professor Smith will be available for interview by prior arrangement. He can be contacted on 01923 897855.
Notes to editors:
David B Smith studied Economics at Trinity College, Cambridge, and the University of Essex in the 1960s. He has since been employed at the Bank of England, Royal Bank of Scotland, National Westminster Bank, Cambridge Econometrics, and the London Business School. He was the Chief Economist at London stockbrokers Williams de Broë plc from 1982 until his retirement in July 2006. David is currently a Visiting Professor in Business and Economic
Forecasting at the University of Derby, Acting Chairman of the Shadow Monetary Policy Committee run by the Institute for Economic Affairs (IEA), and a visiting lecturer at the Cardiff University Business School. He was also a member of the Economics Board of the Council for National Academic Awards in the late 1970s and early 1980s. David has written articles on economic forecasting, economics websites, monetary economics, and European Monetary Union, as well as on public spending and economic performance. He is perhaps best known for his quarterly macroeconomic forecasting model of the international and UK economies, which he developed from the early 1980s onwards, and is now maintained by Beacon Economic Forecasting.
