Monday, May 21, 2007

The Political Economy of Fiscal Transfers

Wat Tyler examines fiscal transfers. Using numbers for regional taxation estimated by David B Smith Tyler reckons that the South East is transferring about 8% of its GVA north each year. He then posits that this is some form of electoral bribe by the Labour party. It's a fun argument but I'm not sure that logic can hold.

If you're the Labour party facing a first past the post election system your objective isn't just to amass a massive total of votes at each election, it is to win a majority of seats. That requires some kind of dispersal of votes over a variety of seats. Given that Labour has a massive surplus of votes in many Northern seats and the major electoral battleground is the South of England Labour is either very clumsy in its bribing or it puts in place a regional subsidy for other reasons. Equally, if this was just a bribe to the electorate by the Labour party wouldn't we expect to see more of an attempt to end the subsidy during Conservative governments?

The subsidy won't have existed before the twentieth century as the North-South divide is a creation of twentieth century industrial decline. As the twentieth was a Conservative century can we really explain enduring patterns in public spending purely in terms of Labour electoral advantage?

I would think the problem is most likely a result of a poorly thought out, ad hoc, initial response to industrial decline which became entrenched through chronic path dependencies. At first politicians just couldn't face trying to sell the idea that the North needed private sector recovery and would have to accept a decline in traditional industries, migration to the south and some degree of impoverishment (which would provide the incentive to new industries and migration south) for a time.

However, the spending designed to prevent this hardship, while it masked the problems for a while, made the root cause, the moribund Northern private sector, worse. As the Northern economy fell further behind that of the South it became less and less practicable to reduce the fiscal subsidy being sent north. After all, if public spending were cut from the North now it would have extremely low incomes as private sector activity is very low indeed. A vicious circle.


Jackart said...

I'm slightly nastier about socialism, and I manage to blame Labour for the north's deprivation. Read my Post
on the subject...

Vino S said...

If the North is poorer than the South then it is natural that it will be getting net fiscal transfers from the South. I fail to see what is particularly outrageous about it independently of the general preference for you guys on the right to reduce state aid to the poor.

Matthew Sinclair said...

Like I said, because it gets in the way of a genuine, private sector Northern revival. If everyone up North is working for the public sector wasting the Southern subsidy they're not rebuilding the private sector. It becomes a very real vicious circle. The money eases the temporary pain but prevents a revival.

Vino S said...

You claim there would be a hypothetical revival in the private sector if state spending was less. I do not believe this would be the case. In fact, if the state spends less there, there could even be a downward spiral as consumers have less to spend and so retailers etc go out of business. I also wonder whether some of the dislike expressed by some of the bloggers for public spending in the North is because they want to cut it to 'punish' the north for voting Labour.