A vision for the North … from the Chancellor

The Chancellor has delivered what must be called a brave speech delivering a vision for the North and future economic prosperity.  I mean it when I say it is worth reading.  I was challenged to read it on the same day I chose to open my sparkling new copy of Overman, Nathan and Cheshire, “Urban Economics and Urban Policy“.  Three strong academics, writing on a fiddly yet important topic; yes, it is worth reading too.

Wouldn’t life be neat if the latter text instantly refuted the speech? But it isn’t. On first glance, Osborne’s speech deserves more consideration.

It is interesting for what it misses out: it doesn’t take pot shots at the RDAs.  The phrase “Labour” is only there in the context “labour market”.  Missing too are killer phrases like “Prezza” or even “Derek Hatton”.  It isn’t full of low blows. And while in other speeches and press releases you can read the usual tired litany blaming Brown and Borrowing for everything, it is missing here.  At the most he just has a dig at trying to keep a place afloat on public sector jobs.  Fair enough.

He is clearly interested in the microeconomics of this topic.  Or at least his advisers are.  I was tweeted a reminder that one of them has gone deeply into this.  At the core is the assertion that size/agglomeration effects are important. I believe this is a view strongly associated with his close friend Paul Krugman.   The whole HS3 thing seems to be an attempt crudely to gain more agglomeration effects.

He gives four ingredients.  You may question how robust they are.  Me, I have 200 pages of Overmans et al before I really know.  They are:

By joining our northern cities together – not physically, or into some artificial political construct – but by providing the modern transport connections they need; by backing their science and universities; by backing their creative clusters; and giving them the local power and control that a powerhouse economy needs.

Some might sneer at the “massive investments” in the North, given this sort of criticism in the Guardian about the thousands more that London has got.  Overmans has a decent answer to this:

“as Ed Glaeser has observed, places which have seen declining or low population growth usually have relatively high per-capita infrastructure stocks. [As evidence of this, note that journey times and congestion levels are significantly lower outside of London and the South East]. If this is the case, then further investments in transport will experience decreasing returns and won’t do much to increase growth. “

I cringe slightly at the “backing science/getting behind clusters” part.  Science frozen in real terms is only a stupendous result in relative terms. What has happened to Further Education may be more important; I cannot say with my microeconomic base.  I can observe that if half the money spent on CT cuts had gone to science, we would have a whole lot more shiny science projects like the ones the Chancellor listed.  A clear choice was made, despite this eager interventionism.  I suspect the theory behind the sort of cluster creation represented by Salford is spotty, and the idea of a tax credit to boost theatre in order to make the whole area more attractive to the great innovators and entrepreneurs seems rather clumsy.  I doubt it will hurt or cost much.

Something else that is interesting is a missing word: tax.  The last section of the speech is about delivering power to the regions.  When he says he will look at devolving budgets, would that mean more tax raising powers?  More ability to borrow?  In short: treating the great cities away from London like grown ups? Giving local politicians that sort of skin in the game is risky. The Treasury’s first stab, a small Single Pot (stripped from the Whitehall departments so there was no overall hit to the Exchequer) was underwhelming. Such risks are necessary if you want these Cities to be the growth-seeking tigers they need to be. I am very sure that the Treasury will be nervous, or worse. Look how small and seemingly ineffective the New Homes Bonus was. What would a proper local income or property tax do to their nerves?

This agenda, of delivering real power and responsibility to Cities, may be one that outlasts the Coalition, like the Heseltine report, and survive considerable party political negativity (if Labour can unite on it).  But it needs real money, the willingness to take the risks intrinsic to localism – in other words, some tougher choices.  And I doubt my early optimism will survive too much contact with the difficult realities in this still new book.  But this doesn’t feel like a bad start.