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'Soviet’ Britain swells amid the recession
Abul Taher
Sunday Times
http://business.timesonline.co.uk/tol/business/economics/article5581225.ece

PARTS of the United Kingdom have become so heavily dependent on
government spending that the private sector is generating less than a
third of the regional economy, a new analysis has found.

The study of “Soviet Britain” has found the government’s share of output
and expenditure has now surged to more than 60% in some areas of England
and over 70% elsewhere.

Experts believe the recession will tighten the state’s grip still
further as benefit handouts soar and Labour directs public sector
organisations to create jobs to soak up unemployment.

In the northeast of England the state is expected to be responsible for
66.4% of the economy this year, up from 58.7% when a similar study was
carried out four years ago. When Labour came to power, the figure was 53.8%.
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The northwest has seen a similarly relentless advance by the state,
according to the research commissioned by The Sunday Times from the
Centre for Economics and Business Research (CEBR).

“Labour has failed to encourage private sector investment across the
country. Instead of supporting enterprise and small businesses, Gordon
Brown has used the public sector to cover up his failures,” said Theresa
May, the shadow work and pensions secretary.

The CEBR reached its estimates for 2008-9 by applying the 6.68% state
spending increase announced in November’s prebudget report evenly across
the country, although in practice some regions will receive more than
others.

Across the whole of the UK, 49% of the economy will consist of state
spending, while in Wales, the figure will be 71.6% – up from 59% in
2004-5. Nowhere in mainland Britain, however, comes close to Northern
Ireland, where the state is responsible for 77.6% of spending, despite
the supposed resurgence of the economy after the end of the Troubles.

Even in southern England, the government’s share of spending is growing
relentlessly. In the southeast, it has gone up from 33% to 36% of the
economy in four years.

The state now looms far larger in many parts of Britain than it did in
former Soviet satellite states such as Hungary and Slovakia as they
emerged from communism in the 1990s, when state spending accounted for
about 60% of their economies.

Large-scale layoffs in the northeast will mean a rise in benefit
payments. Newcastle-based Northern Rock was nationalised last year and
has shed 1,500 jobs. Nissan announced three weeks ago that it was to cut
its workforce in Sunderland by 1,200.

Many are finding new jobs in the public sector, according to One North
East, the state development agency.

One of the biggest public sector employers in the northeast is the
Department of Work and Pensions, which employs 13,400 there, hundreds of
them in jobcentres.

“It’s not that the public sector in the northeast is too big, it is that
the private sector is too small,” said Malcolm Page, deputy chief
executive of One North East. “The decline of traditional industries in
the past means we need to establish more big private-sector companies in
the region.”

Latest figures from the Office for National Statistics show that since
Labour came into power in 1997 jobs in the public sector have swelled by
more than 500,000. In 1997, more than 5.1m people were employed in the
public sector. The figure for 2008 is 5.7m.

However, Vince Cable, the Liberal Democrat Treasury spokesman, said that
the state’s grip on the regions was likely to soften the impact of
recession there.

“Newcastle and areas like that have a large public sector which will at
least shield traditionally very depressed areas from the battering that
southeast England is going to get.

“In the long term we need to do something about it. This does suggest
the crowding-out phenomenon of the private sector and it also suggests
there is a lack of entrepreneurial activity.”