speri.comment: the political economy blog

The state of the regions

The link that previously connected finance-led growth at the core and public sector employment at the periphery of the British political economy is unravelling

Scott Lavery, SPERI Research Fellow

Scott LaveryThe British economy appears to have returned to the debt-led growth model which was in place before the crisis.  Asset-price inflation continues, with property prices rising in London by 18% in the past year.  Relatedly, household debt remains very high at 135% of income, just 5 per cent short of its level ten years ago near the height of the boom.  Additionally, the ‘wage share’ – the proportion of national income which goes to labour – has continued to decline, deepening the distributional inequities which characterised Britain’s  growth model in the pre-crisis period.

Does this mean that we are witnessing a simple return to the economic model which failed so spectacularly in 2007-8?

Nationally aggregated statistics do suggest that the old ‘Anglo-liberal’ growth model is firmly establishing itself once again in the post-crisis period.  However, it is important to note that subtle shifts in the organisation of British capitalism have also taken place since the crisis.  These changes are particularly evident if we move our focus away from the national level of analysis and look instead at the state of the British regions.

Britain’s growth model has been described as an example of ‘privatised Keynesianism’.  As wage growth slowed relative to productivity increases, aggregate demand was increasingly buoyed by the rapid extension of credit to private households and firms.  As a result, private debt ballooned in the 1990s and 2000s, fuelling consumption and the expansion of the financial services sector in Britain.  It was this reliance on private debt which rendered the British economy particularly vulnerable to crisis in 2007-8.

Nevertheless, throughout the pre-crisis period state agency remained very important.  Although private debt and deregulation were certainly central in driving growth, public expenditure and state intervention remained crucial in stabilising and reproducing this dynamic across Britain’s uneven economic landscape.  For example, in New Labour’s second and third terms, public expenditure increased in real terms by almost 50%. The majority of this spending was targeted at health and education, with these sectors experiencing a 6.5% and 5.2% increase in their budgets year-on-year from 1998-2008.

The result was a significant growth in public sector employment, particularly in Britain’s ex-industrial regions.

In addition, rising public expenditure fuelled a growth in what CRESC has termed ‘para-state’ employment.  Official statistics on public sector jobs include only those workers directly employed by government.  However, many services – refuse collection and care work are examples – have been increasingly contracted out to private sector firms which nevertheless remain largely dependent on public funds.

CRESC has developed a measure which accounts for the growth of such publicly-funded ‘private sector’ jobs.  Its research shows that 57% of new jobs across Britain from 1998-2007 were in the ‘state or para-state’ sector.  This calculation found further support from Andrew Glyn, who argued that from 2000-03 around 550,000 jobs were created in Britain’s private sector as a direct result of public spending.

Such employment has become crucial in Britain’s ex-industrial regions.  For example, in the North-East, 73.1% of net job creation was concentrated in the state and para-state sector under New Labour.  In Yorkshire the figure was 66.8%.  In the West Midlands, state and para-state employment accounted for 176% of net jobs growth, as state funding filled in for an overall decline in private sector employment over this period.

State-led employment growth therefore played a crucial role in temporarily stabilising the uneven development of the British economy throughout the 1990s and 2000s.  It allowed for a degree of ‘revenue recycling’ from Britain’s finance-led core outwards towards peripheral labour markets.  In effect, and for a period, this settlement ensured some complementarity between finance-led growth and regional development.

But that was then and this is now.  Today, this regional settlement is rapidly unravelling.

The Coalition government’s pursuit of austerity has the explicit aim of reducing public sector employment, and this has led so far to the loss of 631,000 jobs across the public sector.  These job losses have been disproportionately concentrated in Britain’s ex-industrial regions. The government claims that breaking this regional reliance on the public sector is a positive move because it will unleash an ‘entrepreneurial spirit’ in areas which have for too long been reliant on the dead hand of the state.

The problem, though, is that, structurally, these regions stand at a comparative disadvantage relative to the British ‘core’ regions and are therefore poorly placed to attract investment into high-skill sectors.  For example, there has been a substantial increase in the ‘professional and scientific activities’ sector in recent years across Britain.  However, 56% of employment growth in this sector has been captured by London and the South-East.  Similarly, financial service employment has declined since the crisis in every region – except in London where it has increased by some 17,000.

In spite of this, headline figures might suggest that certain regions are successfully making the transition from ‘public’ to ‘private’ jobs.  In the North-West, for example, job creation in the private sector outstrips jobs losses in the public sector.  However, on my calculations using the Workforce Jobs Survey, the ratio of part-time to full-time jobs created in this region from 2008 onwards is 4:1.  This is a very striking figure and reflects a broader trend – which is that headline ‘positive’ jobs figures often conceal the growing insecurity and precarity of regional labour markets.

The harsh truth is that Britain’s political economy remains deeply imbalanced.  For a period of time, the expansion of public expenditure and state-led job creation alleviated some of the tensions and contradictions associated with Britain’s unevenly developed growth model. However, it increasingly looks as if that settlement is a thing of the past.  Britain’s model of privatised Keynesianism is ascendant once again, but the fragile link that previously connected finance-led growth and peripheral employment is unravelling.  Whether this shift is socially and politically sustainable in the long term remains an open question.

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Categories: British growth crisis, Economics, Finance, Housing, SPERI Comment | Tags: , | 1 comment

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Comments (1)

  1. An excellent analysis ; doesn’t auger well for Sheffield and the rest of the post industrial northern cities though!

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