Hamish McRae: George Osborne must help the North by removing stumbling blocks

Rebalancing: George Osborne has outlined plans to revive northern England (Picture: Reuters)

18 May 2015

It is a good slogan — Northern Powerhouse — but is it real?

George Osborne will doubtless tell us more about his vision for reviving northern England’s economy in his stability budget on July 8, but meanwhile he has appointed a minister, James Wharton, MP for Stockton South, to take charge.

He has also appointed Jim O’Neill, the former Goldman Sachs chief economist, to the post of commercial secretary in the Treasury with the task of driving power out to the regions.

They look good appointments. Wharton is a local, in that he was brought up in County Durham and went to Durham University. Just 31, he was first elected in 2010 and increased his majority this time.

Lord O’Neill, as he is now, is a Mancunian who will be familiar to many for having coined the acronym, the Brics, to encompass the four largest emerging economies, Brazil, Russia, India and China and as one of the Red Knights who tried to by Manchester United.

Those of us who know Jim, however, probably admire him as much for his grounded common sense, as for his coinages. He has been someone who has got big economic calls broadly right, unlike some other economists.

But good appointments do not by themselves assure policy success. Any rebalancing must be welcome — welcome for London and the South-East as much for the North.

This is partly because there is excessive pressure on the infrastructure of the South and some spare capacity in the North, as you see in property prices. But if there is an economic case for seeking to rebalance, there is also a social and political case.

The trouble is: policies up to now have been pretty unsuccessful. For example, one policy pushed by Labour has been to relocate government offices out of London, as well as making the BBC move much of its work to Salford.

Insofar as you can cut costs by moving to cheaper locations this makes sense. But public sector pay scales lead to another problem: moving what are relatively well-paid public sector jobs into a low-wage area sucks talent into the public sector, actually making it harder for local businesses to recruit staff. Short-term the policy helps; long-term it has perverse effects.

Put it this way: we have had 30 years of efforts to narrow the North/South gap and although there are specific success stories the overall gap has, if anything, widened which suggests that a new approach is needed.

George Osborne’s pitch is two-fold. One is to give local municipalities, headed by local mayors, much more power. If you want more power, you need a mayor.

In principle it sounds attractive, but we will have to see whether what sounds good will work. You could claim it has worked in London, though the turnaround in the capital started before the city got its first mayor.

Abolishing the Greater London Council appears to be the decision that triggered London’s growth, though it would be a stretch to claim it was direct cause and effect.

The other part of the plan is to improve infrastructure, particularly east/west links. The band between Liverpool and Hull has 10 million people — huge. But it cannot function as a single agglomeration as it is so hard to get from one side to the other.

It takes at least two-and-a-half hours to get from Hull to Liverpool by train, whereas it takes an hour-and-a-half to do the same distance between London and Birmingham.

One of the many arguments against HS2 is that it will increase London’s advantage over the North by extending its commuter region, without doing anything for at least a generation about northern links.

To his credit Lord O’Neill is sceptical about HS2, but then he understands the concept of opportunity cost — the cost of the projects you have to drop because you are putting all the resources into one particularly expensive one.

You would have thought that politicians would have learned that resources are finite after the experience of the past five years, but maybe not.

So what can governments do? As a general principle, economic policies are successful when they reinforce existing success, and there are plenty of examples of that.

Higher education is one: Manchester University is now the largest in the land, and there are other chunks of excellence elsewhere. The creative industries, financial services, sport (some of the great global football brands of course), and too oft forgotten, top-end manufacturing.

The trouble is that much of what governments can do, at both local and national level, is removing roadblocks rather than pulling policy levers and expecting things to happen.

Politicians like opening hospitals and factories; helping half a dozen small businesses get off the ground does not make such good headlines. But that is where the future lies, and the starting point is not bad at all. If anything the North seems to have been growing faster than the South in recent months.

There are stories of the ambitious young avoiding London because of its housing pressure, and if this means business start-up rates in the North climb, that would be good news indeed — for London, which benefits from a successful hinterland, as well as the North.

Hamish McRae: George Osborne must help the North by removing stumbling blocks

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