Rebalancing the debate about rebalancing the economy – the role of public sector employment

Much of the debate about “rebalancing” the economy has been based on various assertions about the role of public sector employment.

The starting point for the debate is that economies of the cities and city regions of the midlands and north have been over-reliant on the public sector, to the point in some places that it has “crowded out” the private sector. It is clear that in contrast to the pre recession period when increases in public spending boosted jobs and growth in all places, an era of ongoing austerity means that the public sector will continue to shed jobs for the foreseeable future.

The debate is based on an implicit assumption that public sector cuts are hitting all places equally, although they will have a more significant adverse impact on places with lower proportions of jobs in the private sector. However a recent Financial Times article,  London and southeast benefit as public sector job losses show regional divide, reports that public sector employment has only fallen 2.5% in London and the South East, compared to 6.8% across the UK as a whole.

This has led economic commentators scratching their heads for the reason for this geographical imbalance. According to the FT article the Institute of Fiscal Studies said “it was difficult to know why London and the southeast had seen relatively small drops in public sector employment.”

Prof Tony Travers of the LSE provides one explanation: London’s rapidly rising population. For many public services, such as schools and the NHS, spending is allocated on a population basis. Scott Lavery of Sheffield University points to spending on transport, arts and culture that is focused disproportionally on London.

I think there are two further explanations.

First, local government has been hit harder by cuts than the mainly London-based Whitehall departments. And local government in the midlands and north have been hit much harder than Councils in the South East.

Second, even within central Government departments and agencies, more jobs have been lost outside London and the South East. According to the IFS civil service employment in London has fallen by 11% since 2010, compared to 17% across the UK as a whole. Many of the non-London central government functions that have been abolished, such of the Regional Development Agencies and Government Offices for the Regions, had a high economic multiplier. They employed people in high-level jobs, and directed spend into local economies, benefiting supply chains in the private sector (as well as of course realising benefits on the ground).

So what does this mean for cities and regions, and the north-divide in the future?

First, the geography of future public sector job losses will have significant implications. Austerity is here to stay regardless of the outcome of the general election. The Office for Budget Responsibility estimate a further 1 million public sector jobs will be cut in the next parliament.

Second, there would be appear to be a strong case for a more radical approach to relocation of the public sector away from London. The relocation of the BBC to Salford, the Environment Agency to Bristol, the Met Office to Exeter, and parts of the NHS head office functions to Leeds have had huge benefits to those cities. So far, Ed Balls has indicated that this would be a priority for a Labour Government. However the debate has not picked up pace.

Third, there needs to be a more nuanced debate about the role of public sector in the context of “rebalancing” the economy. I think the mantra of “private sector good, public sector bad” (and I speak as someone who has worked in both sectors) is unhelpful. Yes of course we need cities and towns outside London to have stronger private sectors. But we need to recognise that as well providing important services and direct employment, public sector functions (particularly high level ones) create many positive spin-offs that benefit businesses.

Finally, the regional imbalances in public sector job losses strengthen arguments for greater devolution of funding to cities. This is partly about fairness. It is also about effectiveness. The scale of cuts means that we need to drive public sector reform by integrating better policy and investment. Cities, not Whitehall, are best placed to do this, for example achieving integration between areas such as health and social care, and initiatives to end unemployment, skills and employment related benefits. Local people and institutions are better placed to make decisions about their areas than a civil service that has retrenched to its separate silos and its Whitehall base.

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About citypolicy

Interested in what makes cities and regions dynamic, competitive and sustainable. I blog in a personal capacity. I work for Leeds City Council as Chief Economic Development Officer. Previously worked for Arup in their planning, policy and economics practice, and before that for London First.
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