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Is levelling-up a fulfillable economic policy?

Updated: Nov 24, 2020

Boris Johnson wants to 'level-up' regions of the UK and drive prosperity - is it possible?

 

In recent times, one of the main economic agendas being communicated out of Boris Johnson’s conservative government is the necessity of ‘levelling-up’, whereby nationwide regional inequalities are dampened by the reallocation of investment and public service spending (Zaranko, 2020). This may be achieved by pursuing targets such as greater transportation infrastructure investment, which aims to reduce the disparity in productivity between areas with significant socioeconomic gains over those ‘left behind’ (Talbot and Talbot, 2020)] by creating the opportunity for more geographical mobility within an occupation, raising the prospective income of a region’s inhabitants. This follows on from Boris Johnson’s promise to ‘unleash Britain’s potential’ (Johnson 2020) after the United Kingdom’s exit from the European Union, and his government is clearly eager to deliver on those promises given the failure to deliver many others in recent memory.


In 2017, the OECD (Organisation for Economic Co-operation and Development) published revised figures for the Gini Coefficient, a metric for income disparity within nations that takes into account taxation levels and earnings (OECD, 2020a). Also known as the Gini Ratio, the measure is widely considered to be one of most complete indications of whether nations are rife with inequality or run on egalitarian values. The United Kingdom scored 0.35 on the Gini Coefficient, meaning that relative to other countries within the intergovernmental organisation, the UK suffers from a grave capital distribution problem (OECD, 2020b). It is in the best interest of both Downing Street and the wider economy to reduce this disparity, and create nationwide prosperity stretching from Northumberland to Cornwall. Despite opposition from government spending sceptics, many pro-government economists see ‘levelling-up’ as a perfect way to demonstrate the true transformative power of economic resource allocation.


The UK government can ‘level-up’ regions via several different practices that have the potential to ensure a more equal distribution of wealth, and the diffusion of inequalities. One preferred option is to invest significantly in the infrastructure of many deprived and neglected areas that historically have been put on the shelf in terms of investment, such as the North-Eastern counties of England. The need to level-up in this way is easily shown through figures related to transport investment, and treasury figures as recent as 2019 have shown London receives and two-and-a-half times more in transport spending than areas in the north of England, despite the requirement for such facilities to be in place (BBC, 2019). There is of course an argument for this, and it is a reasonable one. In 2016, Londoners provided £3,070 more in taxes than they received in public spending. This supports the idea of higher investment for productive areas, as their larger tax contributions subsidise the rest of the UK when it comes to their respective public spending (Elliot, L 2020). This then poses an interesting question. Like the chicken and the egg, does higher productivity and incomes (indicated by larger tax contributions) lead to larger transport investment, or is greater transport spending a prerequisite for a thriving local economy that can provide greatly in contributing towards other deprived areas? If the answer is the latter, then the case for levelling-up becomes an even more attractive prospect. However, it is of course necessary to consider the implications of either increased government spending, or a reallocation of current resources when trying to facilitate such nationwide prosperity as is desired.


In order to make ‘levelling-up’ possible, there must be dramatic change in government spending policy that facilitates investment to occur on a wider scale whilst retaining its efficacy when implemented. One strategy that the UK government could pursue is the creation of a central body that has near total dominion over the methods used to spend the additional investment. This central body would ideally be made up of economists and social scientists that could investigate and identify the reasons behind regional disparities in order to reach an impartial and justified conclusion as to how capital should be allocated, in order to reach an omni-positive outcome for society. Free from the influence of different economic schools of thought, by using empirical data to determine where and how such investment should be assigned, maximum efficacy and minimal waste can be achieved. No radical theories driven by divisive partisan agendas – just impartial decisions driven by rigorous economic analysis. Where to find such examples to be extrapolated and assimilated into public investment decisions? In order to undertake such a transformative and reinvigorating project, we must draw on arguably the most rich and expansive reserve of intellect available – the ‘knowledge commons’. Garrett Hardin’s original concept of the ‘commons’ has evolved throughout economic history, and in the present day we are presented with a plethora of academic information for uses better or worse. In the case of the UK government, fully utilising the knowledge commons will undoubtedly bear fruit, giving an idea base that far transcends the creativity and brilliance of highly qualified government academics. The proposed impartial central body already exists in some format as the UK Behavioural Insights Team. Whilst having already contributed valuably to government operations using behavioural economic theory and heuristics (UKBIT, 2020), it may be somewhat premature in becoming a taskforce capable of pioneering macro-economic change, especially a task as mammoth as creating nationwide prosperity. If this initial hurdle of political rivalry and ideological loyalty can be put aside, then the path is clearly paved to move into the main issue at hand – successful re-allocation of capital, or alternatively the sourcing of additional resources.

In an ideal world, the resource pool of the UK government is plentiful and superfluous. Unfortunately, the very real truth is that the resource pool is overexploited (OBR, 2020), leading to many regions experiencing chronic underinvestment and the inevitable privatisation of many UK industries. To this end, in order for ‘levelling-up’ to be a fulfillable objective, Downing Street must look for alternative sources of finance, or reallocate their current resources away from inefficient and antiquated enterprise and towards endeavours with the raw potential to make a discernible difference in the lives of citizens nationwide. The boldest approach to sourcing the requisite capital is through taxation, or specifically the more rigorous enforcement of it. Stemming from the archaic feudal system many centuries ago, large organisations and corporations have been given the unobstructed opportunity to exploit otherwise obscure legal loopholes that allow a lower level (if any) of tax to be contributed than is required of them by law (Miller, 2016). This systemic contradiction between the multinational firms’ contributions to the economy and the underinvestment they cause through tax avoidance is damaging, but not irreparable. The incentive is simple. Protect profits by paying less tax. Any government around the world has no trouble understanding the incentives a large corporation has, but seldom act on this understanding to maximise their tax revenue. Borne of Ronald Reagan’s promise as US President to increase public spending whilst keeping tax demands at least stagnant (if not lower), voodoo economics has been a key player in fiscal policy theory mainly in the US (CFI, 2015-2020). Voodoo economics is best illustrated by the Laffer Curve, a descendant of 14th century Islamic mathematical models (van Brederode, 2009). When the taxation levels are at both 0% and 100%, it is assumed no tax revenue is collected, leaving somewhere in between representing tax revenue optimisation, for both consumers and corporations (Feige, Edgar, McGee, Robert, 1982). In the case of financing the UK’s increased budget deficit in funding this audacious project, corporations must be subject to a readjustment of taxation rate. A paradoxical solution to the problem of non-compliance is therefore to lower the levels of taxation corporations are subject to, or even offer additional benefits to compliant firms in the shape of subsidies that further reinforce the rhetoric of ‘levelling-up’. The altering of incentives means firms have much more to gain by being compliant with HMRC, and thus a mutually beneficial relationship is reignited. Estimates vary for how much tax revenue is lost through avoidance and evasion, but there is a consensus of around £7 billion per year. This does not include the tax revenue left uncollected, which totals £35 billion when incorporating the previous figure (Turner, 2019). This systemic failure is chronic, but the issue is simply too deeply rooted to be castigated with thorough analysis in this essay. It should not be overlooked how a ‘goldilocks zone’ of incentives will be of great importance if the far-sighted goal of ‘levelling-up’ is to be realised. This additional tax revenue will not only serve greatly in incrementally improving the infrastructure, education, and availability of opportunities within regions across the UK, but also as a great mediator of weening the UK from EU support, improving independency and prosperity nationwide.


In conclusion, the policy objective of ‘levelling-up’ is one that is both transformative and entirely achievable. However, the fate of such a policy rests heavily on the shoulders of governing bodies and their ability to act efficiently and be centrally driven towards a goal of nationwide economic prosperity. The age of myopic and hastened policy is over, and it is now time to rebuild our regions with egalitarian values – not competitive ones driving inequalities further.


REFERENCE LIST


BBC. (2019). Transport spending in north of England less per head than London. BBC News. 1 (1), para. 1.

Corporate Finance Institute. (2015-2020). Voodoo Economics. CFI Economics. 1 (1), para. 1.

Elliot, L. (2017). London economy subsidises rest of UK, ONS figures show. Guardian Economics. 1 (1), para. 4.

Feige, Edgar L.; McGee, Robert (1982). The Unobserved Economy and the UK Laffer Curve. 3 (1). The Journal of Economic Affairs. 36-42

Johnson, B (2020). Brexit address to the nation [Online]. 31/01/2020, 10 Downing Street. Available from: https://www.youtube.com/watch?v=hdYNcv-chgY

Zaranko, B. (2020). Levelling up: what might it mean for public spending? Institute for Fiscal Studies Publications. 1 (1), para. 5.

Talbot, C and Talbot, C. (2020). What does the government mean by levelling up? Civil Service World: In Depth. 1 (1), para. 2 & 3.

OECD. (2020). Income inequality (indicator). OECD Data. 6 (1), para. 1.

OECD. (2020). Income inequality (indicator). OECD Data. 6 (2), Figure 1.

Office for Budget Responsibility. (2020). Press Notice. Fiscal Sustainability Report. 1 (1), para. 2.

Turner, G. (2019). Billions are being lost due to tax avoidance. Independent Voices. 1 (1), para. 2.

UKBIT. (2020). About Us. UK Behavioural Insights Team information. 1 (1), para. 1.

van Brederode, R. F (2009). Systems of general sales taxation: theory, policy and practice. Austin [Tex.]: Wolters Kluwer Law & Business. p. 117.







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