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Happy new year to all readers!
It may not be quite waiting for Godot. But more than two years after the UK government was elected on the flagship promise (next to Brexit) of “levelling up” the country’s unconscionable regional inequality, there is not much flagship policymaking to show for it.
Prime Minister Boris Johnson has belatedly put some of his party’s most competent politicians on the dossier, and the Labour opposition did the same ahead of the expected publication of a levelling-up white paper. Yet that paper was delayed into the new year — for the ins and outs, read a new blog post by the Institute for Government’s (and former FT colleague) Gemma Tetlow. Maybe the paper will surface by the halfway mark of this parliament’s maximum five-year lifetime.
While we wait, however, regular readers will remember that regional inequality is one of Free Lunch’s favourite interests. So let us start the year by suggesting some ideas I would contribute to the government if I were asked.
It is surely fundamental to be clear about what it is that should be levelled up: it is productivity. Territorial inequality of productivity is the core problem; it is what causes an inequality of incomes that can only partly be remedied by redistribution. It also suggests an enormous amount of waste — if lagging regions could close at least some of their productivity shortfall, a lot of prosperity would be gained.
Productivity depends on many things, including slow-to-acquire resources such as infrastructure and skilled labour. But it also depends here and now on productive businesses choosing to expand, and on businesses generally to shift into higher-productivity production practices. That is most likely in a “high-pressure economy”, where confidence about demand growth makes businesses compete for workers and capital — a competition those who can use it most productively are primed to win. Levelling up will happen, if at all, in a high-pressure economy, so here are three measures to ensure one:
Run the macroeconomy hot: let fiscal and monetary policy remain stimulative for as long as it takes to create booms in left-behind parts of the economy and not just at the centre.
Smooth the reallocation of labour from unproductive to more productive activities by making it easier for people to leave bad jobs and look or prepare themselves for better ones. That requires an immediate support system for job seekers and job switchers with little or no savings to carry them through the time it takes to retrain or search for better jobs, so that tight household budgets do not trap people in bad ones.
Boost investment incentives. Allow full expensing of investment costs for businesses, or even make the “superdeduction” — where you can deduct more than 100 per cent of investment expenditure from taxable income — permanent.
Admittedly, these policies affect the entire national economy — albeit hopefully with more strongly positive effects for places that are lagging behind. They need to be complemented by place-targeted policies to address regional productivity shortfalls directly. Here are two:
Finally, productivity depends on capital being invested in higher-yielding, risky business ventures. Indeed, while lagging-productivity areas could potentially be rewarding to investors — since the catch-up growth potential is big — they are also risky. Their success depends on a lot going right at the same time, from policy, to capital being attracted, to local entrepreneurship not being frustrated. How can we ensure that capital does not flee left-behind areas but flows to them? Two ideas:
Cure the tax system of its bias towards credit financing and make it treat equity just as favourably as debt. In addition, build institutions to channel equity capital towards lagging regions — perhaps local “intangibles investment trusts” as 21st-century versions of local community banks.
Shift the taxation of capital towards a net wealth tax, which rewards more productive investments better than profit taxation. And if great fortunes are disproportionately held by people who live in rich areas, a progressive net wealth tax should over time ensure a wider geographical dispersion of private wealth. That would build up deeper local pools of capital.
We will no doubt return to this when the white paper finally comes out, so stay tuned.
“Learning to live with the virus” does not mean acting as if the pandemic does not exist, I argue in my FT column this week. Instead, it means preparing for this virus — or other viruses — to stay around permanently, and planning ahead to be able to introduce emergency regimes quickly but for a shorter duration.
The European Commission has proposed that both nuclear energy and natural gas can be labelled “green” in its new taxonomy for green finance, under strict conditions to ensure nuclear waste is handled responsibly and gas is merely a transition to zero-emissions power. German and Austrian Greens are up in arms against including nuclear; the FT leader column welcomes the proposal with some reservations.
Do not forget that Russian president Vladimir Putin has already invaded Ukraine.