As a student bartender I once cheerfully announced to a customer that his was the first pint of the day. I could not understand why he looked less than thrilled! Back to that in a moment, but first, in other ‘catering’ news, the UK Prime Minister Boris Johnson set out his plans for Levelling Up the UK, and made the point that it was not a “jam spreading operation”, i.e., prosperous areas would not be depleted to pay for the development of their less affluent neighbours.
Mr Johnson cast an envious glance at Germany, which has been so successful in levelling up its post-reunification economy that the former East Germany now has a higher GDP per head than North East England, Wales or Northern Ireland.
A taste of German jam
In reality, the economic redevelopment of the former East Germany required a lot of West German jam. Through its Solidaritätszuschlag (a ‘solidarity surcharge’ of between 5.5% and 7.5%), German taxpayers have footed a bill that has run to some two trillion euros over three decades.
With the public purse already stretched by the pandemic, such fiscal largesse is unlikely to be recreated in the UK. The challenge for the UK government is to leverage its more modest resources to get the most bang for its buck. This is where private investment comes in.
Private investment and the role of government
Public Private Partnerships (PPP) have not always enjoyed the best reputation, particularly where they have been used to keep debt off the balance sheet, but at an ultimate cost to the taxpayer. However, there are two legitimate roles for government in facilitating private investment in regional development:
- to help overcome market failure in the form of informational asymmetry: lesser-known locations and investment opportunities may not be on the radar of (particularly international) investors, even though they present profitable opportunities
- to perform an icebreaker function, i.e., to subsidise, or mitigate the risk for early private investors, clearing a path for more private investment to follow.
Which brings me back to bartending. No one really wants the first pint of the day because there might be something wrong with it! But once the beer is freely flowing, everyone wants to join the party. As with beer, so with investment. Being the first to invest in a lesser-known location may carry extra risk and certainly requires extra work in terms of due diligence. A helping hand from government might be just what is needed to start investment flowing.
It is hard to see how this can be achieved without any ‘jam spreading’, but the hope is that in the long run, the benefits of levelling up accrue to everyone, including the taxpayer. Many details of the Levelling Up agenda remain to be fleshed out and the ‘left-behind’ regions of the UK will be watching closely in the coming months to see whether these plans amount to more than ‘jam tomorrow’.
