The government’s Regional Growth Fund aims to stimulate private sector growth and employment. Henry Overman comments that while the programme looks like it may be effective on paper, it may well be a case of ‘destroying jobs’ through taxes and borrowing, in order to create new ones. More details are needed.
The government has announced the first round of projects that will be supported by the Regional Growth Fund (RGF). We are told that: “The government will invest £450million RGF support in 50 successful bids to lever in £2.5billion in private sector investment that will create or safeguard over 27,000 direct jobs and close to a further 100,000 indirect jobs.”
With the details provided (severely curtailed by confidentiality requirements) it is essentially impossible to provide any analysis of whether it will achieve this on the basis of the list of schemes agreed.
Instead, it’s worth thinking about the implied cost effectiveness of these grants. Writing in 2005, SERC affiliate Colin Wren reviewed the available evidence on the impact of Regional Selective Assistance(a competitive scheme for allocating money to firms in depressed areas). The estimated cost per job ranged from £8,000-£21,000 (in 1995 prices). If the RGF of £450million delivers 127,000 additional jobs that suggests a cost per job ‘created’ by the government of just over £3,500. In short, if these numbers played out, this would be a remarkably effective intervention relative to existing schemes. Of course, there is another more depressing possibility …
All of this ignores the issue of whether these jobs are truly additional as well as the fact that government funds the RGF through taxes on other firms and consumers or through borrowing (thus “destroying jobs”). In short, for many reasons, governments (and not just this one) find themselves on tricky ground when they try to talk about the way in which government expenditure “creates jobs”.
Finally, a little exam question (not to be taken seriously): If the coalition spending plans differ from Labour’s by £2billion (or £5billion or £40billion- take your pick) how many jobs would spending this through the RGF “create”?
This post first appeared on the LSE’s Spatial Economics Research Centre blog on 12 April.
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“All of this ignores the issue of whether these jobs are truly additional as well as the fact that government funds the RGF through taxes on other firms and consumers or through borrowing (thus “destroying jobs”).”
But doesn’t this statement assume the old Ricardian equivalence proposition (in a roundabout way at least) – i.e. it assumes that the economy is at full employment? It’s saying that there’s no multiplier to be had from government spending because jobs will be offset by the decline in private investment, that every pound of increased government spending must correspond to one less pound of private spending. If, however, there are 2.5m people unemployed then government spending can add to the number of employed and therefore increase demand and output and help towards reducing the deficit.
Unless you believe that all consumers and individuals are superrational agents and are developing their expectations of future tax rates based on government spending now…
Or maybe I’m just an optimistic Keynesian!
I am, however, interested by your point that the cost per head of creating a job of £3,500 is well below that of ‘existing schemes’. The advantage of government spending is that it can counter uncertainty in investment, which may explain why it could be more effective than existing schemes that might be more efficient in some ways but are not currently investing.