The key advice for the Northern Powerhouse is 'small is bountiful'

The methods used over past decades to narrow the North-South gap have often had the opposite effect

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The Independent Online

It is a good slogan – Northern Powerhouse – but is it real? George Osborne has sought to give his vision for reviving the economy of northern England new legs by appointing a minister, James Wharton, MP for Stockton South, to take charge. He has also appointed Jim O’Neill, the former Goldman Sachs chief economist, to the post of commercial secretary in the Treasury with the task of driving power out to the regions.

They look like good appointments. Mr Wharton is a local, in the sense that he was brought up in County Durham and went to Durham University. Just 31, he was first elected in 2010 and increased his majority this time. Lord O’Neill, as he now is, is a Mancunian who coined “the Brics”, the acronym that encompasses the four largest emerging economies, Brazil, Russia, India and China. Those of us who know Jim, however, probably admire him as much for his grounded common sense about economic matters as for these promotional skills. He has called big economic issues broadly right, unlike some other economists who get things pretty consistently wrong.

But good appointments do not by themselves assure policy success. Any rebalancing between North and South must be welcome. This is partly because there is excessive pressure on the infrastructure of the South and some spare capacity in the North. You see this most obviously in property prices. But if there is an economic case for seeking to rebalance, there is also a social and political case, for it cannot be good to have such large divergences in wealth.

The trouble is that policies up to now have been pretty unsuccessful. For example, one policy pushed by Labour has been to relocate government offices out of London. In so far as you can cut costs by moving to cheaper locations this makes sense, and a lot of London-headquartered private sector companies do their back-office work outside. But public sector pay scales lead to another problem, for moving what are relatively well-paid public sector jobs into a low-wage area sucks talent into the public sector, actually making it harder for local businesses to recruit staff. Put it this way: we have had 30 years of efforts to narrow the North-South gulf; while there are specific success stories, the overall gap has, if anything, widened further. That suggests a new approach is needed.

George Osborne’s pitch is twofold. One is to give local municipalities much more power. If you want more power, you have to have a mayor. In principle it sounds attractive, but we will have to see whether it will work in practice. You could claim it has worked in London, though the great turnaround in the capital started before the city got its first mayor. If you look at the time-line, abolishing the Greater London Council appears to be the decision that triggered London’s growth, though it would be a stretch to claim it was direct cause and effect.

The other part of the plan is to improve infrastructure, particularly east-west links. The band between Liverpool and Hull has 10 million people – huge. But it cannot function as a single agglomeration as it is so hard to get from one side to the other. It takes at least two and a half hours to get from Hull to Liverpool by train, whereas it is an hour and a half to do the same distance between London and Birmingham. One of the many arguments against HS2 is that it will exacerbate London’s advantage over the North by extending its commuter region, without doing anything for at least a generation about northern links.

To his credit, Lord O’Neill is sceptical about HS2, but then he understands the concept of opportunity cost – put crudely, the cost of the other projects you have to drop because you are putting all the resources into one particularly expensive one. You would have thought that politicians would have learned that resources are finite after the experience of the past five years, but maybe not.

So what can governments do? In general, economic policies are successful when they reinforce existing success; there are plenty of examples of that. Higher education is one: Manchester University is now the largest in the land. There are other chunks of excellence elsewhere: the creative industries, financial services, sport and, too oft forgotten, top-end manufacturing.

The trouble is that much of what governments can do is removing roadblocks and making small interventions, rather than pulling the policy levers and expecting things to happen. Politicians like opening hospitals and factories; helping small businesses get off the ground does not make such good headlines.

The starting point is not bad. If anything, the North seems to have been growing faster than the South in recent months and, with support, there is no reason why it should not pick up more speed in the months ahead.