The North-South divide

Hamish McRae refers to the persistence of the North-South economic divide and questions the wisdom of taking money from the South and giving it to the North (Independent, 2 May).

The difference in productivity between north and south is an example of the principle described by David Ricardo in the nineteenth century. Ricardo observed that farmers could grow more corn in some fields than in others, the difference between the yield from a particular field and that from the worst field in use (the "marginal field") giving rise to a set of land rental values. The principle applies to all commercial activity. Any street busker knows that he needs to set up pitch in a busy place.

Productivity in the north is inevitably lower than in the more favourably located regions closer to centres of population. This is due to many factors, the most important of which are transport and energy costs. The difference is apparent in rents across the country. The high rental values in London and the South East are the market value of the better infrastructure and trading opportunities available there. This is a value that is sustained largely by public spending. The real subsidy recipients are landowners in the better-off areas who enjoy steady rental growth on the backs of taxpayers at large.

The problem nationally is that taxation ignores these realities of locational advantage and disadvantage. The tax take, as a proportion of the the wealth produced, is almost the same regardless of whether a business is running in the far north
of Scotland or Central London. But in the more distant locations, the burden of tax is critical and can preclude successful production. More tax is demanded from the North than it can afford. The same applies also to pockets of geographical disadvantage – East Kent, and even parts of Greater London – within the most prosperous regions.

This explains why some areas suffer from persistently high unemployment. The problem is tacitly recognised through the programmes of grants and "subsidies" that have been funneled into the regions for many years. Hamish McRae is right to question these policies. But they are not really subsidies, since all they are doing is to feed back, in part and at considerable cost, resources that should not have been taken out in the first place.

The tax system needs to be reformed so as to take account of the facts of geography. When it comes to "ability to pay tax", the prime factor is location.